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on Central Banking |
| By: | Oleg Itskhoki; Dmitry Mukhin |
| Abstract: | We develop a general policy analysis framework for an open economy that features nominal rigidities and financial frictions giving rise to endogenous PPP and UIP deviations. The efficient allocation can be implemented with monetary policy closing the output gap and FX interventions eliminating UIP deviations. When the “natural” real exchange rate is stable, both goals can be achieved solely by monetary policy that fixes the exchange rate — an open-economy divine coincidence. More generally, optimal policy features a managed float/crawling peg complemented with FX forward guidance and macroprudential accumulation of FX reserves, in line with the “fear of floating” observed in the data. Capital controls are not necessary to achieve the frictionless allocation, but they facilitate the extraction of rents in the currency market. Constrained unilateral policies are not optimal from the global perspective, and international cooperation features a complementary use of FX interventions across countries. |
| JEL: | F30 F40 G10 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31933&r=cba |
| By: | Beatriz González; Galo Nuño Barrau; Dominik Thaler; Silvia Albrizio |
| Abstract: | This paper analyzes the link between monetary policy and capital misallocation in a New Keynesian model with heterogeneous firms and financial frictions. In the model, firms with a high return to capital increase their investment more strongly in response to a monetary policy expansion, thus reducing misallocation. This feature creates a new time-inconsistent incentive for the central bank to engineer an unexpected monetary expansion to temporarily reduce misallocation. However, price stability is the optimal timeless response to demand, financial or TFP shocks. Finally, we present firm-level evidence supporting the theoretical mechanism. |
| Keywords: | monetary policy, firm heterogeneity, financial frictions, capital misallocation |
| JEL: | E12 E22 E43 E52 L11 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1148&r=cba |
| By: | Dávila-Ospina, Andrés O. (Universidad de los Andes) |
| Abstract: | What would happen if the central bank makes a mistake facing a crisis? This paper argues that it would leave scars in the long-run trend of production. If monetary policy is not expansionary-enough during crises, an inefficient rise of the interest rate intensifies the scarring effects of recessions. The hysteresis effect comes from higher innovation costs that induce a drop in productivity growth, an indiscriminate firms’ exit process, and a rise in unemployment. This article presents a theoretical model that rationalizes these mechanisms. The theory suggests that, in the longrun, even though growth recovers to its pre-shock rate and the economy converges to full firms’ survival and full employment, the long-term output level is persistently lower than the level it would have reached in the absence of errors. |
| Keywords: | Hysteresis; Monetary Policy; Endogenous Growth; Productivity; Firms’ Exit; Unemployment. |
| JEL: | E52 E58 O11 O40 O41 O42 O47 |
| Date: | 2023–12–13 |
| URL: | http://d.repec.org/n?u=RePEc:col:000089:021003&r=cba |
| By: | Marwil J. Dávila-Fernández; Germana Giombini; Edgar J. Sánchez-Carrera |
| Abstract: | Recent empirical evidence is challenging the conventional paradigm in macroeconomics, which assumes money is neutral in the long run. On the other hand, central banks are gradually acknowledging that climate change can potentially impact price stability, and the term climateflation has entered the vocabulary of policymakers. This paper contributes to current developments between these two major themes. We present an Overlapping Generations (OLG) model to study the interplay between conventional monetary policy and the environment in a context where the so-called “independence hypothesis” does not hold. Individuals are assumed to derive utility from consumption and environmental quality. Firms operate in a competitive market, but output is weighted by a damage function reflecting a negative externality from ecological degradation. We innovate by linking the environment to inflation through inflationary expectations in a modified Phillips curve. Central banks set the nominal interest rate using a generalised Taylor rule. They affect wealth composition via the individual’s intertemporal optimisation problem. Numerical experiments allow us to assess the robustness of the trade-off between environmental quality and economic activity when (i) expectations are more responsive to climateflation, (ii) the monetary authority is more inflation-averse, (iii) the central bank increases the inflation target, and (iv) fiscal policy is less stringent. |
| Keywords: | Monetary policy; Inflation targeting; Green transition; OLG. |
| JEL: | E52 E60 O44 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:usi:wpaper:905&r=cba |
| By: | Rennae Cherry; Eric Tong (Reserve Bank of New Zealand) |
| Abstract: | Clear communication helps New Zealanders understand monetary policy and its relationship to them. Communication explains to the public the purpose and rationale behind monetary policy decisions and, when done right, may enhance monetary policy transmission via different channels (RBNZ, 2020; Blinder et al. 2008; Blot and Hubert, 2018). With this motivation, we apply textual analysis to flagship publications of the Reserve Bank—with the aim of assessing Reserve Bank communications and supporting its mandates of maintaining price stability over the medium term and supporting maximum sustainable employment. Key findings: - Textual analysis shows that keywords mentioned in the Monetary Policy Statements (MPS) align with the objectives in the Remit. - The tone of MPS has been neutral and objective, even as the sentiment in the MPS moves in tandem with household and business confidence surveys. - Similar to monetary policy documents published by central banks overseas, the MPS are complex and may not be accessible to the general public. However, readability, which measures the complexity of a text based on sentence length and the number of syllables in words, has remained stable over 1997Q1-2021Q4 and has marginally improved recently. - The Monetary Policy Snapshots, introduced in 2018, are easier to read than the main part of the MPS – they are accessible to a high school graduate rather than a university graduate. |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbans:2023/4&r=cba |
| By: | Kateryna Savolchuk (National Bank of Ukraine); Tetiana Yukhymenko (National Bank of Ukraine) |
| Abstract: | This study investigates the influence of central bank credibility in forming inflation expectations, using data obtained from business surveys conducted by the National Bank of Ukraine. We employ a two-stage treatment model to mitigate the potential bias of the endogeneity of firms' answers. The results confirm the vital role of credibility in shaping inflation expectations. Notably, credibility reduces sensitivity to past inflation deviations. Robustness checks, which are based on bootstrapping, reinforce the reliability of the findings. Our study underscores the importance of central bank credibility in anchoring inflation expectations. |
| Keywords: | credibility, inflation expectations, endogeneity, surveys |
| JEL: | C51 E58 E70 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:ukb:wpaper:04/2023&r=cba |
| By: | Darracq Pariès, Matthieu; Dées, Stéphane; Parisi, Laura; Sun, Yiqiao; De Gaye, Annabelle |
| Abstract: | In this paper we analyse the sensitivity of the macroeconomic outcomes under the Network for Greening the Financial System’s (NGFS’s) Phase III net-zero and delayed transition scenarios to different monetary and fiscal policy settings. In doing so, we provide a rare application of the NGFS climate scenarios to economic assessment through the lens of the macroeconomic modelling frameworks underlying the scenario construction (e.g. NiGEM). Using the model to disentangle the main drivers of the scenarios, we show that gross domestic product (GDP) growth is shaped by physical and transition shocks jointly, whereas transition shocks account for most of the inflationary pressure. As regards alternative policy settings within the model, it turns out that Fiscal recycling options become more discriminant in terms of GDP impact in the medium term. Full recycling through government investment yields the strongest output multiplier, whereas recycling through household transfers or reduced income taxes yields the lowest multiplier. During the transition, euro area macroeconomic variables respond very similarly if two-pillar or price level-targeting monetary policy rules are followed. The Taylor- rule, reacting to inflation and output gap, yields higher and more persistent inflation as well as stronger short-term interest rate increases. These findings are certainly model-specific but do reflect the policy sensitivity embedded of the NGFS scenarios, within the confines of the very model used to build them up. JEL Classification: Q54, E3, E6, D6 |
| Keywords: | climate scenarios, fiscal policy, modelling strategy, monetary policy |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2023336&r=cba |
| By: | Maurice Obstfeld |
| Abstract: | This paper surveys the decline in real interest rates in advanced and emerging economies over the past several decades, linking that process to a range of global factors that have operated with different force in different periods. The paper argues that estimates of long-run equilibrium real rates (r̄) may not always furnish an accurate guide to the rate appropriate for short-term monetary policy (r*). It argues further that effective monetary should consider not only equilibrium in the market for domestic goods, but also the current account balance, financial conditions (including capital flows), and imperfect policy credibility. Equilibrium long-term real interest rates have risen recently according to market indicators. However, the main underlying factors that have pushed real interest rates down since the 1980s and 1990s – notably demographic shifts, lower productivity growth, corporate market power, and safe asset demand relative to supply – do not appear poised to reverse strongly enough to drive a big and durable rise in global real interest rates over the coming years. Low equilibrium interest rates may well continue periodically to bedevil monetary policy and financial stability. |
| JEL: | E43 E44 E52 F36 N10 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31949&r=cba |
| By: | Suveg, Melinda (Research Institute of Industrial Economics (IFN)) |
| Abstract: | The New Keynesian model, augmented with the working capital channel, predicts that a rise in the policy rate causes firms that use more working capital to increase their prices more, and that the pass-through is gradual because of price rigidity. Using a unique dataset on firm-product-level price indices, I show that a one percentage point monetary policy shock leads to a 6 percent increase in the firm’s price and that the pass-through takes about 4 months. The pass-through in the microdata is 6 times larger than it is implemented in the supply-side block of standard New Keynesian DSGE models. |
| Keywords: | Working capital; Price setting; Inflation; Monetary policy; Pass-through |
| JEL: | E31 E37 E52 L11 |
| Date: | 2023–12–15 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iuiwop:1482&r=cba |
| By: | Meltem Chadwick; Tyler Smith (Reserve Bank of New Zealand) |
| Abstract: | This note explores which survey measures of inflation expectations improve the forecast performance of linear time series models for headline inflation in New Zealand over the period 1996-2021. We use inflation expectations from surveys of consumers, businesses and professional forecasters in a pseudo-out-of-sample forecasting exercise for headline inflation up to 12 quarters ahead. Incorporating survey-based inflation expectations data in linear models typically enhances the accuracy of headline inflation forecasts across different horizons. Among different survey measures, the mean of RBNZ 1-year household inflation expectations survey demonstrates the strongest predictive ability. For policy purposes, a range of measures of expectations are always taken into account, and many different measures contain useful information for policy. Key findings: - Inflation expectations are essential for effective monetary policy as expectations affect current pricing behaviour. - Our results indicate that forecasts for headline inflation that include inflation expectations are significantly better than similar forecasts without survey inflation expectations. - The 1-year mean RBNZ survey of household inflation expectations has the best predictive power for the headline inflation, although the difference is small relative to other survey measures. |
| Date: | 2023–06 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbans:2023/2&r=cba |
| By: | Garcia-Cicco Javier; Bucacos Elizabeth; Mello Miguel |
| Abstract: | We study the effects of exchange rate interventions in Uruguay on relevant macroeconomic variables such as the exchange rate, inflation, activity, and interest rates. Instead of attempting to identify exogenous variations in the intervention policy (a frequent strategy in the related literature, but that raises many endogeneity concerns), we investigate the effect of interventions in dampening the impact of external shocks that are relevant determinants of exchange rate movements. This estimation is carried out through a novel econometric tool called constrained impulse response functions, which allows to construct counterfactual scenarios that are locally valid (i.e. marginal effects around average responses). We find that interventions can help dampen exchange rate effects, and may have non-trivial effects inflation as well, but generally no consequences in terms of activity. Importantly, these effects depend on the type and sign of the external shock under consideration. |
| JEL: | E58 E42 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:aep:anales:4657&r=cba |
| By: | Diego Comin; Robert C. Johnson; Callum J. Jones |
| Abstract: | We develop a multisector, open economy, New Keynesian framework to evaluate how potentially binding capacity constraints, and shocks to them, shape inflation. We show that binding constraints for domestic and foreign producers shift domestic and import price Phillips Curves up, similar to reduced-form markup shocks. Further, data on prices and quantities together identify whether constraints bind due to increased demand or reductions in capacity. Applying the model to interpret recent US data, we find that binding constraints explain half of the increase in inflation during 2021-2022. In particular, tight capacity served to amplify the impact of loose monetary policy in 2021, fueling the inflation takeoff. |
| Keywords: | Monetary policy; Goods constraints; Import constraint; Inflation; Occasionally binding constraint; Supply chain constraints |
| JEL: | E30 E50 |
| Date: | 2023–11–22 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2023-75&r=cba |
| By: | Michał Greszta (Narodowy Bank Polski); Marcin Humanicki (Narodowy Bank Polski); Mariusz Kapuściński (Narodowy Bank Polski); Tomasz Kleszcz (Narodowy Bank Polski); Andrzej Kocięcki (Narodowy Bank Polski); Jacek Kotłowski (Narodowy Bank Polski); Michał Ledóchowski (Narodowy Bank Polski); Michał Łesyk (Narodowy Bank Polski); Tomasz Łyziak (Narodowy Bank Polski); Mateusz Pipień (Narodowy Bank Polski); Piotr Popowski (Narodowy Bank Polski); Ewa Stanisławska (Narodowy Bank Polski); Karol Szafranek (Narodowy Bank Polski); Grzegorz Szafrański (Narodowy Bank Polski); Dorota Ścibisz (Narodowy Bank Polski); Grzegorz Wesołowski (Narodowy Bank Polski); Ewa Wróbel (Narodowy Bank Polski) |
| Abstract: | This report presents the current body of knowledge on the monetary transmission mechanism in Poland. The presented findings confirm the impact of short-term interest rates on a range of macroeconomic variables, indicating in particular that following a monetary policy tightening there is – ceteris paribus – an appreciation of the domestic currency, and, with a lag, a decrease in the volume of credit, economic activity, and inflation. |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:365&r=cba |
| By: | Kevin L. Kliesen |
| Abstract: | The 1994-95 Fed tightening episode was one of the most notable in the Fed’s history. First, the FOMC raised the policy rate by 300 basis points in a year, even though headline and core inflation were trending lower prior to the liftoff that occurred in February 1994. Second, the Fed’s actions caught the Treasury market by surprise, triggering a sharp decline in long-term bond prices. Third, Fed Chair Alan Greenspan and the Federal Open Market Committee were regularly surprised that inflation was not rising by more than the forecasts suggested during the episode. This article presents some evidence that the Greenbook forecast systemically, albeit modestly, overpredicted CPI inflation during the tightening period. Greenspan eventually concluded that the nascent strengthening in labor productivity growth that was a key factor in restraining the growth of unit labor costs, and thus in keeping inflation pressures in check. At the same time, the success of the episode stemmed importantly from the decision by Greenspan and the FOMC to increase the policy rate to a level deemed restrictive for most of 1995. This effort reduced longer-run inflation expectations without triggering a recession. By that metric the 1994-95 tightening episode was a roaring success. Although not the focus of this article, the 1994-95 tightening episode holds important lessons for the FOMC in late 2023, which is attempting to defuse a sharp and unexpected increase in headline and core inflation to levels not seen since the early 1980s without triggering a recession. |
| Keywords: | monetary policy; inflation; forecasts |
| JEL: | E31 E32 E52 E58 E65 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:97435&r=cba |
| By: | Greppmair, Stefan; Jank, Stephan |
| Abstract: | We utilize the Eurosystem securities lending facilities as a laboratory to investigate the impact of collateral scarcity on market functioning. The reduction of securities lending fees, implemented in November 2020, provides a natural experiment for our analyses. This policy change results in a surge in the utilization of securities lending facilities, particularly for bonds with limited supply elasticity in the repo market. We find no evidence of substitution effects; instead, the overall activity in the repo market expands through the collateral multiplier. The improved pricing conditions alleviate collateral scarcity and enhance market quality in both the repo and cash markets. |
| Keywords: | safe assets, collateral scarcity, monetary policy, quantitative easing, securities lending facilities, repo, market functioning |
| JEL: | G10 G21 E50 E58 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:280417&r=cba |
| By: | Rafael Berriel; Eugenia Gonzalez-Aguado; Patrick J. Kehoe; Elena Pastorino |
| Abstract: | We apply ideas from fiscal federalism to reassess how fiscal authority should be delegated within a monetary union. In a real-economy model with fiscal externalities, in which local fiscal authorities have an informational advantage about the preferences of their citizens for public spending relative to a fiscal union, a decentralized regime is optimal for small federations of countries, whereas a centralized regime is optimal for large ones. We then consider a monetary-economy model, in which governments finance their expenditures with nominal debt, and inflation has a negative impact on aggregate productivity. When the monetary authority lacks commitment, the resulting time inconsistency problem generates an indirect endogenous fiscal externality. When a country-level fiscal authority chooses a higher level of nominal debt, it induces the monetary authority to inflate more to reduce the level of distortionary taxes needed to finance the higher debt. The resulting fiscal externality naturally becomes more severe as the number of countries in the monetary union increases. Here also a decentralized fiscal regime is optimal for small monetary unions, whereas a fiscal union is optimal for sufficiently large ones. Our key result is that as the size of a monetary union increases, it becomes relatively more desirable to centralize fiscal authority. |
| JEL: | E61 E63 F34 F42 F45 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31953&r=cba |
| By: | Alkis Georgiadis-Harris; Maxi Guennewig |
| Abstract: | Since the Great Financial Crisis, the share of deposits—both insured and uninsured—in bank liabilities has increased substantially. In this paper, we document this fact for the largest US banks. We show that it can be theoretically explained by the introduction of resolution powers, i.e. the ability to impose losses on bank shareholders and creditors. In such a world, banks issue deposits in order to channel resources towards uninsured depositors, imposing losses on insured depositors and forcing the government to conduct bailouts. Our model suggests that resolution and deposit insurance must be complemented by equity or long-term debt requirements. |
| Keywords: | Bank Resolution, Deposit Insurance, and Fragility |
| JEL: | G18 G21 G32 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2023_477&r=cba |
| By: | Jana Hlavinova; Birgit Rudloff; Alexander Smirnow |
| Abstract: | In recent years, it has become apparent that an isolated microprudential approach to capital adequacy requirements of individual institutions is insufficient. It can increase the homogeneity of the financial system and ultimately the cost to society. For this reason, the focus of the financial and mathematical literature has shifted towards the macroprudential regulation of the financial network as a whole. In particular, systemic risk measures have been discussed as a risk measurement and mitigation tool. In this spirit, we adopt a general approach of multivariate, set-valued risk measures and combine it with the notion of intrinsic risk measures. In order to define the risk of a financial position, intrinsic risk measures utilise only internal capital, which is received when part of the currently held assets are sold, instead of relying on external capital. We translate this methodology into the systemic framework and show that systemic intrinsic risk measures have desirable properties such as the set-valued equivalents of monotonicity and quasi-convexity. Furthermore, for convex acceptance sets we derive a dual representation of the systemic intrinsic risk measure. We apply our methodology to a modified Eisenberg-Noe network of banks and discuss the appeal of this approach from a regulatory perspective, as it does not elevate the financial system with external capital. We show evidence that this approach allows to mitigate systemic risk by moving the network towards more stable assets. |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2311.14588&r=cba |
| By: | Lucas Herrenbrueck, Zijian Wang (Simon Fraser University) |
| Abstract: | The Euler equation of a representative consumer – or its long-run counterpart, the Fisher equation – is at the heart of modern macroeconomics. But it prices a bond – short-term, perfectly safe, yet perfectly illiquid – that does not exist in reality, where most safe assets can be easily traded or pledged as collateral to obtain money, or even for goods and services directly, and their prices reflect their moneyness as much as their dividends. In this paper, we deploy a New Monetarist framework to capture these facts and derive implications for monetary policy and asset pricing. Consistent with the model, we find that the return on a hypothetical illiquid bond, estimated via inflation and consumption growth, behaves very differently from the return on safe and liquid assets. This distinction helps resolve a great number of puzzles associated with the Euler/Fisher equation, and points to a better way of understanding how monetary policy affects the economy |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:sfu:sfudps:dp23-11&r=cba |
| By: | Philippe Bacchetta; J. Scott Davis; Eric van Wincoop |
| Abstract: | Since 2007, an increase in risk or risk aversion has resulted in a US dollar appreciation and greater deviations from covered interest parity (CIP). In contrast, prior to 2007, risk had no impact on the dollar, and CIP held. To explain these phenomena, we develop a two-country model featuring (i) market segmentation, (ii) limited CIP arbitrage (since 2007), (iii) global dollar dominance. During periods of heightened global financial stress, dollar shortages in the offshore market emerge, leading to increased CIP deviations and a dollar appreciation. The appreciation occurs even in the absence of global dollar demand shocks. Central bank swap lines mitigate these effects. |
| JEL: | E44 F31 G15 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31937&r=cba |
| By: | Rezk Ernesto |
| Abstract: | Argentina is being subject to periods of long lasting high inflation (also known as chronic inflation), in which stabilisation plans, based upon different tools (e.g.use of interest rates or monetary aggregates) fell short of being successful and various explanations were resorted io for explaining failed experiences; in this connection, whereas in some cases the blame was put on fiscal policies favouring high fiscal deficits and excessive money printing, there were also explanations seeking the cause for inflation on supply rigidities as well as on oligopolist behaviours by determined economic agents, let alone some natural causes. In trying to more precisely enquire over this long lasting problem in Argentina, as well as on the reasons for stabilisation plans´ poor performance in Argentina, the paper includes an anylisis of stylized facts during four presidential terms (period 2007-2019) based upon the theoretical content of G. Calvo´s seminal paper "Fighting Chronic Inflation with Interest Rates". |
| JEL: | E58 E63 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:aep:anales:4689&r=cba |