nep-cba New Economics Papers
on Central Banking
Issue of 2024‒01‒15
sixteen papers chosen by
Sergey E. Pekarski, Higher School of Economics

  1. How Important Is the Information Effect of Monetary Policy? By Zhao Han; Chengcheng Jia
  2. The effectiveness of macroprudential policies in managing extreme capital flow episodes By David de Villiers; Hylton Hollander; Dawie van Lill
  3. Macro-Financial Impacts of Foreign Digital Money By Anh Le; Alexander Copestake; Brandon Tan; Mr. Shanaka J Peiris; Umang Rawat
  4. Monetary Policy Frameworks and Communication in the Caucasus and Central Asia By Omer Faruk Akbal; Klakow Akepanidtaworn; Ezequiel Cabezon; Mariarosaria Comunale; Mrs. Marina Conesa Martinez; Ms. Filiz D Unsal
  5. Retail Central Bank Digital Currencies: Implications for Banking and Financial Stability By Sebastian Infante; Kyungmin Kim; Anna Orlik; André F. Silva; Robert J. Tetlow
  6. Can Fiscal Consolidation help Central Banks Fight Inflation? By Mr. Jiaqian Chen; Ms. Era Dabla-Norris; Carlos Goncalves; Zoltan Jakab; Jesper Lindé
  7. The International Spillovers of Synchronous Monetary Tightening By Dario Caldara; Francesco Ferrante; Matteo Iacoviello; Andrea Prestipino; Albert Queraltó
  8. Monetary Tightening, Commercial Real Estate Distress, and US Bank Fragility By Erica Xuewei Jiang; Gregor Matvos; Tomasz Piskorski; Amit Seru
  9. Borrowing and Spending in the Money: Debt Substitution and the Cash-out Refinance Channel of Monetary Policy By Elliot Anenberg; Tess C. Scharlemann; Eileen van Straelen
  10. Commodity Prices, Financial Frictions, and Macroprudential Policies By Shigeto Kitano; Kenya Takaku
  11. Contagion of bank failures through the interbank network in Argentina By Carlevaro Emiliano A.
  12. Choosing Exchange Regimes in Oil-Exporting Countries:Frankel’s Proposal (CCB) versus the Actual Regime:The Case of Algeria (In Arabic) By Abderazak Madouri; Hacene Tchoketch-Kebir
  13. Optimal Taxation of Inflation By Mr. Damien Capelle; Yang Liu
  14. Is the Bond Market Competitive? Evidence From the ECB's Asset Purchase Programme By Johannes Breckenfelder; Pierre Collin-Dufresne; Stefano Corradin
  15. Can Passive Monetary Policy Decrease the Debt Burden? By Ruoyun Mao; Wenyi Shen; Shu-Chun S. Yang
  16. The International Supply of Reserve Currency By Pierpaolo Benigno

  1. By: Zhao Han; Chengcheng Jia
    Abstract: Is the "information effect" of monetary policy quantitatively important? We first use a simple model to show that under asymmetric information, monetary policy surprises are correlated with the unobserved state of the economy. This correlation implies that monetary policy surprises provide information about the state of the economy, and at the same time, explains why the estimation of the information effect may be biased. We then develop a New Keynesian DSGE model under asymmetric information and calibrate model parameters to match macroeconomic dynamics in the US and forecasting accuracy in the Greenbook. Under our calibration, both the central bank and the private sector initially have noisy information. Over time, the information effect of monetary policy mitigates information frictions by enhancing the two-way learning between the central bank and the private sector.
    Keywords: monetary policy; information frictions; asymmetric information
    JEL: E52 E58 D84
    Date: 2023–12–18
  2. By: David de Villiers (Department of Economics, Stellenbosch University); Hylton Hollander (Department of Economics, Stellenbosch University); Dawie van Lill (Department of Economics, Stellenbosch University)
    Abstract: Against the backdrop of a proliferation of policy tools, ongoing policy uncertainty surrounds the suitability of capital flow management in mitigating systemic risk and financial disruptions. We study the effectiveness of macroprudential policies in managing extreme capital flow episodes (surges, stops, flight, and retrenchment), comparing them to capital controls and foreign exchange interventions. Using propensity score matching, based on a panel of 54 countries spanning 1990Q1 to 2020Q3, we find that macroprudential policy can reduce the likelihood of extreme capital flow episodes at least as effectively as capital controls or foreign exchange interventions. Their relative effectiveness, however, varies considerably across type of instrument, proliferation of tools, country income-development level, and type of extreme capital flow episode.
    Keywords: macroprudential policy, capital controls, foreign exchange interventions, extreme capital flows, financial stability
    JEL: E58 F3 F4 G01 G1
    Date: 2023
  3. By: Anh Le; Alexander Copestake; Brandon Tan; Mr. Shanaka J Peiris; Umang Rawat
    Abstract: We develop a two-country New Keynesian model with endogenous currency substitution and financial frictions to examine the impact on a small developing economy of a stablecoin issued in a large foreign economy. The stablecoin provides households in the domestic economy with liquidity services and an additional hedge against domestic inflation. Its introduction amplifies currency substitution, reducing bank intermediation and weakening monetary policy transmission, worsening the impacts of recessionary shocks and increasing banking sector stress. Capital controls raise stablecoin adoption as a means of circumvention, increasing exposure to spillovers from foreign shocks. Unlike a domestic CBDC, a ban on stablecoin payments can alleviate these effects.
    Keywords: Cryptocurrency; Open Economy; Financial Frictions; Optimal Policy
    Date: 2023–12–06
  4. By: Omer Faruk Akbal; Klakow Akepanidtaworn; Ezequiel Cabezon; Mariarosaria Comunale; Mrs. Marina Conesa Martinez; Ms. Filiz D Unsal
    Abstract: Central banks in Caucasus and Central Asia (CCA) have been enhancing their monetary policy frameworks in the last decade, and are at different stages of the transition to a type of inflation targeting regimes. This paper documents their progress and the current state of their monetary policy framework, utilizing the IAPOC index developed by Unsal and others (2022) covering Independence and Accountability, Policy and Operational Strategy, and Communications, as well as drawing from central banks’ laws and websites. Additionally, an analysis of press releases from CCA central banks is conducted to evaluate their features, content, and tones. The findings highlight the need for further improvements in the areas of Independence and Accountability, as well as Communications, despite some recent advancements in the latter.
    Keywords: Caucasus and Central Asia; Monetary Policy Frameworks; Communication.
    Date: 2023–12–08
  5. By: Sebastian Infante; Kyungmin Kim; Anna Orlik; André F. Silva; Robert J. Tetlow
    Abstract: This paper reviews the literature examining how the introduction of a retail CBDC would affect the banking sector and financial stability. A CBDC has the potential to improve welfare by reducing financial frictions, countering market power in deposit markets and enhancing the payment system. However, a CBDC also entails noteworthy risks, including the possibility of bank disintermediation and associated contraction in bank credit, as well as potential adverse effects on financial stability. The recycling of the new CBDC liability through asset purchases or lending by the central bank plays an important role in determining the economic consequences of the introduction of a CBDC. A CBDC also raises important questions regarding the footprint of central banks in the financial system. Ultimately, the effects of a CBDC depend critically on its design features, of which remuneration is the one discussed most often in the literature.
    Keywords: Central bank digital currency; Bank disintermediation; Financial stability; Central bank balance sheet; Payment system
    JEL: E40 G20 E50
    Date: 2023–11–20
  6. By: Mr. Jiaqian Chen; Ms. Era Dabla-Norris; Carlos Goncalves; Zoltan Jakab; Jesper Lindé
    Abstract: This paper argues case that a tighter fiscal policy stance can meaningfully support central banks in fighting inflation in both advanced and emerging market economies. While the standard textbook result suggest that monetary policy is much more effective than fiscal policy in battling inflation in open economies due to the exchange rate channel, we show that a tighter fiscal stance is notably more effective in the current situation. This is so because when many countries currently need to tighten the policy stance simultaneously, the exchange rate channel does not provide monetary policy with an edge over fiscal policy. We also show that fiscal consolidation can be helpful in small open emerging markets and developing economies by reaffirming their commitment to price stability, and by putting the fiscal house in order which reduces risk premiums and strengthens the currency. Furthermore, we show that spillovers from major economies can be more adverse from tighter monetary policy. By applying a two-agent New Keynesian modeling framework with unconstrained and hand-to-mouth households, we show that any adverse effects of tighter fiscal policy (relative to tighter monetary policy) on consumption inequality can be handled with a combination of general spending cuts and targeted transfers to vulnerable households.
    Keywords: Policy Coordination; Monetary Policy; Fiscal Policy; High Inflation
    Date: 2023–12–15
  7. By: Dario Caldara; Francesco Ferrante; Matteo Iacoviello; Andrea Prestipino; Albert Queraltó
    Abstract: We use historical data and a calibrated model of the world economy to study how a synchronous monetary tightening can amplify cross-border transmission of monetary policy. The empirical analysis shows that historical episodes of synchronous tightening are associated with tighter financial conditions and larger effects on economic activity than asynchronous ones. In the model, a sufficiently large synchronous tightening can disrupt intermediation of credit by global financial intermediaries causing large output losses and an increase in sacrifice ratios, that is, output lost for a given reduction in inflation. We use this framework to show that there are gains from coordination of international monetary policy.
    Keywords: Monetary Policy; Inflation; International Spillovers; Financial Frictions; Open Economy Macroeconomics; Panel Data Estimation
    JEL: C33 E32 E44 F42
    Date: 2023–11–29
  8. By: Erica Xuewei Jiang; Gregor Matvos; Tomasz Piskorski; Amit Seru
    Abstract: Building on the work of Jiang et al. (2023) we develop a framework to analyze the effects of credit risk on the solvency of U.S. banks in the rising interest rate environment. We focus on commercial real estate (CRE) loans that account for about quarter of assets for an average bank and about $2.7 trillion of bank assets in the aggregate. Using loan-level data we find that after recent declines in property values following higher interest rates and adoption of hybrid working patterns about 14% of all loans and 44% of office loans appear to be in a “negative equity” where their current property values are less than the outstanding loan balances. Additionally, around one-third of all loans and the majority of office loans may encounter substantial cash flow problems and refinancing challenges. A 10% (20%) default rate on CRE loans – a range close to what one saw in the Great Recession on the lower end -- would result in about $80 ($160) billion of additional bank losses. If CRE loan distress would manifest itself early in 2022 when interest rates were low, not a single bank would fail, even under our most pessimistic scenario. However, after more than $2 trillion decline in banks’ asset values following the monetary tightening of 2022, additional 231 (482) banks with aggregate assets of $1 trillion ($1.4 trillion) would have their marked to market value of assets below the face value of all their non-equity liabilities. To assess the risk of solvency bank runs induced by higher rates and credit losses, we expand the Uninsured Depositors Run Risk (UDRR) financial stability measure developed by Jiang et al. (2023) where we incorporate the impact of credit losses into the market-to-market asset calculation, along with the effects of higher interest rates. Our analysis, reflecting market conditions up to 2023:Q3, reveals that CRE distress can induce anywhere from dozens to over 300 mainly smaller regional banks joining the ranks of banks at risk of solvency runs. These findings carry significant implications for financial regulation, risk supervision, and the transmission of monetary policy.
    JEL: G2 L50
    Date: 2023–12
  9. By: Elliot Anenberg; Tess C. Scharlemann; Eileen van Straelen
    Abstract: We show that the strong negative effect of higher mortgage rates on cash-out refinancing reflects substitution into other borrowing products, not large changes in total new household borrowing. We exploit an exogenous increase in long-term rates to show that, in the cross-section of outstanding mortgage rates, changes in cash-out and alternative borrowing are offsetting. Additionally, we instrument using monetary policy surprises to show that, over the period from 2006-2021, changes in cash-out refinancing are offset by alternative borrowing. Our results suggest that debt substitution substantially weakens the cash-out refinance channel of monetary policy and reduces its path-dependence.
    Keywords: Equity extraction; Mortgages and credit; Cash out refinancing; Monetary policy; Refinancing
    JEL: G51
    Date: 2023–11–21
  10. By: Shigeto Kitano (Research Institute for Economics and Business Administration (RIEB), Kobe University, JAPAN); Kenya Takaku (Faculty of International Studies, Hiroshima City University, JAPAN)
    Abstract: Fluctuations in commodity prices have significant effects on output and financial stability in emerging countries. We examine the effect of macroprudential policies on commodity-exporting countries, which consist of two sectors---the commodity-producing sector and final goods sector. When a commodity-exporting country suffers from volatile fluctuations in commodity prices, we find that macroprudential policy in each sector is welfare-enhancing and that it is optimal to impose macroprudential policies in both sectors. We also show that macroprudential policies are more effective in improving welfare for commodity-exporting economies suffering from a stronger link between commodity prices and interest rate spreads, higher sensitivity of interest spreads to debt, and larger commodity price shocks.
    Keywords: Macroprudential policies; Commodity-exporting countries; DSGE model; Financial frictions; Emerging economies; Mongolia
    JEL: E32 E44 F32 O20 Q48
    Date: 2023–12
  11. By: Carlevaro Emiliano A.
    Abstract: Capital regulation on banks aims to reduce the probability of failures. In theory, the effect of capital buffers in preventing failures could depend on the linkages among financial institutions. These linkages are nevertheless usually omitted in empirical models. I study the effectiveness of capital regulation in preventing failures using a spatial autoregressive probit model, which accommodates links among banks and feedback effects. I study the Argentinian banking crisis of 2001 for which I build the complete interbank network. By allowing linkages between banks, estimates from the spatial model show that capital regulation is 50% less effective than estimates of a model in which banks are not interconnected.
    JEL: E44 C21
    Date: 2023–11
  12. By: Abderazak Madouri (Research Center in Applied Economics for Development –CREAD-Algeria); Hacene Tchoketch-Kebir (Research Center in Applied Economics for Development –CREAD-Algeria)
    Abstract: This paper analyzes the potential benefits of an alternative exchange rate regime proposed by Jeffrey Franke, called the Commodity-Currency Basket (CCB) regime, over the current exchange rate regime in Algeria. The CCB regime, which combines the advantages of both floating and fixed exchange rate systems, has been suggested as a way to mitigate the negative impacts of oil price volatility on the economies of countries that heavily rely on oil exports. We use wavelet analysis and quantile-on-quantile regression techniques to estimate and evaluate the impact of the CCB regime on internal and external balance indicators in Algeria, including inflation rates and foreign exchange reserves, over the period of 2001-2021. The findings suggest that the CCB regime is superior to the current floating exchange rate system in terms of maintaining monetary stability and achieving internal and external balance, while also providing more flexibility and stimulation to the domestic economy due to its ability to achieve terms of trade stability through an active countercyclical monetary policy. However, the proposed regime remains subject to further discussion, adjustment, experimentation, and development
    Date: 2023–11–20
  13. By: Mr. Damien Capelle; Yang Liu
    Abstract: When inflation originates from distributional conflicts, shifts in inflation expectations, or energy price shocks, monetary policy (MP) is a costly stabilization instrument. We show that a tax on inflation policy (TIP), which would require firms to pay a tax proportional to the increase in their prices, would effectively correct externalities in firms’ pricing decisions, tackle excessive inflation and reduce output volatility, without exacerbating price distortions. While proposals from the 1970s saw TIP as a substitute to MP, we find that it is a complement, with TIP addressing markups and inflation expectation shocks, and MP addressing demand shocks.
    Keywords: Inflation; Markup Shock; Monetary Policy; Tax on Inflation; Taxbased Incomes Policies; Externality
    Date: 2023–12–08
  14. By: Johannes Breckenfelder (European Central Bank); Pierre Collin-Dufresne (École Polytechnique Fédérale de Lausanne; Swiss Finance Institute; NBER); Stefano Corradin (European Central Bank)
    Abstract: We document a recurring pattern in German sovereign bond prices during the Eurosystem's Public Sector Purchase Program (PSPP): a predictable rise towards month-end, followed by a subsequent drop. We propose a sequential search-bargaining model, capturing salient elements of the PSPP's implementation, such as the commitment to transact within an explicit time horizon. The model suggests that this predictable pattern emerges as a consequence of imperfect competition among dealers who are counterparties to the Eurosystem. Predicated on the model's implications, we find that the price fluctuations are markedly accentuated: (a) for bonds specifically targeted by the PSPP, (b) during monthly intervals wherein the Eurosystem engages with a lower number of counterparties, and (c) when the Eurosystem aims for a larger purchase amount. Finally, we explore the potential consequences of our findings for the design and implementation of future asset purchase programs.
    Keywords: Quantitative Easing, Sequential Search-Bargaining Model, Imperfect Competition, Dealers, Financial Market Design
    JEL: G12 G21 E52 E58
    Date: 2023–11
  15. By: Ruoyun Mao (Department of Economics, University of Arkansas); Wenyi Shen (Department of Economics, Oklahoma State University); Shu-Chun S. Yang (Institute of Economics, Academia Sinica, Taipei, Taiwan)
    Abstract: Large expansionary fiscal measures are often implemented with monetary accommoda- tion during an economic crisis. When a government is highly indebted, and the timing of switching to the conventional regime M (passive fiscal/active monetary policies) is uncertain, a government spending increase in regime F (active fiscal/passive monetary policies) increases government debt. Such regime uncertainty dampens inflation and debt revaluation effects. Also, as regime uncertainty generates a smaller real interest rate decline, debt servicing costs fall less, and tax revenues increase less, than in the fixed regime F. These factors contribute to reversing the debt decline for a spending increase in the fixed regime F. The result holds under adverse supply shocks and po- tentially higher capital taxes, relevant factors in the post-COVID U.S. economy.
    JEL: E62 E63 E52 H30 E32
    Date: 2023–12
  16. By: Pierpaolo Benigno
    Abstract: This paper provides insights into the historical inefficiencies and instabilities of the international monetary system. These inefficiencies are primarily linked to the limited supply of international liquidity and wedges in various money-market rates. The instabilities encompass both macroeconomic and financial aspects, particularly focusing on the challenges of stabilizing inflation and economic activity. Innovations stemming from the competition of cryptocurrencies and the associated blockchain technology hold the potential for improving these outcomes.
    Date: 2023–12

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