nep-cba New Economics Papers
on Central Banking
Issue of 2023‒09‒18
fourteen papers chosen by
Sergey E. Pekarski, Higher School of Economics

  1. UK Monetary Policy in An Estimated DSGE Model with State-Dependent Price and Wage Contracts By Chen, Haixia; Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick
  2. The interplay between monetary and fiscal policy in a small open economy By Øistein Røisland; Tommy Sveen; Ragnar Torvik
  3. Lending by Servicing: Monetary Policy Transmission Through Shadow Banks By Isha Agarwal; Malin Hu; Raluca Roman; Keling Zheng
  4. A Comment on Monetary Policy and Rational Asset Price Bubbles By Franklin Allen; Gadi Barlevy; Douglas Gale
  5. Investigating the Effects of Monetary Policy Shocks on Growth and Inflation in Egypt: Asymmetry and the Long-term Impact By Nadeen Omar
  6. Can Central Banks Do the Unpleasant Job That Governments Should Do? By Vasiliki Dimakopoulou; George Economides; Apostolis Philippopoulos; Vanghelis Vassilatos
  7. Managing an Energy Shock: Fiscal and Monetary Policy By Adrien Auclert; Hugo Monnery; Matthew Rognlie; Ludwig Straub
  8. The origins of monetary policy disagreement: the role of supply and demand shocks By Carlos Madeira; João Madeira; Paulo Santos Monteiro
  9. Contagion Effects of the Silicon Valley Bank Run By Dong Beom Choi; Paul Goldsmith-Pinkham; Tanju Yorulmazer
  10. Housing assistance policy for mortgage borrowers: liquidity improvements or price acceleration? By McCann, Fergal; Singh, Anuj Pratap
  11. The Effects of Exchange Rate Changes on Sudanese Output: An Asymmetric Analysis using the NARDL Model By Mesbah Fathy Sharaf; Abdelhalem Mahmoud Shahen
  12. The FOMC versus the Staff: Do Policymakers Add Value in Their Tales? By Ilias Filippou; James Mitchell; My T. Nguyen
  13. The Crypto Cycle and US Monetary Policy By Ms. Natasha X Che; Alexander Copestake; Davide Furceri; Tammaro Terracciano
  14. Estimating HANK for Central Banks By Sushant Acharya; William Chen; Marco Del Negro; Keshav Dogra; Aidan Gleich; Shlok Goyal; Donggyu Lee; Ethan Matlin; Reca Sarfati; Sikata Sengupta

  1. By: Chen, Haixia (Cardiff Business School); Le, Vo Phuong Mai (Cardiff Business School); Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School)
    Abstract: Considerable micro-level evidence suggests that price/wage contract durations fluctuate with the state of the economy, particularly inflation; nonetheless, macro-level evidence for this is scarce. We incorporate state-dependent price/wage setting into an open economy DSGE model to investigate the evidence of state-dependence in the UK economy’s postwar behaviour. The model is estimated and tested using the Indirect Inference method and is found to fit the dynamic behaviour of key variables very well over a long sample period 1955-2021. In the state-dependent scenario, apart from the direct responses to shocks, monetary policy affects the degree to which the economy is close to the NK world, which in turn indirectly affects the response to these shocks; it also potentially pushes interest rates to the Zero Lower Bound, ZLB. Under the interaction of state-dependence and the ZLB, monetary-fiscal coordination is needed to stabilise the economy, as monetary policy alone cannot achieve economic stability during ZLB scenarios, where it must use bond purchases (Quantitative Easing, QE). Our findings suggest that a coordinated monetary-fiscal policy framework, i.e., an interest rate policy that targets nominal GDP complemented by a ZLB-suppressing fiscal policy, decreases the frequency of economic crises and enhances price/output stability and household welfare compared to the baseline Taylor Rule and QE framework.
    Keywords: State-dependence, DSGE, QE, ZLB, Monetary Policy, Nominal GDP Targeting, Fiscal Policy, Indirect Inference.
    Date: 2023–08
  2. By: Øistein Røisland; Tommy Sveen; Ragnar Torvik
    Abstract: We develop a theory for the optimal interaction between monetary and fiscal policy. While one might initially think that monetary and fiscal policy should pull in the same direction, we show within a simple model that this is not always the case. If there are small costs of changing the interest rate, it is optimal that monetary policy and fiscal policy pull in opposite directions when the economy is hit by an inflation or exchange rate shock. The reason is that monetary policy affects inflation through both the demand channel and the exchange rate channel, while fiscal policy only affects inflation through the demand channel. Therefore, monetary policy has a comparative advantage in stabilizing inflation, while fiscal policy has a comparative advantage in stabilizing output. Only when the costs of changing the interest rate are sufficiently high will it be optimal for monetary and fiscal policy to pull in the same direction. We also analyse how tax deduction for interest payments affects the monetary policy transmission. Such an interest subsidy improves goal achievement in response to inflation and exchange rate shocks, but the opposite is true in response to demand shocks.
    Date: 2023–08
  3. By: Isha Agarwal; Malin Hu; Raluca Roman; Keling Zheng
    Abstract: We propose a new conceptual framework for monetary policy transmission through shadow banks in the mortgage market that highlights the role of mortgage servicing in generating non-deposit funds for lending. We document that mortgage servicing acts as a natural hedge against interest rate shocks and dampens the effect of monetary policy on shadow bank mortgage lending. Higher interest rates reduce prepayment risk, increasing the collateral value of mortgage servicing assets and cashflow from servicing income. This enables shadow banks with greater exposure to mortgage servicing to obtain more funding. The mortgage servicing channel is weaker for traditional banks due to their reliance on deposit funding and the capital charge on mortgage servicing assets. Our estimates imply that the rising share of shadow banks in mortgage servicing has weakened the pass-through of monetary policy to aggregate mortgage lending.
    JEL: E52 G21
    Date: 2023–08–02
  4. By: Franklin Allen; Gadi Barlevy; Douglas Gale
    Abstract: Galí (2014) showed that a monetary policy rule that raises interest rates in response to bubbles can paradoxically lead to larger bubbles. This comment shows that a central bank that wants to dampen bubbles can always do so by raising interest rates aggressively enough. This result is different from the Miao, Shen and Wang (2019) comment on Galí’s paper. They argue Galí’s model contains additional equilibria in which more aggressive rules dampen bubbles. We show that for these equilibria, more aggressive rules involve threats to raise interest rates more than actual rate increases.
    Date: 2023–07–23
  5. By: Nadeen Omar (German University in Cairo)
    Abstract: Egypt is an emerging economy that has been going through a series of monetary reforms since the 1990s. Previous studies examined the effects of monetary policy with the assumption of a symmetric impact on the macroeconomic aggregates. We add to this line of literature with a recent investigation of both the symmetric and asymmetric effects of monetary policy on output and inflation in Egypt. This paper utilized the interest rate as the monetary policy instrument and retrieved quarterly data covering the period from 2007Q3 to 2019Q3. We apply both the linear and non-linear Auto-regressive Distributed Lag (ARDL) model. In addition, the paper employs an F-bounds test for cointegration and derives the dynamic multiplier to visualize the asymmetric effects. Despite a significant long-run impact on both macroeconomic variables, there is evidence for asymmetric effects on inflation, but not on output. We conclude with policy implications reflecting on Egypt’s plans of implementing an inflation-targeting (IT) regime.
    Date: 2023–03–20
  6. By: Vasiliki Dimakopoulou; George Economides; Apostolis Philippopoulos; Vanghelis Vassilatos
    Abstract: We investigate what happens when the fiscal authorities do not react to rising public debt so that the unpleasant task of fiscal sustainability falls upon the Central Bank (CB). In particular, we explore whether the CB’s bond purchases in the secondary market can restore stability and determinacy in an otherwise unstable model. This is investigated in a DSGE model calibrated to the Euro Area (EA) and where monetary policy is conducted subject to the numerical rules of the Eurosystem (ES). We show that given the recent situation in the ES, and to the extent that a relatively big shock hits the economy and fiscal policy remains active, there is no room left for further quasi-fiscal actions by the ECB; there will be room only if the ES’ rules are violated. We then search for policy mixes that can respect the ES’s rules and show that debt-contingent fiscal and quantitative monetary policies can reinforce each other; this confirms the importance of policy complementarities. On the negative side, bond purchases by the CB worsen income inequality and the unavoidable reversal, in the form of QT, will come at a real cost.
    Keywords: central banking, fiscal policy, debt stabilization, Euro Area
    JEL: E50 E60 O50
    Date: 2023
  7. By: Adrien Auclert; Hugo Monnery; Matthew Rognlie; Ludwig Straub
    Abstract: This paper studies the macroeconomic effects of energy price shocks in energy-importing economies using a heterogeneous-agent New Keynesian model. When MPCs are realistically large and the elasticity of substitution between energy and domestic goods is realistically low, increases in energy prices depress real incomes and cause a recession, even if the central bank does not tighten monetary policy. Imported energy inflation can spill over to wage inflation through a wage-price spiral, but this does not mitigate the decline in real wages. Monetary tightening has limited effect on imported inflation when done in isolation, but can be powerful when done in coordination with other energy importers by lowering world energy demand. Fiscal policy, especially energy price subsidies, can isolate individual energy importers from the shock, but it has large negative externalities on other economies.
    JEL: E52 F42 Q43
    Date: 2023–08
  8. By: Carlos Madeira; João Madeira; Paulo Santos Monteiro
    Abstract: We investigate how dissent in the FOMC is affected by structural macroeconomic shocks obtained using a medium-scale DSGE model. We find that dissent is less (more) frequent when demand (supply) shocks are the predominant source of inflation fluctuations. In addition, supply shocks are found to raise private sector forecasting uncertainty about the path of interest rates. Since supply shocks impose a trade-off between inflation and output stabilisation while demand shocks do not, our findings are consistent with heterogeneous preferences over the dual mandate among FOMC members as a driver of policy disagreement.
    Keywords: FOMC, committees, monetary policy, structural shocks, dissent
    JEL: E52 E58 D78
    Date: 2023–08
  9. By: Dong Beom Choi (Seoul National University); Paul Goldsmith-Pinkham (Yale University and NBER); Tanju Yorulmazer (Koç University)
    Abstract: This paper analyzes the contagion effects associated with the failure of Silicon Valley Bank (SVB) and identifies bank-specific vulnerabilities contributing to the subsequent declines in banks’ stock returns. We find that uninsured deposits, unrealized losses in held-to-maturity securities, bank size, and cash holdings had a significant impact, while better-quality assets or holdings of liquid securities did not help mitigate the negative spillovers. Interestingly, banks whose stocks performed worse post SVB also had lower returns in the previous year following Federal Reserve interest rate hikes. The stock market partially anticipated risks associated with uninsured deposit reliance, but did not price in unrealized losses due to interest rate hikes nor risks linked to bank size. While mid-sized banks experienced particular stress immediately after the SVB failure, over time negative spillovers became widespread except for the largest banks.
    Keywords: Contagion, Banking crisis, Bank run, Systemic risk, Interest rate risk, Hidden losses, Held-to-maturity.
    JEL: G01 G21 G14 G28 E58 E43
    Date: 2023–09
  10. By: McCann, Fergal (Central Bank of Ireland); Singh, Anuj Pratap (Central Bank of Ireland)
    Abstract: Public subsidies to support the downpayments of mortgaged home purchasers can be absorbed in the housing market in a number of ways. Using granular data on loans and borrowers in Ireland, we assess three possible transmission channels of an enhancement to subsidy payments introduced in mid-2020: borrowers’ liquidity, equity (or indebtedness), and home purchase values. Our estimates suggests that outof-pocket downpayments fall by almost the size of the increase in the subsidy value, suggesting improvement in liquidity position of eligible borrowers. We also find that this liquidity improving effect is present across all income levels, but highest in the middle of the borrower income distribution. Equity enhancements (lowering Loan-tovalue ratios) and house price increases are smaller in magnitude and more prevalent among higher income borrowers.
    Keywords: Downpayment constraint, housing assistance schemes, macroprudential policy, borrower liquidity.
    JEL: D04 E58 H24 R28
    Date: 2023–06
  11. By: Mesbah Fathy Sharaf (Faculty of Arts, University of Alberta); Abdelhalem Mahmoud Shahen
    Abstract: This study tests the hypothesis that the real effective exchange rate changes have an asymmetric impact on the domestic output in Sudan from 1960 to 2020. The analysis uses a multivariate framework by controlling for the various channels through which exchange rate changes could affect domestic output. To disentangle the potential asymmetric impact of exchange rate changes on domestic income, we use the nonlinear autoregressive distributed lag (NARDL) framework of Shin et al. (2014) to separate real currency appreciations from depreciation. The results show that fiscal policy has no statistically significant effect on domestic output, while monetary policy has a statistically significant long-run contractionary effect. Results of the NARDL model show long-run asymmetry in the effect of real currency appreciations and depreciations. In particular, real currency appreciations (depreciations) have an expansionary (contractionary) effect on domestic output. There is a considerable difference in the magnitude of the effect of the positive exchange rate shocks compared to the negative shocks, in which the magnitude of the effect of the real currency appreciations on domestic output is almost double that of real currency deprecations. Monetary authorities in Sudan can use the real exchange rate as an effective instrument to affect domestic output in the long run.
    Date: 2023–07–20
  12. By: Ilias Filippou; James Mitchell; My T. Nguyen
    Abstract: Using close to 40 years of textual data from FOMC transcripts and the Federal Reserve staff's Greenbook/Tealbook, we extend Romer and Romer (2008) to test if the FOMC adds information relative to its staff forecasts not via its own quantitative forecasts but via its words. We use methods from natural language processing to extract from both types of document text-based forecasts that capture attentiveness to and sentiment about the macroeconomy. We test whether these text-based forecasts provide value-added in explaining the distribution of outcomes for GDP growth, the unemployment rate, and inflation. We find that FOMC tales about macroeconomic risks do add value in the tails, especially for GDP growth and the unemployment rate. For inflation, we find value-added in both FOMC point forecasts and narrative, once we extract from the text a broader set of measures of macroeconomic sentiment and risk attentiveness.
    Keywords: monetary policy; sentiment; uncertainty; risk; forecast evaluation; FOMC meetings; textual analysis; machine learning; quantile regression
    JEL: F31 G11 G15
    Date: 2023–08–30
  13. By: Ms. Natasha X Che; Alexander Copestake; Davide Furceri; Tammaro Terracciano
    Abstract: We examine fluctuations in crypto markets and their relationships to global equity markets and US monetary policy. We identify a single price component—which we label the “crypto factor”—that explains 80% of variation in crypto prices, and show that its increasing correlation with equity markets coincided with the entry of institutional investors into crypto markets. We also document that, as for equities, US Fed tightening reduces the crypto factor through the risk-taking channel—in contrast to claims that crypto assets provide a hedge against market risk. Finally, we show that a stylized heterogeneous-agent model with time-varying aggregate risk aversion can explain our empirical findings, and highlights possible spillovers from crypto to equity markets if the participation of institutional investors ever became large.
    Keywords: US Monetary Policy; Cryptoassets; Stock Markets.
    Date: 2023–08–04
  14. By: Sushant Acharya; William Chen; Marco Del Negro; Keshav Dogra; Aidan Gleich; Shlok Goyal; Donggyu Lee; Ethan Matlin; Reca Sarfati; Sikata Sengupta
    Abstract: We provide a toolkit for efficient online estimation of heterogeneous agent (HA) New Keynesian (NK) models based on Sequential Monte Carlo methods. We use this toolkit to compare the out-of-sample forecasting accuracy of a prominent HANK model, Bayer et al. (2022), to that of the representative agent (RA) NK model of Smets and Wouters (2007, SW). We find that HANK’s accuracy for real activity variables is notably inferior to that of SW. The results for consumption in particular are disappointing since the main difference between RANK and HANK is the replacement of the RA Euler equation with the aggregation of individual households’ consumption policy functions, which reflects inequality.
    Keywords: HANK model; Heterogeneous-agent New Keynesian (HANK) model; Bayesian inference; sequential Monte Carlo methods
    JEL: C11 C32 D31 E32 E37 E52
    Date: 2023–08–01

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