nep-cba New Economics Papers
on Central Banking
Issue of 2023‒06‒12
eighteen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Is Quantitative Easing Productive? The Role of Bank Lending in the Monetary Transmission Process By Francisco Serranito; Philipp RODERWEIS; Jamel Saadaoui
  2. Does Monetary Policy Reinforce the Effects of Macroprudential Policy By Adam Gersl; Barbara Livorova
  3. CBDC and business cycle dynamics in a New Monetarist New Keynesian model By Assenmacher, Katrin; Bitter, Lea; Ristiniemi, Annukka
  4. Monetary Policy without Commitment By Hassan Afrouzi; Marina Halac; Kenneth S. Rogoff; Pierre Yared
  5. Not all ECB meetings are created equal By Sinem Kandemir; Peter Tillmann
  6. Monetary Policy Uncertainty in Mexico: An Unsupervised Approach By Carlos Moreno Pérez; Marco Minozzo
  7. Bank Regulation and Sovereign Risk: A Paradox By António Afonso; André Teixeira
  8. Longer-Run Neutral Rates in Major Advanced Economies By Carolyn Davin; Thiago Revil T. Ferreira
  9. Stress testing with multi-faceted liquidity: the central bank collateral framework as a financial stability tool By Cuzzola, Angelo; Barbieri, Claudio; Bindseil, Ulrich
  10. Reviewing Canada’s Monetary Policy Implementation System: Does the Evolving Environment Support Maintaining a Floor System? By Toni Gravelle; Ron Morrow; Jonathan Witmer
  11. Labor Market Effects of Monetary Policy Across Workers and Firms By Lukas Hack; Klodiana Istrefi; Matthias Meier
  12. Evaluating central bank asset purchases in a term structure model with a forward-looking supply factor By Juan Equiza; Ricardo Gimeno; Antonio Moreno; Carlos Thomas
  13. An Examination of First-Mover Advantage for a CBDC By Ken Isaacson; Jesse Leigh Maniff; Paul Wong
  14. Monetary Policy with Racial Inequality By Makoto Nakajima
  15. Theoretical Foundations of the Dependent Monetary Regimes By Nikolay Nenovsky
  16. Reframing The US Dollar Debate: What Outlook for the US Dollar as World Money? By Jeremy Srouji
  17. Inflation Strikes Back: The Role of Import Competition and the Labor Market By Mary Amiti; Sebastian Heise; Fatih Karahan; Ayşegül Şahin
  18. Could Spain be less different? Exploring the effects of macroprudential policy on the house price cycle By Adrian Carro

  1. By: Francisco Serranito; Philipp RODERWEIS; Jamel Saadaoui
    Abstract: The European Central Bank’s (ECB) quantitative easing (QE) program was supposed to stimulate the real economy and be able to control inflation rates. Nevertheless, primarily the financial sector has benefited from the asset purchase program. Transmission was not taking place as desired, with commercial banks as money creators and thus liquidity distributors at the center of its inefficiency. Accordingly, this article aims to examine the transmission of central bank money to the euro area economy via the banking system and the corresponding bank lending channel (BLC). To bring clarity to the economic debate about the effectiveness of the BLC, bank lending and additional macroeconomic variables are divided into productive and unproductive. We analyze how these data react to an exogenous monetary policy shock in excess reserves, which is identified using different identification schemes before deploying least-square and penalized local projection (LP) methods. Following the estimation results, it can be concluded that a liquidity increase via quantitative easing cannot stimulate economic activity-enhancing lending in the euro area but, on the contrary, tends to disincentivize it. On the other hand, it drives lending to an unproductive sector. Additionally, this is confirmed by the fact that prices, especially in the housing sector, react significantly positively to a QE shock, whereas, on the contrary, producer prices in the industrial sector and inflation are not affected by unconventional monetary policy.
    Keywords: unconventional monetary policy, bank lending, local projection, identification, zero- and sign restrictions
    JEL: C32 E44 E51 E52
    Date: 2023
  2. By: Adam Gersl (Institute of Economic Studies, Faculty of Social Sciences, Charles University); Barbara Livorova (Institute of Economic Studies, Faculty of Social Sciences, Charles University & Czech National Bank)
    Abstract: This paper contributes to studying the interaction between monetary and macroprudential policies by examining whether the impact of macroprudential policy on credit and house price growth differs between the two key phases of monetary policy cycle, i.e. monetary policy tightening and loosening. The dataset covers 33 advanced and 33 emerging market countries in the period 1990 - 2019 in quarterly frequency. Using the GMM estimation method, the results show that tightening of monetary policy does on average reinforce the effects of macroprudential policy on credit and house prices. Furthermore, we show that this reinforcing effect works for some but not all types of macroprudential policy measures, and that the results differ between advanced countries and emerging markets.
    Keywords: Macroprudential Policy, Monetary Policy Cycle, Credit Growth, House Price Growth, Interaction of Policies
    JEL: E52 E58 G21 G28 E32
    Date: 2023–05
  3. By: Assenmacher, Katrin; Bitter, Lea; Ristiniemi, Annukka
    Abstract: To study implications of an interest-bearing CBDC on the economy, we integrate a New Monetarist-type decentralised market that explicitly accounts for the means-of-exchange function of bank deposits and CBDC into a New Keynesian model with financial frictions. The central bank influences the store-of-value function of money through a conventional Taylor rule while it affects the means-of-exchange function of money through CBDC operations. Peak responses to monetary policy shocks remain similar in the presence of an interest-bearing CBDC, implying that monetary transmission is not impaired. At the same time however, the provision of CBDC helps smooth responses to macroeconomic shocks. By supplying CBDC, the central bank contributes to stabilising the liquidity premium, thereby affecting bank funding conditions and the opportunity costs of money, which dampens and smoothes the reaction of investment and consumption to macroeconomic shocks. JEL Classification: E58, E41, E42, E51, E52
    Keywords: Central bank digital currency, DSGE, monetary policy, search and matching
    Date: 2023–05
  4. By: Hassan Afrouzi; Marina Halac; Kenneth S. Rogoff; Pierre Yared
    Abstract: This paper studies the implications of central bank credibility for long-run inflation and inflation dynamics. We introduce central bank lack of commitment into a standard non-linear New Keynesian economy with sticky-price monopolistically competitive firms. Inflation is driven by the interaction of lack of commitment and the economic environment. We show that long-run inflation increases following an unanticipated permanent increase in the labor wedge or decrease in the elasticity of substitution across varieties. In the transition, inflation overshoots and then gradually declines. Quantitatively, the inflation response is large, as is the welfare loss from lack of commitment relative to inflation targeting.
    JEL: D02 E02 E52 E58 E61
    Date: 2023–05
  5. By: Sinem Kandemir (Justus-Liebig-University Giessen); Peter Tillmann (Justus-Liebig-University Giessen)
    Abstract: Most meetings of the Governing Council of the ECB take place intra muros at the ECB’s premises in Frankfurt. Some meetings, however, are held extra muros, i.e. outside Frankfurt, hosted by one of the national central banks. This paper uses high-frequency surprises from meeting days to show that the standard deviation of surprises is higher when the ECB meets intra muros. This difference is mostly due to larger timing, forward guidance and QE surprises when meeting in Frankfurt. We show that the transmission of policy surprises to longer-term interest rates is significantly weaker when meeting extra muros. In addition, when the meeting takes place extra muros, the wording of the ECB communication during the press conference is significantly more similar to the preceding meeting. The results suggest that the important decisions are taken in Frankfurt and that the ECB avoids large changes to the policy path when meeting extra muros. The difference across meeting types has consequences for the macroeconomic impact of monetary policy.
    Keywords: monetary policy, expectations, central bank communication, monetary policy committee, text analysis
    JEL: E58 E43
    Date: 2023
  6. By: Carlos Moreno Pérez (Banco de España); Marco Minozzo (University of Verona)
    Abstract: We study and measure uncertainty in the minutes of the meetings of the board of governors of the Central Bank of Mexico and relate it to monetary policy variables. In particular, we construct two uncertainty indices for the Spanish version of the minutes using unsupervised machine learning techniques. The first uncertainty index is constructed exploiting Latent Dirichlet Allocation (LDA), whereas the second uses the Skip-Gram model and K-Means. We also create uncertainty indices for the three main sections of the minutes. We find that higher uncertainty in the minutes is related to an increase in inflation and money supply. Our results also show that a unit shock in uncertainty leads to changes of the same sign but different magnitude in the inter-bank interest rate and the target interest rate. We also find that a unit shock in uncertainty leads to a depreciation of the Mexican peso with respect to the US dollar in the same period of the shock, which is followed by appreciation in the subsequent period.
    Keywords: Central Bank of Mexico, central bank communication, Latent Dirichlet Allocation, monetary policy uncertainty, Structural Vector Autoregressive model, Word Embedding
    JEL: C32 C45 D83 E52
    Date: 2022–08
  7. By: António Afonso; André Teixeira
    Abstract: This paper investigates the impact of banking prudential regulation on sovereign risk. We show that prudential regulation reduces sovereign risk and induces governments to spend more. As a result, countries with tight prudential regulation have lower primary budget balances and accumulate more government debt over time. This means that prudential regulation reduces private debt, while paradoxically increasing government debt. We explore several explanations for this paradox. Our results suggest that prudential regulation enables governments to accumulate debt because they improve the nation’s credit rating and its borrowing conditions in sovereign bond markets.
    Keywords: bank regulation, fiscal policy, macroprudential policy, sovereign debt, sovereign risk.
    JEL: E52 E58 E62 H3 G28
    Date: 2023–05
  8. By: Carolyn Davin; Thiago Revil T. Ferreira
    Abstract: With major central banks in the process of tightening monetary policy aggressively, an important question is how far policy rates will rise and where they will settle in the longer run. One reference point often used to evaluate this question is the longer-run neutral policy rate—the policy rate consistent with economic activity at its longer-run potential and inflation at its target.
    Date: 2022–12–01
  9. By: Cuzzola, Angelo; Barbieri, Claudio; Bindseil, Ulrich
    Abstract: The paper studies the central bank collateral framework and its impact on banks’ liquidity under an adverse stress test scenario. We construct a stress test model that accounts for a granular and multi-faceted representation of the liquidity of marketable and non-marketable assets. In particular, the model analyses banks’ strategic decisions to mobilise assets through four funding channels: unsecured loans, asset sales, private repurchase agreements, or Central Bank lending. We test three scenarios: the EBA regulatory stress test exercise, a shock to Russia and the Eastern European countries, and a shock to the Southern European countries. Results show that illiquidity can trigger insolvency and that liquidity adjustment can last significantly after the initial shock. We find evidence of a threshold in the benefits of expanding the collateral framework and highlight the heterogeneous effects across different jurisdictions and financial institutions. We find that bank equity losses are reduced in aggregate up to 17% at the tail of the loss distribution and on average by around 5% when financial institutions can rely on the collateral framework channel. JEL Classification: C63, E52, G01, G28
    Keywords: Asset liquidity, Central Bank Collateral Framework, Collateral, Lender-Of-Last Resort, Stress test
    Date: 2023–05
  10. By: Toni Gravelle; Ron Morrow; Jonathan Witmer
    Abstract: At the onset of the pandemic, the Bank of Canada transitioned its framework for monetary policy implementation from a corridor system to a floor system, which it has since decided to maintain. This decision was informed by the analysis and assessment of the two frameworks in this paper. We provide a comprehensive analysis of both frameworks and assess their relative merits based on five key criteria that define a sound framework. Our evaluation includes a discussion of how these relative merits have changed since the pandemic began. Specifically, we examine the evolving regulatory landscape, changes in payment systems, and the Bank's quantitative easing program to understand their implications for the relative strengths of the two frameworks for monetary policy implementation.
    Keywords: Market structure and pricing; Monetary policy implementation; Payment clearing and settlement systems
    JEL: D4 D47 E42 E5 E58
    Date: 2023–05
  11. 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 finndings.
    Keywords: Systematic monetary policy, FOMC, rotation, government spending
    JEL: E32 E52 E62 E63 H56
    Date: 2023–03
  12. By: Juan Equiza (University of Navarra); Ricardo Gimeno (Banco de España); Antonio Moreno (University of Navarra); Carlos Thomas (Banco de España)
    Abstract: The theoretical literature on term structure models emphasises the importance of the expected absorption of duration risk during the residual life of term bonds in order to understand the yield curve effect of central banks’ government bond purchases. Motivated by this, we develop a forward-looking, long-horizon measure of euro area government bond supply net of Eurosystem holdings, and use it to estimate the impact of the ECB’s asset purchase programmes in the context of a no-arbitrage affine term structure model. We find that an asset purchase shock equivalent to 10% of euro area GDP lowers the 10-year average yield of the euro area big four by 59 basis points (bp) and the associated term premium by 50 bp. Applying the model to the risk-free (OIS) yield curve, the same shock lowers the 10-year rate and term premium by 35 and 26 bp, respectively.
    Keywords: monetary policy, ECB, asset purchase programme, yield curve, term premium, risk-neutral rate
    JEL: E43 E44 E47
    Date: 2023–01
  13. By: Ken Isaacson; Jesse Leigh Maniff; Paul Wong
    Abstract: This paper explores whether there could be a first-mover advantage for a jurisdiction issuing a central bank digital currency (CBDC) compared to other jurisdictions that subsequently issue their own CBDC. Conventional academic literature provides a framework by which one can assess a CBDC in the domestic payments market, the international payments market, and the technology markets that support payments. However, a CBDC may be more than just a means of payment and thus first-mover advantage is examined for both the asset component of reserve currency and a future financial system built on CBDCs. Overall, the first mover literature does not suggest that there is a compelling first-mover advantage for issuing a CBDC.
    Date: 2022–11–25
  14. By: Makoto Nakajima
    Abstract: I develop a heterogeneous-agent New-Keynesian model featuring racial inequality in income and wealth, and studies interactions between racial inequality and monetary policy. Black and Hispanic workers gain more from accommodative monetary policy than White workers mainly due to higher labor market risks. Their gains are larger also because of a larger proportion of them are hand-to-mouth, while wealthy White workers gain more from asset price appreciation. Monetary and fiscal policies are substitutes in providing insurance against cyclical labor market risks. Racial minorities gain even more from an accommodative monetary policy in the absence of income-dependent fiscal transfers.
    Keywords: Business cycle; Marginal Propensity to Consume; Monetary policy; Labor market; Heterogeneous agents; Hand-to-mouth; Unemployment; Wealth distribution; Racial inequality
    JEL: J64 J15 E52 E21
    Date: 2023–04–19
  15. By: Nikolay Nenovsky (LEFMI - Laboratoire d’Économie, Finance, Management et Innovation - UR UPJV 4286 - UPJV - Université de Picardie Jules Verne)
    Abstract: The purpose of the present article is to present a comprehensive framework to analyse main characteristics and institutional forms of the dependent monetary regimes. A country's monetary regime is an extension of its geopolitical and geo-economic place in the international system. The dynamic monetary dependence/independence of a particular country is a direct continuation of, as well as ‘serving', the (geo)political and economic dependence/independence of that country. That dependence does not mean that small countries do not benefit from this type of monetary and political regimes; on the contrary – in most cases it is the most appropriate, so to speak, "optimal" form which, if skilfullymanaged, minimises losses under a given external structural constraint. As a rule, in dependent countries, external sources of money supply dominate domestic sources. Peripheral and dependent countries cannot borrow on international markets in their own national currencies. They borrow in major world currencies and become vulnerable to currency (exchange rate) risk. The inflow of external capital, in turn, requires a corresponding stable institutional and political environment. Therefore, the external equilibrium (external stability), i.e., the state of the balance of payments and especially its financial (capital) account, as well as the dynamics of the exchange rate, become central parameters for the development of the peripheral countries. It is interesting to add that the imposition of a dependent regime in small and peripheral countries is accompanied by the imposition and dissemination of economic views, theories and ideas ("economic narrative"), which legitimise this new monetary regime and prepare the imposition of a certain economic development model.
    Keywords: monetary system, monetary regime, dependent monetary regimes, monetary history
    Date: 2022–12–01
  16. By: Jeremy Srouji (Université Côte d'Azur, France; GREDEG CNRS)
    Abstract: It is often difficult to make sense of the range of optimistic, cautious, and pessimistic views about the sustainability of the US dollar's role as the top international currency. This paper reframes the US dollar debate by demonstrating that economists generally draw on two distinct theories of currency internationalization, with very different assumptions about how currencies achieve and maintain an international role. These assumptions often remain implicit, but are essential to make sense of the debate, as well as the question of international money more generally. The paper then considers whether crypto currencies and central bank digital currencies could play the international currency role, as understood by these theories. It concludes by reflecting on whether in an increasingly multipolar world the question of the sustainability of the US dollar's international role is misplaced, particularly given the growing support for the establishment of a true global international reserve currency.
    Keywords: US dollar, international money, international monetary system reform, US debt, Bretton Woods II, global macroeconomic imbalances
    JEL: F01 F33
    Date: 2022–02
  17. By: Mary Amiti; Sebastian Heise; Fatih Karahan; Ayşegül Şahin
    Abstract: U.S. inflation has recently surged, with inflation reaching its highest readings since the early 1980s. We examine the drivers of this rise in inflation, focusing on supply chain disruptions, labor supply constraints, and their interaction. Using a calibrated two-sector New Keynesian DSGE model with multiple factors of production, foreign competition, and endogenous markups, we find that supply chain disruptions combined with a rise in the disutility of work raised inflation by about 2 percentage points in the 2021-22 period. We show that the combined shock increased price inflation in the model by 0.6 percentage point more than it would have risen if the shocks had hit separately. This amplification arises because the joint shock to labor and imported input prices makes substituting between labor and intermediates less effective for domestic firms. Moreover, the simultaneous foreign competition shock allows domestic producers to increase their pass-through into prices without losing market share. We then show that the benefit of aggressive monetary policy in the model depends on the source of the rise in inflation. If the rise in inflation is demand-driven, then aggressive monetary tightening can contain inflation without a recession later. In contrast, aggressive policy can have a large negative effect on the labor market when inflation is driven by supply chain and labor market disruptions. We use aggregate and industry-level data on producer prices, wages, and input prices to provide corroborating evidence for the key amplification channels in the model.
    JEL: E24 E31
    Date: 2023–05
  18. By: Adrian Carro (Banco de España)
    Abstract: Employing an agent-based model of the Spanish housing market, this paper explores the main drivers behind the large amplitude of the Spanish house price cycle —as compared to most other European countries—, as well as the scope for macroprudential policy to reduce this amplitude. First, we exploit the availability of a previous calibration to the UK, which has a less pronounced house price cycle, to show the prominent role played by the distributions of various mortgage risk metrics: loan-to-value, loan-to-income and debt-service-to-income ratios. Second, we use the model to calibrate both a hard loan-to-value limit and a soft loan-to-income limit to smooth the Spanish house price cycle and match the amplitude of the UK equivalent. Finally, we characterise the effects of these calibrated policies over the different phases of the cycle, finding that both instruments reduce credit and price growth during the expansionary phase and also reduce their decline during the contractionary phase. Moreover, both instruments lead to a compositional shift in lending: the loan-to-value policy from first-time buyers to buy-to-let investors and the loan-to-income policy from both first-time buyers and home movers to buy-to-let investors.
    Keywords: agent-based modelling, housing market, macroprudential policy, borrower-based measures, buy-to-let sector
    JEL: D1 D31 E58 G51 R21 R31
    Date: 2022–09

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