nep-cba New Economics Papers
on Central Banking
Issue of 2023‒04‒10
fifteen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Optimal Monetary and Macroprudential Policies under Fire-Sale Externalities By Flora Lutz
  2. Know your (holding) limits: CBDC, financial stability and central bank reliance By Barbara Meller; Oscar Soons
  3. The Last Mile of Monetary Policy: Inattention, Reminders, and the Refinancing Channel By Shane Byrne; Kenneth Devine; Michael King; Yvonne McCarthy; Christopher Palmer
  4. Climate change, financial intermediation, and monetary policy By Eisei Ohtaki
  5. The Heterogeneous Effects of U.S. Monetary Policy on Non-Bank Finance By Miss Anke Weber; Andrew Hodge
  6. Monetary Policy and Inequality: A Two-way Relation By Luzie Thiel
  7. Imperfect bank competition, borrower adverse selection, and the transmission of monetary policy By Miguel Cantillo
  8. Active driver or passive victim: On the role of international monetary policy transmission By Camehl, Annika; von Schweinitz, Gregor
  9. Interdependence between assets and liabilities in the banking system: changes in the last two decades By Valentina Michelangeli; Fabio Massimo Piersanti
  10. The Implementation of Central Bank Policy in China: The Roles of Commercial Bank Ownership and CEO Faction Membership By Michel Antoine Habib; Yushi Peng; Yanjie Wang; Zexi Wang
  11. BEMGIE: Belgian Economy in a Macro General and International Equilibrium model By Gregory de Walque; Thomas Lejeune; Ansgar Rannenberg; Magne Mogstad
  12. Crypto Assets and CBDCs in Latin America and the Caribbean: Opportunities and Risks By Ms. Sandra Marcelino; Weicheng Lian; Ms. Nan Geng; Mr. Yorbol Yakhshilikov; Mr. Takuji Komatsuzaki; Maximiliano Appendino; Olga Bespalova; Jean François Clevy; Justin Lesniak; Ms. Rina Bhattacharya; Mr. Mauricio Villafuerte
  13. The Foreign Exchange Policy of China – Is the Country a “Currency Manipulator”? By Zhelev, Paskal
  14. Monetary Tightening and U.S. Bank Fragility in 2023: Mark-to-Market Losses and Uninsured Depositor Runs? By Erica Xuewei Jiang; Gregor Matvos; Tomasz Piskorski; Amit Seru
  15. International Sanctions and Dollar Dominance By Javier Bianchi; César Sosa-Padilla

  1. By: Flora Lutz
    Abstract: I provide an integrated analysis of monetary and macroprudential policies in a model economy featuring a financial friction and a nominal wage rigidity. In this set-up, the monetary authority faces a trade-off between macroeconomic and financial stability: While expansionary counter-cyclical monetary policy prevents involuntary unemployment, it also amplifies an inefficient reallocation of capital across sectors. The main contribution of the analysis is threefold: First it highlights a novel channel through which monetary policy can impact financial stability. Second, it shows that, by itself, monetary policy can significantly mitigate the wedge between the constrained efficient and the competitive allocation. Third, regardless of the availability of macroprudential tools, stabilizing demand is usually not optimal for monetary policy.
    Keywords: Monetary Policy; Macroprudential Policy; Fire-sales; Pecuniary Externalities; Unemployment
    Date: 2023–03–10
  2. By: Barbara Meller; Oscar Soons
    Abstract: How would a central bank digital currency impact the balance sheets of the central bank and commercial banks? To tackle this question empirically, we propose a constraint optimisation model that allows individual banks to choose how to respond to deposit outflows, minimizing their costs subject to bank-specific and system-wide reserve and collateral availability and different liquidity risk preferences. We simulate the impact of a fictitious digital euro introduction in Q3-2021 using data from over 2, 000 euro area banks. The simulated impact depends on i) the amount of deposits that are withdraw and the speed at which this occurs, ii) the available liquidity in the banking system at the time of a potential digital euro introduction, iii) markets’ and supervisors’ liquidity risk preferences, iv) the bank’s business model, and v) the functioning of the interbank market. For the case of the digital euro, Bindseil (2020) and Bindseil and Panetta (2020) have suggested a €3, 000 digital euro holding limit per person. We illustrate that with such a limit, even in extremely pessimistic scenarios, the impact on banks’ liquidity risk and funding structure and on the Eurosystem balance sheet would have been contained.
    Keywords: digital currency; financial intermediation; financial stability; liquidity risk; euro area
    JEL: E52 E58 G21
    Date: 2023–03
  3. By: Shane Byrne; Kenneth Devine; Michael King; Yvonne McCarthy; Christopher Palmer
    Abstract: Under-refinancing limits the transmission of accommodative monetary policy to the household sector and costs mortgage holders in many countries a significant fraction of income annually. We test whether targeted communication can reduce the attention frictions that inhibit transmission by partnering with a large bank to analyze a field experiment testing messages sent to 12, 000 Irish households. While we find only small effects of disclosure design improvements, a reminder letter increases refinancing by 76%, from 8.9% to 15.7%. To interpret this reminder effect, we extend and estimate a mixture model of inattentive financial decision-making to allow for disclosure treatment effects on attention. We find that reminders increase the likelihood mortgage holders are attentive by over 60%, from 24% to 39%. A conservative back-of-the-envelope cost-effectiveness calculation implies that the average reminder letter generated €42 of mortgagor consumption (€605 per refinancing household). Our results illustrate that targeted central bank communication such as refinancing reminders could have a larger effect on refinancing than a standard policy rate cut. Reminders could further strengthen the refinancing channel and stimulate local consumption even when policy rates are at the zero-lower bound or set in a monetary union.
    JEL: D83 E58 G21 G28 G51
    Date: 2023–03
  4. By: Eisei Ohtaki
    Abstract: Motivated by recent climate actions of central banks and supervisors, this study aims to explore implications of climate change in an economy with financial intermediaries. For this aim, this study develops an overlapping generations model of the environment and financial intermediation. In that model, reactions of financial intermediaries, the monetary steady state, and optimal monetary policy against climate change are studied. Especially, it is demonstrated that the level of the optimal money growth rate depends on how "green" agents are.
    Date: 2023–03
  5. By: Miss Anke Weber; Andrew Hodge
    Abstract: Using flow of funds and high frequency data from the Investment Company Institute, we study the effects of monetary policy shocks on the size of non-bank assets as well as on flows into long-term mutual funds and returns on their assets. Consolidating chains of non-bank intermediation to avoid double counting, we find that contractionary monetary policy shocks shrink the assets of non-banks reliant on long-term funding, while increasing those of nonbanks reliant on short-term funding. Contractionary shocks also cause sustained outflows from long-term mutual funds and reduce their returns. Using a Markov-Switching VAR, we find these effects to be more prevalent after the Global Financial Crisis, and show that monetary policy shocks had the opposite effects in some earlier periods. Policymakers will thus have to contend with a complex and heterogeneous transmission of monetary policy to financial and macroeconomic outcomes through the non-banks.
    Keywords: Non-bank market-based finance; mutual fund performance and flows; monetary policy shocks
    Date: 2023–03–10
  6. By: Luzie Thiel (University of Kassel)
    Abstract: We study the transmission of monetary policy in the presence of heterogeneous households and examine the implications when the share of constrained households is a function of monetary policy. We build an analytically tractable heterogeneous agent New Keynesian model (THANK) with an endogenous share of hand-to-mouth households. The transmission of monetary policy on aggregate demand is amplified in this setup by inequality between saver and hand-to-mouth households. The amplification effect depends on monopolistic rents (enhancing) and redistribution (mitigating). Unlike most THANK models, we refrain from the assumption of a full insurance steady state.
    Keywords: Monetary Policy, Heterogeneous Households, Inequality, Aggregate Demand, Complementarity, Financial Conditions, Imperfect Insurance
    JEL: E12 E21 E44 E52 E58
    Date: 2023
  7. By: Miguel Cantillo (Universidad de Costa Rica)
    Abstract: This paper studies bank competition with borrower adverse selection. In the model, expected non-performing loan costs are high when credit is granted in booms, when risk free rates are low, or when competition is strong. I prove that full competition is suboptimal due to this last effect; that more competition improves the transmission of monetary policy, and that lending rates are always pro-cyclical. The paper examines the relative plausibility of sequential and simultaneous bank competition. I show that with asymmetric costs, bank market shares are always inversely related to their efficiency, and that bank entry does not always lower lending rates.
    Keywords: Bank competition, transmission of monetary policy, Cournot competition, adverse selection in credit markets.
    Date: 2023–03
  8. By: Camehl, Annika; von Schweinitz, Gregor
    Abstract: We provide new insights into determinants of international interest rates spillovers across seven advanced economies. To disentangle and quantify their respective importance, we identify country-specific structural monetary policy, demand, and supply equations in a Bayesian structural panel vector autoregressive model. We formulate prior beliefs on magnitudes and signs of contemporaneous structural coefficients (i.e., (semi-)elasticities), based on a standard theoretical multi-country open economy model from the literature. Our findings show that interest rate spillovers occur via an aggregated demand channel. Unexpected monetary tightening causes modest declines in most foreign interest rates, while demand and supply shocks result in increased foreign interest rates. Our results support that central banks respond to changes in the domestic macroeconomic environment induced by domestic or foreign shocks rather than directly reacting to foreign shocks. Spillovers are quantitatively stronger for shocks originating in economically large areas with strong trade linkages.
    Keywords: informative priors, panel vector autoregressions, spillovers, structural vector autoregressions
    JEL: C11 C30 E52 F42
    Date: 2023
  9. By: Valentina Michelangeli (Bank of Italy); Fabio Massimo Piersanti (Bank of Italy)
    Abstract: Asset and liability management deals with the joint evaluation of assets and liabilities in a bank’s balance sheet; it is a traditional tool used by intermediaries to limit financial risks. Building on a measure of the extent of asset-liability management practices, which we name interdependence index, we show that the intensity of asset-liability linkages decreased between the beginning of the century and the onset of the COVID-19 pandemic for all three main classes of Italian banks (larger, smaller, and BCCs). The monetary policy operations introduced in the wake of the sovereign debt crisis, the 2012 reform of the tax treatment of bank bond yields and the protracted low interest rate environment meant there was less need for banks to closely link assets and liabilities in their balance sheets, thus fostering greater independence between investing and financing decisions.
    Keywords: asset-liability management, banks, interdependence index
    JEL: G21 G32
    Date: 2023–03
  10. By: Michel Antoine Habib (University of Zurich; Centre for Economic Policy Research (CEPR)); Yushi Peng (London School of Economics and Political Science); Yanjie Wang (University of Zurich); Zexi Wang (Lancaster University Management School)
    Abstract: We examine the roles of bank ownership and CEO political faction membership in facilitating or hindering the implementation of central bank policy in China. Specifically, we examine the response of China’s commercial banks to People’s Bank of China (PBC) guidelines intended to decrease mortgage lending and to slow down the rise in residential property prices. We find that both bank ownership and faction membership matter. Central government-owned banks whose CEOs are members of the specialist finance faction within the Chinese Communist Party (CCP) respond most strongly to PBC guidance, whereas provincial or city government-owned banks whose CEOs are members of a generalist faction respond least strongly. The implementation of PBC policy has real effects: in those cities where central government-owned banks with specialist CEOs constitute a larger percentage of total bank branches, house prices grew more slowly, as did the number of residential real estate transactions and the number of new listings.Where in contrast provincial and city government-owned banks with generalist CEOs dominate, the number of transactions grew faster; the rate of house price appreciation and the number of listings were however unaffected. We conclude that China’s different levels of government and the CCP’s different factions enjoy some discretion in responding to PBC guidance and that they exploit the discretion they are afforded to vary the strength of their response.
    Keywords: Government bank ownership, CEO political faction membership, Central bank policy, Window guidance, Mortgage lending, Real estate markets
    JEL: E58 G21 R30
    Date: 2023–02
  11. By: Gregory de Walque (Economics and Research Department, National Bank of Belgium); Thomas Lejeune (Economics and Research Department, National Bank of Belgium); Ansgar Rannenberg (Economics and Research Department, National Bank of Belgium); Magne Mogstad (Economics and Research Department, National Bank of Belgium)
    Abstract: This paper outlines the three-country New Keynesian Dynamic Stochastic General Equilibrium model of the National Bank of Belgium. The model is named BEMGIE for Belgian Economy in a Macro General and International Equilibrium model. It features imperfect market competition, standard real and nominal rigidities, local currency pricing, energy in consumption and oil and foreign inputs in production. The model is estimated using Bayesian econometric techniques on Belgian, euro area and US data. BEMGIE is designed to provide quantitative simulations of macroeconomic shocks and policies, and to be used in the context of the Eurosystem projection exercises.
    Keywords: production networks, endogenous formation, fixed costsDSGE model, Open economy model, Multi-country model, International spillovers, Monetary policy, Exchange rate pass-through, Bayesian estimation.
    JEL: E10 E17 E30 E40 E52 F41 F45 F47 C11 C32 C51
    Date: 2023–03
  12. By: Ms. Sandra Marcelino; Weicheng Lian; Ms. Nan Geng; Mr. Yorbol Yakhshilikov; Mr. Takuji Komatsuzaki; Maximiliano Appendino; Olga Bespalova; Jean François Clevy; Justin Lesniak; Ms. Rina Bhattacharya; Mr. Mauricio Villafuerte
    Abstract: After providing a general overview of the nature, pros, and cons of crypto assets and CBDCs, this paper focuses on documenting their recent experience in LAC. The region records a high interest in unbacked crypto assets and stablecoins and its authorities’ policy responses have varied substantially, ranging from the introduction of Bitcoin as legal tender in El Salvador to their prohibition in many other countries worried about their impact on financial stability, currency/asset substitution, tax evasion, corruption, and money laundering. This paper also describes briefly the results of a survey on CBDCs’ introduction plans and crypto assets regulation. Finally, this paper presents some general lessons and policy recommendations for the region on the regulation of cypto assets, digital currencies and cross-border payments, and on the potential introduction of CBDCs.
    Keywords: crypto assets regulation; asset substitution; CBDCs in Latin America and the Caribbean; Policy recommendation; cypto assets; IMF working paper 23/37; Virtual currencies; Central Bank digital currencies; Digital currencies; Payment systems; Currencies; Caribbean; Central America; South America; Global
    Date: 2023–02–17
  13. By: Zhelev, Paskal
    Abstract: China’s exchange rate policy has been one of the most contentious economic issues in present times. The large open economy with a state-led development model has been often accused of deliberately keeping its currency undervalued, thereby conferring unfair competitive advantages to its exporters, and fuelling global imbalances. The experts’ opinions on that however are greatly divided. The paper’s main goal is to evaluate whether China has been manipulating the exchange rate of the RMB through its exchange rate policy over the last decade. Based on various indicators, the results show that there is no evidence of China engaging in currency manipulation to the detriment of its trading partners.
    Keywords: Renminbi (RMB), undervalued exchange rate, currency manipulation, foreign exchange reform.
    JEL: F31 F33 F50
    Date: 2022–09–20
  14. By: Erica Xuewei Jiang; Gregor Matvos; Tomasz Piskorski; Amit Seru
    Abstract: We analyze U.S. banks’ asset exposure to a recent rise in the interest rates with implications for financial stability. The U.S. banking system’s market value of assets is $2 trillion lower than suggested by their book value of assets accounting for loan portfolios held to maturity. Marked-to-market bank assets have declined by an average of 10% across all the banks, with the bottom 5th percentile experiencing a decline of 20%. We illustrate that uninsured leverage (i.e., Uninsured Debt/Assets) is the key to understanding whether these losses would lead to some banks in the U.S. becoming insolvent-- unlike insured depositors, uninsured depositors stand to lose a part of their deposits if the bank fails, potentially giving them incentives to run. A case study of the recently failed Silicon Valley Bank (SVB) is illustrative. 10 percent of banks have larger unrecognized losses than those at SVB. Nor was SVB the worst capitalized bank, with 10 percent of banks having lower capitalization than SVB. On the other hand, SVB had a disproportional share of uninsured funding: only 1 percent of banks had higher uninsured leverage. Combined, losses and uninsured leverage provide incentives for an SVB uninsured depositor run. We compute similar incentives for the sample of all U.S. banks. Even if only half of uninsured depositors decide to withdraw, almost 190 banks are at a potential risk of impairment to insured depositors, with potentially $300 billion of insured deposits at risk. If uninsured deposit withdrawals cause even small fire sales, substantially more banks are at risk. Overall, these calculations suggest that recent declines in bank asset values very significantly increased the fragility of the US banking system to uninsured depositor runs.
    JEL: G2 L5
    Date: 2023–03
  15. By: Javier Bianchi; César Sosa-Padilla
    Abstract: This paper investigates the implications of international financial sanctions for the reserve currency status of the US dollar. We propose a simple model of a reserve currency, demonstrate how the anticipation of financial sanctions can weaken the dollar’s status, and evaluate the welfare implications.
    JEL: E42 F31 F32 F34 F41 P48
    Date: 2023–03

This nep-cba issue is ©2023 by Sergey E. Pekarski. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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