nep-cba New Economics Papers
on Central Banking
Issue of 2023‒10‒16
nineteen papers chosen by
Sergey E. Pekarski, Higher School of Economics

  1. Monetary Policy Rule and its Performance under Inflation Targeting in Algeria By Cheddad Azzeddine; Mekidiche Mohammed
  2. A Theory of Safe Asset Creation, Systemic Risk, and Aggregate Demand By Levent Altinoglu
  3. Monetary policy rules: model uncertainty meets design limits By Dück, Alexander; Verona, Fabio
  4. Central Bank Mandates and Communication about Climate Change: Evidence from A Large Dataset of Central Bank Speeches By David M. Arseneau; Mitsuhiro Osada
  5. Permanent and Transitory Monetary Shocks around the World By Javier Garcia Cicco; Patricio Goldstein; Federico Sturzenegger
  6. Asymmetric Monetary Policy Tradeoffs By Davide Debortoli; Mario Forni; Luca Gambetti; Luca Sala
  7. Asymmetric Interest Rate Pass-through and Its Effects on Macroeconomic Variables: Evidence from Thailand By THOSAPON TONGHUI; JIN SEO CHO
  8. Assessing targeted longer-term refinancing operations: Identification through search intensity By Laine, Olli-Matti; Nelimarkka, Jaakko
  9. Open banking, shadow banking and regulation By Eccles, Peter; Grout, Paul; Zalewska, Anna; Siciliani, Paolo
  10. Measuring the link between cyclical systemic risk and capital adequacy for Ukrainian banking sector By Alona Shmygel
  11. A safe core mandate By Perotti, Enrico C.
  12. Nonbank Lenders as Global Shock Absorbers: Evidence from US Monetary Policy Spillovers By David Elliott; Ralf R. Meisenzahl; José-Luis Peydró
  13. Hedging, market concentration and monetary policy: a joint analysis of gilt and derivatives exposures By Pinter, Gabor; Walker, Danny
  14. Macroprudential stress‑test models: a survey By Aikman, David; Beale, Daniel; Brinley-Codd, Adam; Covi, Giovanni; Hüser, Anne‑Caroline; Lepore, Caterina
  15. The Twin Deficits, Monetary Instability and Debt Crises in the History of Modern Greece By George Alogoskoufis
  16. Identification Using Higher-Order Moments Restrictions By Philippe Andrade; Filippo Ferroni; Leonardo Melosi
  17. A Bayesian DSGE Approach to Modelling Cryptocurrency By Stylianos Asimakopoulos; Marco Lorusso; Francesco Ravazzolo
  18. Banks’ portfolio of government debt and sovereign risk By António Afonso; José Alves; Sofia Monteiro
  19. Margins, debt capacity, and systemic risk By Sirio Aramonte; Andreas Schrimpf; Hyun Song Shin

  1. By: Cheddad Azzeddine (maghnia University center, Algeria); Mekidiche Mohammed (maghnia University center, Algeria)
    Abstract: The aim of this study is to reassess the efficacy of inflation targeting in Algeria by utilizing the Autoregressive Distributed Lag Bound Test (ARDL) model to analyze the Taylor rules. Our findings reveal that the implementation of inflation targeting in Algeria's monetary policy does not yield a significant immediate impact on inflation. Nonetheless, there is evidence of a gradual adjustment towards attaining the targeted inflation rate over time.
    Keywords: Monetary Policy Inflation Targeting Taylor rules ARDL model JEL Classification Codes: C22 E17 E43 E52 E58, Monetary Policy, Inflation Targeting, Taylor rules, ARDL model JEL Classification Codes: C22, E17, E43, E52, E58
    Date: 2023–06–04
  2. By: Levent Altinoglu
    Abstract: This paper presents a theory of safe asset creation and the interactions between systemic risk and aggregate demand. The creation of private safe assets by financial intermediaries requires them to take leverage, which generates a risk of future crisis (systemic risk) in which intermediaries liquidate assets to service their debt. In contrast, the creation of public safe assets by the government does not generate systemic risk as the government's power to tax allows it to better absorb losses. The level of systemic risk determines the neutral rate of interest through households' precautionary saving and aggregate demand. The model features a two-way interaction between systemic risk and aggregate demand. Monetary and fiscal policy can stabilize aggregate demand and reduce systemic risk by altering the mix of private and public safe assets held by savers. When monetary policy is constrained, the economy can enter a risk-driven stagnation trap in which economic stagnation arises due to excessive systemic risk. Macroprudential policies which reduce systemic risk can stimulate aggregate demand.
    Keywords: Financial crises; Safe assets; Systemic risk; Fiscal policy; Macroprudential policy; Unconventional monetary policy; Demand-driven recession
    JEL: E44 G01 G21 E58 G28 G18
    Date: 2023–09–22
  3. By: Dück, Alexander; Verona, Fabio
    Abstract: Optimal monetary policy studies typically rely on a single structural model and identification of model-specific rules that minimize the unconditional volatilities of inflation and real activity. In our proposed approach, we take a large set of structural models and look for the model-robust rules that minimize the volatilities at those frequencies that policymakers are most interested in stabilizing. Compared to the status quo approach, our results suggest that policymakers should be more restrained in their inflation responses when their aim is to stabilize inflation and output growth at specific frequencies. Additional caution is called for due to model uncertainty.
    Keywords: monetary policy rules, policy evaluation, model comparison, model uncertainty, frequency domain, design limits, DSGE models
    JEL: C49 E32 E37 E52 E58
    Date: 2023
  4. By: David M. Arseneau (Federal Reserve Board); Mitsuhiro Osada (Bank of Japan)
    Abstract: We compare alternative methodologies to identify central banks speeches that focus on climate change and argue a supervised word scoring method produces the most comprehensive set. Using these climate-related speeches, we empirically examine the role of the mandate in shaping central bank communication about climate change. Central banks differ considerably in the extent to which their mandates support a sustainability objective -- it can be explicit, indirect whereby the central bank is mandated to support broader government policies, or it may not be supported at all. Our results show that these differences are important in determining the frequency of climate-related communication as well as context in which central banks address climate-related issues. All told, these findings suggest that mandate considerations play an important role in shaping central bank communication about climate change.
    Keywords: Central bank speeches; Mandates; Climate change; Natural language processing
    JEL: E58 E61 Q54
    Date: 2023–09–29
  5. By: Javier Garcia Cicco (Universidad de San Andrés); Patricio Goldstein (Columbia University); Federico Sturzenegger (Universidad de San Andrés)
    Abstract: The effects of monetary policy on output and inflation have been at the center of macroeconomic debate for decades. Uribe (2022) argues, by looking at the US, that a better characterization of these effects can be obtained by splitting monetary policy into transitory and permanent shocks. He finds that transitory monetary contractions reduce inflation and output as in traditional New Keynesian models, whereas long termincreases in the inflation rate increase output in the short run. In this paper we extend the analysis to other countries in the world and show that its conclusions can roughly be extended to this larger set. We also broaden the analysis by lifting the overidentifying assumption of superneutrality. We find that although superneutrality does not strictly hold, deviations from it are very small. An increase in long run inflation can slightly improve output but this effect quickly dwindles as inflation increases and eventually becomes negative. Our results provide new evidence to the standard tenets of monetary policy: monetary policy is unable to move output and has negative side effects if it is allowed to increase beyond the range typically defended by central banks.
    Date: 2023–09
  6. By: Davide Debortoli; Mario Forni; Luca Gambetti; Luca Sala
    Abstract: We measure the inflation-unemployment tradeoff associated with monetary easing and tightening, during booms and recessions, using a novel nonlinear Proxy-SVAR approach. We find evidence of significant non-linearities for the U.S. economy (1973:M1 - 2019:M6): stimulating economic activity during recessions is associated with minimal costs in terms of inflation, and reducing inflation during booms delivers small costs in terms of unemployment. Overall, these results provide support for countercyclical monetary policies, in contrast with what predicted by a flat Phillips curve, or previous studies on nonlinear effects of monetary policy. Our results can be rationalized by a simple model with downward nominal wage rigidity, which is also used to assess the validity of our empirical approach.
    Keywords: monetary policy, inflation-unemployment tradeoff, structural VAR models, proxy- SVAR.
    JEL: C32 E32
    Date: 2023–09
  7. By: THOSAPON TONGHUI (Yonsei University); JIN SEO CHO (Yonsei University)
    Abstract: This study employs the two-step Nonlinear Autoregressive Distributed Lag estimation method proposed by Cho, Greenwood-Nimmo, and Shin (2019) to identify the asymmetric impact of monetary policy on economic variables using monthly data from Thailand between 2001 and 2023. The primary objective is to investigate the effects of policy rate shocks on the economy. This study examines three key aspects: (i) the asymmetric pass-through of policy rates to commercial bank deposits and loan rates; (ii) pass-through variations across bank sizes; and (iii) the asymmetric macroeconomic effects on output and inflation. The empirical findings reveal the presence of asymmetry within the relationships between the variables. First, the study identifies an incomplete interest rate pass-through with deposit rates ranging from 28.1% to 102.7% and loan rates ranging from 12.7% to 89.6%. Notably, long-term upward asymmetry is observed for loan rates, whereas the evidence for deposit rates is limited. Second, regarding bank size, large banks exhibit a greater pass-through effect on loan rates, whereas small and medium-sized banks display higher responsiveness to short-term deposits or savings rates. Finally, this study provides strong evidence of long-term asymmetric macroeconomic impacts. Quantitatively, rate hikes have a more substantial effect on output growth, being 1.4 times larger than the impact of rate cuts. Conversely, rate decreases exhibit a more pronounced effect on inflation, being 3.4 times larger than the impact of rate increases. These findings suggest the presence of downward price rigidity associated with monetary policy shocks in the context of Thailand.
    Keywords: Interest rate pass-through; asymmetric impact; macroeconomic effects; Nonlinear Autoregressive Distributed Lag model.
    JEL: E43 E51 E52
    Date: 2023–09
  8. By: Laine, Olli-Matti; Nelimarkka, Jaakko
    Abstract: We evaluate the effects of targeted credit injections of the central bank in the euro area. The aggregate policy impacts of credit easing on financial markets, bank lending and key macroeconomic variables are measured with a novel identification approach based on high-frequency web search data. Our results suggest that the targeted longer-term refinancing operations of the European Central Bank between 2014 and 2021 eased credit conditions in financial markets and had economically and statistically significant positive effects on GDP growth, bank lending and firm investment.
    Keywords: Monetary policy, High-frequency identification, TLTRO, Bank lending
    JEL: C36 E42 E51 E52 E58 G31
    Date: 2023
  9. By: Eccles, Peter (Bank of England); Grout, Paul (Bank of England); Zalewska, Anna (University of Leicester School of Business); Siciliani, Paolo (Bank of England)
    Abstract: We argue that open banking will create diverse banking models: competitive banks (serving depositors who adopt open banking) and monopolistic banks (serving the other depositors). In equilibrium, at the margin, the profit of competitive and monopolistic banks should be equal. Hence, the system-wide impact of any policy change cannot be judged solely by the impact on a typical monopolistic or competitive bank, the impact on relative profitability also matters since this can lead banks to move from one banking type to another. For example, an increase in capital requirements bites less on the profits of competitive than monopolistic banks. Some banks thus move to the (riskier) competitive sector which we show can increase overall risk in the system. A deposit rate ceiling dampens the impact of Bertrand competition, making competitive banks more profitable, so the (riskier) competitive sector grows. Hence, rather than making the system more stable, a marginal lowering of a deposit rate ceiling can increase risk. We also show that, in many scenarios, the regulator must choose between banks funding private sector projects or all banks being safe, the regulator cannot have both. This has implications for the optimal risk weights of sovereign debt. In our model, none of these effects are driven by the presence of unregulated assets/sectors nor on impacts on charter value, as is the case in papers that find outcomes that are the opposite of what was intended. We then introduce an unregulated, shadow banking sector into the model and show that the growth in shadow banking benefits monopolistic banks relative to competitive banks. This increases the size of the (low-risk) monopolistic sector, reducing overall risk in the system. We discuss policy implications.
    Keywords: Capital requirements; banking; open banking; shadow banking; competition; FinTech
    JEL: D43 G21 G28
    Date: 2023–09–08
  10. By: Alona Shmygel (National Bank of Ukraine)
    Abstract: In this paper we investigate the impact of cyclical systemic risk on future bank profitability for a large representative panel of Ukrainian banks between 2001 and 2023. Our framework relies on two general methods. The first method is based on linear local projections which allows us to study the estimated negative impact of cyclical systemic risk on bank profitability. The second method is based on the original IMF's Growth-at-Risk approach, utilizing quantile local projections to assess the impact of cyclical systemic risk on the tails of the future bank-level profitability distribution. Additionally, we enhance the macroprudential toolkit with a novel approach to calibrating the countercyclical capital buffer (CCyB). Furthermore, we develop the "Bank Capital-at-Risk" and "Share of vulnerable banks" indicators. These indicators are valuable tools for monitoring the build-up of systemic risk in the banking sector.
    Keywords: Systemic risk; Linear projections; Quantile regressions; Bank capital; Macroprudential policy
    JEL: E58 G21 G32
    Date: 2023–09–28
  11. By: Perotti, Enrico C.
    Abstract: Central banks have vastly expanded their footprint on capital markets. At a time of extraordinary pressure by many sides, a simple benchmark for the scale and scope of their core mandate of price and financial stability may be useful. We make a case for a narrow mandate to maintain and safeguard the border between safe and quasi safe assets. This ex-ante definition minimizes ambiguity and discourages risk creation and limit panic runs, primarily by separating market demand for reliable liquidity from risk-intolerant, price-insensitive demand for a safe store of value. The central bank may be occasionally forced to intervene beyond the safe core but should not be bound by any such ex-ante mandate, unless directed to specific goals set by legislation with explicit fiscal support. We review distinct features of liquidity and safety demand, seeking a definition of the safety border, and discuss LOLR support for borderline safe assets such as MMF or uninsured deposits. A safe core formulation is close to the historical focus on regulated entities, collateralized lending and attention to the public debt market, but its specific framing offers some context on controversial issues such as the extent of LOLR responsibilities. It also justifies a persistently large scale for central bank liabilities (Greenwood, Hansom and Stein 2016), as safety demand is related to financial wealth rather than GDP. Finally, it is consistent with an active central bank role in supporting liquidity in government debt markets trading and clearing (Duffie 2020, 2021).
    Keywords: Lender of Last Resort, Central Banks, Money Market Funds
    Date: 2023
  12. By: David Elliott; Ralf R. Meisenzahl; José-Luis Peydró
    Abstract: We show that nonbank lenders act as global shock absorbers from US monetary policy spillovers. We exploit loan-level data from the global syndicated lending market and US monetary policy surprises. When US policy tightens, nonbanks increase dollar credit supply to non-US firms (relative to banks), mitigating the dollar credit reduction. This increase is stronger for riskier firms, proxied by emerging market firms, high-yield firms, or firms in countries with stronger capital inflow restrictions. However, firm-lender matching, zombie lending, fragile-nonbank lending, or periods of low vs higher local GDP growth do not drive these results. Furthermore, the substitution from bank to nonbank credit has firm-level real effects. Consistent with a funding-based mechanism, when US monetary policy tightens, non-US nonbanks increase short-term dollar debt funding, relative to banks. In sum, despite increased risk-taking by less regulated and more fragile nonbanks (relative to banks), access to nonbank credit reduces the volatility in capital flows—and associated economic activity—stemming from US monetary policy spillovers, with important implications for theory and policy.
    Keywords: nonbank lending; international monetary policy; Global financial cycle; Banks
    JEL: E5 F34 F42 G21 G23 G28
    Date: 2023–08
  13. By: Pinter, Gabor (Bank of England); Walker, Danny (Bank of England)
    Abstract: We use granular data sets – merged across the UK government bond, interest rate swap, options and futures markets – to estimate exposures to interest rate risk at the sector level and for individual funds within the same sector. We focus on non-bank financial intermediaries (NBFIs) such as insurance companies, pension funds, asset managers and hedge funds. We find that NBFIs tend to use derivatives to amplify bond market exposures to interest rate risk, rather than to hedge them. Moreover, interest rate derivatives usage is highly concentrated among a few investors, which could increase the aggregate consequences of idiosyncratic shocks to these investors. We show that this market concentration impedes the monetary policy transmission to asset prices. We also find that monetary policy loosening (tightening) causes NBFIs to take on more (less) interest rate risk via derivatives, consistent with the risk-taking channel of monetary policy.
    Keywords: Interest rate risk; hedging; swaps; options; gilts; futures; NBFI
    JEL: D40 E50 E52 G10 G20 G23
    Date: 2023–07–21
  14. By: Aikman, David (King’s College, London); Beale, Daniel (Bank of England); Brinley-Codd, Adam (Bank of England); Covi, Giovanni (Bank of England); Hüser, Anne‑Caroline (Bank of England); Lepore, Caterina (International Monetary Fund)
    Abstract: We survey the rapidly developing literature on macroprudential stress‑testing models. In scope are models of contagion between banks, models of contagion within the wider financial system including non‑bank financial institutions such as investment funds, and models that emphasise the two-way interaction between the financial sector and the real economy. Our aim is twofold: first, to provide a reference guide of the state of the art for those developing such models; second, to distil insights from this endeavour for policymakers using these models. In our view, the modelling frontier faces three main challenges: (a) our understanding of the potential for amplification in sectors of the non-bank financial system during periods of stress, (b) multi-sectoral models of the non-bank financial system to analyse the behaviour of the overall demand and supply of liquidity under stress and (c) stress‑testing models that incorporate comprehensive two-way interactions between the financial system and the real economy. Emerging lessons for policymakers are that, for a given-sized shock hitting the system, its eventual impact will depend on (a) the size of financial institutions’ capital and liquidity buffers, (b) the liquidation strategies financial institutions adopt when they need to raise cash and (c) the topology of the financial network.
    Keywords: Stress testing; system-wide models; contagion; systemic risk; market-based finance; real-financial linkages; sectoral interlinkages; macroprudential policy
    JEL: G21 G22 G23 G32
    Date: 2023–08–11
  15. By: George Alogoskoufis
    Abstract: This paper reviews, analyses and interprets the determinants and the implications of the twin, fiscal and current account, deficits in the history of modern Greece. The analysis focuses on the determinants and the dynamic interactions among the twin deficits, domestic monetary regimes, and access to international borrowing. Two are the main conclusions: First, when Greece did not have access to international borrowing, fiscal imbalances usually led to monetary destabilization and inflation. Second, when it did have access to international borrowing, fiscal imbalances were generally larger, led to external deficits and, eventually, sovereign debt crises and defaults. The monetary and exchange rate regime also mattered. The 1950s and 1960s were the only prolonged period in which the twin deficits were tackled effectively and, as a result, the only period in which Greece enjoyed high economic growth, monetary stability, and external balance simultaneously.
    Keywords: Modern Greece, economic history, institutions, fiscal policy, monetary policy, debt crises
    Date: 2023–10
  16. By: Philippe Andrade; Filippo Ferroni; Leonardo Melosi
    Abstract: We exploit inequality restrictions on higher-order moments of the distribution of structural shocks to sharpen their identification. We show that these constraints can be treated as necessary conditions and used to shrink the set of admissible rotations. We illustrate the usefulness of this approach showing, by simulations, how it can dramatically improve the identification of monetary policy shocks when combined with widely used sign-restriction schemes. We then apply our methodology to two empirical questions: the effects of monetary policy shocks in the U.S. and the effects of sovereign bond spread shocks in the euro area. In both cases, using higher-moment restrictions significantly sharpens identification. After a shock to euro area government bond spreads, monetary policy quickly turns expansionary, corporate borrowing conditions worsen on impact, the real economy and the labor market of the euro area contract appreciably, and returns on German government bonds fall, likely reflecting investors’ flight to quality.
    Keywords: shock identification; Skewness; Kurtosis; VAR; Sign restrictions; monetary shocks; Euro area
    JEL: C32 E27 E32
    Date: 2023–08–18
  17. By: Stylianos Asimakopoulos; Marco Lorusso; Francesco Ravazzolo
    Abstract: We develop and estimate a DSGE model to evaluate the economic repercussions of cryptocurrency. In our model, cryptocurrency offers an alternative currency option to government currency, with endogenous supply and demand. We uncover a substitution effect between the real balances of government currency and cryptocurrency in response to technology, preferences and monetary policy shocks. We find that an increase in cryptocurrency productivity induces a rise in the relative price of government currency with respect to cryptocurrency. Since cryptocurrency and government currency are highly substitutable, the demand for the former increases whereas it drops for the latter. Our historical decomposition analysis shows that fluctuations in the cryptocurrency price are mainly driven by shocks in cryptocurrency demand, whereas changes in the real balances for government currency are mainly attributed to government currency and cryptocurrency demand shocks.
    Date: 2023–09
  18. By: António Afonso; José Alves; Sofia Monteiro
    Abstract: We analyze domestic, foreign, and central banks holdings of public debt for 31 countries for the period of 1989-2022, applying panel regressions and quantile analysis. We conclude that an increase in sovereign risk raises the share of domestic banks’ portfolio of public debt and reduces the percentage holdings in the case of central banks. Better sovereign ratings also increase (decrease) the share of commercial (central) banks’ holdings. Furthermore, the effects of an increment in the risk for domestic investors have increased since the 2010 financial crisis.
    Keywords: Banking; Sovereign Debt; Sovereign risk; Financial crisis; Ratings.
    JEL: C21 E58 G24 G32 H63
    Date: 2023–10
  19. By: Sirio Aramonte; Andreas Schrimpf; Hyun Song Shin
    Abstract: Debt capacity depends on margins. When set in a financial system context with collateralized borrowing, two additional features emerge. The first is the recursive property of leverage whereby higher leverage by one player begets higher leverage overall, reflecting the nature of debt as collateral for others. The second feature is that the "dash for cash" is the mirror image of deleveraging. In any setting where market participants engage in margin budgeting, a generalized increase in margins entails a shift of the overall portfolio away from riskier to safer assets. These findings have important implications for the design of non-bank financial intermediary (NBFI) regulations and of central bank backstops.
    Keywords: financial intermediation, non-banks, market-based finance, market liquidity, systemic risk
    JEL: G22 G23 G28
    Date: 2023–09

This nep-cba issue is ©2023 by Sergey E. Pekarski. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.