nep-cba New Economics Papers
on Central Banking
Issue of 2024‒01‒01
nineteen papers chosen by
Sergey E. Pekarski, Higher School of Economics

  1. Fighting Inflation More Effectively without Transferring Central Banks’ Profits to Banks By Paul De Grauwe; Yuemei Ji
  2. Global spillovers from multi-dimensional US monetary policy By Georgiadis, Georgios; Jarociński, Marek
  3. The Impact of Currency Carry Trade Activity on the Transmission of Monetary Policy By Steshkova, Alina; Böck, Maximilian; Zörner, Thomas
  4. Does Monetary Policy Affect Non-mining Business Investment in Australia? Evidence from BLADE By Gulnara Nolan; Jonathan Hambur; Philip Vermeulen
  5. Monetary Policy in the Presence of Supply Constraints: Evidence from German Firm-level Data By Nöller, Marvin; Balleer, Almut
  6. Central Bank Digital Currency and Bank Disintermediation in a Portfolio Choice Model By Huifeng Chang; Federico Grinberg; Lucyna Gornicka; Mr. Marcello Miccoli; Brandon Tan
  7. Monetary Policy Design with Recurrent Climate Shocks By Mr. Vimal V Thakoor; Engin Kara
  8. Imperfect Information and Hidden Dynamics By Paul Levine; Maryam Mirfatah; Joseph Pearlman; Stylianos Tsiaras
  9. Federal Reserve Structure and the Production of Monetary Policy Ideas By Michael D. Bordo; Edward Simpson Prescott
  10. Taming Financial Dollarization: Determinants and Effective Policies – The Case of Uruguay By Mr. Mauricio Vargas; Jesus Sanchez
  11. State-dependent inflation expectations and consumption choices By Michal MarenÄ ák
  12. Inflation Literacy, Inflation Expectations, and Trust in the Central Bank: A Survey Experiment By Dräger, Lena; Nghiem, Giang
  13. Policymakers' Uncertainty By Anna Cieslak; Stephen Hansen; Michael McMahon; Song Xiao
  14. Inflation is always and everywhere … a conflict phenomenon: Post-Keynesian inflation theory and energy price driven conflict inflation By Hein, Eckhard
  15. Contingent Credit Under Stress By Viral V. Acharya; Maximilian Jager; Sascha Steffen
  16. Aggregate-Demand Amplification of Supply Disruptions: The Entry-Exit Multiplier By Bilbiie, F. O.; Melitz, M. J.
  17. Predicting the Law: Artificial Intelligence Findings from the IMF’s Central Bank Legislation Database By Khaled AlAjmi; Jose Deodoro; Mr. Ashraf Khan; Kei Moriya
  18. Hyperinflation in Venezuela. An Analysis Based on Cagan's Conceptual Framework By Olivo, Victor
  19. The Theory of Reserve Accumulation, Revisited By Corsetti, G.; Maeng, S. H.

  1. By: Paul De Grauwe; Yuemei Ji
    Abstract: The major central banks now operate in a regime of abundance of bank reserves. As a result, they can only raise the money market rate by increasing the rate of remuneration of bank reserves. This, in turn, leads to large transfers of the central banks’ profits (and more) to commercial banks that will become unsustainable and makes the transmission of monetary policies less effective. We propose a two-tier system of reserve requirements that would only remunerate the reserves in excess of the minimum required. This would drastically reduce the giveaways to banks, allow the central banks to maintain their current operating procedures and make monetary policies more effective in fighting inflation.
    Keywords: monetary policy, bank reserves, minimum reserve requirements
    JEL: E52 E58
    Date: 2023
  2. By: Georgiadis, Georgios; Jarociński, Marek
    Abstract: We estimate spillovers from US monetary policy for different measures in the Federal Reserve’s toolkit. We make use of novel measures of exogenous variation in conventional rate policy, forward guidance and large-scale asset purchases (LSAPs) based on high-frequency asset-price surprises around Federal Open Market Committee meetings. The identification relies on relatively weak assumptions and accounts for the possible presence of residual endogenous components—such as central bank information effects—in these monetary policy surprises. We find that: (i) forward guidance and LSAPs trigger much larger spillovers than conventional rate policy; (ii) spillovers transmit predominantly through financial channels centering on global investors’ risk appetite and manifest in changes in equity prices, bond spreads, capital flows and the dollar exchange rate; (iii) LSAPs trigger immediate international portfolio re-balancing between US and advanced-economy bonds, but generally entail only rather limited term premium spillovers;(iv) both forward guidance and LSAPs entail trade-offs for emerging-market-economy central banks, either between stabilizing output and prices or between additionally ensuring financial stability in terms of capital inflows. JEL Classification: F42, E52, C50
    Keywords: central bank information effects, high-frequency identification, Monetary policy spillovers, US monetary policy shocks
    Date: 2023–12
  3. By: Steshkova, Alina; Böck, Maximilian; Zörner, Thomas
    JEL: C32 E52 F31
    Date: 2023
  4. By: Gulnara Nolan (Reserve Bank of Australia); Jonathan Hambur (Reserve Bank of Australia); Philip Vermeulen (University of Canterbury, New Zealand)
    Abstract: We provide new evidence on the effect of monetary policy on investment in Australia using firm-level data. We find that contractionary monetary policy makes firms less likely to invest and lowers the amount they invest if they do so. The effects are similar for young and old firms, indicating that the decline in the number of young firms in Australia over time is unlikely to have weakened the effect of monetary policy. The effects are also broadly similar for smaller and larger firms. This suggests that evidence that some, particularly large, firms have sticky hurdle rates does not mean that they do not respond to monetary policy. It also suggests that overseas findings that expansionary monetary policy lessens competition by supporting the largest firms likely do not apply to Australia. We find evidence that financially constrained firms, and sectors that are more dependent on external finance, are more responsive to monetary policy, highlighting the important role of cash flow and financing constraints in the transmission of monetary policy. Finally, we find evidence that monetary policy affects firms' actual and expected investment contemporaneously, suggesting that expectations are reactive and will tend to lag over the cycle.
    Keywords: investment; monetary policy; financial constraints
    JEL: E22 E52
    Date: 2023–12
  5. By: Nöller, Marvin; Balleer, Almut
    JEL: E31 E52 C22
    Date: 2023
  6. By: Huifeng Chang; Federico Grinberg; Lucyna Gornicka; Mr. Marcello Miccoli; Brandon Tan
    Abstract: Would the introduction of a Central Bank Digital Currency (CBDC) lead to lower deposits (disintermediation) and lending in the banking sector? This paper develops a model where households heterogeneous in wealth allocate between an illiquid asset and assets that can be used for payments: bank deposits, cash, and CBDC. CBDC is more efficient as a means of payment and has lower access cost than deposits. Deposits are offered by an imperfectly competitive banking sector which raises deposit interest rates after CBDC introduction to prevent substitution away from deposits to CBDC. We find that there are two opposing margins of impact on the level of aggregate deposits: (1) the intensive margin gain in deposits by richer households increasing their holdings of deposits because of higher interest rates, and (2) the extensive margin loss of deposits among poorer households who switch from deposits to the CBDC. The extensive margin loss in deposits is more likely to dominate (yielding a fall in aggregate deposits) when the mass of poorer households is large and when it is relatively costly to access bank accounts. This tends to be the case in developing and emerging market economies. However, even when the extensive margin loss of deposits dominates and there is disintermediation, the impact on lending is quantitatively small if banks have access to other forms of funding, such as wholesale or central bank financing.
    Keywords: CBDC; banking disintermediation; financial inclusion; monetary policy
    Date: 2023–11–17
  7. By: Mr. Vimal V Thakoor; Engin Kara
    Abstract: As climate change intensifies, the frequency and severity of climate-induced disasters are expected to escalate. We develop a New Keynesian Dynamic Stochastic General Equilibrium model to analyze the impact of these events on monetary policy. Our model conceptualizes these disasters as left-tail productivity shocks with a quantified likelihood, leading to a skewed distribution of outcomes. This creates a significant trade-off for central banks, balancing increased inflation risks against reduced output. Our results suggest modifying the Taylor rule to give equal weight to responses to both inflation and output growth, indicating a gradual approach to climateexacerbated economic fluctuations.
    Keywords: Climate change; monetary policy; fiscal policy; Taylor rule
    Date: 2023–11–24
  8. By: Paul Levine (University of Surrey); Maryam Mirfatah (King’s College London); Joseph Pearlman (City University); Stylianos Tsiaras (Ecole Polytechnique Federale de Lausanne)
    Abstract: We study central bank liquidity provisions to the banking sector in a DSGE model estimated for the Euro Area with financial frictions on the supply and demand side of credit. We show that liquidity provisions, as in the ECB’s recent Long Term Refinancing Operations, can be welfare-enhancing or welfare-reducing when both these financial frictions exist. They relax the banks’ leverage constraint and induce banks to provide more credit. This reduces the credit spread facing firms and increases investment, but this comes at the cost of implementing the liquidity policy. We compute a welfare optimized liquidity rule for the central bank responding to output, inflation and the interest rate spread that can increase welfare in comparison with the case of no liquidity provision. Crucially, this result is conditional on a high level of central bank monitoring of the its loanable funds to banks.
    JEL: C11 E44 E52 E58 E61
    Date: 2023–11
  9. By: Michael D. Bordo; Edward Simpson Prescott
    Abstract: We evaluate the decentralized structure of the Federal Reserve System as a mechanism for generating and processing new ideas on monetary policy over the 1960 - 2000 period. We document the introduction of monetarism, rational expectations, credibility, transparency, and other monetary policy ideas by Reserve Banks into the Federal Reserve System. We argue that the Reserve Banks were willing to support and develop new ideas due to internal reforms to the FOMC that Chairman William McChesney Martin implemented in the 1950s and the increased ties with academia that developed in this period. Furthermore, the Reserve Banks were able to succeed at this because of their private-public governance structure. We illustrate this with a time-consistency model in which a decentralized organization is better at producing new ideas than a centralized one. We argue that this role of the Reserve Banks is an important benefit of the Federal Reserve’s decentralized structure by allowing for more competition in formulating ideas and by reducing groupthink.
    Keywords: Federal Reserve System; monetary policy; governance; time consistency
    JEL: B0 E58 G28 H1
    Date: 2023–11–20
  10. By: Mr. Mauricio Vargas; Jesus Sanchez
    Abstract: With some of the most significant levels of financial dollarization in the Western Hemisphere, Uruguay is characterized by extensive dollarization in both deposits and loans. While traditional factors like high inflation and substantial devaluations have been associated with such outcome, the enduring nature of dollarization in Uruguay also underscores the importance of structural elements. In formulating a holistic strategy to reduce dollarization, not only should there be an enhancement of the monetary policy framework aimed at maintaining low, stable inflation, but it should also consider the calibration of prudential policies such as currency-differentiated reserve requirements and foreign-currency credit repos.
    Keywords: Dollarization; Prudential Policies; Monetary Policy; Uruguay; Peru.
    Date: 2023–11–24
  11. By: Michal MarenÄ ák (National Bank of Slovakia)
    Abstract: This paper shows that the impact of inflation expectations on consumption depends on prevailing inflation. Beyond the quantitative-qualitative distinction in inflation expectations, differentiating among qualitative expectations of higher, constant, or positive inflation is key. Qualitative expectations have a greater impact on consumption than expected levels and changes in inflation, and the significance of specific qualitative expectations is contingent upon the prevailing inflation conditions. The effect of expecting qualitatively higher inflation on the willingness to consume is more pronounced during periods of inflation surges than in times of low and stable inflation, and is insignificant during periods of decline or deflation. Policy implications are discussed.
    JEL: D1 D8 E2 E3 E5
    Date: 2023–11
  12. By: Dräger, Lena; Nghiem, Giang
    JEL: E52 E31 D84
    Date: 2023
  13. By: Anna Cieslak; Stephen Hansen; Michael McMahon; Song Xiao
    Abstract: Uncertainty is a ubiquitous concern emphasized by policymakers. We study how uncertainty affects decision-making by the Federal Open Market Committee (FOMC). We distinguish between the notion of Fed-managed uncertainty vis-a-vis uncertainty that emanates from within the economy and which the Fed takes as given. A simple theoretical framework illustrates how Fed-managed uncertainty introduces a wedge between the standard Taylor-type policy rule and the optimal decision. Using private Fed deliberations, we quantify the types of uncertainty the FOMC perceives and their effects on its policy stance. The FOMC's expressed inflation uncertainty strongly predicts a more hawkish policy stance that is not explained either by the Fed's macroeconomic forecasts or by public uncertainty proxies. We rationalize these results with a model of inflation tail risks and argue that the effect of uncertainty on the FOMC's decisions reflects policymakers' concern with maintaining credibility for the inflation anchor.
    JEL: E58
    Date: 2023–11
  14. By: Hein, Eckhard
    Abstract: This paper reviews the post-Keynesian theory of inflation against the background of the simultaneous rise in inflation and profit shares in the course of the Covid-19 recovery and the Russian war in Ukraine. It distinguishes between the Keynes, Kaldor, Robinson, and Marglin tradition, and the Kalecki, Rowthorn, and Dutt tradition. Two prototype models in the latter tradition-the Dutt, Blecker/Setterfield and Lavoie variant, and the Rowthorn and Hein/Stockhammer variant-are discussed. The paper applies the latter to elucidate recent inflation trends propelled by increasing imported energy prices and then rising mark-ups. The effects of inflation-targeting central bank interest policies versus a post-Keynesian alternative macroeconomic policy approach are evaluated. It is argued that from a post-Keynesian perspective inflation is always and everywhere a conflict phenomenon, with different potential triggers. Adequate policies should thus focus on moderating distribution conflict by incomes policies, complemented by central banks targeting low long-term real interest rates, functional finance fiscal policies and international coordination of inflation targets.
    Keywords: conflict inflation, post-Keynesian models, imported energy inflation shock
    JEL: E12 E25 E31 E61
    Date: 2023
  15. By: Viral V. Acharya; Maximilian Jager; Sascha Steffen
    Abstract: Over the past two decades, banks have increasingly focused on offering contingent credit in the form of credit lines as a primary means of corporate borrowing. We review the existing body of research regarding the rationales for banks’ provision of liquidity insurance in the form of credit lines, their significance in managing corporate liquidity, and the reasons and circumstances under which firms opt to utilize them. We emphasize that the options for firms to both draw down and repay credit lines are put options issued by banks, which are exercised by firms in a correlated manner during periods of widespread stress, with adverse affects on bank intermediation thereafter. We discuss the bank capital and the bank funding channels that can drive these effects, contrasting their roles during the Global Financial Crisis and the Covid-19 outbreak. We conclude by discussing the increasing extension of bank credit lines to non-bank financial intermediaries, as well as the role of stress tests and monetary policy in managing the risks of contingent credit under stress.
    JEL: G01 G21 G23 G32
    Date: 2023–11
  16. By: Bilbiie, F. O.; Melitz, M. J.
    Abstract: Due to its impact on nominal firm profits, price rigidity amplifies the response of entry and exit to supply shocks. When those supply shocks are negative, such as those following supply chain disruptions, this “entry-exit multiplier†substantially magnifies the associated welfare losses—especially when wages are also rigid. This is in stark contrast to the benchmark New Keynesian model (NK), which predicts a positive output gap in response to that same shock under the same monetary policy. Endogenous entry-exit thus radically changes the consequences of nominal rigidities. In addition to the aggregate-demand amplification of supply disruptions, our model also reconciles the response of hours worked across the NK and RBC models. And unlike the standard NK model, our model can also be used to evaluate how monetary expansions can alleviate or even eliminate the negative output gap induced by supply disruptions.
    Keywords: Aggregate Demand and Supply, Entry-Exit, Monetary Policy, Recessions, Sticky Prices, Sticky Wages, Variety
    JEL: E30 E40 E50 E60
    Date: 2023–10–20
  17. By: Khaled AlAjmi; Jose Deodoro; Mr. Ashraf Khan; Kei Moriya
    Abstract: Using the 2010, 2015, and 2020/2021 datasets of the IMF’s Central Bank Legislation Database (CBLD), we explore artificial intelligence (AI) and machine learning (ML) approaches to analyzing patterns in central bank legislation. Our findings highlight that: (i) a simple Naïve Bayes algorithm can link CBLD search categories with a significant and increasing level of accuracy to specific articles and phrases in articles in laws (i.e., predict search classification); (ii) specific patterns or themes emerge across central bank legislation (most notably, on central bank governance, central bank policy and operations, and central bank stakeholders and transparency); and (iii) other AI/ML approaches yield interesting results, meriting further research.
    Keywords: central bank legislation; central banking; artificial intelligence; machine learning; Bayesian algorithm; Boolean algorithm; central bank governance; law and economics
    Date: 2023–11–17
  18. By: Olivo, Victor
    Abstract: The purpose of this work is to provide a detailed descriptive analysis of the hyperinflationary process that affected Venezuela between December 2017 and January 2020. The analysis is based on the approach of Cagan (1956) in the sense that it uses the criteria defined by Cagan to identify hyperinflationary episodes, and places special emphasis on the behavior of monetary factors (the supply of and demand for money) as the main direct determinants of hyperinflationary dynamics. Evidence is presented that the change in monetary dynamics through a jump in the rate of growth of the monetary base was a fundamental factor in the process of acceleration of the price level. The study also confirms that Cagan's condition of stability of the money demand was met during the hyperinflationary episode, and that the essential impulse of the hyperinflationary process was generated via expansion of the money supply and not an unstable behavior of the demand for money.
    Keywords: Hyperinflation, money supply, money demand, monetary base, fiscal deficit, monetary financing.
    JEL: E41 E51 E63
    Date: 2023–11–11
  19. By: Corsetti, G.; Maeng, S. H.
    Abstract: Uncertainty about a government willingness to repay its outstanding liabilities upon auctioning new debt creates vulnerability to belief-driven hikes in borrowing costs. We show that optimizing policymakers will eliminate such vulnerability by accumulating reserves up to ensuring post-auction debt repayment in all (off-equilibrium) circumstances. The model helps explaining why governments hold significant amounts of reserves and appear reluctant to use them to smooth fundamental shocks. Quantitatively, the model explains reserve holdings up to 3% of GDP if debt is short term, 2.4% with long-term debt—as long bond maturities mitigate vulnerability to belief-driven crises.
    Keywords: Debt Sustainability, Discretionary Fiscal Policy, Expectations, Foreign Reserves, Self-Fulfilling Crises, Sovereign Default
    JEL: E43 E62 F34 H50 H63
    Date: 2023–11–08

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