nep-cba New Economics Papers
on Central Banking
Issue of 2024‒03‒04
twenty papers chosen by
Sergey E. Pekarski, Higher School of Economics

  1. Safe Asset Scarcity and Monetary Policy Transmission By Benoit Nguyen; Davide Tomio; Miklos Vari
  2. What can keep euro area inflation high? By Reis, Ricardo
  3. Macroprudential Policies and Dollarisation: Implications for the Financial System and a Cross-Exchange Rate Regime Analysis By Fisnik Bajrami
  4. Welfare implications of nomimal GDP targeting in a small open economy By Ortiz, Marco; Inca, Arthur; Solf, Fabrizio
  5. Bank Market Power and Monetary Policy Transmission: Evidence from Loan-Level Data By Nadezhda Ivanova; Svetlana Popova; Konstantin Styrin
  6. Anchoring Boundedly Rational Expectations By Stephane Dupraz; Magali Marx
  7. Monetary Policy Wedges and the Long-term Liabilities of Households and Firms By Jules H. van Binsbergen; Marco Grotteria
  8. Asymmetric expectations of monetary policy By Busetto, Filippo
  9. Monetary policy in Sweden after the end of Bretton Woods By Bylund, Emma; Iversen, Jens; Vredin, Anders
  10. The anatomy of a peg: lessons from China’s parallel currencies By Saleem Bahaj; Ricardo Reis
  11. Do Monetary Policy and Economic Conditions Impact Innovation? Evidence from Australian Administrative Data By Omer Majeed; Jonathan Hambur; Robert Breunig
  12. Trust and monetary policy By De Grauwe, Paul; Ji, Yuemei
  13. Monetary Policy Transmission with Adjustable and Fixed Rate Mortgages: The Role of Credit Supply By Fatih Altunok; Yavuz Arslan; Steven Ongena
  14. Deposit market concentration and monetary transmission: evidence from the euro area By Kho, Stephen
  15. How changes in the share of constrained households affect the effectiveness of monetary policy By Felipe Alves; Sushant Acharya
  16. On the Effects of Monetary Policy Shocks on Income and Consumption Heterogeneity By Minsu Chang; Frank Schorfheide
  17. The ECB Press Conference Statement Deriving a New Sentiment Indicator for the Euro Area By Dimitrios Kanelis; Pierre L. Siklos
  18. Rational inattention to inflation among New Zealand households By Gerelmaa Bayarmagnai
  19. Whatever-It-Takes Policymaking during the Pandemic By Kathryn M.E. Dominguez; Andrea Foschi
  20. The "real" exchange rate regime in China since 2015's exchange rate reform By Jinzhao Chen

  1. By: Benoit Nguyen; Davide Tomio; Miklos Vari
    Abstract: Most central banks exited their decade-long accommodative monetary policy cycle by first raising rates, rather than starting by reducing their balance sheet. We show that the scarcity of government bonds---which were purchased under QE and held by the Eurosystem---reduces the transmission of rate hikes to money market rates. In July 2022, when the ECB increased its policy rates by 50bp for the first time in a decade, rates of repo transactions collateralized by the scarcest bonds increased by only 35bp. We show that this imperfect pass-through to repo rates is priced in treasury yields. Heterogeneous bond holdings across institutions imply that collateralized funding costs vary significantly across European institutions.
    Keywords: Natural Disasters; Extreme Weather; Inflation; Disaggregate Inflation; Inequality; Price Gouging
    JEL: E51 E52 E58 G21
    Date: 2023
  2. By: Reis, Ricardo
    Abstract: A central bank that faces inflation above target may fail to bring it down. This article discusses six ways in which this happens because the central bank is dominated by: misjudgment, expectations, fiscal policy, financial markets, recession fears, or external forces. It applies this approach to the challenge facing the ECB in 2023-24. The hope is that the factors identified can serve as warning signs for what to avoid.
    Keywords: monetary policy; interest rates; central bank independence; OUP deal
    JEL: E58 E50 E31
    Date: 2023–11–14
  3. By: Fisnik Bajrami (Charles University, Institute of Economic Studies, Faculty of Social Sciences, Prague, Czech Republic.)
    Abstract: Macroprudential policy has gained prominence for promoting financial stability. In this paper, we assess the effectiveness of macroprudential policy in reducing credit growth over a 22-year period across 129 countries. Additionally, we investigate the interaction between macroprudential policy, dollarisation, and various exchange rate regimes, examining their impact on different financial stability indicators. Our findings indicate that macroprudential policy significantly reduces credit growth within a quarter of implementation, though this is not evident in the case of soft peg exchange rate regimes. Furthermore, our analysis reveals that dollarised countries exhibit superior outcomes in financial stability when compared to alternative exchange rate regimes.
    Keywords: macroprudential policy, dollarisation, exchange rate, credit growth, non-performing loans, inflation, interest rates, empirical evaluation
    JEL: E42 E52 E58
    Date: 2024–02
  4. By: Ortiz, Marco; Inca, Arthur; Solf, Fabrizio
    Abstract: Nominal GDP targeting (NGDP) rules have gained attention as a potential alternative to traditional models of monetary policy. In this paper, we extend the analysis of the welfare implications of NGDP rules within a New Keynesian model with nominal price and wage rigidities. Using a welfare function derived from the utility of consumers, we compare the NGDP target with a domestic inflation target, a CPI inflation target, and a Taylor rule in a small open economy scenario. Our simulations reveal that NGDP rules confer advantages on a central bank when the economy faces supply shocks, while their performance against demand shocks is comparable to that of a CPI target rule. These findings suggest that NGDP targeting could be a useful policy framework for central banks seeking to enhance their ability to stabilize the economy.
    Keywords: Nominal GDP targeting, optimal monetary policy, General equilibrium, open economy macroeconomics.
    JEL: E31 E32 E52 F41
    Date: 2024–01–28
  5. By: Nadezhda Ivanova (Bank of Russia, Russian Federation); Svetlana Popova (Bank of Russia, Russian Federation); Konstantin Styrin (Bank of Russia, Russian Federation)
    Abstract: This paper asks the following questions. How does market structure reshape the transmission of monetary policy to bank lending? How are loan characteristics such as loan volume, maturity, lending rate, risk, and the extensive margin of lending affected? Is there a trade-off between financial stability and the strength of monetary transmission? We find that, on more concentrated markets, the effect of monetary policy on lending rate and risk taking is amplified whereas the effect on loan volume is muted. Our current findings may imply the existence of a trade-off between the strength of monetary policy transmission and financial stability, but are subject to further investigation.
    Keywords: Monetary policy transmission; Market concentration.
    JEL: E44 E52 G21 C14
    Date: 2024–01
  6. By: Stephane Dupraz; Magali Marx
    Abstract: How can a central bank avoid losing control over inflation expectations in the face of a large supply shock ? Under rational expectations, respecting the Taylor principle - increasing rates more than one for one with inflation - prevents self-fulfilling inflation and defines an active monetary policy. We reconsider the issue away from rational expectations, for a large class of boundedly rational expectations featuring both limited foresight and long-term learning. We show three results. (1) When restricting monetary policy to a Taylor rule, the Taylor principle does not prevent self-fulfilling inflation but hyperinflation spirals, unless for unrealistically high degrees of foresight. (2) Against hyperinflation spirals, active monetary policy can be characterized without restricting policy to a Taylor rule, as a sufficient increase of a weighted average of present and future expected policy rates. (3) The weights on future policy rates first increase but then decrease with the horizon, implying that delaying hikes too much requires larger hikes later, with a larger drop in output. Yet, being slow in hiking rates can be optimal provided a large cost on output stabilization, as it spreads the output cost over time.
    Keywords: De-anchoring, Taylor Principle, Bounded Rationality
    JEL: E52 E31 E43
    Date: 2023
  7. By: Jules H. van Binsbergen; Marco Grotteria
    Abstract: We examine the transmission of monetary policy shocks to the long-duration liabilities of households and firms using high-frequency variation in 10-year swap rates around FOMC announcements. We find that four weeks after the announcement mortgage rates move one-for-one with 10-year swap rates, leaving little explanatory power for mortgage concentration, bank market power, or credit risk. Variation in credit risk does materially affect monetary policy transmission to corporate bonds. Expected future short rates and term premia play a significant role in driving both mortgage rates and corporate bond yields, which explains the Federal Reserve’s increased focus on these quantities.
    JEL: E40 E43 E44 E5 E50 E52 E58 G21 G51
    Date: 2024–02
  8. By: Busetto, Filippo (Bank of England)
    Abstract: We study the determinants of the asymmetric behaviour of monetary policy expectations in the United States, Germany and the United Kingdom. A common factor based on macroeconomic data and survey variables has predictive ability above and beyond yield based factors for negative changes in expected rates during an easing cycle, but not for increases in expected rates during a tightening in monetary policy. At the same time, macroeconomic information does not have any asymmetric effect on the conditional distribution of term premia. We complement previous findings on the asymmetric predictability of expected rates by showing that monetary policy easing during crises is predictable. This is also relevant for policymakers, as the yield curve does not always provide an accurate picture of the expected future stance of monetary policy at turning points.
    Keywords: Interest rates; monetary policy; macro-finance; quantile regressions
    JEL: E43 E44 E52 E58
    Date: 2024–02–08
  9. By: Bylund, Emma (Monetary Policy Department, Central Bank of Sweden); Iversen, Jens (Monetary Policy Department, Central Bank of Sweden); Vredin, Anders (Monetary Policy Department, Central Bank of Sweden)
    Abstract: This paper discusses how monetary policy in Sweden has evolved since 1973. We provide a chronology of the different monetary policy regimes in place during the past fifty years and identify two main regimes, the pegged-but-adjustable exchange rate regime (1973 – 1992) and the inflation targeting regime (1993 – 2022). Inflation in Sweden has been more stable under the inflation targeting regime than under both the Bretton Woods system, and the pegged-but-adjustable exchange rate regime. GDP growth was higher and more stable during the Bretton Woods System. We argue that inflation targeting was implemented according to the simple text book version only during a short period, 1999-2007. We illustrate that economic developments in Sweden have in many respects been similar to that of Denmark. Lastly, we identify and discuss recurrent themes in the discussions of monetary policy under inflation targeting.
    Keywords: monetary policy; inflation targeting; exchange rate regimes
    JEL: E42 E52 E58 E65
    Date: 2023–11–01
  10. By: Saleem Bahaj (UCL); Ricardo Reis (London School of Economics (LSE); Centre for Macroeconomics (CFM))
    Abstract: China’s current account transactions use an offshore international currency, the CNH, that co-exists as a parallel currency with the mainland domestic currency, the CNY. The CNH is freely used, but by restricting its exchange for CNY, the authorities can enforce capital controls. Sustaining these controls requires tight management of the money supply and liquidity to keep the exchange rate between the dual currencies pegged. After describing how the central bank implements this system, we find a rare instance of identified, exogenous, transitory increases in the supply of money and estimate by how much they depreciate the exchange rate. Theory and evidence show that elastically supplying money in response to demand shocks can maintain a currency peg. Liquidity policies complement these monetary interventions to deal with the pressure on the peg from financial innovation. Finally, deviations from the CNH/CNY peg act as a pressure valve to manage the exchange rate between the yuan and the US dollar.
    Keywords: Chinese monetary policy, Gresham’s law, Goodhart’s law, Money markets, RMB
    JEL: F31 F33 E51 G15
    Date: 2024–01
  11. By: Omer Majeed (Reserve Bank of Australia); Jonathan Hambur (Reserve Bank of Australia); Robert Breunig (Crawford School of Public Policy, Australian National University)
    Abstract: Recent papers have argued that monetary policy and economic conditions can influence the amount of innovative activity in the economy, and therefore productivity and living standards in the future. This paper examines whether this is the case for Australia, a small open economy that tends to import innovation from overseas. We find that contractionary (expansionary) monetary policy reduces (increases) aggregate research and development (R&D) spending, and that lower (higher) R&D spending reduces (increases) future productivity. However, using firm-level data and a broader survey measure of innovation that also captures adoption, we find heterogeneous responses across different firm types. Small firms decrease innovation in response to contractionary monetary policy shocks whereas large firms increase innovation. This heterogeneity appears to reflect differing exposure to the channels through which monetary policy affects innovation. These channels include affecting demand or affecting financial conditions and constraints. We also find that US monetary policy spills over and affects Australian firms' innovation. Overall, our results suggest that monetary policy and economic conditions have medium-run effects on productivity, though the effects are more heterogeneous than previously documented. While the effects may cancel out over a cycle, this finding highlights the importance of stabilisation policy in preventing medium-run economic scarring.
    Keywords: innovation; monetary policy; firm-level data
    JEL: E52 O30
    Date: 2024–02
  12. By: De Grauwe, Paul; Ji, Yuemei
    Abstract: We analyze how trust affects the transmission of negative demand and supply shocks using a behavioural macroeconomic model. We define trust to have two dimensions: trust in the central bank’s inflation target and trust in the central bank’s capacity to stabilize the business cycle. We find, first, that when large negative shocks occur the subsequent trajectories taken by output gap and inflation typically coalesce around a good and a bad trajectory. Second, these good and bad trajectories are correlated with movements in trust. In the bad trajectories trust collapses, in the good trajectories it is not affected. This feature is stronger when a negative supply shock occurs than in the case of a negative demand shock. Third, initial conditions, in particular the initial state of inflation and output expectations matters. Unfavorable initial expectations drive the economy into a bad trajectory, favorable initial expectations produce good trajectories. Fourth, we analyze the sensitivity of our results with respect to the size of the shocks. Fifth, we derive implications of our results for our capacity of making forecasts about the effects of large demand and supply shocks.
    Keywords: behavioral macroeconomics; monetary policy; trust; Wiley deal
    JEL: E32 E52
    Date: 2024–01–26
  13. By: Fatih Altunok; Yavuz Arslan; Steven Ongena
    Abstract: While a higher monetary policy rate increases the payments for borrowers with adjustable-rate mortgages (ARMs) and reduces their disposable income, it increases the interest income of lenders, thereby improving lenders’ balance sheets. We find that when monetary policy tightens, banks with a higher share of ARMs experience better stock price performance, exhibit a stronger credit supply, and generate higher interest income compared to banks with a low ARM share. Therefore, our results imply that a higher ARM share might weaken monetary policy transmission through banks. In the event of a banking crisis, for instance, when interest income becomes vital, a decline in policy rates might even prove harmful if the ARM share is high.
    Keywords: Monetary policy, Adjustable rate mortgages, Fixed rate mortgages
    JEL: E50 E52 E58
    Date: 2023–07
  14. By: Kho, Stephen
    Abstract: I study the transmission of monetary policy to deposit rates in the euro area with a focus on asymmetries and the role of banking sector concentration. Using a local projections framework with 2003-2023 country-level and bank-level data for thirteen euro area member states, I find that deposit rates respond symmetrically to an unexpected tightening or easing of monetary policy. However, more concentrated domestic banking sectors do pass-on unexpected monetary tightening (easing) more slowly (quickly) than less concentrated banking sectors, which contributes to a temporary divergence of deposit rates across the euro area. These results suggest that heterogeneity in the degree of banking sector concentration matters for the transmission of monetary policy to deposit rates, which in turn may affect banking sector profitability. JEL Classification: D40, E43, E52, G21
    Keywords: banking sector, deposit rates, market power, monetary policy
    Date: 2024–01
  15. By: Felipe Alves; Sushant Acharya
    Abstract: We measure how the change in the share of constrained households in Canada following the COVID-19 recession has impacted the effectiveness of monetary policy.
    Keywords: Coronavirus disease (COVID-19); Monetary policy transmission
    JEL: E21 E40 E50
    Date: 2024–02
  16. By: Minsu Chang (Georgetown University); Frank Schorfheide (University of Pennsylvania)
    Abstract: In this paper we use the functional vector autoregression (VAR) framework of Chang, Chen, and Schorfheide (2024) to study the eeffects of monetary policy shocks (conventional and informational) on the cross-sectional distribution of U.S. earnings (from the Current Population Survey), consumption, and financial income (both from the Consumer Expenditure Survey). We find that a conventional expansionary monetary policy shock reduces earnings inequality, in large part by lifting individuals out of unemployment. There is a weakly positive effect on consumption inequality and no effect on financial income inequality, but credible bands are wide.
    Keywords: Consumption Distribution, Earnings Distribution, Financial Income Distribution, Functional Vector Autoregressions, Monetary Policy Shocks
    JEL: C11 C32 C52 E32
    Date: 2024–02–14
  17. By: Dimitrios Kanelis; Pierre L. Siklos
    Abstract: We analyze the introductory statements of the ECB president and derive new sentiment indicators for the euro area based on a novel approach. To evaluate sentiment, we utilize a Large Language Model, namely FinBERT, which classifies the verbal sentiment of economics and finance-related textual data. We find that the ECB's conveyed sentiment about monetary policy, which is influenced by the economic outlook and the state of the euro area macroeconomy as expressed in speeches, plays a significant role in shaping the content of press conferences following a Governing Council decision. In contrast, speech sentiment regarding financial stability does not significantly influence introductory statements.
    Keywords: ECB, communication, financial stability, FinBERT, monetary policy, sentiment analysis
    JEL: E50 E58
    Date: 2024–01
  18. By: Gerelmaa Bayarmagnai (Reserve Bank of New Zealand)
    Abstract: This analytical note looks at how New Zealand households’ inflation expectations respond to changing prices — what inflation is now and how that shapes what people think it will be in future. Key findings - This Note presents empirical evidence suggesting that New Zealand households tend to pay more attention to inflation when it is high than when it is low. In the academic literature, this is known as rational inattention. - Rational inattention can result in a non-linear relationship between actual inflation and households’ inflation expectations. Once inflation rate rises above a certain threshold, for example, 2%, household inflation expectations line up closely with actual inflation. Thus, inflation expectations may be slow to respond to monetary policy announcements, and this may make it more difficult for the central bank to rein in high inflation by raising interest rates. - It is important for monetary policymakers to monitor this potential non-linearity in how households perceive and internalise inflation data. The Analytical Notes series encompasses a range of background papers prepared by Reserve Bank staff. Unless otherwise stated, views expressed are those of the authors, and do not necessarily represent the views of the Reserve Bank.
    Date: 2023–12
  19. By: Kathryn M.E. Dominguez; Andrea Foschi
    Abstract: Central banks across the globe introduced large-scale asset purchase programs to address the unprecedented circumstances experienced during the pandemic. Many of these programs were announced as open-ended to shock-and-awe market participants and restore confidence in financial markets. This paper examines whether these whatever-it-takes announcements had larger effects than announcements with explicit limits on scale. We use a narrative approach to categorize announcements made by twenty-two central banks, and event study, propensity-score-matching, and local projection methods to measure the short-term effects of policy announcements on exchange rates and sovereign bond yields. We find that on average a central bank's first whatever-it-takes announcement lowers 10-year bond yields by an additional 25 basis points relative to size-limited announcements, suggesting that communication of potential policy scale matters. Our results for yields hold for both advanced and emerging economies, while exchange rates go in opposing directions, muting their response when we group all countries together.
    JEL: E44 E58 F42 G14
    Date: 2024–02
  20. By: Jinzhao Chen (CleRMa - Clermont Recherche Management - ESC Clermont-Ferrand - École Supérieure de Commerce (ESC) - Clermont-Ferrand - UCA - Université Clermont Auvergne, ESC Clermont-Ferrand - École Supérieure de Commerce (ESC) - Clermont-Ferrand)
    Abstract: Moving away from a fixed exchange rate in 2005, China has gradually enlarged the band of fluctuations of Renminbi (RMB) and implemented various reforms on its central parity to have a more flexible exchange rate regime. This paper studies the nature of the exchange rate regime in China since the exchange regime reform of August 2015. Relying on the selfexciting threshold autoregressive (SETAR) model, it identifies endogenously the band of inaction beyond which the People's bank of China (China's central bank) starts to intervene in the foreign exchange market to restrict further fluctuations. Based on the comparison of the estimated threshold with the official band, this paper shows that the RMB/USD exchange rate followed an intermediate regime similar to the crawling band but with only one single threshold of intervention which is much lower than the upper boundary of the announced band.
    Keywords: Exchange rate regime, self-exciting threshold autoregressive model (SETAR), Renminbi (RMB), Central bank intervention
    Date: 2023

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