nep-cba New Economics Papers
on Central Banking
Issue of 2023‒04‒24
sixteen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Impact of RBI's monetary policy announcements on government bond yields: Evidence from the pandemic By Aeimit Lakdawala; Bhanu Pratap; Rajeswari Sengupta
  2. Chorus in the cacophony: Dissent and policy communication of India's Monetary Policy Committee By Rounak Sil; Unninarayanan Kurup; Ashima Goyal; Apoorva Singh and Rajendra Paramanik
  3. The First Practical Guide to Inflation Targeting By Jonung, Lars
  4. Monetary Policy Shocks and Multi-Scale Positive and Negative Bubbles in an Emerging Country: The Case of India By Oguzhan Cepni; Rangan Gupta; Jacobus Nel; Joshua Nielsen
  5. Hegemony or Harmony? A Unified Framework for the International Monetary System By Tao Liu; Dong Lu; Liang Wang
  6. The changing and growing roles of independent central banks now do require a reconsideration of their mandate By Goodhart, Charles; Lastra, Rosa
  7. Public money as a store of value, heterogeneous beliefs, and banks: implications of CBDC By Muñoz, Manuel A.; Soons, Oscar
  8. Did monetary policy kill the Phillips Curve? Some simple arithmetics By Drago Bergholt; Francesco Furlanetto; Etienne Vaccaro-Grange
  9. Welfare Cost of Inflation, when Credit Card Transaction Services Are Included among Monetary Services By William Barnett; Sohee Park
  10. Big techs and the credit channel of monetary policy By Fiorella De Fiore; Leonardo Gambacorta; Cristina Manea
  11. The March 2023 Bank Interventions in Long-Run Context – Silicon Valley Bank and beyond By Andrew Metrick; Paul Schmelzing
  12. Fiscal policy in the semi-structural model ECB-BASE By Bańkowski, Krzysztof
  13. The Effects of a Money-Financed Fiscal Stimulus Under Fiscal Stress By Hao Jin; Junfeng Wang
  14. Practical Macrofinancial Stability Analysis: A Prototype Semistructural Model By Jaromir Benes; Tomas Motl; David Vavra
  15. Can governments sleep more soundly when holding international reserves? A banking and financial vulnerabilities perspective By Audrey Sallenave; Jean-Pierre Allegret; Tolga Omay
  16. The Euro Crisis in the Mirror of the EMS: How Tying Odysseus to the Mast Avoided the Sirens but Led Him to Charybdis By Corsetti, Giancarlo; Eichengreen, Barry; Hale, Galina; Tallman, Eric

  1. By: Aeimit Lakdawala (Wake Forest University); Bhanu Pratap (Reserve Bank of India); Rajeswari Sengupta (Indira Gandhi Institute of Development Research)
    Abstract: We investigate how the bond market responded to the effects of the Reserve Bank of India's (RBI) monetary policy actions undertaken since the start of the pandemic. Our approach involves combining a narrative analysis of the media coverage together with an event-study framework around RBI's monetary policy announcements. We find that the RBI's actions early in the pandemic were helpful in providing an expansionary impulse to the bond market. Specifically, long-term bond interest rates would have been meaningfully higher in the early months of the pandemic if not for the actions undertaken by the RBI. These actions involved unconventional policies providing liquidity support and asset purchases. We find that some of the unconventional monetary policy actions had a substantial signalling channel component where the market perceived the announcement of an unconventional monetary policy action as representing a lower future path for the short-term policy rate. We also find that the RBI's forward guidance was more effective in the pandemic than it had been in the couple of years preceding the pandemic
    Keywords: Monetary Policy, Reserve Bank of India, Unconventional Monetary Policy, Bond Yields, Forward Guidance, Pandemic
    JEL: E44 E52 E58 G10
    Date: 2023–03
  2. By: Rounak Sil (KPMG Global Services, India); Unninarayanan Kurup; Ashima Goyal (Indira Gandhi Institute of Development Research); Apoorva Singh and Rajendra Paramanik (Indian Institute of Technology, Patna)
    Abstract: Using minutes of consecutive Monetary Policy Committee (MPC) meetings of the Indian central bank, we have constructed two novel measures of implicit dissent at the individual level as well as across groups. We have used VADER sentiment analysis to arrive at the proposed measures and investigated their influence on anchoring Indian growth and inflation forecasts. Our empirical findings show discordance amongst members increases forecast accuracy. This implies promoting an environment that supports nuanced opinions could improve policy outcomes.
    Keywords: Monetary policy, Dissent, NLP, Supply shock, Linear Regression
    JEL: E52 E58 C22
    Date: 2023–03
  3. By: Jonung, Lars (Department of Economics, Lund University)
    Abstract: When Sweden left the gold standard on September 27, 1931, the Swedish government declared that the aim of monetary policy should be to stabilize the domestic purchasing power of the Swedish currency, the krona. With this step, price level targeting officially became for the first time the goal for a central bank. Soon after, the Riksbank (Bank of Sweden) sent a questionnaire to three prominent economics professors, Gustav Cassel, David Davidson and Eli Heckscher, asking for advice about the new monetary situation. In a few weeks, the Riksbank received their replies. <p> This paper presents the three reports, for decades kept as classified documents in the archives of the Riksbank. The reports give an excellent view of the monetary thinking in the early 1930s of the first generation of modern Swedish economists, prior to the outbreak of the world depression of the 1930s and the emergence of the Stockholm School in macroeconomics. The reports are strikingly modern. They deal with the central issues in the present discussion on inflation targeting, such as the choice of price index to target, the proper instrument to use, the importance of creating public credibility for the new monetary rule, potential legal changes to anchor the new standard, and the appropriate central bank response to changes in the exchange rate. In short, the three economists prepared the first practical guide to inflation targeting at the zero rate. <p> The paper also considers the impact of the reports on the policy of the Riksbank. Most strikingly, the Riksbank started to construct and collect a weekly consumer price index to use as a guide for implementing the new policy of price stabilization. This task was carried out by Dag Hammarskjöld under the guidance of Erik Lindahl.
    Keywords: Inflation targeting; price level targeting; Gustav Cassel; David Davidson; Eli Heckscher; Knut Wicksell; Dag Hammarskjöld; Erik Lindahl; the Riksbank; the Great Depression; Sweden
    JEL: B22 B25 D83 E31 E32 E50 F33 N14
    Date: 2023–04–03
  4. By: Oguzhan Cepni (Business School, Department of Economics, Porcelaenshaven 16A, Frederiksberg DK-2000, Denmark); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Jacobus Nel (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Joshua Nielsen (Boulder Investment Technologies, LLC, 1942 Broadway Suite 314C, Boulder, CO, 80302, USA)
    Abstract: First, we employ the Multi-Scale Log-Periodic Power Law Singularity Confidence Indicator (MS-LPPLS-CI) approach to identify both positive and negative bubbles in the short-, medium, and long-term for the Indian stock market. We successfully detect major crashes and rallies during the weekly period from November 2003 to December 2020. Second, we utilize a nonparametric causality-in-quantiles approach to analyze the predictive impact of monetary policy shocks on the six bubble indicators. This econometric framework allows us to circumvent potential misspecification due to nonlinearity and instability, rendering the results of no causal influence derived from a linear framework invalid. The two factors of monetary policy shocks namely, the target and path associated with short- and long-term interest rates, reveal strong evidence of predictability for the six bubble indicators across their entire conditional distributions. We observe relatively stronger impacts for the negative bubble indicators due to the target factor rather than the path factor of monetary policy shocks. Our findings have significant implications for the Reserve Bank of India, as well as for academics and investors.
    Keywords: Multi-Scale Positive and Negative Bubbles, Monetary Policy Shocks, Nonparametric Causality-in-Quantiles Test, India
    JEL: C22 E52 G10
    Date: 2023–03
  5. By: Tao Liu (Central University of Finance and Economics); Dong Lu (Renmin University of China); Liang Wang (University of Hawaii Manoa)
    Abstract: There have been two competing views on the structure of the international monetary system. One sees it as a unipolar system with a dominant currency, such as the U.S. dollar, while the other argues that multiple international currencies can coexist. Aiming to provide a unified theoretical framework to reconcile these two views, we develop a micro-founded monetary model to examine the interactions of two essential roles played by international currencies, the medium of exchange and the store of value, and highlight the importance of abundant safe asset supplies. When the two roles of international currencies reinforce each other, a unipolar equilibrium exists. However, when one currency is unable to serve as sufficient safe assets for international trade transactions, the two roles work against each other. Agents have the incentive to diversify their portfolio and we have a multipolar system. The effects of monetary policy, fiscal policy, and their combinations crucially depend on the total supply of safe assets and the relative importance of the two functions of international currencies. The structure of the international monetary system could be influenced by various policies such as monetary policy, fiscal policy, and financial sanctions. We also discuss welfare under different equilibria and the effect of financial sanctions on the dominant currency in a unipolar world.
    Keywords: International, Money, Multipolar, Safe Assets, Unipolar
    JEL: E42 E52 F33 F40
    Date: 2023–03
  6. By: Goodhart, Charles; Lastra, Rosa
    Abstract: In this paper, we analyse why the changing and growing roles of independent Central Banks now do require a reconsideration of their mandate.
    Keywords: accountability; central banking; financial stability; independence; monetary policy
    JEL: M40 J1
    Date: 2023–02–27
  7. By: Muñoz, Manuel A.; Soons, Oscar
    Abstract: The bulk of euro-denominated cash is held for store of value purposes, with such holdings sharply increasing in times of high economic uncertainty. We develop a Diamond and Dy-bvig model with public money as a store of value and heterogeneous beliefs about bank stability that accounts for this evidence. Consumers who are sufficiently pessimistic prefer to hold cash. In our model, the introduction of a central bank digital currency (CBDC) as a store of value that is superior to cash leads to bank disintermediation as some depositors opt for switching to CBDC based on their beliefs. While CBDC partially replaces deposits, long-term lending decreases less than proportionally as remaining depositors are, on aver-age, more optimistic about bank stability and banks re-balance their portfolio accordingly. The appropriate calibration of CBDC design features such as remuneration and quantity limits can mitigate these effects. We study the individual and social welfare implications of introducing CBDC as a store of value. JEL Classification: E41, E58, G11, G21
    Keywords: bank disintermediation, bank stability, cash, central bank digital currency, welfare
    Date: 2023–03
  8. By: Drago Bergholt; Francesco Furlanetto; Etienne Vaccaro-Grange
    Abstract: An apparent disconnect has taken place between inflation and economic activity in the US over the last 25 years, with price inflation remaining remarkably stable in spite of large fluctuations in the output gap and other measures of economic slack. This observation has led some to believe that the Phillips curve–a summary measure of aggregate supply–has flattened. We argue that this view may be premature and put forward a few, simple arithmetics which give rise to testable implications for demand and supply curve slopes. Equipped with New Keynesian theory and estimated SVAR models, we decompose the unconditional variation in US macro data into the components driven by demand and supply disturbances, and confront the inflation disconnect with our simple arithmetics. This exercise reveals a relatively stable supply curve slope once shocks to supply have been properly accounted for. The demand curve, instead, has flattened substantially in recent decades. Our results are at odds with a decline in the Phillips curve slope, but fully consistent with a shift towards a more firm monetary policy commitment to inflation stability.
    Keywords: Inflation, The Phillips curve, Monetary policy, Structural VAR models
    JEL: C3 E3 E5
    Date: 2023–02
  9. By: William Barnett (Department of Economics, University of Kansas and Center for Financial Stability, New York City); Sohee Park (Department of Economics, Valparaiso University, Valparaiso, IN 46383, USA)
    Abstract: We investigate the welfare cost of anticipated inflation, when the volume of credit card transactions is included in measured monetary service flows. We use the credit-card-augmented Divisia monetary aggregates in a nonlinear dynamic stochastic general equilibrium (DSGE) New Keynesian model and calculate the welfare costs of inflation. The welfare costs of inflation with credit card services included are greater than without them in the New Keynesian DSGE model. Because of the complexity of the model’s dynamical structure, we are not aware of a simple explanation for the increased welfare sensitivity to inflation.
    Keywords: Welfare Cost, Divisia, Credit-Card-Augmented Divisia, Monetary Aggregates, Money Demand, Inflation, nonlinear dynamics.
    JEL: E31 E41 E51 E52
    Date: 2023–04
  10. By: Fiorella De Fiore; Leonardo Gambacorta; Cristina Manea
    Abstract: We document some stylized facts on big tech credit and rationalize them through the lens of a model where big techs facilitate matching on the e-commerce platform and extend loans. The big tech reinforces credit repayment with the threat of exclusion from the platform, while bank credit is secured against collateral. Our model suggests that: (i) a rise in big techs' matching efficiency increases the value for firms of trading on the platform and the availability of big tech credit; (ii) big tech credit mitigates the initial response of output to a monetary shock, while increasing its persistence; (iii) the efficiency gains generated by big techs are limited by the distortionary fees collected from users.
    Keywords: Big Techs, monetary policy, credit frictions
    JEL: E44 E51 E52 G21 G23
    Date: 2023–04
  11. By: Andrew Metrick; Paul Schmelzing
    Abstract: U.S. and European banking institutions were hit by a wave of distress in March 2023. Policymakers on both sides of the Atlantic reacted with an array of interventions, some targeting individual institutions, others designed to shore up the banking sector as a whole. This paper contextualizes events using a new long-run database on banking-sector policy interventions over the last eight centuries. On that basis, recent actions have already been unusual in their policy mix and size – in the database, the vast majority of events with the same pattern of interventions ultimately evolved into “systemic” bank-distress episodes.
    JEL: G01
    Date: 2023–03
  12. By: Bańkowski, Krzysztof
    Abstract: Fiscal policy constitutes a key tool for business cycle stabilisation next to monetary policy. In this context, having a well-suited macroeconomic model for analysing fiscal policy at a central bank is of primary importance. This paper documents the fiscal block of the ECB-BASE, which is a semi–structural model for the euro area developed at the ECB for projections and policy analysis. The set-up of the fiscal block ensures comprehensive coverage of the government sector and tight links to the quarterly fiscal accounts. Thanks to this design, it is possible to simulate the model with a wide range of fiscal shocks, which, as shown in the paper, have distinct propagation mechanisms. Having discussed the set-up and the potency of fiscal policy in the model, this paper also includes the following applications for fiscal policy analysis: counterfactual scenarios with alternative fiscal rules, assessment of fiscal policy conducted in the euro area in the past and stochastic fiscal projections. JEL Classification: C3, C5, E1, E2, E6
    Keywords: euro area, fiscal policy, forecasting, semi-structural model, simulations
    Date: 2023–03
  13. By: Hao Jin (Beihang University); Junfeng Wang (Xiamen University)
    Abstract: This paper studies the local determinacy requirements and effects of a money-financed fiscal stimulus under fiscal stress in a canonical New Keynesian model. We consider three alternative monetary policies and find that:(1) The money-financed policy adopted in Galí (2020) to keep real debt level unchanged (zero-debt-increase policy, or ZDI) leads to an unsustainable debt path, while introducing a debt growth target restores stability. (2) A debt-targeting money growth rule (DT) generates smaller instantaneous multipliers and larger cumulative multipliers with respect to ZDI. (3) A mixed-targeting money growth rule (MT) that takes both debt and inflation into consideration exaggerates the trade-off between short-run and long-run multipliers. In addition, we show that relative to seiniorage, inflation and changes in the discount factor play more important roles in financing fiscal stimulus. The results above hold with alternative degree of price stickiness, velocity of money and steady state debt level. Moreover, the effectiveness of a money-financed fiscal stimulus increases when the government issues real instead of nominal debt.
    Keywords: Fiscal Stimulus; Fiscal Stress; Seigniorage; Government Debt
    Date: 2023–03
  14. By: Jaromir Benes; Tomas Motl; David Vavra
    Abstract: We introduce the mess, the MacroEconomic Stress Scenario builder, as a macroprudential modeling framework for practical application at policymaking institutions. The framework synthesizes the key insights from academic literature on financial cycles, interactions between the real economy and the financial system, and macroprudential policy. It features an explicit description of gross quantities on the financial sector’s balance sheet and explicit concepts of demand and supply on the credit market. The key equations linking the real economy and the financial sector are nonlinear, making it possible to realistically examine the costs and benefits of macroprudential policy. The intended use of the model is for policymaking institutions that need a tool which is theoretically consistent, but also malleable and flexible enough to be able to fit particular features of the economy and financial sector. The framework is already in use by financial stability authorities in several countries. This paper presents the model itself, the principles on which it is built, and use cases in policymaking institutions.
    Date: 2023–03
  15. By: Audrey Sallenave; Jean-Pierre Allegret (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis (1965 - 2019) - COMUE UCA - COMUE Université Côte d'Azur (2015-2019) - CNRS - Centre National de la Recherche Scientifique); Tolga Omay (Atilim Universitesi)
    Abstract: We use a sample of 40 developing and emerging countries over the period 1995- 2015 to assess the effectiveness of international reserve holding as a crisis mitigator. We test the relevance of the reserve accumulation decreasing returns assumption by estimating the most recent version of the PSTR model. We find that increasing stocks of international reserves allows domestic authorities to mitigate the negative impacts of financial and banking vulnerabilities on GDP growth rates leading to reject the decreasing returns assumption. This evidence is robust to sensitivity checks.
    Keywords: Banking vulnerabilities, Financial vulnerabilities, External shocks, Emerging and developing countries, Panel Smooth Transition Regression model, Reserves accumulation
    Date: 2023–02–16
  16. By: Corsetti, Giancarlo; Eichengreen, Barry; Hale, Galina; Tallman, Eric
    Date: 2023–04–02

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