nep-cba New Economics Papers
on Central Banking
Issue of 2023‒06‒19
39 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Monetary Policy Interactions: The Policy Rate, Asset Purchases, and Optimal Policy with an Interest Rate Peg By Isabel Gödl-Hanisch; Ronald Mau; Jonathan Rawls
  2. The Macroeconomic Implications of CBDC: A Review of the Literature By Sebastian Infante; Kyungmin Kim; André F. Silva; Robert J. Tetlow
  3. The role of financial stability considerations in monetary policy and the interaction with macroprudential policy in the euro area By Policy, Monetary; Stability, Financial; Albertazzi, Ugo; Martin, Alberto; Assouan, Emmanuelle; Tristani, Oreste; Galati, Gabriele; Vlassopoulos, Thomas; Adolf, Petra; Kok, Christoffer; Altavilla, Carlo; Lewis, Vivien; Andreeva, Desislava; Lima, Diana; Brand, Claus; Musso, Alberto; Bussière, Matthieu; Nikolov, Kalin; Fahr, Stephan; Patriček, Matic; Fourel, Valère; Prieto, Esteban; Heider, Florian; Rodriguez-Moreno, Maria; Idier, Julien; Signoretti, Federico; Aban, Jorge; Busch, Ulrike; Ambrocio, Gene; Cassar, Alan; Balfoussia, Hiona; Chalamandaris, Dimitrios; Bonatti, Guido; Cuciniello, Vincenzo; Bonfim, Diana; Eller, Markus; Bouchinha, Miguel; Falagiarda, Matteo; Fernandez, Luis; Maddaloni, Angela; Garabedian, Garo; Mazelis, Falk; Geiger, Felix; Miettinen, Pavo; Grassi, Alberto; Nakov, Anton; Hristov, Nikolay; Obradovic, Goran; Ibas, Pelin; Papageorghiou, Maria; Ioannidis, Michael; Pogulis, Armands; Jan, Jansen David; Redak, Vanessa; Jovanovic, Mario; Velez, Anatoli Segura; Kakes, Jan; Tapking, Jens; Kempf, Alina; Valderrama, Maria; Klein, Melanie; Weigert, Benjamin; Licak, Marek; policy, Work stream on macroprudential
  4. The ECB’s new inflation target from a short- and long-term perspective By BENIGNO, Pierpaolo; CANOFARI, Paola; DI BARTOLOMEO, Giovanni; MESSORI, Marcello
  5. Central Bank Credibility and Fiscal Responsibility By Jesse Schreger; Pierre Yared; Emilio Zaratiegui
  6. Inflation and Monetary Policy in a Low-Income and Fragile State: The Case of Guinea By Mr. Yan Carriere-Swallow; Nelnan Fidèle Koumtingué; Mr. Sebastian Weber
  7. Information Shocks in the U.S. and Asset Mispricing in Emerging Economies By Antonia Lopez Villavicencio; Marc Pourroy
  8. Macroeconomic Effects of Inflation Targeting: A Survey of the Empirical Literature By Petrevski, Goran
  9. Will Central Bank Digital Currency Disintermediate Banks? By Whited, Toni M.; Wu, Yufeng; Xiao, Kairong
  10. Effects of Monetary Policy on Household Expectations: The Role of Homeownership By Hie Joo Ahn; Choongryul Yang
  11. The impact of monetary policy on functional income distribution: a panel SVAR analysis (1970-2019) By Stefano Di Bucchianico; Antonino Lofaro
  12. Volatility jumps and the classification of monetary policy announcements By G.M. Gallo; D. Lacava; E. Otranto
  13. Bank Deposit Flows to Money Market Funds and ON RRP Usage during Monetary Policy Tightening By Manjola Tase; Andrei Zlate
  14. To What Degree and through Which Channel Do Central Banks Other Than the Federal Reserve Cause Spillovers? By Christopher D. Cotton
  15. Money Matters: Broad Divisia Money and the Recovery of Nominal GDP from the COVID-19 Recession By Michael D. Bordo; John V. Duca
  16. Kites and Quails: Monetary Policy and Communication with Strategic Financial Markets By Giampaolo Bonomi; Ali Uppal
  17. Too Low for Too Long: Could Extended Periods of Ultra Easy Monetary Policy Have Harmful Effects? By Mr. Etibar Jafarov; Enrico Minnella
  18. Optimal monetary policy and the vintage-dependent price and wage Phillips curves: An international comparison By DI BARTOLOMEO, Giovanni; SERPIERI, Carolina
  19. Does U.S. Monetary Policy Respond to Macroeconomic Uncertainty? By Thomas Gomez; Giulia Piccillo
  20. ECB Euro Liquidity Lines By Silvia Albrizio; Iván Kataryniuk; Luis Molina; Jan Schäfer
  21. Macroprudential Policies, Economic Growth and Banking Crises By Belkhir, Mohamed; Ben Naceur, Sami; Candelon, Bertrand; Wijnandts, Jean-Charles
  22. Identifying financial fragmentation: do sovereign spreads in the EMU reflect differences in fundamentals? By Jan Kakes; Jan Willem van den End
  23. Are Basel III requirements up to the task? Evidence from bankruptcy prediction models By Pierre Durand; Gaëtan Le Quang; Arnold Vialfont
  24. Spillovers to Emerging Markets from US Economic News and Monetary Policy By Philipp Engler; Mr. Roberto Piazza; Galen Sher
  25. Oil Prices, Monetary Policy and Inflation Surges By Luca Gagliardone; Mark Gertler
  26. Measuring the Stances of Monetary and Fiscal Policy By Mr. Francis Vitek
  27. History-Dependent Monetary Regimes: A Lab Experiment and a Henk Model By Jasmina Arifovic; Isabelle Salle; Hung Truong
  28. Whatever it Takes? The Impact of Conditional Policy Promises By Valentin Haddad; Alan Moreira; Tyler Muir
  29. The spectre of financial dominance in the eurozone By BENIGNO, Pierpaolo; CANOFARI, Paola; DI BARTOLOMEO, Giovanni; MESSORI, Marcello
  30. Trillion Dollar Words: A New Financial Dataset, Task & Market Analysis By Agam Shah; Suvan Paturi; Sudheer Chava
  31. The German inflation trauma: Weimar's policy lessons between persistence and reconstruction By Barkhausen, David; Teupe, Sebastian
  32. Stress Relief?: Funding Structures and Resilience to the Covid Shock By Kristin Forbes; Christian Friedrich; Dennis Reinhardt
  33. Quantitative Easing, Households' Savings and Growth: A Luxembourgish Case Study By Sarah Goldman; Shouyi Zhang
  34. Carbon pricing and inflation expectations: evidence from France By Jannik Hensel; Giacomo Mangiante; Luca Moretti
  35. Central Bank Communication and House Price Expectations By Carola Binder; Pei Kuang; Li Tang
  36. Inflation targeting and the composition of public expenditure: Evidence from developing countries By Ablam Estel Apeti; Jean-Louis Combes; Alexandru Minea
  37. Pushing Bonds Over the Edge: Monetary Policy and Municipal Bond Liquidity By John Bagley; Stefan Gissler; Ivan T. Ivanov
  38. Recovery of 1933 By Margaret M. Jacobson; Eric M. Leeper; Bruce Preston
  39. European lessons from Silicon Valley Bank resolution: A plea for a comprehensive demand deposit protection scheme (CDDPS) By Heider, Florian; Krahnen, Jan Pieter; Pelizzon, Loriana; Schlegel, Jonas; Tröger, Tobias

  1. By: Isabel Gödl-Hanisch; Ronald Mau; Jonathan Rawls
    Abstract: We study monetary policy in a New Keynesian model with a variable credit spread and scope for central bank asset purchases to matter. A novel financial and labor market interaction generates an endogenous cost-push channel in the Phillips curve and a credit wedge in the IS curve. The “divine coincidence” holds with the nominal short-term rate and central bank balance sheet available as policy tools. Credit spread-targeting balance sheet policy provides a determinate equilibrium with a fixed policy rate. This policy induces similar welfare losses relative to dual-instrument policy as inflation-targeting interest rate policy with a fixed balance sheet.
    Keywords: unconventional monetary policy, optimal monetary policy, New Keynesian model, policy rate lower bound, interest rate peg
    JEL: E43 E52 E58
    Date: 2023
  2. By: Sebastian Infante; Kyungmin Kim; André F. Silva; Robert J. Tetlow
    Abstract: This paper provides an overview of the literature examining how the introduction of a CBDC would affect the banking sector, financial stability, and the implementation and transmission of monetary policy in a developed economy such as the United States. A CBDC has the potential to improve welfare by reducing financial frictions in deposit markets, by boosting financial inclusion, and by improving the transmission of monetary policy. However, a CBDC also entails noteworthy risks, including the possibility of bank disintermediation and associated contraction in bank credit, as well as potential adverse effects on financial stability. A CBDC also raise important questions regarding monetary policy implementation and the footprint of central banks in the financial system. Ultimately, the effects of a CBDC depend critically on its design features, particularly remuneration.
    Keywords: Financial stability; Monetary policy; Banking; Central bank digital currency; Central banking
    JEL: G20 E40 E50
    Date: 2022–11–17
  3. By: Policy, Monetary; Stability, Financial; Albertazzi, Ugo; Martin, Alberto; Assouan, Emmanuelle; Tristani, Oreste; Galati, Gabriele; Vlassopoulos, Thomas; Adolf, Petra; Kok, Christoffer; Altavilla, Carlo; Lewis, Vivien; Andreeva, Desislava; Lima, Diana; Brand, Claus; Musso, Alberto; Bussière, Matthieu; Nikolov, Kalin; Fahr, Stephan; Patriček, Matic; Fourel, Valère; Prieto, Esteban; Heider, Florian; Rodriguez-Moreno, Maria; Idier, Julien; Signoretti, Federico; Aban, Jorge; Busch, Ulrike; Ambrocio, Gene; Cassar, Alan; Balfoussia, Hiona; Chalamandaris, Dimitrios; Bonatti, Guido; Cuciniello, Vincenzo; Bonfim, Diana; Eller, Markus; Bouchinha, Miguel; Falagiarda, Matteo; Fernandez, Luis; Maddaloni, Angela; Garabedian, Garo; Mazelis, Falk; Geiger, Felix; Miettinen, Pavo; Grassi, Alberto; Nakov, Anton; Hristov, Nikolay; Obradovic, Goran; Ibas, Pelin; Papageorghiou, Maria; Ioannidis, Michael; Pogulis, Armands; Jan, Jansen David; Redak, Vanessa; Jovanovic, Mario; Velez, Anatoli Segura; Kakes, Jan; Tapking, Jens; Kempf, Alina; Valderrama, Maria; Klein, Melanie; Weigert, Benjamin; Licak, Marek; policy, Work stream on macroprudential
    Abstract: Since the European Central Bank’s (ECB’s) 2003 strategy review, the importance of macro-financial amplification channels for monetary policy has increasingly gained recognition. This paper takes stock of this evolution and discusses the desirability of further incremental enhancements in the role of financial stability considerations in the ECB’s monetary policy strategy. The paper starts with the premise that macroprudential policy, along with microprudential supervision, is the first line of defence against the build-up of financial imbalances. It also recognises that the pursuit of price stability through monetary policy, and of financial stability through macroprudential policy, are to a large extent complementary. Nevertheless, macroprudential policy may not be able to ensure financial stability independently of monetary policy, because of spillovers originating from the common transmission channels through which the two policies produce their effects. For example, a low interest rate environment can create incentives to engage in more risk-taking, or can adversely impact the profitability of financial intermediaries and hence their capacity to absorb shocks. The paper argues that the existence of such spillovers creates a conceptual case for monetary policy to take financial stability considerations into account. It then goes on to discuss what this conclusion might imply in practice for the ECB. One option would be to exploit the flexible length of the medium-term horizon over which price stability is to be achieved. Longer deviations from price stability could occasionally be tolerated, if they resulted in materially lower risks for financial stability and, ultimately, for future price stability. However, model-based quantitative analysis suggests that this approach may require impractically drawn-out periods of deviation from price stability and potentially result in a de-anchoring of inflation expectations. ... JEL Classification: E3, E44, G01, G21
    Keywords: financial frictions, Monetary policy, systemic risk
    Date: 2023–05
  4. By: BENIGNO, Pierpaolo; CANOFARI, Paola; DI BARTOLOMEO, Giovanni; MESSORI, Marcello
    Abstract: The ECB’s target was recently revised, specifying that the 2%-inflation-rate threshold must be applied symmetrically and with a medium-term orientation. In the current phase, characterized by high inflation rates and a growing risk of stagnation in the euro area, this revision of the monetary policy strategy is crucial for explaining the recent decisions of the ECB and forecasting their possible evolution. However, monetary policy can only become one of many policy tools in the euro area. Therefore, there is room for a compelling policy mix necessary to control excessive inflation and support the European economy’s medium-term sustainable growth.
    Keywords: European Central Bank, Inflation expectations, Stagflation, Policy mix
    Date: 2023–03
  5. By: Jesse Schreger; Pierre Yared; Emilio Zaratiegui
    Abstract: We consider a New Keynesian model with strategic monetary and fiscal interactions. The fiscal authority maximizes social welfare. Monetary policy is delegated to a central bank with an anti-inflation bias that suffers from a lack of commitment. The impact of central bank hawkishness on debt issuance is non-monotonic because increased hawkishness reduces the benefit from fiscal stimulus while simultaneously increasing real debt capacity. Starting from high levels of hawkishness (dovishness), a marginal increase in the central bank's anti-inflation bias decreases (increases) debt issuance.
    JEL: E40 E44 E49 E50 E52
    Date: 2023–05
  6. By: Mr. Yan Carriere-Swallow; Nelnan Fidèle Koumtingué; Mr. Sebastian Weber
    Abstract: Inflation in low-income countries is often high and volatile, driven by external shocks. In addition, inflation in fragile states is affected by highly volatile domestic factors that complicate monetary policy’s ability to deliver price stability. We estimate the drivers of inflation in Guinea since the early 2000s, a period in which the country suffered major shocks from pandemics, commodity price movements, and multiple military coups, and during which inflation averaged 12 percent. Results confirm that global commodity and transport prices account for a large share of the variation in inflation. The contribution of monetary policy shocks to inflation is moderate, reflecting its broadly neutral stance throughout most of the last two decades. However, monetary policy has occasionally made larger contributions to inflation, and recently helped contain price pressures from high commodity prices. The effectiveness of monetary policy reflects a strong relationship between monetary aggregates and the exchange rate.
    Keywords: Monetary Policy; Inflation; Low-income Countries; Fragile States; inflation dynamics; shocks to inflation; monetary policy shock; commodity price movement; inflation development; Monetary base; Exchange rates; Exchange rate arrangements; Nominal effective exchange rate; Global; Sub-Saharan Africa
    Date: 2023–04–21
  7. By: Antonia Lopez Villavicencio; Marc Pourroy
    Abstract: We explore whether U.S. monetary policy shocks can lead to create booms and busts of asset prices in emerging economies. Using impulse response function obtained from local projections, we show that the Fed's announcements of a tighter monetary policy lead to strong under-valuations of equity markets in EMEs. However, the information content in a tightening announcement lead to over-valuation in EME's asset prices. We attribute these differences to perceptions of signalling a better-than-expected economic outlook. Finally, we show that real integration influences more than financial integration the propagation of communication shocks.
    Keywords: emerging markets, asset mispricing, monetary policy, information channel, local projections
    JEL: E52 E58 F41
    Date: 2023
  8. By: Petrevski, Goran
    Abstract: This paper surveys the voluminous empirical literature of inflation targeting (IT). Specifically, the paper focuses on three main issues: the main institutional, macroeconomic, and technical determinants that affect the adoption of IT; the effects of IT on macroeconomic performance (inflation expectations, inflation persistence, average inflation rate, inflation variability, output growth, output volatility, interest rates, exchange rates, and fiscal outcomes); and disinflation costs of IT (the so-called sacrifice ratios). The main findings from our review are the following: concerning the determinants behind the adoption of IT, there is robust empirical evidence that larger and more developed countries are more likely to adopt the IT regime; similarly, the introduction of this regime is conditional on previous disinflation, greater exchange rate flexibility, central bank independence, and higher level of financial development; however, the literature suggests that the link between various macroeconomic and institutional determinants and the likelihood of adopting IT may be rather weak, i.e., they are not to be viewed either as strict necessary or sufficient conditions; the empirical evidence has failed to provide convincing evidence that IT itself may serve as an effective tool for stabilizing inflation expectations and for reducing inflation persistence; the empirical research focused on advanced economies has failed to provide convincing evidence on the beneficial effects of IT on inflation performance, concluding that inflation targeters only converged towards the monetary policy of non-targeters, while there is some evidence that the gains from the IT regime may have been more prevalent in the emerging market economies (EMEs); there is not convincing evidence that IT is associated with either higher output growth or lower output variability; the empirical research suggests that IT may have differential effects on exchange-rate volatility in advanced economies versus EMEs; although the empirical evidence on the impact of IT on fiscal policy is quite limited, it supports the idea that IT indeed improves fiscal discipline; the empirical support to the proposition that IT is associated with lower disinflation costs seems to be rather weak. Therefore, the accumulated empirical literature implies that IT does not produce superior macroeconomic benefits in comparison with the alternative monetary strategies or, at most, they are quite modest.
    Keywords: monetary policy, inflation targeting
    JEL: E52 E58
    Date: 2023
  9. By: Whited, Toni M. (University of Michigan and the NBER); Wu, Yufeng (University of Illinois); Xiao, Kairong (Columbia University)
    Abstract: We estimate a dynamic banking model to quantify the impact of a central bank digital currency (CBDC) on the banking system. Our counterfactuals show that a one-dollar introduction of CBDC replaces bank deposits by around 80 cents on the margin. Bank lending falls by one-fourth of the drop in deposits because banks partially replace lost deposits with wholesale funding. This substitution raises banks’ interest-rate risk exposure and lowers their resilience to negative equity shocks. If CBDC bears interest or is intermediated through banks, it captures a greater deposit market share, amplifying the impact on lending. The effect on lending is ampliï¬ ed for small banks, for which wholesale funding is more expensive.
    Keywords: central bank digital currency, banking competition, maturity mismatch, ï¬ nancial stability
    JEL: E51 E52 G21 G28
    Date: 2023–05
  10. By: Hie Joo Ahn; Choongryul Yang
    Abstract: We study the role of homeownership in the effectiveness of monetary policy on households' expectations. Empirically, we find that homeowners revise down their near-term inflation expectations and their optimism about future labor market conditions in response to a rise in mortgage rates, while renters are less likely to do so. We further show that the monetary-policy component of mortgage-rate changes creates the difference in expectation revisions between homeowners and renters. This result suggests that homeowners are attentive to news on interest rates and adjust their expectations accordingly in a manner consistent with the intended effect of monetary policy. We characterize these findings using a rational inattention model with two types of households---homeowners and renters.
    Keywords: Inflation expectations; Homeownership; Rational inattention
    JEL: D83 D84 E31 E52
    Date: 2022–10–03
  11. By: Stefano Di Bucchianico; Antonino Lofaro
    Abstract: In most countries, recurrent crises episodes due to financial disorder, the pandemic, and the recent war have increased income and wealth inequality. Moreover, since the 2008 crisis, major central banks have adopted highly expansionary conventional and unconventional monetary policies. Thus, attention towards the connection between monetary policy and inequality is surging. However, first, there is no consensus in the empirical literature on what the impact of monetary policy shocks on inequality is. Second, the literature is mainly focused on the effects of monetary policy on personal rather than functional income distribution. Third, the conventional hypothesis is for monetary policy to have at most an impact over the cycle but not in the long-run. Therefore, our work grounds on three objectives. First, we tackle the role of monetary policy in shaping functional income distribution by looking at the long-run behavior of real wages and the labor share of income. Second, we employ for the first time a panel SVAR methodology to a new panel dataset of 15 advanced economies during the 1970-2019 period. Third, differently from extant literature, we pose special attention to the so called ‘cost’ and ‘labor market’ channels of monetary policy. According to our results, a contractionary monetary policy shocks generates long-run adverse effects on the level of real wages. While the labor share initially rises because of the fall in GDP, the subsequent pronounced fall in real wages lets the labor share fall back to the pre-shock level.
    Keywords: Monetary policy; functional income distribution; Panel SVAR; labor share; income inequality
    JEL: E24 E52 E58
    Date: 2023–05
  12. By: G.M. Gallo; D. Lacava; E. Otranto
    Abstract: Central Banks interventions are frequent in response to any endogenous and/or exogenous exceptional events (in the last two decades, subprime mortgage crisis, the Covid-19 pandemic, and the recent high inflation), with direct implications on financial market volatility. In this paper, we propose a new model in the class of Multiplicative Error Models (MEM), the Asymmetric Jump MEM (AJM), which accounts for a specific jump component of volatility within an intradaily framework (thirty minute intervals), while preserving the flexibility and the ability of the MEM to reproduce the empirical regularities characterizing volatility. Taking the actions of the US Federal Reserve (Fed) as a reference, we introduce a new model–based classification of monetary policy announcements according to their impact on the jump component of realized volatility. Focusing on a short window following each Fed's communication, we isolate the impact of monetary announcements by excluding any contamination carried by relevant events that may occur within the same announcement day. By considering specific tickers, our classification method provides useful information for both policy makers and investors about the impact of monetary announcements on specific sectors of the market.
    Keywords: Financial markets;realized volatility;Significant jumps;Monetary policy an- nouncements;Multiplicative Error Model
    Date: 2023
  13. By: Manjola Tase; Andrei Zlate
    Abstract: Using the historical experience from past monetary tightening cycles and the market-expected path of the federal funds rate for the current tightening cycle, we project that the flows from bank deposits to money market funds (MMFs) would be relatively small, at about $600 billion through the end of 2024, or about 3 percent of current bank deposits. Of these potential inflows to MMFs, about $100 billion are projected to flow into the overnight reverse repo (ON RRP) facility, or about 7 percent of MMFs’ recent take-up. Other factors such as the private demand for repo funding and the net supply of Treasury bills are expected to have more substantial effects on MMFs’ take-up at the ON RRP facility than the inflows from bank deposits.
    Keywords: Monetary policy tightening; Bank deposits; Money market funds; Overnight reverse repo facility; Private repo funding; Treasury bills
    JEL: E43 E52 E58
    Date: 2022–09–02
  14. By: Christopher D. Cotton
    Abstract: Spillovers play a crucial role in driving monetary policy around the world. The literature focuses predominantly on spillovers from the Federal Reserve. Less attention has been paid to spillovers from other central banks. I measure the degree to which 20 central banks cause spillovers. I show that central banks in medium- to high-income countries cause spillovers to medium- to long-term interest rates in similar countries through a bond-pricing channel. These effects are narrower than spillovers from the Federal Reserve, which also affect emerging markets, short-term interest rates, and other assets. However, they are still pronounced. Fourteen central banks other than the Federal Reserve cause significant spillovers: the central banks of Australia, Canada, Czechia, the eurozone, Japan, Mexico, Norway, New Zealand, Poland, Romania, South Korea, Sweden, Switzerland, and the United Kingdom. Consequently, the Federal Reserve causes only one-fifth of the spillovers to 10-year interest rates, and the United States is the recipient of large spillovers. My results imply that central banks, especially the Federal Reserve, are affected by greater spillovers than is commonly believed, and that non-Fed central banks cause spillovers through a bond-pricing channel.
    Keywords: monetary policy spillovers; central bank; global financial cycle
    JEL: F42 E43 E52
    Date: 2022–09–01
  15. By: Michael D. Bordo; John V. Duca
    Abstract: The rise of inflation in 2021 and 2022 surprised many macroeconomists who ignored the earlier surge in money growth because past instability in the demand for simple-sum monetary aggregates had made these aggregates unreliable indicators. We find that the demand for more theoretically-based Divisia aggregates can be modeled and that their growth rates provide useful information for future nominal GDP growth. Unlike M2 and Divisia-M2, whose velocities do not internalize shifts in liabilities across commercial and shadow banks, the velocities of broader Divisia monetary aggregates are more stable and can be reasonably empirically modeled in both the short run and the long run through the COVID-19 pandemic and to date. In the long run, these velocities depend on regulatory changes and mutual fund costs that affect the substitutability of money for other financial assets. In the short run, we control for swings in mortgage activity and use vaccination rates and an index of the stringency of government pandemic restrictions to control for the unusual effects of the pandemic. The velocity of broad Divisia money temporarily declines during crises like the Great and COVID Recessions, but later rebounds. In each recession monetary policy lowered short-term interest rates to zero and engaged in quantitative easing of about $4 trillion. Nevertheless, broad money growth was more robust in the COVID Recession, likely reflecting that the banking system was less impaired and could promote rather than hinder multiple deposit creation. Partly as a result, our framework implies that nominal GDP growth and inflationary pressures rebounded much more quickly from the COVID Recession versus the Great Recession. We consider different scenarios for future Divisia money growth and the unwinding of the pandemic that have different implications for medium-term nominal GDP growth and inflationary pressures as monetary policy tightening seeks to restore low inflation.
    Keywords: Velocity; monetary services index; Divisia; liquidity; money; shadow banks; mutual funds
    JEL: E51 E41 E52 E58
    Date: 2023–05–25
  16. By: Giampaolo Bonomi; Ali Uppal
    Abstract: We develop a simple game-theoretic model to determine the consequences of explicitly including financial market stability in the central bank objective function, when policymakers and the financial market are strategic players, and market stability is negatively affected by policy surprises. We find that the inclusion of financial sector stability among the policy objectives can induce an inefficiency, whereby market anticipation of policymakers' goals biases investment choices. When the central bank has private information about its policy intentions, the equilibrium communication is vague, because fully informative communication is not credible. The appointment of a ``kitish'' central banker, who puts little weight on market stability, reduces these inefficiencies. If interactions are repeated, communication transparency and overall efficiency can be improved if the central bank punishes any abuse of market power by withholding forward guidance. At the same time, repeated interaction also opens the doors to collusion between large investors, with uncertain welfare consequences.
    Date: 2023–05
  17. By: Mr. Etibar Jafarov; Enrico Minnella
    Abstract: Extended periods of ultra-easy monetary policy in advanced economies have rekindled debates about the zombification of weak companies and its impact on resource allocation, economic growth, inflation, and financial stability. Using both firm-level and macroeconomic data, we find that recessions are a critical factor in the rapid increase in the number of zombie firms. Expansionary monetary policy can help reduce zombification when interest rates are at the zero lower bound (ZBL), but a too-accommodative monetary policy for extended periods is associated with a higher probability of zombification. Small and medium enterprises are more likely to become zombie firms. This raises concerns about the sustainability of too-easy monetary policy implementation, especially in countries where growth is lackluster. Our findings imply a tradeoff between conducting a countercyclical monetary policy, which also helps contain the increase in the number of zombie firms in cyclical downturns, and using an expansionary monetary policy for long periods, which may lead to a combination of low interest rates, low growth, and high financial vulnerability. Such a tradeoff is not a concern currently when most countries are tightening their monetary policy stance, but policymakers should be mindful of it during future recessions.
    Keywords: Too Low for Too Long; Zombie Firms; Financial Stability
    Date: 2023–05–19
  18. By: DI BARTOLOMEO, Giovanni; SERPIERI, Carolina
    Abstract: In this study, we compare the conduct of central banks across seven advanced economies by analyzing the relationship between observed and optimal monetary policies. We estimate the New Keynesian Phillips curves for prices and wages and use model-consistent welfare measures to conduct counterfactual analysis. What sets our approach apart is the focus on the impact of inertia on output gaps and price/wage dynamics, which we model using duration-dependent adjustments. Ignoring the effects of inertia on welfare and policies could result in a misleading and incomplete understanding of inflation dynamics. By incorporating this element into our analysis, we aim to identify common trends and specificities in central banks’ monetary policy conduct across different countries.
    Keywords: Duration-dependent adjustments, Intrinsic inflation persistence, DSGE models, Hybrid Phillips curves, Optimal policy
    JEL: E31 E32 C11
    Date: 2023–03
  19. By: Thomas Gomez; Giulia Piccillo
    Abstract: We find that macroeconomic uncertainty plays a significant role in U.S. monetary policy. First, we construct a measure of uncertainty as felt by policymakers at the time of making their rate-setting decisions. This measure is derived from a real-time, Bayesian estimation of a small monetary VAR with time-varying parameters. We use it to calculate the probability of being in a high-uncertainty regime. Second, we estimate a monetary policy reaction function that, apart from macroeconomic uncertainty, includes Greenbook forecasts, revisions of those forecasts, and a measure of stock market volatility. Using data for the period 1969 - 2008, we find that policymakers set an interest rate that is significantly lower in a high-uncertainty regime, compared to a low-uncertainty regime.
    Keywords: monetary policy, uncertainty, real-time data, Bayesian VAR, time-varying coefficients
    JEL: E52 E58 E01 D81
    Date: 2023
  20. By: Silvia Albrizio; Iván Kataryniuk; Luis Molina; Jan Schäfer
    Abstract: Central bank liquidity lines have gained momentum since the global financial crisis as a crosscurrency liquidity management tool. We provide a complete timeline of the ECB liquidity line announcements and study their signalling and spillback effects. The announcement of an ECB euro liquidity line decreases the premium paid by foreign agents to borrow euros in FX markets relative to currencies not covered by these facilities by 51 basis points. Consistent with a stylized model, bank equity prices increase by around 1.75% in euro area countries highly exposed via banking linkages to countries whose currencies are targeted by liquidity lines.
    Keywords: liquidity facilities; central bank swap and repo lines; spillbacks.
    Date: 2023–05–05
  21. By: Belkhir, Mohamed; Ben Naceur, Sami; Candelon, Bertrand (Université catholique de Louvain, LIDAM/LFIN, Belgium); Wijnandts, Jean-Charles
    Abstract: Using a sample covering emerging market and advanced economies, we assess the impact of macroprudential policies on financial stability. Our empirical setup is designed to account for the potential direct and indirect effects that macroprudential policies can have on banking crises. We find that while macroprudential policies (MPPs) exert a direct stabilizing effect, they also have an indirect destabilizing effect, which works through the depressing of economic growth. It turns out that mitigating effects of MPPs on the likelihood of banking crises is more pronounced in emerging market economies relative to advanced economies.
    Keywords: Macroprudential Policies ; Banking Crises ; Economic Growth
    JEL: C33 G01 G18
    Date: 2022–01–01
  22. By: Jan Kakes; Jan Willem van den End
    Abstract: We present a metric for financial fragmentation in the Economic and Monetary Union (EMU), based on the higher moments of the distribution of sovereign spreads relative to macro-financial fundamentals. We apply fixed parameter and rolling regressions to allow for time variation in this relationship, while controlling for market sentiment. The metric shows that the observed moments of the spread distribution occasionally overshot the fundamentals-based benchmark until 2018. Since then, the moments of observed spreads have generally not exceeded the fundamentals-based moments, also not in the most recent period, despite the increase in interest rates. The latter may be attributed to backstop facilities of the European Central Bank (ECB), such as the Transmission Protection Instrument (TPI).
    Keywords: Monetary policy; Quantitative Easing; Sovereign risk; Sovereign spreads
    JEL: E52 E58 G12
    Date: 2023–05
  23. By: Pierre Durand (Université Paris Est Créteil, ERUDITE, 94010 Créteil Cedex, France); Gaëtan Le Quang (Univ Lyon, Université Lumière Lyon 2, GATE UMR 5824, F-69130 Ecully, France); Arnold Vialfont (Université Paris Est Créteil, ERUDITE, 94010 Créteil Cedex, France)
    Abstract: Using a database comprising US bank balance sheet variables covering the 2000-2018 period and the list of failed banks as provided by the FDIC, we run various models to exhibit the main determinants of bank default. Among these models, Logistic Regression, Random Forest, Histogram-based Gradient Boosting Classification and Gradient Boosting Classification perform the best. Relying on various machine learning interpretation tools, we manage to provide evidence that 1) capital is a stronger predictor of default than liquidity, 2) Basel III capital requirements are set at a too low level. More precisely, having a look at the impact of the interaction between capital ratios (the risk-weighted ratio and the simple leverage ratio) and the liquidity ratio (liquid assets over total assets) on the probability of default, we show that the influence of capital on this latter completely outweighs that of liquidity, which is in fact very limited. From a prudential perspective, this questions the recent stress put on liquidity regulation. Concerning capital requirements, we provide evidence that setting the risk-weighted ratio at 15% and the simple leverage ratio at 10% would significantly decrease the probability of default without hampering banks'activities. Overall, these results therefore call for strengthening capital requirements while at the same time releasing the regulatory pressure put on liquidity.
    Keywords: Basel III; capital requirements ; liquidity regulation ; bankruptcy prediction models ; statistical learning ; classification
    JEL: C44 G21 G28
    Date: 2023
  24. By: Philipp Engler; Mr. Roberto Piazza; Galen Sher
    Abstract: When the U.S. economy sneezes, do emerging markets catch a cold? We show that economic news, and not just monetary policy, in the United States affects financial conditions in emerging markets. News about U.S. employment has the strongest effects, followed by news about economic activity and about vaccines during the COVID-19 pandemic. News about inflation has instead limited effects on average. A key channel of international transmission of U.S. economic news appears to be the risk perceptions or risk aversion of international investors. We also show that some of the transmission of U.S. economic news occurs independently of the U.S. monetary policy reaction. Finally, we expand on evidence that financial conditions in the U.S. and emerging markets respond differently to U.S. monetary policy surprises, depending on the reaction of US stock prices.
    Keywords: Spillovers; economic news; emerging markets; financial conditions
    Date: 2023–05–19
  25. By: Luca Gagliardone; Mark Gertler
    Abstract: We develop a simple quantitative New Keynesian model aimed at accounting for the recent sudden and persistent rise in inflation, with emphasis on the role of oil shocks and accommodative monetary policy. The model features oil as a complementary good for households and as a complementary input for firms. It also allows for unemployment and real wage rigidity. We estimate the key parameters by matching model impulse responses to those from identified money and oil shocks in a structural VAR. We then show that our model does a good job of explaining unemployment and inflation since 2010, including the recent inflation surge that began in mid 2021. We show that mainly accounting for this surge was a combination oil price shocks and “easy” monetary policy, even after allowing for demand shocks and shocks to labor market tightness. Important for the quantitative impact of the oil price shock is a low elasticity of substitution between oil and labor, which we estimate to be the case.
    JEL: E0
    Date: 2023–05
  26. By: Mr. Francis Vitek
    Abstract: We derive measures of the stances of monetary and fiscal policy within the framework of an empirically plausible extension of the basic New Keynesian model, and jointly estimate them for the United States using a closed form multivariate linear filter. Our theoretical analysis reveals that the neutral stance of monetary policy — as measured by the real natural rate of interest — depends on the stance of fiscal policy, which in turn depends on the composition and expected timing of structural changes in the fiscal instruments. Our empirical application finds that accounting for fiscal policy significantly alters the estimated stance of monetary policy, and that the so-called fiscal impulse is a poor proxy for the stance of fiscal policy.
    Keywords: stance of monetary policy; stance of fiscal policy; new keynesian model; multivariate linear filter
    Date: 2023–05–12
  27. By: Jasmina Arifovic (Simon Fraser University); Isabelle Salle (University of Ottawa); Hung Truong (Simon Fraser University)
    Abstract: Price-level targeting (PLT) is optimal under the fully-informed rational expectations (FIRE) benchmark but lacks empirical support. Given the hurdles to the implementation of macroeconomic field experiments, we utilize a laboratory group experiment – where expectations are elicited from human subjects – to collect data on expectations, inflation and output dynamics under a traditional inflation targeting (IT) framework and a PLT regime with both deflationary and cost-push shocks. We then emulate the subjects’ expectations with a micro-founded heterogeneous-expectation New Keynesian (HENK) model and reproduce the macroeconomic dynamics observed in the lab. Both in the lab and in the HENK model, the benefits of PLT over an IT regime obtained under the FIRE assumption are not observed: both human subjects and HENK agents are unable to learn the underlying implications of PLT, which results in excess macroeconomic volatility. However, once augmented with an inflation guidance from the CB consistent with closing the price gap, the stabilizing benefits of PLT materialize both in the lab and in the model.
    Keywords: heterogeneous expectations, learning, central bank communication, lab experiments
    JEL: E7 E52 E42 C92
    Date: 2023–05–12
  28. By: Valentin Haddad; Alan Moreira; Tyler Muir
    Abstract: At the announcement of a new policy, agents form a view of state-contingent policy actions and impact. We develop a method to estimate this state-contingent perception and implement it for many asset-purchase interventions worldwide. Expectations of larger support in bad states—“policy puts”—explain a large fraction of the announcements’ impact. For example, when the Fed introduced purchases of corporate bonds in March 2020, markets expected five times more price support had conditions worsened relative to the median scenario. Perceived promises of additional support in bad states persistently distort asset prices, risk, and the response to future announcements.
    JEL: E50 G0
    Date: 2023–05
  29. By: BENIGNO, Pierpaolo; CANOFARI, Paola; DI BARTOLOMEO, Giovanni; MESSORI, Marcello
    Abstract: Differently from previous crises, the European institutions responded promptly to the Covid-19 pandemic by implementing an appropriate policy mix. However, this policy mix has proven to be insufficient for reducing the risks of financial instability in the European Union due to the temporary horizon of the centralised fiscal policy and the persistence of adverse shocks. In fact, the impact of the pandemic was exacerbated by the dramatic consequences of the war in Ukraine. The possible inefficiencies in implementing the Next Generation-EU (NG-EU) and an inadequate response to the war’s shock could trigger, at best, the revival of financial and fiscal dominance in the euro-area economies. However, by using a simple model referred to the post-pandemic and war period, we show that the overburdening of the European Central Bank’s role would come with high costs. Hence, we argue that it is necessary to pursue sustainable development based on the successful implementation of the NG-EU and the related transformation of the one-shot centralised fiscal policy into a recurrent policy tool.
    Keywords: Fiscal dominance, Financial dominance, ECB, Monetary policy
    JEL: E31 E51 E58
    Date: 2023–03
  30. By: Agam Shah; Suvan Paturi; Sudheer Chava
    Abstract: Monetary policy pronouncements by Federal Open Market Committee (FOMC) are a major driver of financial market returns. We construct the largest tokenized and annotated dataset of FOMC speeches, meeting minutes, and press conference transcripts in order to understand how monetary policy influences financial markets. In this study, we develop a novel task of hawkish-dovish classification and benchmark various pre-trained language models on the proposed dataset. Using the best-performing model (RoBERTa-large), we construct a measure of monetary policy stance for the FOMC document release days. To evaluate the constructed measure, we study its impact on the treasury market, stock market, and macroeconomic indicators. Our dataset, models, and code are publicly available on Huggingface and GitHub under CC BY-NC 4.0 license.
    Date: 2023–05
  31. By: Barkhausen, David; Teupe, Sebastian
    Abstract: The notion of a nation-specific inflation trauma among the German population is ubiquitous in the public debate in Germany and beyond. Because of its experience with hyperinflation in 1923, the German population fears rising prices and favors stability-oriented monetary as well as fiscal policy. It is less clear, however, whether this contemporary understanding of the German inflation trauma is as old as its historical point of reference. The majority of the literature presumes that such a traumatic disposition has persisted since 1923 and has been transposed intergenerationally (persistence thesis). Others, however, point to an ex-ante reconstruction of past experiences (reconstruction thesis). By employing an interdisciplinary approach of methodological triangulation drawing on both methods of history and political sciences, we provide new insights on the question of origin. Specifically, we examine the remembrance of hyperinflation in personal memoirs and the German Bundestag in regard to the monetary and fiscal policy lessons connected to memories of 1923. Doing so, we find support for the logic of reconstruction. We show that the hyperinflation was not remembered unambiguously, and that memories were not immediately linked to specific policy lessons. Only from the 1980s onwards, a process of discursive alignment occurred that mirrors the contemporary understanding of the inflation trauma. By providing this insight, our paper allows to better understand the historical origins of today's popular memory and its political uses.
    Keywords: Inflation Trauma, Hyperinflation, Stability Culture, Monetary History, Collective memory
    JEL: N0 Z1
    Date: 2023
  32. By: Kristin Forbes; Christian Friedrich; Dennis Reinhardt
    Abstract: This paper explores the relationship between different funding structures—including the source, instrument, currency, and counterparty location of funding—and the extent of financial stress experienced in different countries and sectors during the sharp risk-off shock in early 2020 when Covid-19 spread globally. We measure financial stress using a new dataset on changes in credit default swap spreads for sovereigns, banks, and corporates. Then we use country-sector and country-sector-time panels to assess how different funding structures are related to financial stress. A higher share of funding from non-bank financial institutions (NBFIs) or in US dollars was correlated with significantly greater stress, while a higher share of funding in debt instruments (instead of loans) or cross-border (instead of domestically) was not significantly related to financial stress. The results suggest that macroprudential regulations should broaden their current focus to take into account exposures to NBFI and dollar funding, with less priority for regulations focused on residency (i.e., capital controls). After the sharp increase in financial stress in early 2020, policy responses targeting these structural vulnerabilities (i.e., US$ swap lines and focused on NBFIs) were more effective at mitigating stress related to these funding structures than policies supporting banks, even after controlling for macroeconomic policy responses.
    JEL: E44 E65 F31 F36 F42 G18 G23 G38
    Date: 2023–05
  33. By: Sarah Goldman (Lux-SIR); Shouyi Zhang (LEFMI - Laboratoire d’Économie, Finance, Management et Innovation - UR UPJV 4286 - UPJV - Université de Picardie Jules Verne)
    Abstract: The aim of the paper is to evaluate the impact of Quantitative Easing (QE) on economic growth through households' saving, in particular currency, deposits, and mutual funds. We focus on currency, deposits, and mutual funds since they represent more than 75% of the total assets of Luxembourgish households (on average more than 50% for the currency and deposits and about 25% for the mutual funds for the period 2002Q1 to 2016Q2). We try to under-line how savings' decisions are affected by unconventional monetary policies during crisis periods, economic instability and low-interest rate environment. Different scenarios are taken into account. Three trials, with one being the base-line model, are performed. The baseline is run with the pre-crisis values for all model parameters. The first scenar-io presents a crisis environment without quantitative easing policy whereas the second Scenario introduces the QE policy in a crisis environment. According to our simple theoretical model, the saving rate decreases during an eco-nomic crisis without QE framework. This result may be interpreted as a "ratchet effect", and increase globally when the QE program is applied. For the wealthier the precautionary saving rises (despite its weak yield) due to economic uncertainty whereas the poorest population dissave.
    Keywords: Quantitative Easing Policy, Mutual Funds, Currency
    Date: 2022
  34. By: Jannik Hensel; Giacomo Mangiante; Luca Moretti
    Abstract: This paper studies the impact of carbon pricing on firms’ inflation expectations and discusses the potential implications for what constitutes the core of most central banks’ mandate: price stability. Carbon policy shocks are identified from high-frequency changes in carbon futures price around regulatory events. The shock series is combined with French firm-level survey data. We document that a change in the price of carbon increases firms’ inflation expectations. We then investigate how firms’ business conditions are affected by carbon policy shocks and we find that firms’ own expected and realized price growth respond similarly to inflation expectations. The effect on price expectations is more persistent than on actual price growth leading to positive forecast errors in the medium- /long-run. We also show that a sizable share of the increase in inflation expectations is due to indirect effects. Firms rely on their own business conditions to form expectations about the aggregate price dynamics. Therefore, the expected positive growth in their own prices significantly contributes to the observed increase in inflation expectations. Finally, we study how firms’ responses are heterogeneously influenced by the shocks based on the share of input costs devoted to energy expenditures. We find that high energy-intensive firms tend to overreact relatively more in terms of their own price expectations compared to the actual price change the shocks induce.
    Keywords: Climate policies, carbon pricing, inflation expectations, monetary policy, survey data
    JEL: E31 E52 E58 Q43 Q54
    Date: 2023–04
  35. By: Carola Binder; Pei Kuang; Li Tang
    Abstract: We study how US consumers’ house price expectations respond to verbal and non-verbal communication about interest rate changes using several large online surveys. Verbal communication about interest rate hikes leads to little response of average house price expectations but large heterogeneity among household groups. Communication about rate hikes combined with a simple explanation of the mortgage rate channel causes large downward revisions to house price expectations. Consumers interpret heterogeneously Chair Powell’s voice tone and body language at the press conference which significantly influence their house price expectations. More negative evaluations are associated with larger upward revisions to house price expectations.
    JEL: E30 E31 E52 E7
    Date: 2023–05
  36. By: Ablam Estel Apeti (LEO - Laboratoire d'Économie d'Orleans [2022-...] - UO - Université d'Orléans - UT - Université de Tours - UCA - Université Clermont Auvergne, UCA - Université Clermont Auvergne); Jean-Louis Combes (LEO - Laboratoire d'Économie d'Orleans [2022-...] - UO - Université d'Orléans - UT - Université de Tours - UCA - Université Clermont Auvergne, UCA - Université Clermont Auvergne); Alexandru Minea (LEO - Laboratoire d'Économie d'Orleans [2022-...] - UO - Université d'Orléans - UT - Université de Tours - UCA - Université Clermont Auvergne, ICUB - Research Institute of the University of Bucharest - UniBuc - University of Bucharest, Carleton University)
    Abstract: An important literature shows that inflation targeting (IT) adoption improves fiscal discipline. Our impact assessment analysis performed in a large sample of 89 developing countries over three decades shows that this favorable impact covers a composition effect: IT adoption is found to reduce more current expenditure compared with public investment in IT countries relative to non-IT countries. This finding is robust to various alternative specification, related to the structure of the sample, the measurement of the IT regime, or the estimation method. Consequently, aside from its acknowledged benefits for monetary policy goals, IT appears as an efficient tool to strengthen fiscal policy in developing countries towards lower and more productive public expenditure.
    Keywords: Inflation targeting, Composition effect of public expenditure, Impact analysis, Current expenditure, Public investment
    Date: 2023–06
  37. By: John Bagley; Stefan Gissler; Ivan T. Ivanov
    Abstract: We examine the role of institutional investors in monetary policy transmission to asset markets by exploiting a discontinuous threshold in the tax treatment of municipal bonds. As bonds approach the threshold, mutual funds, the primary institutional traders in the market, dispose of the bonds at significant risk of falling below the threshold. This is driven by mutual funds anticipating future illiquidity. Once bonds cross the threshold, their liquidity declines and illiquidity-induced yield spreads increase substantially as retail investors become more important in price formation. Unexpected monetary policy tightening sharply reduces trading activity, amplifying the path to illiquidity in the market.
    Keywords: monetary policy; municipal bonds; institutional investors; asset liquidity
    Date: 2023–01–19
  38. By: Margaret M. Jacobson; Eric M. Leeper; Bruce Preston
    Abstract: When Roosevelt abandoned the gold standard in April 1933, he converted government debt from a tax-backed claim to gold to a claim to dollars, opening the door to unbacked fiscal expansion. Roosevelt followed a state-contingent fiscal rule that ran nominal-debt-financed primary deficits until the price level rose and economic activity recovered. Theory suggests that government spending multipliers can be substantially larger when fiscal expansions are unbacked than when they are tax-backed. VAR estimates using data on "emergency" unbacked spending and "ordinary" backed spending confirm this prediction and find that primary deficits made quantitatively important contributions to raising both the price level and real GNP after 1933. VAR evidence does not support the conventional monetary explanation that gold revaluation and gold inflows, which raised the monetary base, drove the recovery independently of fiscal actions.
    Keywords: Great depression; Monetary-fiscal interactions; Monetary policy; Fiscal policy; Government debt
    JEL: E31 E52 E62 E63 N12
    Date: 2023–05–12
  39. By: Heider, Florian; Krahnen, Jan Pieter; Pelizzon, Loriana; Schlegel, Jonas; Tröger, Tobias
    Abstract: The SVB case is a wake-up call for Europe's regulators as it demonstrates the destructive power of a bank-run: it undermines the role of loss absorbing capital, elbowing governments to bailout affected banks. Many types of bank management weaknesses, like excessive duration risk, may raise concerns of bank losses - but to serve as a run-trigger, there needs to be a large enough group of bank depositors that fails to be fully covered by a deposit insurance scheme. Latent run-risk is the root cause of inefficient liquidations, and we argue that a run on SVB assets could have been avoided altogether by a more thoughtful deposit insurance scheme, sharply distinguishing between loss absorbing capital (equity plus bail-in debt) and other liabilities which are deemed not to be bail-inable, namely demand deposits. These evidence-based insights have direct implications for Europe's banking regulation, suggesting a minimum and a maximum for a banks' loss absorption capacity.
    Keywords: European Deposit protection scheme
    Date: 2023

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