nep-cba New Economics Papers
on Central Banking
Issue of 2023‒04‒17
eighteen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Asymmetric effects of conventional and unconventional monetary policy when rates are low By Laine, Olli-Matti; Pihlajamaa, Matias
  2. Monetary policy strategies for the euro area: optimal rules in the presence of the ELB By Mazelis, Falk; Motto, Roberto; Ristiniemi, Annukka
  3. Liquidity Dependence and the Waxing and Waning of Central Bank Balance Sheets By Viral V. Acharya; Rahul S. Chauhan; Raghuram Rajan; Sascha Steffen
  4. Useful, usable, and used? Buffer usability during the Covid-19 crisis By Mathur, Aakriti; Naylor, Matthew; Rajan, Aniruddha
  5. Forward guidance and the exchange rate: A theoretical sign restricted VAR analysis. By Fabrice Dabiré
  6. The valuation haircuts applied to eligible marketable assets for ECB credit operations By Adler, Martin; Camba-Méndez, Gonzalo; Džaja, Tomislav; Manzanares, Andrés; Metra, Matteo; Vocalelli, Giorgio
  7. Subjective Monetary Policy Shocks By Kento Tango; Yoshiyuki Nakazono
  8. Money velocity, digital currency, and inflation dynamics By Danny Hermawan; Denny Lie; Aryo Sasongko; Richard I. Yusan
  9. Firm Heterogeneity and the Transmission of Central Bank Credit Policy By Konrad Kuhmann
  10. Helicopter Drops and Liquidity Traps By Manuel Amador; Javier Bianchi
  11. Nonbank lenders as global shock absorbers: evidence from US monetary policy spillovers By Elliott, David; Meisenzah, Ralf R; Peydró, José-Luis
  12. Supervisory policy stimulus: evidence from the euro area dividend recommendation By Dautović, Ernest; Gambacorta, Leonardo; Reghezza, Alessio
  13. Analysing the response of U.S. financial market to the Federal Open Market Committee statements and minutes based on computational linguistic approaches By Xuefan, Pan
  14. Cost of Implementation of Basel III reforms in Bangladesh -- A Panel data analysis By Dipti Rani Hazra; Md. Shah Naoaj; Mohammed Mahinur Alam; Abdul Kader
  15. The EU’s Open Strategic Autonomy from a central banking perspective. Challenges to the monetary policy landscape from a changing geopolitical environment. By Ioannou, Demosthenes; Pérez, Javier J.; Balteanu, Irina; Kataryniuk, Ivan; Geeroms, Hans; Vansteenkiste, Isabel; Weber, Pierre-François; Attinasi, Maria Grazia; Buysse, Kristel; Campos, Rodolfo; Clancy, Daragh; Essers, Dennis; Faccia, Donata; Freier, Maximilian; Gerinovics, Rinalds; Khalil, Makram; Kosterink, Patrick; Mancini, Michele; Manrique, Marta; McQuade, Peter; Molitor, Philippe; Pulst, Daniela; Timini, Jacopo; Van Schaik, Ilona; Valenta, Vilém; Vergara Caffarelli, Filippo; Viani, Francesca; Viilmann, Natalja; Almeida, Ana M.; Alonso, Daniel; Bencivelli, Lorenzo; Borgogno, Oscar; Borrallo, Fructuoso; Cuadro-Sáez, Lucía; Di Stefano, Enrica; Esser, Andreas; García-Lecuona, María; Habib, Maurizio; Jeudy, Bruno-Philippe; Lájer, Andrés; Le Gallo, Florian; Martonosi, Ádám; Millaruelo, Antonio; Miola, Andrea; Négrin, Pauline; Zangrandi, Michele Savini; Strobel, Felix; Tylko-Tylczynska, Kalina Paula
  16. A Review of the Bank of Canada’s Market Operations related to COVID-19 By Grahame Johnson
  17. Banking union: state of play and proposals for the way forward By Kornilia Vikelidou; Athanasios Tagkalakis
  18. The Financial Macro-econometric Model (FMM, 2022 Version) By Nobuhiro Abe; Kyosuke Chikamatsu; Kenji Kanai; Yusuke Kawasumi; Ko Munakata; Koki Nakayama; Tatsushi Okuda; Yutaro Takano

  1. By: Laine, Olli-Matti; Pihlajamaa, Matias
    Abstract: We study asymmetric inflation effects of both conventional and unconventional monetary policy in the euro area during the period of low nominal interest rates. We find that rate cuts are inflationary also during low interest rates. Positive quantitative easing surprises have a deflationary effect, but negative quantitative easing surprises have no inflationary effects. This result may be explained by information effects. The effect of monetary policy depends on the size of policy surprise and is lower during recessions than during booms. We also provide evidence that interest rate policy, forward guidance and quantitative easing are complementary to one another.
    Keywords: Monetary policy, asymmetric effects, inflation
    JEL: E50 E31
    Date: 2023
  2. By: Mazelis, Falk; Motto, Roberto; Ristiniemi, Annukka
    Abstract: We study alternative monetary policy strategies in the presence of the lower bound on nominal interest rates and a low equilibrium real rate using an estimated DSGE model for the euro area. We find that simple feedback rules that implement inflation targeting result in a binding lower bound one-fourth of the time as well as inflation and output exhibiting large downward biases and heightened volatility. Rule-based asset purchases that are activated once the policy rate reaches the lower bound are not able to fully offset the destabilizing effects of the lower bound if we assume plausible limits on the size of purchases. Makeup strategies, especially average inflation targeting with a long averaging window, perform better than inflation targeting. However, differences in performance across strategies become small if the response coefficients of the feedback rules are optimized. In addition, we find that the benefits of makeup strategies tend to vanish if agents exhibit a degree of inattention to central bank policies as estimated in the data. JEL Classification: E31, E32, E37, E52, E58, E61, E71
    Keywords: asset purchases, effective lower bound, forward guidance, makeup strategies, monetary policy, optimal policy
    Date: 2023–03
  3. By: Viral V. Acharya; Rahul S. Chauhan; Raghuram Rajan; Sascha Steffen
    Abstract: When the Federal Reserve (Fed) expanded its balance sheet via quantitative easing (QE), commercial banks financed reserve holdings with deposits and reduced their average maturity. They also issued lines of credit to corporations. However, when the Fed halted its balance-sheet expansion in 2014 and even reversed it during quantitative tightening (QT) starting in 2017, there was no commensurate shrinkage of these claims on liquidity. Consequently, the financial sector was left more sensitive to potential liquidity shocks, with weaker-capitalized banks most exposed. This necessitated Fed liquidity provision in September 2019 and again in March 2020. Liquidity-risk-exposed banks suffered the most drawdowns and the largest stock price declines at the onset of the Covid crisis in March 2020. The evidence suggests that the expansion and shrinkage of central bank balance sheets involves tradeoffs between monetary policy and financial stability.
    JEL: G21
    Date: 2023–03
  4. By: Mathur, Aakriti (Bank of England); Naylor, Matthew (Bank of England and University of Oxford); Rajan, Aniruddha (Bank of England)
    Abstract: Macroprudential policies have been shown to be beneficial during booms but there is limited evidence on how well they operate during periods of stress. Using a difference‑in‑differences empirical strategy we test whether regulatory capital buffers, a key component of the Basel III reforms, helped to support lending provision by UK banks through Covid‑19. To identify credit supply effects, we exploit data on the universe of UK mortgages, which were outside the scope of government guaranteed lending schemes. We find that more constrained banks defended their capital surpluses to a greater extent during the pandemic, and did so by maintaining higher loan rates, lower loan values, and tighter terms on riskier lending. In contrast, banks receiving greater capital relief from the cut to the UK countercyclical capital buffer during the pandemic maintained more stable capital ratios, lending provision and risk‑taking capacity. Our results suggest regulatory buffers may be less usable than intended, but buffer releases can dampen these unintended consequences.
    Keywords: Banks; capital regulation; lending; macroprudential policy; Covid-19
    JEL: E58 G21 G28 G51
    Date: 2023–01–13
  5. By: Fabrice Dabiré (Université de Sherbrooke)
    Abstract: This paper uses zero and signs restrictions to study the effect of the U.S. forward guidance and unanticipated monetary policy on four U.S. bilateral nominal exchange rates and net exports. I find that although the U.S. forward guidance easing depreciates the exchange rate, the policy does not transmit to the real activity via an “expenditure-switching effect” on the net exports. The use of narrative sign restrictions improves the identification method. The complementary results are as follows: a VAR model augmented with interest rate forecasts contains at least enough information to identify the forward guidance and unanticipated monetary shocks; the nominal bilateral exchange rates depreciate by two to four percent after a 25 basis point forward guidance easing in a hump-shaped pattern without any deviation from the Uncovered Interest rate Parity condition; both shocks explain between 7.3 percent to 27.9 percent of the exchange rates variance, and the forward guidance shock contributes to at least half of this variance decomposition; finally, forecasters perceive the forward guidance shock as future deviation from the Taylor rule.
    Keywords: Monetary policy, Forward guidance, Exchange rate, Sign restrictions.
    JEL: E52 E58 F31 F41
    Date: 2022–12
  6. By: Adler, Martin; Camba-Méndez, Gonzalo; Džaja, Tomislav; Manzanares, Andrés; Metra, Matteo; Vocalelli, Giorgio
    Abstract: In implementing its monetary policy, the ECB conducts collateralised credit operations with banks. The bulk of the financial risks involved in these collateralised credit operations are mitigated primarily by the valuation haircuts imposed on the mobilised collateral. Since the establishment of the euro in January 1999, valuation haircuts have been formulated mainly on the basis of risk management considerations and have been systematically calibrated with a very low level of risk tolerance. However, their implied risk tolerance may sometimes be used as a monetary policy stance lever, as clearly illustrated when the ECB decided to reduce haircuts to improve funding conditions for the real economy during the outset of the coronavirus (COVID-19) pandemic. In addition, the ECB ensures that financial market developments warranting general methodological changes are incorporated into the calibration of valuation haircuts adequately and in good time. In a particularly challenging economic environment, the ECB has also recently committed to ensuring that climate change risks are considered when calibrating the valuation haircuts applied to corporate bonds. Against this background, the purpose of this paper is to provide an overview and explanation of the main guiding rules, as well as explaining some of the statistical methods currently employed by the ECB when formulating valuation haircuts. Keywords: monetary policy implementation, risk control framework of credit operations, valuation haircuts JEL Classification: D02, E58, G32, Q54
    Keywords: monetary policy implementation, risk control framework of credit operations, valuation haircuts
    Date: 2023–03
  7. By: Kento Tango; Yoshiyuki Nakazono
    Abstract: We propose a new concept of monetary policy shocks: subjective monetary policy shocks. Using a unique survey on both consumption expenditures and forecasts of interest rates, we identify a cross-sectionally heterogeneous monetary policy shock at the micro level. We first distinguish between exogenous and endogenous interest rate changes and define the exogenous component as a subjective monetary policy shock for each household. We then estimate the impulse responses of consumption expenditures to a subjective monetary policy shock. We find the stark contrasts in the dynamics of consumption expenditures between borrowers and lenders; in response to an unexpected rise in interest rates, consumption expenditures by borrowers decrease, whereas those of asset holders increase. We also find large and quick responses of consumption expenditures when households are attentive to interest rates. Our findings support the theoretical prediction of not only heterogeneous agent New Keynesian models, but also behavioral macroeconomics under imperfect information.
    Date: 2023–04
  8. By: Danny Hermawan; Denny Lie; Aryo Sasongko; Richard I. Yusan
    Abstract: This paper empirically investigates the impact of transaction cost-induced variations in the velocity of money on inflation dynamics, based on a structural New Keynesian Phillips curve (NKPC) with an explicit money velocity term. The money velocity effect arises from the role of money, both in physical and digital forms, in reducing the aggregate transaction costs and facilitating purchases of goods and services. We find a non-trivial aggregate impact in the context of the Indonesian economy: our benchmark estimates suggest that a 10% decrease in money velocity, which might be facilitated by a new digital currency (e.g. CBDC) issuance, would reduce the inflation rate by 0:6-1:7%, all else equal. Using the estimates and within a small-scale New Keynesian DSGE model, we analyze the potential implications of a CBDC issuance on aggregate fluctuations. A CBDC issuance that conservatively lowers the velocity of money by 5% is predicted to permanently raise the GDP level by 0:8% and lower the inflation rate by 0:8%. Both nominal and real interest rates are also permanently lower. Our findings imply that central banks could potentially use CBDCs as an additional stabilization policy tool by influencing the velocity.
    Keywords: inflation dynamics; transaction cost; velocity of money; digital money; digital currency; central bank digital currency (CBDC); aggregate fluctuations;
    Date: 2023–03
  9. By: Konrad Kuhmann
    Abstract: I study the role of firm heterogeneity for the transmission of unconventional monetary policy in the form of “credit policy†à la Gertler and Karadi (2011). To this end, I lay out a Two-Agent New-Keynesian model with financially constrained and unconstrained firms and a financial intermediary with an endogenous leverage constraint. I find that, when firms are heterogeneous, aggregate investment is substantially less responsive to credit policy compared to an identical firm setting. Moreover, when debt markets are segmented, credit policy directed exclusively at financially unconstrained firms is most effective. My paper provides a tractable framework to illustrate mechanisms through which firm heterogeneity affects the transmission of credit policy. According to my findings, the presence of firm heterogeneity can be expected to make credit policy less effective than predicted by a representative agent framework.
    Keywords: Credit Policy, Firm Heterogeneity, Investment, Financial Frictions
    JEL: E50 E52 E58
    Date: 2023–03–23
  10. By: Manuel Amador; Javier Bianchi
    Abstract: We show that if the central bank operates without commitment and faces constraints on its balance sheet, helicopter drops can be a useful stabilization tool during a liquidity trap. With commitment, even with balance sheet constraints, helicopter drops are irrelevant.
    JEL: E31 E52 E58 E61 E63
    Date: 2023–03
  11. By: Elliott, David (Bank of England); Meisenzah, Ralf R (Federal Reserve Bank of Chicago); Peydró, José-Luis (Imperial College London, ICREA-Universitat Pompeu Fabra-CREI-Barcelona GSE, and CEPR)
    Abstract: We show that nonbank lenders act as global shock absorbers from US monetary policy spillovers. For identification, we exploit loan‑level data from the global syndicated lending market and US monetary policy surprises. We find that when US monetary policy tightens, nonbanks increase dollar credit supply to non‑US corporate borrowers, relative to banks. This partially mitigates the total reduction in dollar lending. The substitution is stronger for emerging market borrowers, riskier borrowers, and borrowers in countries subject to stronger capital inflow restrictions. Results suggest that our findings are not driven by borrower‑lender matching, zombie lending, or destabilising lending. Moreover, the credit substitution has real effects, as firms with existing relationships with nonbank lenders increase total debt, investment, and employment relative to firms without such relationships. Our findings suggest that having more diversified funding providers (nonbanks in addition to banks) reduces the volatility in capital flows and economic activity associated with the global financial cycle.
    Keywords: Nonbank lending; international monetary policy spillovers; global financial cycle; banks; US dollar funding for non-US firms
    JEL: E50 F34 F42 G21 G23
    Date: 2023–01–13
  12. By: Dautović, Ernest; Gambacorta, Leonardo; Reghezza, Alessio
    Abstract: At the onset of the Covid-19 outbreak, central banks and supervisors introduced dividend restrictions as a new policy instrument aimed at supporting lending to the real economy and strengthening banks’ capacity to absorb losses. In this paper we estimate the impact of the ECB’s dividend recommendation on bank lending and risk-taking. To address identification issues, we rely on credit registry data and a direct measure that captures variation in compliance with the recommendation across banks in the euro area. The analysis disentangles the confounding effects stemming from the wide range of monetary and fiscal policies that supported credit during the Covid-19 downturn and investigates their interaction with the dividend recommendation. We find that dividend restrictions have been an effective policy in supporting financially constrained firms, adding capital space to banks, and limiting procyclical behaviour. The effects on lending are larger for small and medium enterprises and for firms operating in Covid-19 vulnerable sectors. At the same time, we do not find evidence of a significant increase in lending to riskier borrowers and ”zombie” firms. JEL Classification: E5, E51, G18, G21
    Keywords: Covid-19, credit supply, dividend restrictions, European Central Bank, supervisory policy
    Date: 2023–03
  13. By: Xuefan, Pan (University of Warwick)
    Abstract: I conduct content analysis and extent the existing models of analysing the reaction of the stock market and foreign currency markets to the release of Federal Open Market Committee (FOMC) statements and meeting minutes. The tone changes and uncertainty level of the monetary policy communication are constructed using the dictionary-based word-count approach at the whole document level. I further apply the Latent Dirichlet Allocation (LDA) algorithm to investigate the different impacts of topics in the meeting minutes. High-frequency data is used as the analysis is an event study. I find that the tone change and uncertainty level have limited explanation power on the magnitude of the effect of the release of FOMC documents especially statements on the financial market. The communication from FOMC is more informative for the market during the zero lower bound period, compared to the whole sample period.
    Keywords: Monetary policy ;Communication ; Text Mining JEL Classification: E52 ; E58
    Date: 2023
  14. By: Dipti Rani Hazra; Md. Shah Naoaj; Mohammed Mahinur Alam; Abdul Kader
    Abstract: Inspired by the recent debate on the macroeconomic implications of the new bank regulatory standards known as Basel III, we tried to find out in this study that the impact of Basel III liquidity and capital requirements in Bangladesh proposed by Basel Committee on Banking Supervision (BCBS, 2010a). A small set of macro variables, using a sample of 22 private commercial banks operating in Bangladesh for the period of 2010-2014, are used to estimate long-run relationships among the variables. The macroeconomic variables are included The profitability of banks, GDP, banks' lending to private sector, Net Stable Funding Ratio, Tier 1 capital Ratio, Interest rate spread, real interest rate. The cost is quantified using Driscoll and Kraay panel data models with fixed effect. Impact of higher capital and liquidity requirement on Interest rate spread and lending to private sector of banks were considered as the cost to the economy as a whole whereas impact of higher capital and liquidity requirement on profitability of banks(ROE) was considered as the cost of banks. Here it is found that, the interest rate level is positively affected by the tighter liquidity and capital requirements which driven toward lessen of the private sector lending of banks. The return on equity of banks varies negatively with the liquidity and capital. The economic costs are considerably below the estimated positive benefit that the reform should have by reducing the probability of banking crises and the associated banking losses (BCBS, 2010b).
    Date: 2023–03
  15. By: Ioannou, Demosthenes; Pérez, Javier J.; Balteanu, Irina; Kataryniuk, Ivan; Geeroms, Hans; Vansteenkiste, Isabel; Weber, Pierre-François; Attinasi, Maria Grazia; Buysse, Kristel; Campos, Rodolfo; Clancy, Daragh; Essers, Dennis; Faccia, Donata; Freier, Maximilian; Gerinovics, Rinalds; Khalil, Makram; Kosterink, Patrick; Mancini, Michele; Manrique, Marta; McQuade, Peter; Molitor, Philippe; Pulst, Daniela; Timini, Jacopo; Van Schaik, Ilona; Valenta, Vilém; Vergara Caffarelli, Filippo; Viani, Francesca; Viilmann, Natalja; Almeida, Ana M.; Alonso, Daniel; Bencivelli, Lorenzo; Borgogno, Oscar; Borrallo, Fructuoso; Cuadro-Sáez, Lucía; Di Stefano, Enrica; Esser, Andreas; García-Lecuona, María; Habib, Maurizio; Jeudy, Bruno-Philippe; Lájer, Andrés; Le Gallo, Florian; Martonosi, Ádám; Millaruelo, Antonio; Miola, Andrea; Négrin, Pauline; Zangrandi, Michele Savini; Strobel, Felix; Tylko-Tylczynska, Kalina Paula
    Abstract: Over the past decade, geopolitical developments - and the policy responses to these by major economies around the world - have challenged economic openness and the process of globalisation, with implications for the economic environment in which central banks operate. The return of war to Europe and the energy shock triggered by the Russian invasion of Ukraine in 2022 are the latest in a series of episodes that have led the European Union (EU) to develop its Open Strategic Autonomy (OSA) agenda. This Report is a broad attempt to take stock of these developments from a central banking perspective. It analyses the EU's economic interdependencies and their implications for trade and finance, with a focus on strategically important dimensions such as energy, critical raw materials, food, foreign direct investment and financial market infrastructures. Against this background, the Report discusses relevant aspects of the EU's OSA policy agenda which extend to trade, industrial and state aid measures, as well as EU initiatives to strengthen and protect the internal market and further develop Economic and Monetary Union (EMU). The paper highlights some of the policy choices and trade-offs that emerge in this context and possible implications for the ECB's monetary policy and other policies. JEL Classification: F0, F10, F30, F4, F5, F45, E42, L5, Q43
    Keywords: capital flows, European Central Bank, European Economic and Monetary Union, financial market infrastructures, financial stability, geoeconomics, geopolitics, globalisation, global value chains, industrial policy, international trade, monetary policy, multilateralism, Open Strategic Autonomy
    Date: 2023–03
  16. By: Grahame Johnson
    Abstract: The economic lockdowns that began in March 2020 in response to the COVID-19 pandemic led to an unparalleled level of financial market disruption. Investors sought liquidity by selling financial assets and drawing down loans and credit lines. The speed, scale and one-way nature of these transactions caused an almost complete breakdown of market functioning. In response, the Bank of Canada launched 10 extraordinary programs, 9 of which had never been used before, to restore market functioning. As market conditions improved, 9 of the 10 programs were wound down. One, the Government of Canada Bond Purchase Program, was continued and transitioned into a monetary policy tool. In general, most of the programs were well designed and effectively executed—an impressive achievement given the circumstances under which they were conceived, developed and deployed. The extreme level of uncertainty and the magnitude of the downside risks to economic and financial activity warranted an aggressive response. Going forward, however, several areas exist where program design and implementation could be changed if these programs ever need to be used again. Overall, the design and implementation recommendations for future interventions focus on the need to ensure the programs are appropriately structured, in terms of both size and duration, for the financial and economic circumstances. Given the speed with which the outlook can change, program parameters must be flexible, and the Bank must be nimble in making the necessary adjustments.
    Keywords: Coronavirus disease (COVID-19); Financial markets; Financial stability
    JEL: D47 E41 E5 G01 G14 G23 H12
    Date: 2023–03
  17. By: Kornilia Vikelidou (Aristotle University of Thessaloniki); Athanasios Tagkalakis (University of Patras)
    Abstract: This paper examines the current state of play of the Banking Union project aiming at unveiling the weaknesses and gaps of this still incomplete framework. In this context, the implementation so far of the Banking Union legislation sheds light on the vulnerabilities concerning supervisory change, transparency, trust and a proper allocation of bank failure costs since all these criteria are deemed as essential contributing factors to promoting financial stability at European level. Taking into consideration the latest steps towards completing the Banking Union framework until June 2022, this paper aims at depicting the proposed leeway potentially capable to align resilience and flexibility with the view of mitigating any persisting shock-amplifying factor against financial stability.
    Keywords: Banking Union; Single Supervisory Mechanism; Single Resolution Mechanism; European Deposit Insurance Scheme
    JEL: G21 G28 O52 E42 F33 F42
    Date: 2022–08
  18. By: Nobuhiro Abe (Bank of Japan); Kyosuke Chikamatsu (Bank of Japan); Kenji Kanai (Bank of Japan); Yusuke Kawasumi (Bank of Japan); Ko Munakata (Bank of Japan); Koki Nakayama (Bank of Japan); Tatsushi Okuda (International Monetary Fund); Yutaro Takano (Bank of Japan)
    Abstract: The Financial Macro-econometric Model (FMM) is the model that the Bank of Japan (BOJ) employs in its macro stress testing to examine the risk resilience of Japan's financial system in a comprehensive and quantitative manner. The BOJ semiannually publishes the results of its analyses based on this model in the Financial System Report. The FMM is also used in the simultaneous stress testing based on common scenarios conducted periodically with the Financial Services Agency of Japan. Key characteristics of the FMM are that it (1) explicitly captures feedback loops between the domestic banking sector and the real economy, and (2) makes it possible to calculate the variables of interest (e.g. amount of loans and capital adequacy ratios of Japanese banks), not only at the sector level but also at the individual bank level. Since its development in 2011, the FMM has been continuously improved to reflect new developments in economic and financial conditions and to better incorporate the transmission mechanisms of financial shocks into the macro stress testing. This paper provides an outline of the basic macro stress testing framework and the FMM, and then describes the structure of the model as of September 2022 in detail.
    Keywords: Banks' stability; Macro stress test; Capital buffer regulation
    JEL: E10 E32 E44 E47 G10 G21 G28
    Date: 2023–03–30

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