nep-cba New Economics Papers
on Central Banking
Issue of 2023‒07‒31
twenty papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Monetary policy transmission below zero By Fungáécová, Zuzana; Kerola, Eeva; Laine, Olli-Matti
  2. Whose inflation rates matter most? A DSGE model and machine learning approach to monetary policy in the Euro area By Stempel, Daniel; Zahner, Johannes
  3. Impact of monetary policy on financial inclusion in emerging markets By Ozili, Peterson K
  4. Monetary Policy Transmission under Financial Repression By Kaiji Chen; Yiqing Xiao; Tao Zha
  5. Monetary Policy Transmission Through Online Banks By Isil Erel; Jack Liebersohn; Constantine Yannelis; Samuel Earnest
  6. Inflation, Monetary Policy and the Sacrifice Ratio:The Case of Southeast Asia By Leef H. Dierks
  7. Macrofinancial Dynamics in a Monetary Union By Daniel Monteiro
  8. Social learning expectations: microfoundations and a Dynare toolbox By Alex Grimaud; Isabelle Salle; Gauthier Vermandel
  9. Googling “Inflation”: What does Internet Search Behaviour Reveal about Household (In)attention to Inflation and Monetary Policy? By Christian Buelens
  10. The effects of monetary policy surprises and fiscal sustainability regimes in the Euro Area By António Afonso; José Alves; Serena Ionta
  11. The Geography of Climate Change Risk Analysis at Central Banks in Europe By Csaba Burger; Dariusz Wojcik
  12. Transition risk uncertainty and robust optimal monetary policy By Dück, Alexander; Le, Anh H.
  13. Updated estimates of the role of the bank lending channel in monetary policy transmission in Poland By Mariusz Kapuściński
  14. Interest rate pass-through to risk-free rates in Poland By Mariusz Kapuściński
  15. Investigating the inflation-output-nexus for the euro area: Old questions and new results By Gerdesmeier, Dieter; Reimers, Hans-Eggert; Roffia, Barbara
  16. Identifying News Shocks from Forecasts By Jonathan J Adams; Philip Barrett
  17. What caused the US pandemic-era inflation? By Ben Bernanke; Olivier J Blanchard
  18. The Credit Supply Channel of Monetary Policy Tightening and its Distributional Impacts By Joshua Bosshardt; Marco Di Maggio; Ali Kakhbod; Amir Kermani
  19. Optimal fiscal and monetary policy in a model with government corruption By Keen, Benjamin; Strong, Christine
  20. Financial Shocks in an Uncertain Economy By Chiara Scotti

  1. By: Fungáécová, Zuzana; Kerola, Eeva; Laine, Olli-Matti
    Abstract: This study considers the pass-through of different ECB monetary policy measures to bank corporate lending rates of different maturities during 2010-2020. We find changes in the pass-through as policy rates first dip below zero in 2014 and again when negative interest rates become more persistent during the "low-for-long" period beginning in 2016. Overall, the transmission of monetary policy to bank lending rates appears to have become less efficient below zero, particularly in the case of corporate loans with short maturities. The effect is most pronounced for banks that did not lower their own retail deposit rates below zero or held significant amounts of negative interest-bearing central bank deposits. We see a reversal in the pass-through during the low-for-long period with banks raising their lending rates as monetary policy is eased. Unconventional monetary policy measures such as targeted longer-term refinancing operations (TLTROs) and quantitative easing (QE) appear to have mitigated these contractionary effects, even during the low-for-long period. In our examination of below-zero policy tools, we provide evidence that negative policy rates and TLTROs complement each other, while negative policy rates and QE do not.
    Keywords: negative interest rates, unconventional monetary policy, lending rates, bank lending channel, euro area
    JEL: E52 E58 G21
    Date: 2023
  2. By: Stempel, Daniel; Zahner, Johannes
    Abstract: In the euro area, monetary policy is conducted by a single central bank for 20 member countries. However, countries are heterogeneous in their economic development, including their inflation rates. This paper combines a New Keynesian model and a neural network to assess whether the European Central Bank (ECB) conducted monetary policy between 2002 and 2022 according to the weighted average of the inflation rates within the European Monetary Union (EMU) or reacted more strongly to the inflation rate developments of certain EMU countries. The New Keynesian model first generates data which is used to train and evaluate several machine learning algorithms. They authors find that a neural network performs best out-of-sample. They use this algorithm to generally classify historical EMU data, and to determine the exact weight on the inflation rate of EMU members in each quarter of the past two decades. Their findings suggest disproportional emphasis of the ECB on the inflation rates of EMU members that exhibited high inflation rate volatility for the vast majority of the time frame considered (80%), with a median inflation weight of 67% on these countries. They show that these results stem from a tendency of the ECB to react more strongly to countries whose inflation rates exhibit greater deviations from their long-term trend.
    Keywords: New Keynesian Models, Monetary Policy, European Monetary Union, Neural Networks, Transfer Learning
    JEL: E58 C45 C53
    Date: 2023
  3. By: Ozili, Peterson K
    Abstract: The study investigates the impact of monetary policy on the level of financial inclusion in the big-five emerging market countries from 2004 to 2020. Several indicators of financial inclusion and the central bank interest rate were used in the analysis. It was found that the monetary pol-icy rate has a mixed effect on financial inclusion, and the effect depends on the dimension of fi-nancial inclusion examined. Specifically, a high monetary policy rate has a significant negative impact on financial inclusion through a reduction in the number of depositors in commercial banks. A high monetary policy rate also has a significant positive impact on financial inclusion through greater bank branch expansion. The policy implication is that both contractionary and expansionary monetary policies lead to positive improvements in specific indicators of financial inclusion, because increase in interest rate leads to bank branch expansion which is beneficial for financial inclusion and decrease in interest rate leads to increase in the number of depositors in commercial banks which is also beneficial for financial inclusion. It was also found that the rising monetary policy rate has a negative effect on all indicators of financial inclusion in the post-financial crisis period. Overall, the effect of monetary policy on financial inclusion seem to depend on the monetary policy tool used by the monetary authority and the dimension of financial inclusion examined. The monetary authorities should pay attention to how their monetary policy choices might affect the level of financial inclusion and reduce the benefits that society gains from financial inclusion.
    Keywords: monetary policy, interest rate, financial inclusion, access to finance, emerging markets
    JEL: E51 E52 E58 G21
    Date: 2023–06–19
  4. By: Kaiji Chen; Yiqing Xiao; Tao Zha
    Abstract: According to the conventional bank lending channel of monetary policy, wholesale funding in economies with well-developed financial markets moves negatively with retail deposits in response to changes in the monetary policy rate, thereby weakening the transmission of monetary policy. We present a theoretical model to demonstrate that in economies with financial repression, (i) retail deposits and wholesale funding comove positively in response to changes in the policy rate and (ii) wholesale funding strengthens, rather than weakens, the transmission of monetary policy to bank loans. We support these findings by bank-level evidence with deposit rate ceilings.
    JEL: E02 E5 G11 G12 G28
    Date: 2023–06
  5. By: Isil Erel; Jack Liebersohn; Constantine Yannelis; Samuel Earnest
    Abstract: Financial technology has reshaped commercial banking. It has the potential to radically alter the transmission of monetary policy by lowering search costs and expanding bank markets. This paper studies the reaction of online banks to changes in federal fund rates. We find that these banks increase rates that they offer on deposits significantly more than traditional banks do. A 100 basis points increase in the federal fund rate leads to a 30 basis points larger increase in rates of online banks. Consistent with the rate movements, online bank deposits experience inflows, while traditional banks experience outflows during monetary tightening in 2022. The findings are consistent across banking markets of different competitiveness and demographics. Our findings shed new light on the role of online banks in interest rate pass-through and deposit channel of monetary policy.
    JEL: E52 E58 G21 G23 G28
    Date: 2023–06
  6. By: Leef H. Dierks (Lübeck University of Applied Sciences, Germany)
    Abstract: Motivated by the 2022 uptick in headline inflation and the marked shift towards more restrictive monetary policies globally, this paper examines the sacrifice ratio, i.e., the percentage cost of actual production lost to every one percentage point decrease in (trend) inflation, for selected Southeast Asian economies. Results indicate that upon adopting a contractive monetary policy, GDP growth dropped by up to 0.5%, confirming that monetary authorities’ disinflationary policies typically trigger declines in both output and employment. However, as even minor adjustments to the way of determining the sacrifice ratio lead to varying results, caution ought to be applied when deriving potential (monetary) policy recommendations.
    Keywords: Monetary Policy, Interest Rates, Inflation, Sacrifice Ratio, (Trend) Output
    JEL: E31 E52 E58 E65 E71
    Date: 2023–07
  7. By: Daniel Monteiro
    Abstract: We develop a dynamic stochastic general equilibrium model of a monetary union and employ it to study in an integrated manner different macrofinancial disturbances and related policy options. The model is calibrated to the euro area, comprises two regions subject to real, nominal and financial rigidities, and features microfounded regional banking sectors and portfolio selection mechanisms allowing for empirically-consistent properties. Among the questions to which we devote our analysis are the transmission of conventional and unconventional monetary policy, the effects of private- and government-sector default risk, the implications of different macroprudential policies, the endogenous emergence of country risk premia in a context of crossborder financial flows, and the stabilising properties of joint sovereign debt issuance.
    JEL: E32 E44 E52 F36 F45 G28 H63
    Date: 2023–06
  8. By: Alex Grimaud (Department of Economics, Vienna University of Economics and Business); Isabelle Salle (Department of Economics, University of Ottawa); Gauthier Vermandel (Ecole Polytechnique UMR 7641)
    Abstract: Social learning (SL) is a behavioral model in which expectations and the resulting aggregate dynamics stem from the interactions of a large amount of heterogeneous agents. Nonetheless, this framework has so far lacked micro-foundations and a general-solution method. This paper bridges these two gaps with: (i) a micro-founded New Keynesian model with social learning expectations; (ii) a general solution method that we implement in a Dynare toolbox that solves any linear state-space model with SL expectations. The resulting framework provides a self-contained tool to contrast policy analysis under SL and rational expectations. As an illustration, optimal monetary policy rules are studied under the two expectation regimes.
    Keywords: Inflation targeting, Monetary policy, Heterogeneous expectations
    JEL: E32 E52 E58 E71
    Date: 2023–07
  9. By: Christian Buelens
    Abstract: This paper shows that internet search intensity for the term “inflation” provides a meaningful direct measure of attention to inflation by households across the euro area. In support of the theory of rational inattention, it finds that inflation attention is contingent on the level of inflation and increases in it in a non-linear manner, pointing to different inflation attention-regimes. As inflation increases, economic agents abandon their state of inattention at an accelerating rate, which may have lasting implications on inflation expectations and the way they are formed. Attention to inflation in some euro area countries is also found to be triggered by other factors, notably monetary policy decisions or a deterioration in households’ economic situation. This suggests that households do establish a link between inflation and monetary policy decisions, and think about inflation when economic sentiment drops. However, there is strong heterogeneity across the euro area, both in terms of inflation attention levels and sensitivity. These findings have implications for public communication in high inflation attention-regimes and for the modelling of inflation expectations when there are information frictions.
    JEL: C82 D83 D84 E31 E52 E58 E7
    Date: 2023–03
  10. By: António Afonso; José Alves; Serena Ionta
    Abstract: We study the effect of monetary surprise shocks on real output and the price level, conditioned on different fiscal sustainability regimes in the period 2001Q4-2021Q4. First, we estimate time-varying fiscal sustainability coefficients based on Bohn’s (1998) approach through Schlicht’s (2003) method. Then, by taking these sustainability coefficients in a nonlinear local projection model for the Euro Area (aggregate data), Germany, Italy, and Portugal, we analyze the interaction between both policies under (un)sustainable fiscal regimes. Our results show that in a Ricardian regime, output and prices respond to monetary tightening by contracting, while in a non-Ricardian regime the effect on output and price levels is negligible (or even positive). The dependence of the effectiveness of monetary policy on fiscal solvency is valid for Euro-Area and all the countries assessed, and does not depend on whether a country is “core” or “periphery”, but on the policy conduct over time.
    Keywords: monetary surprises, fiscal sustainability, local-projection models, fiscal-monetary policy mix, Euro area, Germany, Italy, Portugal
    JEL: C32 E58 E62 E63
    Date: 2023–07
  11. By: Csaba Burger (Magyar Nemzeti Bank (the Central Bank of Hungary)); Dariusz Wojcik (University of Oxford, School of Geography and the Environment)
    Abstract: Incorporating climate change considerations in central bank decisions has been fraught with legal and technical controversies. Legal, because interpretations of central bank mandates in relation to sustainability has been widely cited as hurdles to the discussion of climate change; and technical, because no methodology used to exist to assess and to measure the impact of climate risks on financial stability. This paper first analyses the spatial and temporal process climate change-related risk analysis spread among central banks by text mining - counting relevant bigrams - in 941 European financial stability reports of 39 central banks in Europe. It then maps climate risk relevant references of these reports. The study argues that geographical proximity played a significant role in the spread of the climate friendly central bank mandate interpretations. It also shows that the ECB, together with representatives of EU national central banks and their technical know-how, played a pivotal role in turning an innovation from being a novel research method into an accepted analytical framework. At the beginning of 2023, it now paves the way a towards a Basel-conform banking regulation within the EU, which reflects climate change risks too.
    Keywords: financial geography, central bank mandates, climate change, financial stability, text mining, bigram search, fiduciary duty
    JEL: E58 Q54 G17 G21 L38
    Date: 2023
  12. By: Dück, Alexander; Le, Anh H.
    Abstract: Climate change has become one of the most prominent concerns globally. In this paper, we study the transition risk of greenhouse gas emission reduction in structural environmental-macroeconomic DSGE models. First, we analyze the uncertainty in model prediction on the effect of unanticipated and pre-announced carbon price increases. Second, we conduct optimal model-robust policy in different settings. We find that reducing emissions by 40% causes 0.7% - 4% output loss with 2% on average. Pre-announcement of carbon prices affects the inflation dynamics significantly. The central bank should react slightly less to inflation and output growth during the transition risk. With optimal carbon price designs, it should react even less to inflation, and more to output growth.
    Keywords: Climate change, Environmental policy, Optimal policy, Transition risk, Model uncertainty, DSGE models
    JEL: Q58 E32 Q54 C11 E17 E52
    Date: 2023
  13. By: Mariusz Kapuściński (Narodowy Bank Polski)
    Abstract: In this research note I provide updated estimates of the role of the bank lending channel in monetary policy transmission in Poland. Previous estimates were described in Kapuściński (2017). The bank lending channel is defined following Disyatat (2011), as the amplification of the effect of monetary policy on bank lending, due to its impact on bank balance sheet strength. As before, the estimates are based on counterfactual impulse response functions from panel vector autoregressive models. Differences include not only the longer time series dimension of available data, but also enhancements in terms of the number of banks covered, data processing and coefficient uncertainty coverage. I find the bank lending channel to operate differently in cooperative and commercial banks. Nevertheless, estimates for the latter, significantly larger part of the banking sector are broadly in line with previous ones. 18 percent of a decline in bank lending after the tightening of monetary policy can be attributed to the bank lending channel.
    Keywords: transmission mechanism of monetary policy, bank lending channel.
    JEL: E52 G21
    Date: 2023
  14. By: Mariusz Kapuściński (Narodowy Bank Polski)
    Abstract: In this research note I provide the first estimates of the transmission of monetary policy in Poland to risk-free rates, WIRON rates. I take into account the effects of changes in the policy rate, in the width of the standing facilities corridor and in the reserve position of the banking sector. I also make comparisons to the transmission to POLONIA and WIBOR rates. I find both the overnight and term WIRON rates to be affected by interest rate policy and other components of the operational framework of Narodowy Bank Polski. This makes the transmission similar as to the POLONIA rate, but to some extent different than to WIBOR rates. For the term rates, by construction, there are differences in transmission lags. This might have implications for the transmission mechanism of monetary policy in Poland in the future. The extent will depend on the character of changes in the policy rate (unexpected versus expected), and the term of the rate chosen for financial contracts and instruments. Given the limited number of observations, the conclusions should be treated with caution.
    Keywords: transmission mechanism of monetary policy, interest-rate pass through, risk-free rates, interest rate benchmark reform.
    JEL: E43 E52
    Date: 2023
  15. By: Gerdesmeier, Dieter; Reimers, Hans-Eggert; Roffia, Barbara
    Abstract: The relationship between inflation and real GDP growth is one of the most widely researched topics in macroeconomics. At the same time, it is certainly not exaggerated to claim that this nexus also stands at the heart of monetary policy, given the fact that low inflation in combination with high and sustained output growth should be the central objective of any sound economic policy. The latter notion becomes even more obvious, when taking account of the fact that many central banks all over the world have selected target levels for inflation and communicated them to the public. Against this background, it is of utmost importance for central banks to know more about the nature and form of the relationship between inflation and real GDP. This study tries to shed more light on the concrete shape of this relationship for the euro area and, more specifically, on the issue of possible regime shifts therein. The analysis provides strong evidence for non-linear effects in the euro area. As a by-product, the methods used allow for a quantification of the point of switch across the different regimes and it is found that this breakpoint closely matches the ECB's previous definitions of price stability and its new inflation target of 2%. While these results look encouraging, further research in this area seems warranted.
    JEL: E31 E52 E58
    Date: 2023
  16. By: Jonathan J Adams (Department of Economics, University of Florida); Philip Barrett (International Monetary Fund)
    Abstract: We propose a method to identify the anticipated components of macroeconomic shocks in a structural VAR: we include empirical forecasts about each time series in the VAR, which introduces enough linear restrictions to identify each structural shock and to further decompose each one into “news†and “surprise†shocks. We estimate our VAR on US time series using forecast data from the SPF, CBO, Federal Reserve, and asset prices. The fiscal stimulus and interest rate shocks that we identify have typical effects that comport with existing evidence. In our news-surprise decomposition, we find that news contributes to a third of US business cycle volatility, where the effect of fiscal shocks is mostly anticipated, while the effect of monetary policy shocks is mostly unexpected. Finally, we use the news structure of the shocks to estimate counterfactual policy rules, and compare the ability of fiscal and monetary policy to moderate output and inflation.
    JEL: C32 E32 E52 E62
    Date: 2023–06
  17. By: Ben Bernanke (Brookings Institution); Olivier J Blanchard (Peterson Institute for International Economics)
    Abstract: Bernanke and Blanchard answer the question posed by the title by specifying and estimating a simple dynamic model of prices, wages, and short-run and long-run inflation expectations. The estimated model allows them to analyze the direct and indirect effects of product-market and labor-market shocks on prices and nominal wages and to quantify the sources of US pandemic-era inflation and wage growth. The authors find that, contrary to early concerns that inflation would be spurred by overheated labor markets, most of the inflation surge that began in 2021 was the result of shocks to prices given wages. These shocks included sharp increases in commodity prices, reflecting strong aggregate demand, and sectoral price spikes, resulting from changes in the level and sectoral composition of demand together with constraints on sectoral supply. However, although tight labor markets have thus far not been the primary driver of inflation, the authors find that the effects of overheated labor markets on nominal wage growth and inflation are more persistent than the effects of product-market shocks. Controlling inflation will thus ultimately require achieving a better balance between labor demand and labor supply.
    Keywords: inflation, monetary policy, aggregate demand, Beveridge curve, commodity prices, shortages, inflation expectations
    JEL: E31 E37 E52 E6 E24
    Date: 2023–06
  18. By: Joshua Bosshardt (Federal Housing Finance Agency); Marco Di Maggio (Harvard University); Ali Kakhbod (University of California, Berkeley); Amir Kermani (University of California, Berkeley)
    Abstract: This paper studies how tightening monetary policy transmits to the economy through the mortgage market and sheds new light on the distributional consequences at both the individual and regional levels. We find that mortgage supply factors, specifically restrictions on the debt-to-income (DTI) ratio, account for the majority of the decline in mortgages. These effects are even more pronounced for young and middle-income borrowers who find themselves excluded from the credit market. Also, regions with historically high DTI ratios exhibited greater reductions in mortgage originations, house prices, and consumption.
    Keywords: interest rates, mortgage lending, house prices, debt-to-income (DTI)
    JEL: G21 E43 G51
  19. By: Keen, Benjamin; Strong, Christine
    Abstract: This paper builds a theoretical model where corrupt government officials select the optimal amount of government spending directed toward building wealth for themselves and political allies. We refer to this type of government expenditures as rent extraction spending. Our results show that more government corruption leads to higher rent extraction spending, increased inflation, additional taxation, and lower non-rent extraction spending. The increases in inflation and rent extraction spending, however, are more muted when the corrupt country is a member of a currency union.
    Keywords: Corruption; Rent Extraction; Optimal Fiscal Policy; Optimal Monetary Policy.
    JEL: E52 E61 E62 O23
    Date: 2023–06–09
  20. By: Chiara Scotti
    Abstract: The past 15 years have been eventful. The Global Financial Crisis (GFC) reminded us of the importance of a stable financial system to a well-functioning economy, one with low and stable inflation and maximum employment. Given the recent banking stress, we ponder this issue again. The pandemic was a huge shock surrounded by much uncertainty, making precise forecasts within traditional models difficult. And more recently, there has been continuous talk of a soft landing and recession risks. In this paper, I focus on some of the lessons we have learned over the years: (i) uncertainty and tail risk have cyclical variation; (ii) financial shocks can have a significant effect on macroeconomic outcomes; (iii) the impact of shocks is stronger in periods of high volatility. These lessons have important implications for policymakers in today’s environment.
    Keywords: uncertainty; tail risk; stochastic volatility; monetary policy; financial stability
    JEL: C32 E44
    Date: 2023–07–07

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