nep-cba New Economics Papers
on Central Banking
Issue of 2023‒09‒25
twelve papers chosen by
Sergey E. Pekarski, Higher School of Economics

  1. Monetary Policy Implementation with Ample Reserves By Gara Afonso; Kyungmin Kim; Antoine Martin; Ed Nosal; Simon M. Potter; Sam Schulhofer-Wohl
  2. Analysis of CBDC Narrative OF Central Banks using Large Language Models By Andres Alonso-Robisco; Jose Manuel Carbo
  3. Preaching to the agnostic: Inflation reporting can increase trust in the central bank but only among people with weak priors By Bernd Hayo; Pierre-Guillaume Méon
  4. Unveiling the Interplay between Central Bank Digital Currency and Bank Deposits By Hanfeng Chen; Maria Elena Filippin
  5. The Profitability of Monetary Policy Transmission By Alex Hsu; Indrajit Mitra; Linghang Zeng
  6. Same old song: On the macroeconomic and distributional effects of leaving a Low Interest Rate Environment By Alberto Botta; Eugenio Caverzasi; Alberto Russo
  7. US Monetary Policy and the Return to Price Stability By Richard H. Clarida
  8. Financial Inclusion and Monetary Policy: A Study on the Relationship between Financial Inclusion and Effectiveness of Monetary Policy in Developing Countries By Gautam Kumar Biswas; Faruque Ahamed
  9. The ECB and the inflation monsters: strategic framing and the responsibility imperative (1998-2023) By Fontan, Clément; Goutsmedt, Aurélien
  10. Effects of the ECB's communication on government bond spreads By Camarero Garcia, Sebastian; Neugebauer, Frederik; Russnak, Jan; Zimmermann, Lilli
  11. The Inflation Attention Threshold and Inflation Surges By Oliver Pf\"auti
  12. The Trend Effect of Foreign Exchange Intervention By FATUM, Rasmus; YAMAMOTO, Yohei; CHEN, Binwei

  1. By: Gara Afonso; Kyungmin Kim; Antoine Martin; Ed Nosal; Simon M. Potter; Sam Schulhofer-Wohl
    Abstract: We offer a parsimonious model of the reserve demand to study the tradeoffs associated with various monetary policy implementation frameworks. Prior to the 2007–09 financial crisis, many central banks supplied scarce reserves to execute their interest-rate policies. In response to the crisis, central banks undertook quantitative-easing policies that greatly expanded their balance sheets and, by extension, the amount of reserves they supplied. When the crisis and its aftereffects passed, central banks were in a position to choose a framework that has reserves that are (1) abundant—by keeping their balance sheets and reserves at the expanded level; (2) scarce—by vastly decreasing their balance sheets and reserves; or (3) somewhere in between abundant and scarce—by moderately decreasing their balance sheets and reserves. We find that the best policy implementation outcomes are realized when reserves are somewhere between scarce and abundant. This outcome is consistent with the Federal Open Market Committee’s 2019 announcement to implement monetary policy in a regime with an ample supply of reserves.
    Keywords: federal funds market; monetary policy implementation; ample reserves
    JEL: E42 E58
    Date: 2023–08–31
  2. By: Andres Alonso-Robisco (Banco de España); Jose Manuel Carbo (Banco de España)
    Abstract: Central banks are increasingly using verbal communication for policymaking, focusing not only on traditional monetary policy, but also on a broad set of topics. One such topic is central bank digital currency (CBDC), which is attracting attention from the international community. The complex nature of this project means that it must be carefully designed to avoid unintended consequences, such as financial instability. We propose the use of different Natural Language Processing (NLP) techniques to better understand central banks’ stance towards CBDC, analyzing a set of central bank discourses from 2016 to 2022. We do this using traditional techniques, such as dictionary-based methods, and two large language models (LLMs), namely Bert and ChatGPT, concluding that LLMs better reflect the stance identified by human experts. In particular, we observe that ChatGPT exhibits a higher degree of alignment because it can capture subtler information than BERT. Our study suggests that LLMs are an effective tool to improve sentiment measurements for policy-specific texts, though they are not infallible and may be subject to new risks, like higher sensitivity to the length of texts, and prompt engineering.
    Keywords: ChatGPT, BERT, CBDC, digital money
    JEL: G15 G41 E58
    Date: 2023–08
  3. By: Bernd Hayo; Pierre-Guillaume Méon
    Abstract: Using a randomized controlled trial, we study whether showing German respondents a graph plotting the European Central Bank’s inflation target alongside inflation in the euro area from 1999 to 2017 affects respondents’ trust in the ECB. The treatment has, on average, no significant effect on the level of trust in the ECB respondents report, but trust increases among respondents who report no preference for any political party. Within this group, the information about the actual development of the inflation rate, and not information about the inflation target itself, appears to be the main driving force.
    Keywords: Central bank trust; European Central Bank; Central bank communication; Monetary policy; Germany; Household survey; RCT
    JEL: E52 E58 Z10
    Date: 2023–08–31
  4. By: Hanfeng Chen; Maria Elena Filippin
    Abstract: We extend the Real Business Cycle model in Niepelt (2022) to analyze the risk to financial stability following the introduction of a central bank digital currency (CBDC). CBDC competes with commercial bank deposits as households' source of liquidity. We consider different degrees of substitutability between payment instruments and review the equivalence result in Niepelt (2022) by introducing a collateral constraint banks must respect when borrowing from the central bank. When CBDC and deposits are perfect substitutes, the central bank can offer loans to banks that render the introduction of CBDC neutral to the real economy. We show that the optimal level of the central bank's lending rate depends on the restrictiveness of the collateral constraint: the tighter it is, the lower the loan rate the central bank needs to post. However, when CBDC and deposits are imperfect substitutes, the central bank cannot make banks indifferent to the competition from CBDC. It follows that the introduction of CBDC has real effects on the economy.
    Date: 2023–08
  5. By: Alex Hsu; Indrajit Mitra; Linghang Zeng
    Abstract: We provide firm-level evidence that Federal Open Market Committee announcements have real effects by changing expectations of firm profitability. We use an existing decomposition of a monetary policy shock into a central bank information component (CBI) and a conventional monetary component (MP). We find (1) firms with a higher value of capital asset pricing model (CAPM) beta have a higher investment rate sensitivity to the CBI component; no similar heterogeneity in investment response is observed for the MP component. We also find (2) the heterogeneity in investment sensitivity is due to innovations to firm profitability.
    Keywords: monetary policy; Fed information shocks; investments; CAPM beta
    JEL: E22 E52 G31
    Date: 2023–06–20
  6. By: Alberto Botta (School of Accounting, Finance and Economics, University of Greenwich, London, UK); Eugenio Caverzasi (Department of Economics, Università degli Studi dell’Insubria, Varese, Italy); Alberto Russo (Department of Economics and Social Sciences, Università Politecnica delle Marche, Ancona, Italy and Department of Economics, Universitat Jaume I, Castellón, Spain)
    Abstract: This paper analyzes the macroeconomic and distributional implications of central banks’decisions to raise interest rates after a prolonged period at near the Zero Lower Bound (ZLB). The main goal of our study is to assess the interaction between monetary policy, inequality, and financial fragility, in a financialized economic system. Financialization is here portrayed as the presence in the economy of complex financial products, i.e., assetbacked securities, produced via the securitization of banks’ loans. We do so in the context of a hybrid Agent-Based Model (ABM). We first compare the prevailing macroeconomic and financial features of a low interest rate environment (LIRE) with respect to a “Great Moderation”(GM)-like setting. As expected, we show that LIRE tends to stimulate faster growth and higher employment, and to reduce income and wealth inequality, as well as (poor) households’ indebtedness. Consistent with existing empirical literature, this comes at the cost of higher inflation and some signs of financial system’s fragility, i.e., lower banks’ profitability and Capital Adequacy Ratio (CAR), and higher “search for risk” given by credit extension to poorer households. We then show that increases in the central bank’s policy rate, as motivated by the central bank’s willingness to reduce inflation, effectively curb price dynamics and accomplish with central bank’s inflation targeting mandate. Higher interest rates also improve commercial banks’ CAR and profitability. However, they also cause a pronounced increase in non-performing loans (stronger tan what possibly observed in a GM scenario) and some worrisome macro-financial dynamics. In fact, higher interest rates give rise to higher households’ and overall economy indebtedness as allowed by wealthier households’ demand for high-yield complex financial products and mounting securitization. We finally show how financialization structurally changes the functioning of the economy and the behavior of central banks. Financialization actually contributes to create a (private sector) debt-led economy, which becomes structurally more resistant to central bank’s attempts to control inflation. Central bank’s reaction in terms of higher interest rates could likely come with perverse distributional consequences.
    Keywords: Low interest rate environment, Contractionary monetary policy, Securitization
    JEL: E24 E44 E52
    Date: 2023
  7. By: Richard H. Clarida
    Abstract: This paper assesses the proximate causes of the post pandemic surge in US inflation, the Federal Reserve's real time reaction to and interpretation of incoming data in 2021, and the pivot to raising rates and shrinking the balance sheet that commenced in 2022 and continues in 2023. Particular attention is devoted to the role, if any, that Fed's August 2020 revisions to its monetary policy framework may have played in delaying lift - off relative to counterfactuals informed by simple policy rules, including a framework - consistent "shortfalls" policy rule featured in its semi - annual Monetary Policy Reports.
    JEL: E30 E4 E5
    Date: 2023–08
  8. By: Gautam Kumar Biswas; Faruque Ahamed
    Abstract: The study analyzed the impact of financial inclusion on the effectiveness of monetary policy in developing countries. By using a panel data set of 10 developing countries during 2004-2020, the study revealed that the financial inclusion measured by the number of ATM per 100, 000 adults had a significant negative effect on monetary policy, whereas the other measure of financial inclusion i.e. the number of bank accounts per 100, 000 adults had a positive impact on monetary policy, which is not statistically significant. The study also revealed that foreign direct investment (FDI), lending rate and exchange rate had a positive impact on inflation, but only the effect of lending rate is statistically significant. Therefore, the governments of these countries should make necessary drives to increase the level of financial inclusion as it stabilizes the price level by reducing the inflation in the economy.
    Date: 2023–08
  9. By: Fontan, Clément; Goutsmedt, Aurélien (UC Louvain - F.R.S-FNRS)
    Abstract: The recent resurgence of inflation in Europe has led the ECB to increase interest rates and phase out asset purchase programs designed to address the effects of the Great Financial Crisis. This article investigates how the ECB adjusts its logic of responsibility throughout this series of crises. Using a topic model and in-depth analysis of speeches, we examine the ECB's strategic framing of causal linkages related to inflation during three historical periods: the Central Bank Independence (CBI) era (1998-2011), the secular stagnation era (2011-2021), and the new inflation era (2021-). Our findings indicate that modifications made to the CBI's causal linkages during the secular stagnation era shaped the ECB's framing of the new inflation era in a novel way. However, despite acknowledging difficult policy tradeoffs, which they tended to obscure in the past, ECB policymakers still seek to uphold the imperative of responsibility by adapting it to varying policy contexts.
    Date: 2023–08–19
  10. By: Camarero Garcia, Sebastian; Neugebauer, Frederik; Russnak, Jan; Zimmermann, Lilli
    Abstract: This paper investigates the financial market effects of the ECB's communication on the Pandemic Emergency Purchase Programme (PEPP). Using data for 10 euro area countries, we first analyse the impact of different communication channels such as press releases, ECB blog contributions, speeches and interviews on changes in government bond spreads. Second, we assess whether spreads react differently to communication by specific ECB Executive Board members. Markets turn out to be sensitive to both the communication channel and the communicating ECB Executive Board member.
    Keywords: Event study, central bank communication, ECB, PEPP, sovereign yields
    JEL: E52 E58 G14
    Date: 2023
  11. By: Oliver Pf\"auti
    Abstract: At the outbreak of the recent inflation surge, the public's attention to inflation was low but increased rapidly once inflation started to rise. In this paper, I develop a general equilibrium monetary model where it is optimal for agents to pay little attention to inflation when inflation is low and stable, but in which they increase their attention once inflation exceeds a certain threshold. Using survey inflation expectations, I estimate the attention threshold to be at an inflation rate of 4%, with attention in the high-attention regime being twice as high as in the low-attention regime. When calibrated to match these findings, the model generates inflation and inflation expectation dynamics consistent with the recent inflation surge in the US. The attention threshold induces a state dependency: cost-push shocks become more inflationary in times of loose monetary policy. These state-dependent effects are absent in the model with constant attention or under rational expectations. Following simple Taylor rules triggers frequent and prolonged episodes of heightened attention, thereby increasing the volatility of inflation, and-due to the asymmetry of the attention threshold-also the average level of inflation, which leads to substantial welfare losses.
    Date: 2023–08
  12. By: FATUM, Rasmus; YAMAMOTO, Yohei; CHEN, Binwei
    Abstract: The 2022 and the 2010-2011 Bank of Japan interventions provide an opportunity for investigating whether unusually large-scale and infrequent interventions are capable of generating trend effects. To this end, we estimate the counterfactual exchange rate and analyze structural changes in the level and the trend of the gap sequence between actual and counterfactual exchange rates. Our results show that the trend of the gap sequence reversed in the desired direction around the intervention dates, indicating that the intervention policy instrument is potentially powerful enough to generate long-term trend effects. This is an important insight not previously found in the intervention literature.
    Keywords: Foreign Exchange Intervention, Counterfactual Exchange Rate, Currency Factors, Synthetic Control Methods, Structural Changes
    JEL: F31 C38
    Date: 2023–08

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