nep-cba New Economics Papers
on Central Banking
Issue of 2023‒05‒01
seventeen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Central Bank Forecasting: A Survey By Carola Conces Binder; Rodrigo Sekkel
  2. CBDC policies in open economies By Andrej Sokol; Michael Kumhof; Marco Pinchetti; Phurichai Rungcharoenkitkul
  3. An Estimated Model of a Commodity-Exporting Economy for the Integrated Policy Framework: Evidence from Mongolia By Gan-Ochir Doojav; Munkhbayar Gantumur
  4. Optimal Disinflation and Reflation By Michl, Thomas R.
  5. Do non-banks need access to the lender of last resort? Evidence from fund runs By Breckenfelder, Johannes; Hoerova, Marie
  6. Identification of Systematic Monetary Policy By Lukas Hack; Klodiana Istrefi; Matthias Meier
  7. Effects of Banking Sector Cleanup on Lending Conditions- Evidence from Ukraine By Gan-Ochir Doojav; Munkhbayar Gantumur
  8. Impact of TLTRO III on bank lending: The Slovak experience By Juraj Falath; Alena Kissova; Adriana Lojschova
  9. Labor Market Effects of Monetary Policy Across Workers and Firms By Andreas Gulyas; Matthias Meier; Mykola Ryzhenkov
  10. What consistent responses on future inflation by consumers can reveal By Sarah Miller; Patrick Sabourin
  11. How Different is Euro Area and US Inflation? By Aydin Yakut, Dilan
  12. Real exchange rate and international reserves in the era of financial integration. By Joshua Aizenman; Sy-Hoa Ho; Luu Duc Toan Huynh; Jamel Saadaoui; Gazi Salah Uddin
  13. Banking Crises in Historical Perspective By Carola Frydman; Chenzi Xu
  14. Financial asymmetries between Euro area and the United States: An International Political Economy Perspective By Audrey Allegret Sallenave; Jean-Pierre Allegret; Dalia Ibrahim
  15. Effects of the Extraordinary Measures Implemented by Banco de México during the COVID-19 Pandemic on Financial Conditions By Alba Carlos; Cuadra Gabriel; Ibarra Raúl
  16. Does External Debt Drive Inflation in Sudan? Evidence from Symmetric and Asymmetric ARDL approaches By Sharaf, Mesbah Fathy; Shahen, Abdelhalem Mahmoud
  17. Supply Drivers of the US Inflation Since the Pandemic By Serdar Kabaca; Kerem Tuzcuoglu

  1. By: Carola Conces Binder; Rodrigo Sekkel
    Abstract: Central banks’ forecasts are important monetary policy inputs and tools for central bank communication. We survey the literature on forecasting at the Federal Reserve, European Central Bank, Bank of England and Bank of Canada, focusing especially on recent developments. After describing these central banks’ forecasting frameworks, we discuss the literature on central bank forecast evaluation and new tests of unbiasedness and efficiency. We also discuss evidence of central banks’ informational advantage over private sector forecasters—which appears to have weakened over time—and how central bank forecasts may affect private sector expectations even in the absence of an informational advantage. We discuss how the Great Recession led central banks to evaluate their forecasting frameworks and how the COVID-19 pandemic has further challenged central bank forecasting. Finally, we consider directions for future research.
    Keywords: Monetary policy
    JEL: E47 E58
    Date: 2023–03
  2. By: Andrej Sokol; Michael Kumhof; Marco Pinchetti; Phurichai Rungcharoenkitkul
    Abstract: We study the consequences for business cycles and welfare of introducing an interest-bearing retail CBDC, competing with bank deposits as medium of exchange, into an estimated 2-country DSGE environment. According to our estimates, financial shocks account for around half of the variance of aggregate demand and inflation, and for the bulk of the variance of financial variables. CBDC issuance of 30% of GDP increases output and welfare by around 6% and 2%, respectively. An aggressive Taylor rule for the interest rate on reserves achieves welfare gains of 0.57% of steady state consumption, an optimized CBDC interest rate rule that responds to a credit gap achieves additional welfare gains of 0.44%, and further gains of 0.57% if accompanied by automatic fiscal stabilizers. A CBDC quantity rule, a response to an inflation gap, CBDC as generalized retail access to reserves, and especially a cash-like zero-interest CBDC, yield significantly smaller gains. CBDC policies can substantially reduce the volatilities of domestic and cross- border banking flows and of the exchange rate. Optimal policy requires a steady state quantity of CBDC of around 40% of annual GDP.
    Keywords: central bank digital currencies, monetary policy, bank deposits, bank loans, monetary frictions, money demand, money supply, credit creation
    JEL: E41 E42 E43 E44 E52 E58 F41
    Date: 2023–04
  3. By: Gan-Ochir Doojav (Bank of Mongolia); Munkhbayar Gantumur (Bank of Mongolia)
    Abstract: This paper develops an estimated New Keynesian model of a commodity-exporting economy for an integrated policy framework, integrating the full range of policies used in practice and featuring a range of nominal and real rigidities, macro-financial linkages, and transmission channels of external shocks. We jointly examine the optimal conduct of conventional and unconventional monetary policies, macroprudential policy, foreign exchange intervention, capital flow management, and fiscal policy based on the model. The policy analysis framework is applied empirically to Mongolia, a small open, and developing economy highly dependent on imports and commodity exports. We find that an eclectic policy mix improves policy tradeoffs, and a lack of cooperation among policy authorities may result in conflicting policies, hence suboptimal results for overall economic stability. Our optimal policy analysis shows that policy mix adjustments should differ depending on the type of shocks and the policy objectives. The results suggest that the policy analysis framework can help policymakers choose their policy mix adjustments to deal with external shocks in an integrated and optimal way.
    Keywords: Monetary policy; Macroprudential policy; Foreign exchange intervention; Fiscal policy; Capital flow management; Optimal policy mix; Open economy macroeconomics; External shocks; Bayesian analysis
    JEL: C11 C32 E32 E43 E52 F41
    Date: 2023–04–10
  4. By: Michl, Thomas R. (Department of Economics, Colgate University)
    Abstract: This paper presents an alternative foundation to the standard quadratic loss function characterizing central bank inflation policy. The alternative treats high employment as a social benefit. In recognition of the inherent asymmetry of the output gap, two self-imposed constraints provide guardrails that rule out excess unemployment and opportunistic reflation. The loss function includes a novel reverse discounting mechanism that penalizes the bank for more sustained inflation gaps that could undermine confidence and reduce inflation expectations anchoring. Anchoring shapes the way the bank manages inflation expectations. In the absence of anchoring the shadow price of expectations is equal to the sacrifice ratio but in the presence of anchoring the shadow price drops to zero reflecting the policy flexibility anchoring affords the central bank. The central bank’s optimal policy differs dramatically from the standard Taylor Rule recommendation in choosing policy plans with higher employment, in its willingness to overshoot inflation targets, and in avoiding excess unemployment, all while observing the discipline needed for successful inflation targeting.
    JEL: E31
    Date: 2023–04–13
  5. By: Breckenfelder, Johannes; Hoerova, Marie
    Abstract: Are central bank tools effective in reaching non-banks with no access to the lender-of-last-resort facilities? Using runs on mutual funds in March 2020 as a laboratory, we show that, following the announcement of large-scale purchases, funds with higher ex ante shares of assets eligible for central bank purchases saw their performance improve by 3.6 percentage points and outflows decrease by 61% relative to otherwise similar funds. Following central bank liquidity provision to banks, the growth rate of repo lending to funds by banks more exposed to the system-wide liquidity crisis was up to five times higher compared to other banks. JEL Classification: E58, G01, G10, G21, G23
    Keywords: asset purchases, COVID-19 liquidity crisis, Investment funds, lender of last resort, market maker of last resort
    Date: 2023–04
  6. By: Lukas Hack; Klodiana Istrefi; Matthias Meier
    Abstract: We propose a novel identification design to estimate the causal effects of systematic monetary policy on the propagation of macroeconomic shocks. The design combines (i) a time-varying measure of systematic monetary policy based on the historical composition of hawks and doves in the Federal Open Market Committee (FOMC) with (ii) an instrument that leverages the mechanical FOMC rotation of voting rights. We apply our design to study the effects of government spending shocks. We find fiscal multipliers between two and three when the FOMC is dovish and below zero when it is hawkish. Narrative evidence from historical FOMC records corroborates our findings
    Keywords: Systematic monetary policy, FOMC, rotation, government spending
    JEL: E32 E52 E62 E63 H56
    Date: 2023–03
  7. By: Gan-Ochir Doojav (Bank of Mongolia); Munkhbayar Gantumur (Bank of Mongolia)
    Abstract: This study investigates the causal effects of the banking sector cleanup on lending conditions. To overcome the banking crisis consequences of 2014–2016, the National Bank of Ukraine changed its regulation approach to strict intolerance towards financially weak and opaque banks and launched the development of the macroprudential regulation concept. As a result, a significant number of banks, accounting for approximately one-third of pre-crisis banking assets, were declared insolvent or withdrawn from the market for other reasons. We analyze bank-firm-loan level data merged with information from borrowers' financial statements. Examining a significant set of loan, bank, and borrower characteristics, we cannot conclude that lending conditions have definitely tightened since the cleanup of the banking sector. On the one hand, banks reduce large exposures in response to stricter regulatory requirements, primarily for lending to related parties, thereby decreasing the loan amount on average. On the other hand, loan interest rates decline due to monetary policy easing. As the risks for banks gradually decreased over time, interest spreads also narrowed, which was reflected in lower loan prices. At the same time, banks deteriorate lending conditions for loss-making firms- loan size significantly decreases compared to the whole sample of firms, and interest rates rise. Furthermore, bank requirements for financial performance of corporates become more stringent and generally do not ease to pre-policy levels over time. Finally, the results suggest that the crucial factors for corporate borrowers to receive a loan from a new bank after their bank closure are firm profitability at the time of a new match and loans quality in closed banks.
    Keywords: Banking sector cleanup; Bank liquidations; lending conditions
    JEL: C21 C41 G21 G28
    Date: 2023–04–10
  8. By: Juraj Falath (National Bank of Slovakia); Alena Kissova (National Bank of Slovakia); Adriana Lojschova (National Bank of Slovakia)
    Abstract: We investigate the impact of the TLTRO III operations introduced by the European Central Bank in 2020 on the bank lending activity of Slovak banks, using unique bank-level data on the program. We deploy a difference-in-difference approach on monthly data covering the time period from January 2012 o December 2021with 34 banks included in the analysis. Our findings suggest that the credit easing measures had a positive effect on bank lending to non- inancial corporations and negative effect on lending rates, even when controlling for possible confounding factors. We also explore other possible uses of TLTRO III liquidity by banks besides increased lending. Although inconclusive, there is some evidence of banks improving their profitability via holding cheap liquidity in their deposit accounts and to a lesser extent via increasing their holdings of debt securities.
    JEL: E43 E44 E51 E52 E58
    Date: 2023–03
  9. By: Andreas Gulyas; Matthias Meier; Mykola Ryzhenkov
    Abstract: This paper uses Austrian social security records to analyze the effects of ECB monetary policy on the labor market. Our focus is on the role of worker and firm wage components, defined by an Abowd et al. (1999) wage regression. Our findings show that monetary tightening causes the largest employment losses for low-paid workers who are employed in high-paying firms before the tightening. Monetary tightening further causes a reallocation of workers to lower-paying firms. In particular low-paid workers who were originally employed by low-paying firms are prone to falling down the firm wage ladder.
    Keywords: Monetary policy, worker reallocation, heterogeneity, AKM
    JEL: E24 E32 E52
    Date: 2023–03
  10. By: Sarah Miller; Patrick Sabourin
    Abstract: Inflation expectations play a vital role in determining inflation. Central bankers need to understand their intricacies and the information they can reveal. We look at the consistency of consumers’ answers to questions on inflation expectations in the Bank of Canada’s Canadian Survey of Consumer Expectations. We analyze factors that may explain consistencies among individuals and overall. We also compare the inflation forecasts of consumers with consistent responses with those of professional forecasters and consumers with varying responses.
    Keywords: Central bank research; Inflation and prices
    JEL: E31 D84
    Date: 2023–03
  11. By: Aydin Yakut, Dilan (Central Bank of Ireland)
    Abstract: Larger and more sustained energy and commodity price shocks as a result of the war in Ukraine are contributing to higher headline inflation in the euro area (EA), when compared with the US. Underneath the headline numbers, trend inflation – something monetary policy-makers pay close attention to in order to get a sense of persistence in inflation dynamics – is still lower in the EA, mainly due to lower services inflation. However, this gap in trend inflation is gradually closing and even slightly reversed recently when owneroccupied housing services costs are excluded from US inflation.
    Date: 2023–02
  12. By: Joshua Aizenman; Sy-Hoa Ho; Luu Duc Toan Huynh; Jamel Saadaoui; Gazi Salah Uddin
    Abstract: The global financial crisis has brought increased attention to the consequences of international reserves holdings. In an era of high financial integration, we investigate the relationship between the real exchange rate and international reserves using nonlinear regressions and panel threshold regressions over 110 countries from 2001 to 2020. We find the buffer effect of international reserves is more pronounced in Europe and Central Asia above a threshold of 17% of international reserves over GDP. Our study shows the level of financial-institution development plays an essential role in explaining the buffer effect of international reserves. Countries with a low development of their financial institutions may manage the international reserves as a shield to deal with the negative consequences of terms-of-trade shocks on the real exchange rate. We also find the buffer effect is stronger in countries with intermediate levels of financial openness.
    Keywords: Real exchange rate, International reserves, Financial institutions.
    JEL: F15 F21 F32 F36 G20
    Date: 2023
  13. By: Carola Frydman; Chenzi Xu
    Abstract: This paper surveys the recent empirical literature on historical banking crises, defined as events taking place before 1980. Advances in data collection and identification have provided new insights into the causes and consequences of crises both immediately and over the long run. We highlight three overarching threads that emerge from the literature: first, leverage in the financial system is a systematic precursor to crises; second, crises have negative effects on the real economy; and third, government interventions can ameliorate these effects. Contrasting historical episodes reveals that the process of crisis formation and evolution does vary significantly across time and space. Thus, we also highlight specific institutions, regulations and historical contexts that give rise to these divergent experiences. We conclude by identifying important gaps in the literature and discussing avenues for future research.
    JEL: E44 E58 G01 G21 N10 N20
    Date: 2023–03
  14. By: Audrey Allegret Sallenave (LEAD - Laboratoire d'Économie Appliquée au Développement - UTLN - Université de Toulon); 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); Dalia Ibrahim (Banque de France - Banque de France - Banque de France)
    Abstract: This paper assesses financial asymmetries between the Euro area and the United Stats using a financial accelerator framework. We estimate a GVAR model from 1995Q1 to 2016Q4 and find (i) that American financial shocks have a global influence whereas those of the Euro area are regional and (ii) that American financial shocks have larger effects in size than those of the Euro area. We develop an International Political Economy framework based on the concept of asymmetrical interdependence to point out policy suggestions whose the main objective is to increase the autonomy of the Euro area.
    Keywords: Complex Interdependence, Financial Accelerator, United States, Euro area, GVAR
    Date: 2023
  15. By: Alba Carlos; Cuadra Gabriel; Ibarra Raúl
    Abstract: This paper analyzes the effects of the extraordinary measures implemented by the Bank of Mexico during the COVID-19 pandemic on financial conditions. For this purpose, we estimate a factor-augmented vector autoregressive (FAVAR) model for the period 2001-2021. Based on this model, we construct a financial conditions index, estimate the response of this indicator and its components from a shock to the outstanding amount of these measures, and conduct a counterfactual exercise to further analyze the effect of the aforementioned measures. The results indicate that the extraordinary measures seem to have contributed to improve financial conditions. In particular, we find that if these measures had not been implemented, the sovereign risk premium, the 10-year government bond yield, the slope of the yield curve, the long and short-term yield spreads between Mexico and USA, the exchange rate and its volatility would have been higher. In turn, the Mexican stock market index would have been lower.
    Keywords: Financial Conditions;Central Bank Policies;Factor-Augmented VAR
    JEL: C32 E58 G01 E44
    Date: 2023–03
  16. By: Sharaf, Mesbah Fathy; Shahen, Abdelhalem Mahmoud
    Abstract: This study aims to examine the symmetric and asymmetric impact of external debt on inflation in Sudan from 1970 to 2020 within a multivariate framework by including money supply and the nominal effective exchange rate as additional inflation determinants. We utilize an Auto Regressive Distributed Lag (ARDL) model to examine the symmetric impact of external debt on inflation, while the asymmetric impact is examined using a nonlinear Auto Regressive Distributed Lag (NARDL) model. The existence of a long-run relationship between inflation and external debt is tested using the bounds-testing approach to cointegration, and a vector error-correction model is estimated to determine the short parameters of equilibrium dynamics. The linear ARDL model results show that external debt has no statistically significant impact on inflation in the long run. On the contrary, the results of the NARDL model show that positive and negative external debt shocks statistically affect inflation in the long run. The estimated long-run elasticity coefficients of both the linear and nonlinear ARDL models reveal that the domestic money supply has a statistically significant positive impact on inflation. In contrast, the nominal effective exchange rate has a statistically significant negative impact on inflation. The reliance on symmetric analysis may not be sufficient to uncover the existence of a linkage between external debt and inflation. Proper external debt management is crucial to control inflation rates in Sudan.
    Keywords: External Debt; Exchange rate; Inflation; Money supply; NARDL; Sudan
    JEL: E31 E52 F34 O24
    Date: 2023–03–01
  17. By: Serdar Kabaca; Kerem Tuzcuoglu
    Abstract: This paper examines the contribution of several supply factors to US headline inflation since the start of the COVID-19 pandemic. We identify six supply shocks using a structural VAR model: labor supply, labor productivity, global supply chain, oil price, price mark-up and wage mark-up shocks. Our shock identification relies mainly on sign restrictions. But for the global supply chain shock, we propose a new identification scheme combining sign, narrative and variance decomposition restrictions. Historical decomposition results suggest that global supply chain and oil price shocks are the biggest supply contributors to the US inflation during the pandemic. In contrast, labor shortages only mildly contribute to inflation, but their impact on output is larger in that period. Additionally, price and wage mark-up shocks start to significantly contribute to inflation only towards the middle of 2022. Finally, our analysis, which also allows the identification of monetary policy and aggregate demand shocks, suggests that demand and supply factors are almost equally responsible for the movements in the inflation rate during the pandemic.
    Keywords: Business fluctuations and cycles; Econometric and statistical methods; Inflation and prices
    JEL: C32 E32
    Date: 2023–03

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