nep-cba New Economics Papers
on Central Banking
Issue of 2024‒01‒29
thirteen papers chosen by
Sergey E. Pekarski, Higher School of Economics

  1. How Optimal Was U.S. Monetary Policy at the Zero Lower Bound? By Brent Bundick; Logan Hotz; Andrew Lee Smith
  2. Technological innovation and the bank lending channel of monetary policy transmission By Hasan, Iftekhar; Li, Xiang; Takalo, Tuomas
  3. Monetary tightening, inflation drivers and financial stress By Frederic Boissay; Fabrice Collard; Cristina Manea; Adam Shapiro
  4. Effects of Emerging Markets’ Asset Purchase Programs on Financial Markets By Irfan Cercil; Cem Ali Gökcen
  5. Understanding and Predicting Monetary Policy Framework Choice By Sullivan, Megan
  6. Monetary Policy and Climate Change: Challenges and the Role of Major Central Banks By Tobias Kranz; Hamza Bennani; Matthias Neuenkirch
  7. Foreign institutional investors, monetary policy, and reaching for yield By Ahmed Ahmed; Boris Hofmann; Martin Schmitz
  8. Fintech vs bank credit: How do they react to monetary policy? By Giulio Cornelli; Fiorella De Fiore; Leonardo Gambacorta; Cristina Manea
  9. Market power in banking By Carletti, Elena; Leonello, Agnese; Marquez, Robert
  10. Financial development and the effectiveness of macroprudential and capital flow management measures By Yusuf Soner Baskaya; Ilhyock Shim; Philip Turner
  11. Modelling Canadian mortgage debt and payments in a semi-structural model By Fares Bounajm; Austin McWhirter
  12. Green Macro-Financial Governance in the European Monetary Architecture: Assessing the Capacity to Finance the Net-Zero Transition By Guter-Sandu, Andrei; Haas, Armin; Murau, Steffen
  13. Monetary tightening in the Euro Area: Implications for residential investment By Egan, Paul; McQuinn, Kieran

  1. By: Brent Bundick; Logan Hotz; Andrew Lee Smith
    Abstract: The zero lower bound on nominal interest rates can generate substantial downward pressure on longer-term inflation expectations. We use data on interest rate options and inflation compensation to estimate how the probability that the zero lower bound will bind in the future has weighed on inflation expectations in the United States. Over the 2008–19 period, we estimate that the zero lower bound imparted only a small drag on longer-term inflation expectations of around 10 basis points. We argue that the Federal Reserve's forward guidance and large-scale asset purchases largely offset the potential disinflationary effects of the zero lower bound, even prior to the formal adoption of an average inflation-targeting framework.
    Keywords: monetary policy; inflation expectations; zero lower bound; forward guidance; asset purchases
    JEL: E32 E52
    Date: 2023–12–01
  2. By: Hasan, Iftekhar; Li, Xiang; Takalo, Tuomas
    Abstract: This paper studies whether and how banks' technological innovations affect the bank lending channel of monetary policy transmission. We first provide a theoretical model in which banks' technological innovation relaxes firms' earning-based borrowing constraints and thereby enlarges the response of banks' lending to monetary policy changes. To test the empirical implications, we construct a patent-based measurement of bank-level technological innovation, which can specify the nature of technology and tell whether it is related to the bank's lending business. We find that lending-related innovations significantly strengthen the transmission of the bank lending channel.
    Keywords: Innovation, FinTech, Monetary Policy Transmission, Bank Lending Channel
    JEL: E52 G21 G23
    Date: 2023
  3. By: Frederic Boissay; Fabrice Collard; Cristina Manea; Adam Shapiro
    Abstract: The paper explores the state–dependent effects of a monetary tightening on financial stress, focusing on a novel dimension: the nature of supply versus demand inflation at the time of policy rate hikes. We use local projections to estimate the effect of high frequency identified monetary policy surprises on a variety of financial stress measures, differentiating the effects based on whether inflation is supply–driven (e.g. due to adverse supply or cost–push shocks) or demand–driven (e.g. due to positive demand factors). We find that financial stress flares up after a policy rate hike when inflation is supply–driven, but it remains roughly unchanged, or even declines when inflation is demand–driven. Our findings point to a particular tension between price stability and financial stability when inflation is high and largely supply–driven.
    Keywords: supply– versus demand–driven inflation, monetary tightening, financial stress
    JEL: E1 E3 E6 G01
    Date: 2023–12
  4. By: Irfan Cercil; Cem Ali Gökcen
    Abstract: Most advanced economy central banks cut their policy rates and introduced asset purchase programs (APPs) to weather the impacts of the Covid-19 pandemic on their economies and financial systems. Similar to their advanced economy counterparts, a number of emerging market (EM) central banks also initiated APPs during the Covid-19 pandemic. In this paper, we analyze the effects of these EM APPs on financial market variables such as sovereign bond yields, nominal exchange rates vis-à-vis US dollar, and stock market indices by using a novel causal inference approach. We utilize the local projections (LP) methodology of Jordà (2005) and estimate the average treatment effect (ATE) of EM APPs by applying the augmented inverse probability weighting (AIPW) estimator that addresses the selection bias and endogeneity problems inherent in the statistical analysis of quantitative easing (QE) policies. Our empirical findings suggest that QE policies adopted by EM central banks played an instrumental role in lowering sovereign bond yields and supporting exchange rates and equity markets during Covid-19 pandemic. This suggests that QE policies may complement traditional monetary policies in EM countries especially during periods of elevated market stress and uncertainty.
    Keywords: Covid-19, Quantitative easing, Asset purchase program, Central banks, Emerging markets, Local projections, Augmented inverse probability weighting estimation.
    JEL: E5 F3 G1
    Date: 2023
  5. By: Sullivan, Megan
    Abstract: This paper investigates the determinants of countries' choice of monetary policy frameworks (MPF) for emerging and developing countries. Countries make different MPF choices and we think it is because they have different country-level characteristics (e.g. democratic strength and trade networks). By covering 87 countries from 1985-2017, we investigate the role these characteristics play in predicting MPF choice. A highlight of this paper is that it uses a tailored variable to measure the volume of trade with a network that pegs to an anchor currency. We find that a country is significantly more likely to choose an exchange rate MPF when the volume increases. The model used in this paper correctly predicts 74% of MPF choice when done via a cross-validation method. This paper enables policymakers to see which MPF countries similar to their own have chosen, and they can decide if it is suitable for them, too.
    Keywords: Inflation targeting, central bank independence, trade networks, cross-validation
    JEL: E42 E52 E58 F40
    Date: 2024
  6. By: Tobias Kranz; Hamza Bennani; Matthias Neuenkirch
    Abstract: Climate change poses significant challenges through rising temperatures, extreme weather events, and the exposure of economic (and societal) systems to these dangers. The irreversible and potentially non-linear nature of climate change, together with evolving technological and policy landscapes, complicates matters and predictions. We review the theoretical and empirical literature on climate change's effects on prices, output, and monetary policy transmission. In addition, we describe central banks' responses, including a timeline of efforts, potential actions, data sources, and a comparison of the five largest central banks.
    Keywords: Central Banks, Climate Change, Financial Stability, Macroprudential Regulation, Monetary Policy
    Date: 2024
  7. By: Ahmed Ahmed; Boris Hofmann; Martin Schmitz
    Abstract: This paper uses security-level data of euro area investment funds' bond holdings to analyze their reaching for yield in the US dollar bond market. We find that they rebalance their US dollar bond portfolios toward higher yielding, riskier bonds when US monetary policy tightens, reflecting the effects of foreign exchange hedging. The effect is driven by the practice of hedging currency risk through rolling short-term hedging contracts. This gives rise to an erosion of the hedged yield earned on US dollar bonds when US monetary policy tightens and hedging costs increase, inducing reaching for yield in order to bolster portfolio returns. The hedging channel of monetary transmission is diametrically opposed to the classical risk-taking channel operating through US dollar-based investors, where a monetary tightening is associated with less reaching for yield. We further find that the US dollar bond purchases by euro area investment funds induced by their reaching for yield have meaningful effects on bond prices, implying that they affect conditions in the US dollar bond market.
    Keywords: monetary policy, foreign institutional investors, FX hedging, US dollar bond market
    JEL: E43 E52 G11 G12 G15 G23
    Date: 2023–12
  8. By: Giulio Cornelli; Fiorella De Fiore; Leonardo Gambacorta; Cristina Manea
    Abstract: Fintech credit, which includes peer-to-peer and marketplace lending as well as lending facilitated by major technology firms, is witnessing rapid growth worldwide. However, its responsiveness to monetary policy shifts remains largely unexplored. This study employs a novel credit dataset spanning 19 countries from 2005 to 2020 and conducts a PVAR analysis to shed some light on the different reaction of fintech and bank credit to changes in policy rates. The main result is that fintech credit shows a lower (even non-significant) sensitivity to monetary policy shocks in comparison to traditional bank credit. Given the still marginal – although fast growing – macroeconomic significance of fintech credit, its contribution in explaining the variability of real GDP is less than 2%, against around one quarter for bank credit.
    Keywords: fintech credit, monetary policy, PVAR, collateral channel
    JEL: D22 G31 R30
    Date: 2023–12
  9. By: Carletti, Elena; Leonello, Agnese; Marquez, Robert
    Abstract: Bank market power, both in the loan and deposit market, has important implications for credit provision and for financial stability. This article discusses these issues through the lens of a simple theoretical framework. On the asset side, banks choose the quality and quantity of loans. On the liability side, they may be subject to depositor runs whenever they offer demandable contracts. This structure allows us to review the literature on the role of market power for credit provision and stability and also highlight the interactions between the two sides of banks’ balance sheets. Our approach identifies relevant channels that deserve further analysis, especially given the rising importance of bank market power for monetay policy transmission and the the rise of the digital economy. JEL Classification: G01, G21, G28
    Keywords: balance sheet interactions, bank runs, credit provision, digital economy, monetary policy transmission
    Date: 2024–01
  10. By: Yusuf Soner Baskaya; Ilhyock Shim; Philip Turner
    Abstract: Using quarterly data on macroprudential policy (MaPP) measures and capital flow management measures (CFMs) taken by 39 economies in 2000–2013, we analyse how domestic credit and cross-border capital flows respond to such measures. In doing so, we take a granular approach by considering price-based and quantity-based MaPP measures and CFMs, and also examine if the level of financial development matters in explaining policy effectiveness. We find that quantity-based MaPP measures significantly affect total credit and its components such as domestic bank credit, corporate credit and housing credit, but that the effects fade away beyond a certain level of financial development, suggesting that highly developed financial markets provide opportunities to circumvent MaPP measures imposed on banks. We also find that both price- and quantity-based CFMs are effective in slowing down bank inflows with the former effective at all levels of financial development and the latter effective at relatively high levels. Finally, we find some evidence on the existence of leakage effects. For example, tighter overall MaPP measures are associated with larger bond inflows, and tighter quantity-based MaPP measures with larger bank inflows.
    Keywords: bank lending, capital flow management measures, cross-border capital flows, financial development, macroprudential policy
    JEL: F34 G15 G28
    Date: 2024–01
  11. By: Fares Bounajm; Austin McWhirter
    Abstract: We show how Canadian mortgage debt dynamics can be modelled in a semi-structural macroeconomic model, such as the Bank of Canada’s LENS. The model we propose accounts for Canada’s unique mortgage debt structure.
    Keywords: Economic models; Monetary policy transmission
    JEL: E27 E43 E47 G51
    Date: 2024–01
  12. By: Guter-Sandu, Andrei; Haas, Armin; Murau, Steffen
    Abstract: The Green Transition to net-zero carbon emissions in Europe requires massive financing efforts, with estimates of 620 billion EUR annually, but the headwinds are substantive. Central banks seem overstretched and busy tightening to combat inflation; treasuries are subject to austerity-inducing fiscal rules; and banking systems are afflicted by non-performing loans, fragmentation, and risk aversion. We employ the framework of ‘monetary architecture’ to analyse the EU’s monetary and financial system as a constantly evolving hierarchical web of interlocking balance sheets and study its capacity to find ‘elasticity space’ to meet the financing challenge. To this end, we draw on a four-step scheme for green macro-financial governance along the financial cycle of balance sheet expansion, funding, and final contraction. We find that, first, Europe’s monetary architecture still has ample elasticity space to provide a green initial expansion due to its developed ecosystem of national, subnational, and supranational off-balance-sheet fiscal agencies. Second, as mechanisms lack to consciously organise the distribution of long-term debt instruments across different segments, its capacity to provide long-term funding is limited. Third, institutional transformation in the last two decades have greatly improved the capacity of the European monetary architecture to counteract financial instability by providing emergency elasticity. Fourth, the capacity of the European monetary architecture to manage a final contraction of balance sheets is limited, which is a general quandary in modern credit money systems. Our analysis points to the need for further investigations into techniques for monetary architectures to manage long-term funding and balance sheet contractions.
    Date: 2023–12–23
  13. By: Egan, Paul; McQuinn, Kieran
    Date: 2023

This nep-cba issue is ©2024 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.