nep-cba New Economics Papers
on Central Banking
Issue of 2023‒10‒02
thirteen papers chosen by
Sergey E. Pekarski, Higher School of Economics

  1. An unconventional FX tail risk story By Cañon, Carlos; Gerba, Eddie; Pambira, Alberto; Stoja, Evarist
  2. Monetary Policy Surprises on the Banking Sector: the Role of the Information and Pure Monetary Shocks By Felipe Beltrán; David Coble
  3. Optimal Monetary Policy and Rational Asset Bubbles By Jacopo Bonchi; Salvatore Nisticò
  4. The Importance of Sound Monetary Policy: Some Lessons for Today from Canada’s Experience with Floating Exchange Rates Since 1950 By Michael D. Bordo; Pierre Siklos
  5. Stocks, Bonds and the US Dollar - Measuring Domestic and International Market Developments in an Emerging Market By Nicolas Eterovic; Dalibor Eterovic
  6. Monetary Policy in Small Open Economies and the International Zero Lower Bound By Marco Rojas
  7. Global monetary policy surprises and their transmission to emerging market economies: an external VAR analysis By Felipe Beltrán
  8. The Impact of Monetary Policy on a Labor Market with Heterogeneous Workers: The Case of Chile By Carlos Madeira; Leonardo Salazar
  9. Foreign Exchange Intervention with UIP and CIP Deviations: The Case of Small Safe Haven Economies By Philippe Bacchetta; Kenza Benhima; Brendan Berthold
  10. What determines passthrough of policy rates to deposit rates in the euro area? By Todd Messer; Friederike Niepmann
  11. Latin American Natural Rates of Interest By Luciano Campos
  12. Interest Expenses, Coverage Ratio, and Firm Distress By Falk Bräuning; Gustavo Joaquim; Hillary Stein
  13. Agree to Disagree: Measuring Hidden Dissents in FOMC Meetings By Kwok Ping Tsang; Zichao Yang

  1. By: Cañon, Carlos; Gerba, Eddie; Pambira, Alberto; Stoja, Evarist
    Abstract: We examine how the tail risk of currency returns over the past 20 years were impacted by central bank (monetary and liquidity) measures across the globe with an original and unique dataset that we make publicly available. Using a standard factor model, we derive theoretical measures of tail risks of currency returns which we then relate to the various policy instruments employed by central banks. We find empirical evidence for the existence of a cross-border transmission channel of central bank policy through the FX market. The tail impact is particularly sizeable for asset purchases and swap lines. The effects last for up to 1 month, and are proportionally higher for joint QE actions. This cross-border source of tail risk is largely undiversifiable, even after controlling for the U.S. dollar dominance and the effects of its own monetary policy stance.
    Keywords: unconventional and conventional monetary policy; liquidity measures; currency tail risk; systematic and idiosyncratic components of tail risk
    JEL: E44 G12 G15 E52
    Date: 2023
  2. By: Felipe Beltrán; David Coble
    Abstract: This paper analyzes how monetary policy surprises in Chile affects the real and financial sector separating between a pure monetary policy shock and an information shock. Using inter-day movements of futures of interest rate in the banking system, we identify an information shock when labor data is released and a pure monetary policy shock when the central bank reveals their interest rate decision, and their effects are quantified through an external vector autoregression model. Our results suggest that a pure monetary policy shock produce an appreciation of nominal exchange rate, and contractionary effects on the economy. However, an information shock does not necessarily produce adverse effects. This paper contribute to the literature in two dimensions: studying the effect of the main driver behind the central bank announcements, and their transmission to the banking sector and consequently to the real and monetary sector.
    Date: 2023–04
  3. By: Jacopo Bonchi; Salvatore Nisticò
    Abstract: Using a New Keynesian model with stochastic asset market participation, we analyze the normative implications of bubbly fluctuations for monetary policy. We show that stochastic asset-market participation allows rational bubbles to emerge in equilibrium despite the fact that households are infinitely lived. A central bank concerned with social welfare faces an additional tradeoff implied by the effect of bubbly fluctuations on consumption dispersion across market participants, which makes, in general, strict inflation targeting a suboptimal monetary-policy regime. Deviations from inflation targeting are welfare improving in particular when the economy fluctuates around a balanced-growth path where equilibrium bubbles are small or absent, and the endogenous tradeoff is more stringent, requiring larger deviations of inflation/output gap to mitigate bubbly fluctuations in wealth and thus consumption inequality. The specific optimal monetary-policy response to bubbly fluctuations depends however on the intrinsic features of latter, and the associated effects on wealth inequality.
    Keywords: Rational bubbles, Optimal monetary policy, Stochastic Asset Market Participation, Consumption dispersion
    JEL: E21 E32 E44 E58
    Date: 2023–08
  4. By: Michael D. Bordo; Pierre Siklos
    Abstract: In this paper we revisit the Canadian experience with floating exchange rates since 1950. Canada was a pioneer in successfully adopting a floating exchange rate during the Bretton Woods pegged exchange rate regime. Since then, most advanced countries have followed the Canadian example. A key finding of our paper based on historical narrative and econometric analysis is that economic performance under floating depended on its monetary policy performance as Milton Friedman originally argued in his seminal 1953 article. Canadian monetary policy achieved low and stable inflation once it adopted inflation targeting as a nominal anchor. Also, as Friedman argued, Canada’s floating exchange rate provided it with a modicum of insulation from external shocks, especially commodity price shocks that influenced both the level and volatility of the real exchange rate over the past three decades. The Canadian experience with floating (along with that of other small open economies such as Australia, New Zealand and Sweden) and inflation targeting became a model for the conduct of monetary policy in emerging countries.
    JEL: E32 E52 F31 F32 N1
    Date: 2023–09
  5. By: Nicolas Eterovic; Dalibor Eterovic
    Abstract: We propose a novel specification strategy using a SVAR identified with zero and sign-restrictions to uncover real-time financial shocks in an emerging market. By adding a foreign exogenous block and differentiating between local and US risk premia, we build on the literature that employs economically intuitive sign restrictions on the comovement of stocks and bonds to distinguish between different types of news shocks. We then apply our methodology to Chile’s financial markets. Our main results are the following. First, for Chilean financial assets, US shocks account for approximately 12% of the volatility of both short and long rates and 25% of the volatility of the stock market. Second, the transmission of US shocks to local assets comes mainly through risk aversion shocks and pure risk premia, followed by US monetary policy shocks. Third, the introduction of an exogenous block allows to better capture the effects of central bank communication around monetary policy meetings from both the Central Bank of Chile and the Federal Reserve.
    Date: 2022–10
  6. By: Marco Rojas
    Abstract: How does the zero lower bound (ZLB) on the international interest rate affect monetary policy in small open economies (SOE)? When the Fed’s rate was at the ZLB (2008-2015), data for several SOE show a significantly lower correlation between interest rates and inflation, which is at odds with the empirical regularity. This is explained in a model where the distribution of shocks that affect SOE changes when the international interest rate hits the ZLB. Two opposing channels affect the exchange rate. At the ZLB, the depreciating channel is amplified, while the appreciating channel is attenuated. Then, the SOE currency depreciates more than in a scenario without ZLB. This passes through to inflation, which affects SOE’s ability to stabilize the economy as it cannot lower its interest rate as much. In an estimated model, this mechanism by itself can explain 26 percent of the lower correlation observed in the data.
    Date: 2022–12
  7. By: Felipe Beltrán
    Abstract: This paper analyzes how monetary policy surprises in the U.S. affects emerging market economies (EMs) focusing on the transmission through the real exchange rate (RER) and country spreads (EMBI). To do so, we disentangle U.S. interest rate movements between both a pure monetary policy shock and an information shock: while the former is constructed based on high-frequency movements of the interest rate around FOMC announcements, the latter builds from major macroeconomic releases. We quantify their relative impacts through an SVAR model with external instruments. The results suggest that a pure monetary policy shock produces a persistent appreciation of the RER in the U.S. coupled with an increase of the EMBI that induces contractionary effects in the real sector of EMs. In contrast, an information shock does not necessarily produce such contractionary effects in EMs. These results contribute to the literature in identifying the specific drivers behind each movement in Fed announcements and its transmission to EMs.
    Date: 2023–04
  8. By: Carlos Madeira; Leonardo Salazar
    Abstract: We use a factor-augmented vector autoregressive (FAVAR) model to analyze the effect of a contractionary monetary policy shock on macroeconomic aggregates and labor market indicators for different demographic groups in Chile classified by industry, age, and income quintile. Inflation is negatively correlated with unemployment across groups. The model shows that most groups’ job-separation rate and wage volatility increase after an interest rate rise. The response of the job-finding rate is mixed, decreasing in some groups and rising in others after an interest rate shock. The labor market in the primary sector is the least sensitive to monetary shocks.
    Date: 2023–06
  9. By: Philippe Bacchetta (University of Lausanne; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)); Kenza Benhima (University of Lausanne; Centre for Economic Policy Research (CEPR)); Brendan Berthold (University of Lausanne)
    Abstract: We examine the welfare-based opportunity cost of foreign exchange (FX) intervention when both CIP and UIP deviations are present. We consider a small open economy that receives international capital flows through constrained international financial intermediaries. Deviations from CIP come from limited arbitrage or through a convenience yield, while UIP deviations are also affected by risk. We show that the sign of CIP and UIP deviations may differ for safe haven countries. We find that there may be a benefit, rather than a cost, of FX reserves if international intermediaries value the safe haven properties of a currency more than domestic households. We show that this has been the case for the Swiss franc and the Japanese Yen. We examine the optimal policy of a constrained central bank planner in this context.
    Date: 2023–08
  10. By: Todd Messer; Friederike Niepmann
    Abstract: Interest rates on bank deposits are sticky and move only sluggishly following changes in central bank policy rates. As deposits are typically the largest share of bank liabilities, deposit rate stickiness plays a key role for bank funding costs and profitability.
    Date: 2023–07–28
  11. By: Luciano Campos (CONICET/IIEP)
    Abstract: This paper estimates the natural rate of interest for the six biggest Latin American economies. Considering the fact that money velocity is the permanent component of the nominal interest rate, both the nominal and real natural rates are estimated simply by running an OLS regression. It is evidenced a downward trend in the real natural rate since the 2010s, comparable with the decline displayed by potential output once the favorable conditions of the 2000s commodity boom were over. This result has direct implications for the monetary stance evaluation in the region, which is analyzed as well in this work.
    Keywords: Natural rate of interest; money velocity; Latin America
    JEL: E58 N16
    Date: 2023–09
  12. By: Falk Bräuning; Gustavo Joaquim; Hillary Stein
    Abstract: Historically, the pass-through of federal funds rate increases into firms’ interest expenses has been incomplete and delayed, with the peak responses occurring about one year after a policy rate increase. These findings indicate that current corporate interest rate expenses will continue to increase, even absent any additional rate hikes going forward. Higher interest expenses can lead to firm distress and defaults, which have adverse effects on employment and investment. These effects can be amplified through the financial accelerator channel.
    Keywords: monetary policy; interest expenses; firm distress
    JEL: E32 E52 G32
    Date: 2023–08–29
  13. By: Kwok Ping Tsang; Zichao Yang
    Abstract: Based on a record of dissents on FOMC votes and transcripts of the meetings from 1976 to 2017, we develop a deep learning model based on self-attention modules to create a measure of the level of disagreement for each member in each meeting. While dissents are rare, we find that members often have reservations with the policy decision. The level of disagreement is mostly driven by current or predicted macroeconomic data, and personal characteristics of the members play almost no role. We also use our model to evaluate speeches made by members between meetings, and we find a weak correlation between the level of disagreement revealed in them and that of the following meeting. Finally, we find that the level of disagreement increases whenever monetary policy action is more aggressive.
    Date: 2023–08

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