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on Central Banking |
| By: | Srichander Ramaswamy (The South East Asian Central Banks (SEACEN) Research and Training Centre) |
| Abstract: | One of the challenges of issuing a central bank digital currency (CBDC) is its potential to disintermediate banks through deposit substitution. To avoid this outcome, much of the research on CBDC is focused on whether and what limits to set on CBDC holdings, and if CBDC accounts should be paid interest. But the issuance of CBDC can also generate significant fiscal revenue through central bank balance sheet expansion if they are funded by unremunerated CBDC liabilities. This can lead to a criticism of central bank policies and can potentially compromise its independence. Taking the view that a significant share of unremunerated bank demand deposits can migrate to retail CBDC account if there are no restrictions on the holding amounts, this paper raises and provides some indicative answers to a number of policy questions that arise in this setup. These include the following: Will the commercial bank’s money creation process et disrupted? How will it impact the efficient transmission of monetary policy? What role can central banks play to ensure that the demand for credit in the economy is met at reasonable price terms? Will non-bank actors be able to offer better terms and conditions for loans than banks in the changed intermediation landscape brought about by CBDC? What levers will central banks have to control non-bank actors so that they do not amplify procyclical lending behaviour? Will the remit of central banks need to broaden in scope and reach? We will explore the options and alternatives that might emerge while highlighting what the challenges might be. |
| Keywords: | Central banks, digital currency, financial stability, monetary policy, bank intermediation, non-banks, collateral. |
| JEL: | E42 E51 E52 G21 G23 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:sea:wpaper:wp52&r=cba |
| By: | Antón Sarabia Arturo; Bazdresch Santiago; Lelo-de-Larrea Alejandra |
| Abstract: | This paper evaluates the influence of central bank's projections and narrative signals provided in the summaries of its Inflation Report on the expectations of professional forecasters for inflation and GDP growth in the case of Mexico. We use the Latent Dirichlet Allocation model, a text-mining technique, to identify narrative signals. We show that both quantitative and qualitative information have an influence on inflation and GDP growth expectations. We also find that narrative signals related to monetary policy, observed inflation, aggregate demand, and inflation and employment projections stand out as the most relevant in accounting for changes in analysts' expectations. If the period of the COVID-19 pandemic is excluded, we still find that forecasters consider both types of information for their inflation expectations. |
| Keywords: | Central bank projections;Economic forecasting;Machine learning;Text mining |
| JEL: | E52 E58 C55 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:bdm:wpaper:2023-21&r=cba |
| By: | Patrick Gruning (Latvijas Banka); Andrejs Zlobins (Latvijas Banka) |
| Abstract: | Given the decades-high inflation, central banks are complementing conventional rate hikes with quantitative tightening (QT), i.e. a reduction of the sizeable asset holdings accumulated during the quantitative easing (QE) era. In this study, we employ empirical (proxy-SVAR) and structural (medium-scale NK DSGE) frameworks to study the macroeconomic implications of QT. Our empirical findings show that the impact of QT has been relatively muted in the US, suggesting asymmetric effects of QT compared to QE. This finding is corroborated by model simulations, calibrated to the post-pandemic high inflation environment. Nevertheless, QT can partly substitute conventional rate hikes by creating some deflationary pressure and requiring less aggressive conventional policy action. QT produces smaller effects in the euro area (EA) due to the smaller share of private bonds on the ECB’s balance sheet. However, a potential concern for QT in the EA is the proliferation of fragmentation risk. We empirically argue that the deployment of market-stabilisation QE can be used to stabilise sovereign spreads without creating considerable inflationary pressure in case QT leads to disorderly market dynamics. |
| Keywords: | monetary policy, quantitative tightening, quantitative easing, proxy-SVAR, DSGE |
| JEL: | C54 E31 E52 E58 G12 |
| Date: | 2023–12–27 |
| URL: | http://d.repec.org/n?u=RePEc:ltv:wpaper:202309&r=cba |
| By: | Marcin Kolasa (SGH Warsaw School of Economics; International Monetary Fund); Grzegorz Wesołowski (University of Warsaw, Faculty of Economic Sciences) |
| Abstract: | We investigate the domestic and international consequences of three types of Fed monetary policy instruments: conventional interest rate (IR), forward guidance (FG) and large scale asset purchases (LSAP). We document empirically that they can be seen as close substitutes when used to meet macroeconomic stabilization objectives in the US, but have markedly different spillovers to other countries. This is because each of the three monetary policy instruments transmits differently to asset prices and exchange rates of small open economies. The LSAP by the Fed lowers the term premia both in the US and in other countries, and results in bigger exchange rate adjustments compared to conventional policy. Importantly for international spillovers, LSAP is typically associated with a more accommodative reaction of other countries' monetary authorities, especially in emerging market economies. We demonstrate how these findings can be rationalized within a stylized dynamic theoretical framework featuring a simple form of international bond market segmentation. |
| Keywords: | monetary policy, forward guidance, quantitative easing, international spillovers |
| JEL: | E44 E52 F41 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:war:wpaper:2024-01&r=cba |
| By: | Edward S. Knotek; James Mitchell; Mathieu Pedemonte; Taylor Shiroff |
| Abstract: | We study how monetary policy communications associated with increasing the federal funds rate causally affect consumers' inflation expectations. In a large-scale, multi-wave randomized controlled trial (RCT), we find weak evidence on average that communicating policy changes lowers consumers' medium-term inflation expectations. However, information differs systematically across demographic groups, in terms of ex ante informedness about monetary policy and ex post compliance with the information treatment. Monetary policy communications have a much stronger effect on people who had not previously heard news about monetary policy and who take sufficient time to read the treatment, implying scope to increase the impact of communications by targeting specific groups of the general public. Our findings show that, in an inflationary environment, consumers expect that raising interest rates will lower inflation. More generally, our results emphasize the importance of measuring both respondents' information sets and their compliance with treatment when using RCTs in empirical macroeconomics, to better understand the well-documented evidence of heterogeneous treatment effects. |
| Keywords: | expectations formation; policy communication; monetary policy; inflation; surveys |
| JEL: | E31 E52 E58 |
| Date: | 2024–01–03 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwq:97534&r=cba |
| By: | Sarah Arndt; Zeno Enders |
| Abstract: | We show that the impact of supply and monetary policy shocks on consumer prices is state-dependent. First, we let the data determine two inflation regimes and find that they are characterized by high and low inflation volatility. We then identify upstream supply shocks using instrumental variables based on data outliers in the producer price series. Such shocks exhibit a more substantial and more persistent effect on downstream prices during periods of elevated inflation volatility (State 2) compared to phases of more stable consumer price growth (State 1). Similarly, monetary policy shocks are more effective in State 2. Exogenously differentiating regimes by the level of inflation or the shock size does not reveal state dependency. The evidence supports a model in which producers invest in price flexibility. This model predicts that stricter inflation targeting reduces price flexibility and, consequently, the pass-through of all shocks to inflation, beyond the standard channel that affects demand. |
| Keywords: | inflation regimes, supply shocks, monetary policy, cost pass-through, producer prices |
| JEL: | E31 E52 E32 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10839&r=cba |
| By: | Fiorella De Fiore; Benoit Mojon; Daniel Rees; Damiano Sandri |
| Keywords: | inflation; monetary policy frameworks; central bank reviews; inflation targeting; inflation expectations |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbaacp:acp2023-06&r=cba |
| By: | Taniya Ghosh (Indira Gandhi Institute of Development Research); Yadavindu Ajit (Indira Gandhi Institute of Development Research) |
| Abstract: | With the transparency revolution across the world, this paper aims to investigate the effect of increased central bank transparency on inflation dynamics. We use the-oretical and empirical methods to show the importance of various institutional factors and their interdependence. Using a panel of advanced economies from 1998 to 2017, we investigate the role of central bank transparency in influencing inflation persistence in the presence of institutional factors such as central bank independence and labor market institutions, along with policy uncertainty. While previous research has examªined the role of these institutional variables independently, this paper focuses on how these variables influence the efficacy of central bank transparency. We find that while central bank transparency reduces inflation persistence, its overall effect depends on the level of other variables. The role of central bank transparency in reducing inflation persistence can further be enhanced when we have an independent central bank, colªlective wage bargaining happening at the central level, relaxed labor laws, and lower policy uncertainty. |
| Keywords: | Inflation persistence, Central bank transparency, Central bank independence, Labor market institutions; Interdependence; Policy uncertainty |
| JEL: | D81 D82 E31 E52 E58 J51 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:ind:igiwpp:2023-012&r=cba |
| By: | Javier Bianchi; Louphou Coulibaly |
| Abstract: | Financial integration generates macroeconomic spillovers that may require international monetary policy coordination. We show that individual central banks may set nominal interest rates too low or too high relative to the cooperative outcome. We identify three sufficient statistics that determine whether the Nash equilibrium exhibits under-tightening or over-tightening: the output gap, sectoral differences in labor intensity, and the trade balance response to changes in nominal rates. Independently of the shocks hitting the economy, we find that under-tightening is possible during economic expansions or contractions. For large shocks, the gains from coordination can be substantial. |
| JEL: | E21 E23 E43 E44 E52 E62 F32 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32009&r=cba |
| By: | Ashima Goyal (Indira Gandhi Institute of Development Research) |
| Abstract: | While the basic exchange rate regime has stayed the same since the liberalizing reforms of the nineties, its implementation has varied over the years. The paper assesses the evolution of India's nominal exchange rate regime and its suitability under inflation targeting. It also examines the evolving impact on trade, inflation, on currency and financial markets, country risk premium and the cost of borrowing. The analysis suggests a flexible exchange rate with intervention to prevent excess volatility as well as misalignment from competitive real exchange rates, while allowing some volatility to aid price discovery in foreign exchange markets, would work best in inflation targeting emerging markets. |
| Keywords: | India, exchange rate regime, capital flows, inflation targeting |
| JEL: | F41 F31 E52 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:ind:igiwpp:2023-015&r=cba |
| By: | Paolo Gelain; Pierlauro Lopez |
| Abstract: | This paper outlines the dynamic stochastic general equilibrium (DSGE) model developed at the Federal Reserve Bank of Cleveland as part of the suite of models used for forecasting and policy analysis by Cleveland Fed researchers, which we have nicknamed CLEMENTINE (CLeveland Equilibrium ModEl iNcluding Trend INformation and the Effective lower bound). This document adopts a practitioner's guide approach, detailing the construction of the model and offering practical guidance on its use as a policy tool designed to support decision-making through forecasting exercises and policy counterfactuals. |
| Keywords: | DSGE model; labor market frictions; zero lower bound; trends; expectations |
| JEL: | E32 E23 E31 E52 D58 |
| Date: | 2023–12–27 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwq:97525&r=cba |
| By: | Fumitaka Nakamura |
| Abstract: | We analyze the effects of borrower-based macroprudential tools in Finland. To evaluate the efficiency of the tools, we construct a heterogeneous agent model in which households endogenously determine their housing size and liquid asset levels under two types of borrowing constraints: (i) a loan-to-value (LTV) limit and (ii) a debt-to-income (DTI) limit. When an unexpected negative income shock hits the economy, we find that a larger and more persistent drop in consumption is observed under the LTV limit compared to the DTI limit. Our results indicate that although DTI caps tend to be unpopular with lower income households because they limit the amount they can borrow, DTI caps are beneficial even on distributional grounds in stabilizing consumption. Specifically, DTI caps mitigate the consumption decline in recessions by restricting high leverage, and thus, they can usefully complement LTV caps. |
| Keywords: | Household indebtedness; loan-to-value ratio; debt-to-income ratio; macroprudential policy. |
| Date: | 2023–12–15 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/262&r=cba |