nep-cba New Economics Papers
on Central Banking
Issue of 2024‒02‒12
sixteen papers chosen by
Sergey E. Pekarski, Higher School of Economics

  1. Central bank digital currency: when price and bank stability collide By Fernández-Villaverde, Jesús; Schilling, Linda; Uhlig, Harald
  2. The Interaction between Macroprudential and Monetary Policies and the Housing Market – A VAR Examination for Israel By Sigal Ribon
  3. Central Bank Independence at Low Interest Rates By Benjamín García; Arsenios Skaperdas
  4. Analysis of the Impact of Central bank Digital Currency on the Demand for Transactional Currency By Ruimin Song; Tiantian Zhao; Chunhui Zhou
  5. Monetary Policy across Inflation Regimes By Valeria Gargiulo; Christian Matthes; Katerina Petrova
  6. Granular shocks to corporate leverage and the macroeconomic transmission of monetary policy By Holm-Hadulla, Fédéric; Thürwächter, Claire
  7. Economics of Fiscal Dominance and Ramifications for the Discharge of Effective Monetary Policy Transmission By Jackson, Emerson Abraham
  8. Easing of Borrower-Based Measures: Evidence from Czech Loan-Level Data By Martin Hodula; Lukas Pfeifer; Ngoc Anh Ngo
  9. Money is the roof of asset bubbles By Makoto WATANABE; Yu Awaya; kohei Iwasaki
  10. Transmission of monetary policy: Bank interest rate pass-through in Ireland and the euro area By Byrne, David; Foster, Sorcha
  11. Speeches in the Green: The Political Discourse of Green Central Banking By Martin Feldkircher; Viktoriya Teliha
  12. The impact of Basel III implementation on bank lending in South Africa By Xolani Sibande; Alistair Milne
  13. Bank Capital Regulation in a Zero Interest Environment By Döttling, Robin
  14. Money Market Fund Repo and the ON RRP Facility By Samuel J. Hempel; Calvin Isley; R. Jay Kahn; Patrick E. McCabe
  15. The Fiscal Dimension of the Economic Integration By Andrei, Liviu.C.; Andrei, Dalina
  16. Shocks, Frictions, and Policy Regimes: Understanding Inflation after the COVID-19 Pandemic By Taeyoung Doh; Choongryul Yang

  1. By: Fernández-Villaverde, Jesús; Schilling, Linda; Uhlig, Harald
    Abstract: This paper shows the existence of a central bank trilemma. When a central bank is involved in financial intermediation, either directly through a central bank digital currency (CBDC) or indirectly through other policy instruments, it can only achieve at most two of three objectives: a socially eÿcient allocation, financial stability (i.e., absence of runs), and price stability. In particular, a commitment to price stability can cause a run on the central bank. Implementation of the socially optimal allocation requires a commitment to inflation. We illustrate this idea through a nominal version of the Diamond and Dybvig (1983) model. Our perspective may be particularly appropriate when CBDCs are introduced on a wide scale. JEL Classification: E58, G21
    Keywords: bank runs, CBDC, central bank digital currency, currency crises, financial intermediation, inflation targeting, monetary policy, spending runs
    Date: 2024–01
  2. By: Sigal Ribon (Bank of Israel)
    Abstract: We examine the interaction between housing-market macroprudential (MaP) measures, monetary policy, and housing market dynamics in Israel. Using a structural VAR, we show that monetary policy and MaP policy react to positive shocks to house prices and to the volume of transactions in the housing market, acting as complementary policies, but do not react to changes in the levels of mortgage debt. We find that MaP measures are tigghtened in response to negative (accomodative) monetary policy shocks, offsetting their effect, while monetary policy only weakly reacts to shocks to MaP measures. Similar to the findings in previous research, contractionary monetary policy and MaP measures tend to mitigate the increase in house prices. Transaction volume declines in response to monetary tightening, and is also reduced in response to MaP measures, after a temporary increase. While monetary policy does not significantly change housing debt, MaP measures do have a mitigating effect on debt after a few periods. Our results are robust to alternative specifications.
    Date: 2023–07
  3. By: Benjamín García; Arsenios Skaperdas
    Abstract: We create a new measure of the political pressure faced by the Federal Reserve based on the analysis of transcripts of the Chairs’ testimonies to Congress. We find that the use of non-traditional policies at low interest rates led to increased political criticism and that criticism predicts legislative actions that threaten central bank independence. We develop a model where the probability of the monetary authority’s future loss of independence is increasing in the use of non-traditional instruments, leading to attenuated monetary responses and higher inflation volatility. We show that this attenuation can be mitigated under an institutional framework with clearly defined targets where the central bank is evaluated by how efficiently it achieves its goals.
    Date: 2024–01
  4. By: Ruimin Song; Tiantian Zhao; Chunhui Zhou
    Abstract: This paper takes the development of Central bank digital currencies as a perspective, introduces it into the Baumol-Tobin money demand theoretical framework, establishes the transactional money demand model under Central bank Digital Currency, and qualitatively analyzes the influence mechanism of Central bank digital currencies on transactional money demand; meanwhile, quarterly data from 2010-2022 are selected to test the relationship between Central bank digital currencies and transactional money demand through the ARDL model. The long-run equilibrium and short-run dynamics between the demand for Central bank digital currencies and transactional currency are examined by ARDL model. The empirical results show that the issuance and circulation of Central bank digital currencies will reduce the demand for transactional money. Based on the theoretical analysis and empirical test, this paper proposes that China should explore a more effective Currency policy in the context of Central bank digital currencies while promoting the development of Central bank digital currencies in a prudent manner in the future.
    Date: 2024–01
  5. By: Valeria Gargiulo; Christian Matthes; Katerina Petrova
    Abstract: Does the effect of monetary policy depend on the prevailing level of inflation? In order to answer this question, we construct a parsimonious nonlinear time series model that allows for inflation regimes. We find that the effects of monetary policy are markedly different when year-over-year inflation exceeds 5.5 percent. Below this threshold, changes in monetary policy have a short-lived effect on prices, but no effect on the unemployment rate, giving a potential explanation for the recent “soft landing” in the United States. Above this threshold, the effects of monetary policy surprises on both inflation and unemployment can be larger and longer lasting.
    Keywords: monetary policy; shocks; inflation; regime-dependence; outliers; nonlinear time series models
    JEL: C11 C12 C22
    Date: 2024–01–01
  6. By: Holm-Hadulla, Fédéric; Thürwächter, Claire
    Abstract: We study how shocks to corporate leverage alter the macroeconomic transmission of monetary policy. We identify leverage shocks as idiosyncratic firm-level disturbances that are aggregated up to a size-weighted country-level average to generate a Granular Instrumental Variable (Gabaix and Koijen, forthcoming). Interacting this instrumental variable with high-frequency identified monetary policy shocks, we find that transmission to the price level strengthens in the presence of leverage shocks, while the real effects of monetary policy are unaffected. We show that this disconnect can be rationalized with an internal devaluationchannel. Economies experiencing an increase in leverage exhibit a stronger monetary policy-induced contraction in domestic demand. This, however, is counteracted by a weaker contraction in exports, facilitated by their improved price competitiveness. JEL Classification: C36, E22, E52
    Keywords: corporate leverage, granular instrumental variable, micro-to-macro analysis, monetary policy transmission
    Date: 2024–01
  7. By: Jackson, Emerson Abraham
    Abstract: This paper explores the intricate dynamics of fiscal dominance and its profound implications for monetary policy efficacy, contributing to the discourse on the interplay between fiscal and monetary policies. The theoretical foundation critically examines existing literature, integrating empirical evidence to construct a comprehensive understanding. Model blocks strategically elucidate the significance of fiscal variables in shaping monetary transmission mechanisms. The ensuing analysis scrutinises the disruptive potential of fiscal dominance on conventional monetary policy tools. The conclusion navigates policy recommendations, emphasising the necessity of coordinated fiscal-monetary strategies to effectively mitigate inflationary pressures. This research provides a nuanced perspective for policymakers, offering theoretical depth and empirical insights to guide decisions in addressing the complex challenges posed by fiscal dominance in economic governance.
    Keywords: Fiscal Dominance, Monetary policy, Inflationary Pressures, Economic Growth
    JEL: E31 H62
    Date: 2024
  8. By: Martin Hodula; Lukas Pfeifer; Ngoc Anh Ngo
    Abstract: We analyze how a large-scale easing of borrower-based measures affects residential mortgage credit and borrower characteristics. We exploit a case of the easing of the LTV limit and the complete abolition of DTI and DSTI limits in the Czech Republic in the first half of 2020. Our empirical evidence suggests that the households affected increased their borrowing and purchased more expensive houses while being able to decrease the collateral value. We also document a significant increase in borrowers' debt (service) but this was softened by the concurrent growth in borrowers' income. While exploring the heterogeneity in the transmission of the regulatory easing, we find that: (i) LTV-constrained borrowers showed signs of cash-retention behavior while DTI- and DSTI-constrained borrowers acted in line with the financial accelerator mechanism; (ii) relaxing the LTV limit had a larger effect in poorer districts while the abolition of DTI and DSTI limits affected borrowers in richer regions; (iii) younger borrowers were more affected by the easing of LTV and DTI limits, while the easing of the DSTI limit affected older borrowers; (iv) relaxing the LTV limit affected mostly first-time borrowers while abolishing the DTI and DSTI limits affected mostly second-time borrowers who obtained higher mortgages and purchased more expensive property.
    Keywords: Borrower-based measures, household finance, loosening, macroprudential policy
    JEL: E58 G21 G28 G51
    Date: 2023–12
  9. By: Makoto WATANABE; Yu Awaya; kohei Iwasaki
    Abstract: This paper examines how monetary expansion causes asset bubbles. Whenthere is no monetary expansion, a bubbly asset is not created due to a hold-upproblem. Monetary expansion increases buyers money holdings, and then, dealersare willing to buy a worthless asset from sellers, in hopes of selling it to buyers
    Date: 2024–01
  10. By: Byrne, David (Central Bank of Ireland); Foster, Sorcha (Central Bank of Ireland)
    Abstract: The pace of current monetary policy tightening has been unprecedented in the history of the Eurosystem. The key ECB interest rates started to increase in July 2022, the first rate rise in 11 years, and have increased sharply by 425 basis points since then. Monetary policy operates with long and variable lags, meaning these increases will take time to affect inflation. However, the first phase of transmission can already be seen in financial conditions, in particular in loan and deposit pricing by banks. In this Letter, we examine how banks’ interest rates have responded to changes in the ECB’s monetary policy rates. We address two key questions regarding this aspect of monetary policy “pass-through” in the euro area and Ireland. First, is there evidence that pass-through is different in this tightening cycle? Second, does pass-through in Ireland differ from other euro area countries? Based on our historical comparisons, we find that pass-through in the euro area is weaker now relative to previous cycles for some deposit products, stronger for new business lending and business term deposits, and the same for mortgages and outstanding business loans. For Ireland, we find evidence that, in this cycle, pass-through to new mortgage rates and to household overnight deposits, which represent the majority of Irish deposits, has been weaker than in other euro area countries.
    Date: 2023–09
  11. By: Martin Feldkircher; Viktoriya Teliha
    Abstract: In this paper, we employ a keyword-assisted topic model to quantify the extent of climate-related communication of central banks. We find evidence for a significant increase in climate-related speeches by central banks, which address the topic mostly in parallel with topics on financial stability, payment innovations, and the banking sector. Price stability concerns play a minor role. Finally, we examine factors that can explain the extent of green communication by central banks. Controlling for macroeconomic and climate-related variables, we identify two external factors that can prompt central banks to prioritize climate research on their agenda: First, peer pressure, measured by membership of a working group on green financing, increases green communication. Second, a high degree of governmental climate engagement, reflected by the extent of national climate laws, is positively related to green communication by central banks. Whether the central bank has an implicit or explicit sustainability mandate, however, does not explain the extent of green communication.
    Keywords: central banking, climate change, narrative analysis, topic modelling
    JEL: E58 E61
    Date: 2024–01
  12. By: Xolani Sibande; Alistair Milne
    Abstract: This study investigates the impact of the Basel III capital requirement on the supply of bank credit in South Africa. The literature offers greatly varying estimates of the impact of bank capital requirements on loan supply. Using a specification closely modelled on a related study of Peru by Fang et al. (2020), we report panel regressions using monthly balance sheet data for the four biggest banks in South Africa. We distinguish between three different categories of bank lending for household and corporate borrowers and report complementary local projection estimates to capture dynamic impacts. We find little evidence that the introduction of higher capital requirements under Basel III has reduced the supply of bank credit in South Africa. We surmise that this is mainly due to the large banks being well capitalised and operating with capital buffers that are larger than regulatory minimum requirements.
    Date: 2024–01–29
  13. By: Döttling, Robin
    Abstract: How does the zero lower bound on deposit rates (ZLB) affect how banks respond to capital regulation? I study this question in a model in which households value the liquidity services of deposits yet do not accept negative deposit rates. When deposit rates are constrained by the ZLB, tight capital requirements disproportionately hurt franchise values and are therefore less effective in curbing excessive risk taking. The model delivers a novel rationale for "interest-dependent" capital regulation that is optimally laxer when the ZLB binds and tighter when the ZLB is slack but may bind in the future.
    Date: 2023–12–19
  14. By: Samuel J. Hempel; Calvin Isley; R. Jay Kahn; Patrick E. McCabe
    Abstract: Between January 2021 and June 2022, money market funds' (MMFs') investments in the Federal Reserve's Overnight Reverse Repurchase (ON RRP) facility rose by $2 trillion, while their private repo lending fell by almost $500 billion. These sizable shifts give us an opportunity to examine how monetary policy implementation and the ON RRP facility interact with the private repo market.
    Date: 2023–12–15
  15. By: Andrei, Liviu.C.; Andrei, Dalina
    Abstract: Previously to the “Euro currency’s birth” there was even more than a debate about; there was a real fight of ideas between pro- and against the new currency and its “renewed” Union around. Then, there came the moment around the year 2000 (i.e. the Euro currency in 1999, then the effective Euro in 2002) when the pro-Euro and pro-Union won the match – e.g. the “Happy new Euro!” and its fire-works feast – this Programme came to be successful, as previously drawn. The EU was done, as resulted from the Maästricht Treaty (1992); so was the Euro and its Euro-Area/Euro-Zone/Euro-land. This was equally a new step taken into the integration process, as previously indicated by the “old” theory of economic integration. However, on the one hand this was not more than the euphoric end of an old period, on the other just the start of a new one that was going to be quite different and not entirely predictable. So, 2004-2005 was coming to be the moment of the French, Danish and Dutch voters’ rejection of the EU Constitution project on the very ground, 2008-2009 was the one of Lehman Brothers’ economic crisis, as international, and 2020-2021 the one called “Brexit” – the UK leaving the EU. Along this same period (2000-2023) context, first, singular voices came up in the literature for a presumable “fiscal union to accompany the monetary one”, but then such an idea, although not exactly disappeared, stays quite far from the current EU activities and projects. And from the literature, as well.
    Keywords: monetary policy; central banks; fiscal policy; modern monetary theory; economic integration & theory about.
    JEL: E02 E52 E58 E62 F15
    Date: 2023–07–20
  16. By: Taeyoung Doh; Choongryul Yang
    Abstract: We set- up a two-sector New Keynesian model with input-output linkages to study the persistently high inflation during the post-COVID-19 period. We include multiple shocks as well as several amplification channels of these shocks in a parsimonious model to quantify the relative importance of each factor. We calibrate the model to match the pre-COVID-19 data and alter parameters governing 1) the fiscal rule, 2) inflation feedback in the monetary policy rule, 3) elasticity of substitution among intermediary inputs in production, and 4) the size of a sectoral demand shift shock to explain the post-COVID-19 data. We obtain estimates of shocks in the model to fit goods inflation data during the post-COVID-19 period and use aggregate inflation to test the model’s ability to explain the recent inflationary episode. Although aggregate demand shocks and a sectoral demand shift shock have played a significant role in the initial inflation surge during 2021, the propagation of these shocks into the persistently high aggregate inflation was also helped by lower inflation feedback in the monetary policy response relative to the pre-COVID-19 period. Compared with other changes in parameters, this alteration of the monetary policy rule best fits the level and persistence of the post-COVID-19 aggregate inflation. While lowering the elasticity of substitution among intermediary inputs can match the level of inflation, it does a poorer job of explaining the persistence of inflation compared with allowing changes in the monetary policy rule.
    Keywords: inflation persistence; COVID-19; sectoral reallocation; inflation feedback; production friction
    JEL: E62 E63
    Date: 2023–12–22

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