nep-cba New Economics Papers
on Central Banking
Issue of 2023‒05‒29
seventeen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Bank capitalization heterogeneity and monetary policy By Peter Paz
  2. Dampening global financial shocks: can macroprudential regulation help (more than capital controls)? By Katharina Bergant; Francesco Grigoli; Niels-Jakob Hansen; Katharina Damiano Sandri
  3. The Energy-Price Channel of (European) Monetary Policy By Gökhan Ider; Alexander Kriwoluzky; Frederik Kurcz; Ben Schumann
  4. Can We Use High-frequency Yield Data to Better Understand the Effects of Monetary Policy and Its Communication? Yes and No! By Jonathan Hambur; Qazi Haque
  5. A Simple Model of a Central Bank Digital Currency By Bineet Mishra; Eswar S. Prasad
  6. Market-Function Asset Purchases By Darrell Duffie; Frank M. Keane
  7. Do buffer requirements for european systemically important banks make them less systemic? By Carmen Broto; Luis Fernández Lafuerza; Mariya Melnychuk
  8. “Making Text Talk”: The Minutes of the Central Bank of Brazil and the Real Economy By Carlos Moreno Pérez; Marco Minozzo
  9. Inflation as Redistribution. Creditors, Workers, Policymakers By Bichler, Shimshon; Nitzan, Jonathan
  10. Macroprudential FX Regulations: Sacrificing Small Firms for Stability? By María Alejandra Amado
  11. Inflation Surge and Sovereign Borrowing: The Role of Policy Practices in Strengthening Sovereign Resilience By Joshua Aizenman; Huanhuan Zheng
  12. The Transmission of Negative Nominal Interest Rates in Finland By Simon H. Kwan; Mauricio Ulate; Ville Voutilainen
  13. Money market funds and the pricing of near-money assets By Sebastian Doerr; Sebastian Egemen Eren; Semyon Malamud
  14. Balance Sheet Policies in an Evolving Economy: Some Modelling Advances and Illustrative Simulations By Hess T. Chung; Etienne Gagnon; James Hebden; Kyungmin Kim; Bernd Schlusche; Eric Till; James Trevino; Diego Vilán
  15. Effectiveness of Foreign Exchange Interventions Evidence and Lessons from Chile By Jorge Arenas; Stephany Griffith-Jones
  16. It’s Baaack: The Surge in Inflation in the 2020s and the Return of the Non-Linear Phillips Curve By Pierpaolo Benigno; Gauti B. Eggertsson
  17. Too-many-to-fail and the Design of Bailout Regimes By Wolf Wagner; Jing Zeng

  1. By: Peter Paz (Banco de España)
    Abstract: This paper shows that heterogeneity in bank capitalization ratios plays a crucial role in the transmission of monetary policy to bank lending. First, I offer new empirical evidence on how banks’ lending responses to monetary policy shocks depend on their capitalization ratios. Highly capitalized banks reduce their lending more after a monetary tightening, even after controlling for bank liquidity, size and market power in the deposit market. I also document how highly capitalized banks have a riskier portfolio, as measured by loan charge-off rates, and default rates on their loans increase relatively more after a tightening in monetary policy. I then construct a dynamic macroeconomic model that rationalizes the empirical evidence through the interaction of the heterogeneous recovery technologies of banks facing a risk-weighted capital constraint. In particular, after an increase in the policy rate, the model predicts that loan rates and default probabilities increase in both sectors. Highly capitalized banks with a riskier portfolio are more sensitive because the risk-weighted capital constraint affects them more, so they contract lending more. In a counterfactual analysis, I find higher capital requirements amplify the effects of monetary policy.
    Keywords: monetary policy, banks, heterogeneity
    JEL: E43 E52 E58 E60 G21
    Date: 2022–10
  2. By: Katharina Bergant; Francesco Grigoli; Niels-Jakob Hansen; Katharina Damiano Sandri
    Abstract: We show that macroprudential regulation significantly dampens the impact of global financial shocks on emerging markets. Specifically, a tighter level of regulation reduces the sensitivity of GDP growth to capital flow shocks and movements in the VIX. A broad set of macroprudential tools contributes to this result, including measures targeting bank capital and liquidity, foreign currency mismatches, and risky credit. We also find that tighter macroprudential regulation allows monetary policy to respond more countercyclically to global financial shocks. This could be an important channel through which macroprudential regulation enhances macroeconomic stability. We do not find evidence that capital controls provide similar benefits.
    Keywords: macroprudential regulation, monetary policy, capital controls
    JEL: F3 F4 E5
    Date: 2023–05
  3. By: Gökhan Ider; Alexander Kriwoluzky; Frederik Kurcz; Ben Schumann
    Abstract: This study examines whether central banks can combat inflation that is caused by rising energy prices. By using a high-frequency event study and a Structural Vector Autoregression, we find evidence that the European Central Bank (ECB) and the Federal Reserve (Fed) are capable of doing so by affecting domestic and global energy prices. This “energy-price channel” of monetary policy plays an important role in the transmission mechanism of monetary policy. As many major sources of energy, such as oil, are priced in dollars, fluctuations in the domestic exchange rate vis-a-vis the dollar crucially shapes the transmission of monetary policy to energy prices. On the one hand an appreciation of the euro against the dollar lowers local energy prices (in euro) through cheaper imports. On the other hand lower import prices raise energy demand and thereby increase global energy prices (in dollars). Our counterfactual analysis demonstrates that both effects are present, but the latter effect is stronger than the former.
    Keywords: Inflation, energy prices, monetary policy transmission mechanism
    JEL: C22 E31 E52 Q43
    Date: 2023
  4. By: Jonathan Hambur (Reserve Bank of Australia); Qazi Haque (University of Adelaide)
    Abstract: Understanding the effects of monetary policy and its communication is crucial for a central bank. This paper explores a new approach to identifying the effects of monetary policy using high-frequency data around monetary policy decisions and other announcements that allows us to explore different facets of monetary policy, specifically: current policy action; signalling or forward guidance about future rates; and the effect on uncertainty and term premia. The approach provides an intuitive lens through which to understand how policy and its communication affected expectations for rates and risks during certain historical periods, and more generally. For example, it suggests that: (i) signalling/forward guidance shocks tended to raise expected future policy rates in the mid-2010s as the RBA highlighted rising risks in housing markets; (ii) COVID-19-era monetary policy worked mainly through affecting term premia rather than expectations for future policy rates, unlike pre-COVID-19 policy; and (iii) shocks to the expected path of rates are predictable based on data available at the time, which suggests that markets systematically misunderstand how the RBA reacts to data, highlighting the importance of clear communication. We also explore the macroeconomic effects of these different shocks. The effects of shocks to current policy are similar to those estimated in previous papers, and existing issues such as the 'price puzzle' remain, while the effects of other shocks are imprecisely estimated. Although the approach provides little new information on the macroeconomic effects of monetary policy, it does highlight the importance of these other facets of policy in moving interest rates and suggests additional work in this space could be valuable.
    Keywords: high-frequency data; affine term structure model; multidimensional policy shocks; monetary policy transmission
    JEL: C58 E43 E52 E58
    Date: 2023–05
  5. By: Bineet Mishra; Eswar S. Prasad
    Abstract: We develop a general equilibrium model that highlights the trade-offs between physical and digital forms of retail central bank money. The key differences between cash and central bank digital currency (CBDC) include transaction efficiency, possibilities for tax evasion, and, potentially, nominal rates of return. We establish conditions under which cash and CBDC can co-exist and show how government policies can influence relative holdings of cash, CBDC, and other assets. We illustrate how a CBDC can facilitate negative nominal interest rates and helicopter drops, and also how a CBDC can be structured to prevent capital flight from other assets.
    JEL: E4 E5 E61
    Date: 2023–04
  6. By: Darrell Duffie; Frank M. Keane
    Abstract: This paper investigates the goals, costs, and benefits of official-sector purchases of government securities for the purpose of restoring market functionality. We explore the design of market-function purchase programs, including their communication, triggers, operational protocols, exit, and wind-down strategies. We further discuss whether, under some circumstances, fiscal buybacks might be a useful alternative or complement to central-bank market-function purchase programs, and how these buybacks could be funded. The use of fiscal buybacks to support market functionality can be aligned with the fiscal authority’s goal of minimizing the government’s interest expense and can reduce challenges that can be faced by a central bank when asset purchases are not naturally congruent with monetary policy. Depending on the setting and circumstances, fiscal buybacks can also mitigate perceptions of risks to the central bank’s independence.
    Keywords: government securities; financial stability; bond markets; central banking; debt management
    JEL: D53 E52 E58 E44 E61
    Date: 2023–02–01
  7. By: Carmen Broto (Banco de España); Luis Fernández Lafuerza (Banco de España); Mariya Melnychuk (Banco de España)
    Abstract: Buffers for systemically important institutions (SIIs) were designed to mitigate the risks posed by these large and complex banks. With a panel data model for a sample of listed European banks, we demonstrate that capital requirements for SIIs effectively reduce the perceived systemic risk of these institutions, which we proxy with the SRISK indicator in Brownlees and Engle (2017). We also study the impact of the adjustment mechanisms that banks use to comply with SII buffer requirements and their contribution to systemic risk. The results show that banks mainly respond to higher SII buffers by increasing their equity, as intended by the regulators. Once we control for the options SIIs employ to fulfil these requirements and SII characteristics (e.g. total asset size), we find a residual effect of having SII status. This result suggests that being an SII provides a positive signal to markets by further decreasing its contribution to systemic risk.
    Keywords: capital requirements, systemically important institutions, systemic risk, SRISK, macroprudential policy
    JEL: C54 E58 G21 G32
    Date: 2022–12
  8. By: Carlos Moreno Pérez (Banco de España); Marco Minozzo (University of Verona)
    Abstract: This paper investigates the relationship between the views expressed in the minutes of the meetings of the Central Bank of Brazil’s Monetary Policy Committee (COPOM) and the real economy. It applies various computational linguistic machine learning algorithms to construct measures of the minutes of the COPOM. First, we create measures of the content of the paragraphs of the minutes using Latent Dirichlet Allocation (LDA). Second, we build an uncertainty index for the minutes using Word Embedding and K-Means. Then, we combine these indices to create two topic-uncertainty indices. The first one is constructed from paragraphs with a higher probability of topics related to “general economic conditions”. The second topic-uncertainty index is constructed from paragraphs that have a higher probability of topics related to “inflation” and the “monetary policy discussion”. Finally, we employ a structural VAR model to explore the lasting effects of these uncertainty indices on certain Brazilian macroeconomic variables. Our results show that greater uncertainty leads to a decline in inflation, the exchange rate, industrial production and retail trade in the period from January 2000 to July 2019.
    Keywords: Central Bank of Brazil, monetary policy communication, Latent Dirichlet Allocation, monetary policy uncertainty, Structural Vector Autoregressive model, Word Embedding
    JEL: C32 C45 D83 E52
    Date: 2022–11
  9. By: Bichler, Shimshon; Nitzan, Jonathan
    Abstract: This paper is part of a dialogue with Blair Fix on how inflation redistributes income between creditors and workers and the way in which monetary policy affects this process. In his 2023 paper, ‘Inflation! The Battle Between Creditors and Workers’, Fix shows, first, that the impact of U.S. inflation on creditor-worker distribution has been historically contingent (favouring workers during some periods and creditors in others); and second, that since the 1970s, Fed policy to combat inflation with higher interest rates boosted the yield of creditors relative to the wage rate of workers. Our own research suggests that these conclusions might be too general. We point out that creditors are not a monolithic class and that different types of creditors are affected differently, and often inversely, by the rate of interest. We illustrate that, contrary to bank depositors, bondholders tend to lose from inflation. And we show that monetary policy, at least in the United States, appears to follow rather than determine market yields. More generally, since most capitalists nowadays are lenders as well as borrowers, and given that ‘dominant capital’ profits from the full spectrum of investment instruments, we wonder if ‘creditors’ is still a useful category for analysing redistribution in general and inflationary redistribution in particular.
    Keywords: Blair Fix, bond yields, creditors, income distribution, inflation, interest rate, monetary policy, total returns, wages
    JEL: G12 E5 J3 D3 E5
    Date: 2023
  10. By: María Alejandra Amado (Banco de España)
    Abstract: Macroprudential FX regulation may reduce systemic risk; however, little is known about its unintended consequences. I propose a theoretical mechanism in which currency mismatch acts as a means for relaxing small firms’ borrowing constraints, and show that policies taxing dollar lending may increase financing disparities between small and large firms. To verify this empirically, I study the implementation of a macroprudential FX tax by the Central Bank of Peru. I construct a novel dataset that combines confidential credit register data with firm-level data on employment, sales, industry and geographic location for the universe of formally registered firms. I show that a 10% increase in bank exposure to the tax significantly increases disparities in the growth of total loans between small and large firms by 1.6 percentage points. When accounting for firms switching to soles financing from different banks, the effect on large firms’ debt is only compositional. Using a confidential dataset on the universe of FX derivative contracts, I show that firms that are mostly affected by the policy are not hedged through FX derivatives. Additional findings using survey data suggest that this policy has potential heterogeneous implications for firms’ real outcomes.
    Keywords: macroprudential FX regulations, currency mismatch, small firms, FX derivatives, emerging markets, borrowing constraints, bank lending channel
    JEL: E43 E58 F31 F38 F41
    Date: 2022–10
  11. By: Joshua Aizenman; Huanhuan Zheng
    Abstract: Sovereign borrowing during inflation surges is a litmus test of a government’s ability to withstand and navigate macroeconomic shocks. Based on transaction-level bond issuance data, we explore how sovereign financing strategies respond to inflation surges and how policy practices affect their ability to weather inflation shocks. We find that governments rely more on foreign-currency debt from foreign investors during periods of high inflation. This pattern is particularly prevalent in emerging markets (EMs), especially when the inflation surge is prolonged and severe. We further show that good practices of fiscal discipline, credibly pegged exchange regime, open capital account, and monetary dependence alleviate the need to borrow foreign capital in foreign currency during periods of inflation surges.
    JEL: F21 F31
    Date: 2023–04
  12. By: Simon H. Kwan; Mauricio Ulate; Ville Voutilainen
    Abstract: Despite the implementation of negative nominal interest rates by several advanced economies in the last decade and the many papers that have been written about this novel policy tool, there is still much we do not know about the effectiveness of this instrument. The pass-through of negative policy rates to loan rates is one of the main points of contention. In this paper, we analyze the pass-through of the ECB’s changes in the deposit facility rate to mortgage rates in Finland between 2005 and 2020. We use monthly data and three different empirical methodologies: correlational event studies, high-frequency identification, and exposure-measure regressions. We provide robust evidence that there continues to be pass-through of a cut in the policy rate to mortgage rates even when the policy rate is in negative territory, but that this pass-through is smaller than when the policy rate is in positive territory. The evidence in this paper contrasts with some previous studies and provides moments that can be useful to discipline theoretical negative-rates models.
    Keywords: negative nominal interest rates; Finland; European Central Bank (ECB); negative rates; mortgage rates
    Date: 2023–04–20
  13. By: Sebastian Doerr; Sebastian Egemen Eren; Semyon Malamud
    Abstract: US money market funds (MMFs) play an important role in short-term markets as large investors of Treasury bills (T-bills) and repurchase agreements (repos). We build a theoretical model in which MMFs strategically interact with banks and each other. These interactions generate interdependencies between repo and T-bill markets, affecting the pricing of these near-money assets. Consistent with the model's predictions, we empirically show that when MMFs allocate more cash to the T-bill market, T-bill rates fall, and the liquidity premium on T-bills rises. To establish causality, we devise instrumental variables guided by our theory. Using a granular holding-level dataset to examine the channels, we show that MMFs internalize their price impact in the T-bill market when they set repo rates and tilt their portfolios towards repos with the Federal Reserve when Treasury market liquidity is low. Our results have implications for the transmission of monetary policy, benchmark rates, and government debt issuance.
    Keywords: T-bills, repo, money market funds, near-money assets, liquidity
    JEL: E44 G11 G12 G23
    Date: 2023–05
  14. By: Hess T. Chung; Etienne Gagnon; James Hebden; Kyungmin Kim; Bernd Schlusche; Eric Till; James Trevino; Diego Vilán
    Abstract: Once considered "unconventional, " balance sheet policies have become an integral part of the toolkit of many central banks. Increased reliance on balance sheet policies reflects in part a decline in the neutral level of interest rates, which limits central banks' ability to cut their policy rates to support the economy during downturns, and many observers expect that neutral level to remain low relative to its historical average in the coming decades.
    Date: 2023–02–03
  15. By: Jorge Arenas; Stephany Griffith-Jones
    Abstract: In this article we evaluate the effectiveness of the last two foreign exchange interventions (FXI) of the Central Bank of Chile (BCCh), dated 2019 and 2022. Using data with daily and intra-daily frequency for the nominal exchange rate, results show through different empirical methods that both intervention episodes have significant effects in the expected direction on the level and volatility of the exchange rate. The effects associated with the 2019 and 2022 interventions are appreciations of an average of 2% and 6%, respectively. The estimated decrease in volatility is also greater in the 2022 intervention. The results support the implications of the different mechanisms that have been proposed in the literature to understand the effectiveness of FXI. Simultaneously, these results suggest that intervening the forward market seems just as effective as intervening into the spot market.
    Date: 2023–04
  16. By: Pierpaolo Benigno; Gauti B. Eggertsson
    Abstract: This paper proposes a non-linear New Keynesian Phillips curve (Inv-L NK Phillips Curve) to explain the surge of inflation in the 2020s. Economic slack is measured as firms' job vacancies over the number of unemployed workers. After showing empirical evidence of statistically significant nonlinearities, we propose a New Keynesian model with search and matching frictions, complemented by a form of wage rigidity, in the spirit of Phillips (1958), that generates strong nonlinearities. Policy implications include the thesis that appropriate monetary policy can bring inflation down without a significant recession and that the recent inflationary surge was mostly generated by a labor shortage -- i.e. an exceptionally tight labor market.
    JEL: E12 E3 E30 E40 E50 E60
    Date: 2023–04
  17. By: Wolf Wagner (Erasmus University and CEPR); Jing Zeng (University of Bonn and CEPR)
    Abstract: We analyze the design of bailout regimes when investment is distorted by a too-many-to-fail problem. The first-best allocation equalizes benefits from more banks investing in high-return projects with endogenously higher systemic risk due to more banks failing simultaneously. A standard bailout policy cannot implement the first-best, as bailouts cause herding by banks. However, a bailout policy that assigns banks to separate bailout regimes eliminates herding and achieves the first-best. When such a policy is not feasible, targeted bailouts can be implemented by decentralizing bailout decisions to independent regulators. Our results have various implications for the optimal allocation of regulatory powers, both at the international level and domestically.
    Keywords: systemic risk, too-many-to-fail, optimal investment, bailouts
    JEL: G1 G2
    Date: 2023–05

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