nep-cba New Economics Papers
on Central Banking
Issue of 2023‒10‒09
sixteen papers chosen by
Sergey E. Pekarski, Higher School of Economics

  1. Banking Crises under a Central Bank Digital Currency (CBDC) By Lea Bitter
  2. Determinants of monetary policy frameworks in emerging and developing countries By Sullivan, Megan
  3. The Macroeconomic Effects of the Federal Reserve's Conventional and Unconventional Monetary Policies By Eric T. Swanson
  4. Firm Financial Conditions and the Transmission of Monetary Policy By Thiago Revil T. Ferreira; Daniel Ostry; John Rogers
  5. How usable are capital buffers? By Zsámboki, Balázs; Leitner, Georg; Dvořák, Michal; Magi, Alessandro
  6. The effect of monetary policy on inflation heterogeneity along the income distribution By Miguel Ampudia; Michael Ehrmann; Georg Strasser
  7. Corporate Quantitative Easing in Europe during the COVID-19 Crisis and Debt Overhang By Asli Demirgüç-Kunt; Bálint L. Horváth; Harry Huizinga
  8. Review essay: Central banking in Italy By Ivo Maes
  9. Sticky information and the Taylor rule By Meyer-Gohde, Alexander; Tzaawa-Krenzler, Mary
  10. R-star: A new approach to estimate the polar star of monetary policy By Bofinger, Peter; Haas, Thomas
  11. System-wide Dividend Restrictions: Evidence and Theory By Miguel Ampudia; Manuel A. Muñoz; Frank Smets; Alejandro Van der Ghote
  12. Central Bank Digital Currencies in the Post-pandemic Era By Dominique Torre; Qing Xu
  13. The Recent Rise in US Inflation: Policy Lessons from the Quantity Theory By Han Gao; Juan Pablo Nicolini
  14. Households' response to the wealth effects of inflation By Schnorpfeil, Philip; Weber, Michael; Hackethal, Andreas
  15. Regulatory Arbitrage and Loan Location Decisions by Multinational Banks By Asli Demirgüç-Kunt; Bálint L. Horváth; Harry Huizinga
  16. Keep Calm and Bank On: Panic-Driven Bank Runs and the Role of Public Communication By Damiano Sandri; Francesco Grigoli; Yuriy Gorodnichenko; Olivier Coibion

  1. By: Lea Bitter (TU Berlin)
    Abstract: One of the main concerns associated with central bank digital currencies (CBDC) is the disintermediating effect on the banking sector in general, and the risk of bank runs in times of crisis in particular. This paper examines the implications of an interest-bearing CBDC on banking crises in a dynamic bank run model with a financial accelerator. The analysis distinguishes between bank failures due to illiquidity and due to insolvency. In a numerical exercise, CBDC leads to a reduction in the net worth of banks in normal times but mitigates the risk of a bank run in times of crisis. The financial stability implications also depend on how CBDC is accounted for on the asset side of the central bank balance sheet: if CBDC issuance is offset by asset purchases, it delays the onset of both types of bank failures to larger shocks. In contrast, if CBDC issuance is offset by loans to banks, it substantially impedes failures due to illiquidity, but only marginally affects bank failures due to insolvency.
    Keywords: central bank digital currency; financial intermediation; financial stability; bank runs;
    JEL: E42 E58 G01 G21
    Date: 2023–09–12
  2. By: Sullivan, Megan
    Abstract: This paper investigates the determinants of countries’ choice of monetary policy frameworks for emerging and developing countries. It draws on the literature concerning how exchange rate regimes are determined, and the much smaller body of literature on determination of monetary policy frameworks (for advanced and emerging countries), to identify 3 approaches that account for countries’ choice of monetary policy framework. We empirically test the joint relevance of the variables within each theory and find them to be jointly statistically significant. A key highlight of this paper is that it uses an (emerging and developing) country tailored variable that measures trade networks of potential currency blocs. The model correctly predicts 79% of countries’ choice of framework, when aggregated by target variable, and 84% of countries’ choices, when aggregated by degree of monetary control.
    Keywords: monetary policy frameworks; trade networks; inflation targets; exchange rate targets; discretion; central bank independence
    JEL: E42 E52 E58 F40
    Date: 2023–07
  3. By: Eric T. Swanson
    Abstract: I separately identify and estimate the effects of the Federal Reserve’s federal funds rate, forward guidance, and large-scale asset purchase (LSAP) policies on the U.S. economy. I extend the high-frequency identification strategy of Bauer and Swanson (2023b) for monetary policy VARs by allowing each of the above policies to have possibly different economic effects. I follow Swanson (2021) and Swanson and Jayawickrema (2023) to separately identify federal funds rate, forward guidance, and LSAP components of monetary policy announcements using high-frequency interest rate changes around FOMC announcements, post- FOMC press conferences, FOMC meeting minutes releases, and speeches and testimony by the Fed Chair and Vice Chair. I find that changes in the federal funds rate have had the most powerful effects on the U.S. economy, followed by forward guidance and, lastly, LSAPs.
    JEL: E52 E58
    Date: 2023–08
  4. By: Thiago Revil T. Ferreira; Daniel Ostry; John Rogers
    Abstract: We study how the transmission of monetary policy to firms' investment and credit spreads depends on their financial conditions, finding a major role for their excess bond premia (EBPs), the component of credit spreads in excess of default risk. While monetary policy easing shocks compress credit spreads more for firms with higher ex-ante EBPs, it is lower-EBP firms that invest more. We rationalize these findings using a model with financial frictions in which lower-EBP firms have flatter marginal product of capital curves. We also show empirically that the cross-sectional distribution of firm EBPs determines the aggregate effectiveness of monetary policy.
    Keywords: monetary policy; investment; credit spreads; excess bond premium; firm heterogeneity
    JEL: E22 E44 E50
    Date: 2023–05–31
  5. By: Zsámboki, Balázs; Leitner, Georg; Dvořák, Michal; Magi, Alessandro
    Abstract: This paper analyses banks’ ability to use capital buffers in the euro area, taking into account overlapping capital requirements between the risk-based capital framework and the leverage ratio capital framework from 2016 to 2022. This analysis is the first to quantify buffer usability in multiple jurisdictions and across various bank types, identify key drivers of buffer usability and assess the impact of various policy measures using longer time series. The paper shows that while both risk-based and leverage frameworks play a key role in enhancing the resilience of the banking system and ensuring financial stability, their simultaneous application creates interactions that may affect the functioning of capital buffers. In this regard, we investigate to what extent banks could have drawn down regulatory capital buffers in the risk-based framework without breaching current leverage ratio requirements, which is in line with the approach to buffer usability taken in ESRB (2021b). We show that buffer usability was partially constrained in the period examined and is expected to remain so under the current regulatory framework and if risk weight densities (RWDs) remain low. This finding indicates that the leverage ratio constitutes an effective backstop to the risk-based framework, both as regards minimum requirements and capital buffers. Limited buffer usability was identified especially for global systemically important institutions (G-SIIs) that rely largely on internal modelling approaches to calculate risk-based capital requirements, leading to comparably low risk weights and making the leverage ratio relatively more binding. Adding to previous contributions, we find that banks’ ability to use capital buffers fluctuated over time, generally increasing before 2019 and decreasing after the start of the coronavirus (COVID-19) pandemic, with substantial heterogeneity across countries. Furthermore, we provide new insights into the relationship between the RWD of a bank and its buffer usability and find that there is a critical RWD range between 25% JEL Classification: G21, G28
    Keywords: banking regulation, buffer usability, capital buffers, leverage ratio, macroprudential policy
    Date: 2023–09
  6. By: Miguel Ampudia; Michael Ehrmann; Georg Strasser
    Abstract: This paper studies the effect of monetary policy on inflation along the income distribution in several euro area countries. It shows that monetary policy has differential effects and identifies two channels which point in opposite directions. On the one hand, different consumption shares imply that inflation by high-income households responds less to monetary policy. On the other hand, the paper provides novel evidence that there are substantial differences in shopping behaviour and its reaction to monetary policy, which imply that inflation by high-income households responds more to monetary policy.
    Keywords: inflation, distributional effects, monetary policy, shopping behaviour, substitution
    JEL: E31 E52 D30
    Date: 2023–09
  7. By: Asli Demirgüç-Kunt (Center for Global Development); Bálint L. Horváth (University of Arizona); Harry Huizinga (Tilburg University and CEPR)
    Abstract: This paper finds that shareholders of highly leveraged firms benefit relatively less compared to bondholders from the corporate quantitative easing (QE) announcements by the European Central Bank and the Bank of England in March 2020, as evidence of debt overhang. Firms more heavily impacted by the pandemic gain less from corporate QE, which could also reflect debt overhang. The monetary and fiscal responses to the pandemic are complements in the sense that a stronger pandemic-related fiscal response and higher pre-announcement sovereign credit default swap (CDS) spreads enhance the positive effects of corporate QE on equity and debt valuations.
    Keywords: Quantitative easing, debt overhang, pandemic
    JEL: E52 G14
    Date: 2023–04–26
  8. By: Ivo Maes (Robert Triffin Chair, University of Louvain and Visiting Fellow, Bruegel)
    Abstract: Gianni Toniolo was one of Italy’s, and Europe’s, foremost economic historians. Unfortunately, he suddenly passed away in November 2022, a few weeks after he had presented in Rome his newest book, the first volume of his history of the Bank of Italy, Storia della Banca d’Italia. Tomo I. Formazione ed evoluzione di una banca centrale, 1893-1943 (History of the Bank of Italy. Part I. Formation and evolution of a central bank, 1893-1943). Toniolo’s history of the Bank of Italy illustrates very well many issues which are at the heart of the literature on central banking. What emerges very well is the gradual transformation of the Bank of Italy, from an emission bank to a central bank, with a growing public character of the Bank. The early relationship between the Bank of Italy and the commercial banks was often one of business rivalry and competition. Through time, the Bank of Italy gained the monopoly of the emission of banknotes but had to stop its commercial activities, while being entrusted with responsibilities in the supervision of the commercial banks. Toniolo’s book covers a turbulent period in Italian monetary history, with several banking crises. Monetary policy was dominated by the issue of the reconciliation of two contrasting objectives: the exchange rate of the lira and the stability of the banking system. A distinguishing feature of the Italian experience of central banking is how the development of the Bank of Italy was embedded in the process of nation-building. In other countries, where the nation-state was established before the central bank, this was very much a process of extending the network of branches. In Italy, where the process of unification was later, it implied the merger of emission banks, a much more delicate political issue.
    Keywords: central banking, Bank of Italy, banking crises, financial stability, Italian lira
    JEL: E42 E58 G28 N10
    Date: 2023–09
  9. By: Meyer-Gohde, Alexander; Tzaawa-Krenzler, Mary
    Abstract: We present determinacy bounds on monetary policy in the sticky information model. We find that these bounds are more conservative here when the long run Phillips curve is vertical than in the standard Calvo sticky price New Keynesian model. Specifically, the Taylor principle is now necessary directly - no amount of output targeting can substitute for the monetary authority's concern for inflation. These determinacy bounds are obtained by appealing to frequency domain techniques that themselves provide novel interpretations of the Phillips curve.
    Keywords: Determinacy, Taylor Rule, Sticky Information, Frequency Domain, z-Transform
    JEL: C62 E31 E43 E52
    Date: 2023
  10. By: Bofinger, Peter; Haas, Thomas
    Abstract: The necessary adjustments to prominent measures of the neutral rate of interest following the COVID pandemic sparked a wide-ranging debate on the measurement and usefulness of r-star. Due to high uncertainty about relevant determinants, trend patterns and the correct estimation method, we propose in this paper a simple alternative approach derived from a standard macro model. Starting from a loss function, neutral periods can be determined in which a neutral real interest rate is observable. Using these values, a medium-term trend for a neutral interest rate can be determined. An application to the USA shows that our simple calculation of a neutral interest rate delivers comparable results to existing studies. A Taylor rule based on our neutral interest rate also does a fairly good job of explaining US monetary policy over the past 60 years.
    Keywords: Neutral rate of interest, equilibrium real interest rate, monetary policy rul
    JEL: E3 E4 E5
    Date: 2023
  11. By: Miguel Ampudia; Manuel A. Muñoz; Frank Smets; Alejandro Van der Ghote (-)
    Abstract: We provide evidence that the ECB system-wide dividend recommendation (SWDR) of March 2020 contributed to sustain lending, had a negative but moderate and transitory impact on bank stock prices and largely operated as a deferral of dividend payouts rather than as a dividend cut. Then, we develop a quantitative macro-banking DSGE model that accounts for this evidence and captures the key mechanism through which SWDRs operate to study the general equilibrium effects of the ECB SWDR. The measure contributed to sustain aggregate bank lending and mitigate the adverse impact of the COVID-19 shock on economic activity by safeguarding euro area banks’ capitalization. Welfare-maximizing SWDRs stabilize the economy regardless of the shock type but they only induce significant welfare gains in response to financial shocks.
    Keywords: dividend recommendation, dividend prudential target (DPT), COVID-19, usable capital buffers, welfare
    JEL: E44 E58 E61
    Date: 2023–09
  12. By: Dominique Torre (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis (1965 - 2019) - CNRS - Centre National de la Recherche Scientifique - UCA - Université Côte d'Azur); Qing Xu (UCL - Université catholique de Lille, GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis (1965 - 2019) - CNRS - Centre National de la Recherche Scientifique - UCA - Université Côte d'Azur)
    Abstract: With fast development of Fintech in financial industry and increasing popularity of cryptocurrencies and stablecoins, more and more central banks conducted extensive research on Central Bank Digital Currencies (CBDCs), the new form of digital fiat currency. Some of them are engaging in CBDCs pilots, with cross border payment tests. Important currency areas as China, EU or UK are interested in the subject but less significative ones as Bahamas, Nigeria, or Venezuela seem also interested in. This chapter aims to analyze this new phase in the development of the forms of money/means of payment. Different forms of CBDCs are imagined: are they different expressions of the same objective or not? Will hey substitute the official currency or other means of payments? Which technology will be activated to make the operational? Which will be the role of banks on this context? How to explain that some big central banks (the Federal Reserve) are not interested in them? Will they generalize?
    Keywords: CBDC, People's Bank of China, blockchains, disintermediation, Stable coins, means of payment, currencies, digitalization
    Date: 2023–07–20
  13. By: Han Gao; Juan Pablo Nicolini
    Abstract: We build a scenario for inflation in the United States in the years to come. Following Gao, Kulish, and Nicolini (2021), we use the quantity theory of money as a conceptual framework and confront the theory with evidence from both the United States and other OECD countries. We argue that a) the quantity theory of money works very well in the medium term, which we define to be close to four years; b) deviations from the inflation rate predicted by the quantity theory tend to disappear in the medium term; c) the burst in inflation that started in 2012 in the United States is a deviation from the inflation rate predicted by the quantity theory; and d) if the policy framework does not change, we expect inflation to be back close to its 2% target no later than 2025.
    Keywords: Quantity theory of money; Inflation; Monetary policy
    JEL: E51 E41 E52
    Date: 2023–08–31
  14. By: Schnorpfeil, Philip; Weber, Michael; Hackethal, Andreas
    Abstract: We study the redistributive effects of inflation combining administrative bank data with an information provision experiment during an episode of historic inflation. On average, households are well-informed about prevailing inflation and are concerned about its impact on their wealth; yet, while many households know about inflation eroding nominal assets, most are unaware of nominal-debt erosion. Once they receive information on the debt-erosion channel, households update upwards their beliefs about nominal debt and their own real net wealth. These changes in beliefs causally affect actual consumption and hypothetical debt decisions. Our findings suggest that real wealth mediates the sensitivity of consumption to inflation once households are aware of the wealth effects of inflation.
    Keywords: Inflation Beliefs, Information Treatment, Consumption, Monetary Policy
    JEL: D12 D14 D83 D84 E21 E31 E52
    Date: 2023
  15. By: Asli Demirgüç-Kunt (Center for Global Development); Bálint L. Horváth (University of Arizona); Harry Huizinga (Tilburg University and CEPR)
    Abstract: This paper examines the impact of international differences in capital regulation on multinational banks’ loan origination location decisions. International loan location decisions represent a key banking margin that has previously not been examined in the literature on regulatory arbitrage by banks. Our estimation relies on within-loan contribution variation in location options for individual multinational banks that participate in a syndicated loan. We examine how the loan location choice and the intensity of regulatory arbitrage are affected by borrower transparency. We find that greater borrower transparency to a local bank establishment makes loan location at this establishment more likely, and that regulatory arbitrage is more intense in the case of more transparent borrowers.
    Keywords: Regulatory arbitrage, capital regulations, loan origination
    JEL: G21 G38
    Date: 2023–04–11
  16. By: Damiano Sandri; Francesco Grigoli; Yuriy Gorodnichenko; Olivier Coibion
    Abstract: Using a survey with information treatments conducted in the aftermath of SVB’s collapse, we study households’ perspectives on bank stability, the potential for panic-driven bank runs, and the role of public communication. When informed about SVB’s collapse, households become more likely to withdraw deposits, due to both a higher perceived risk of bank failure and higher expected losses on deposits in case of bank failure. Leveraging hypothetical questions and the exogenous variation in beliefs generated by the information treatments, we show that households reallocate deposit withdrawals primarily into other banks and cash, with little passthrough into spending. Information about FDIC insurance and communication about bank stability by the Federal Reserve can reassure depositors, while communication from political leaders only influences their electoral base.
    JEL: E21 E58
    Date: 2023–08

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