nep-cba New Economics Papers
on Central Banking
Issue of 2024‒03‒18
twenty-one papers chosen by
Sergey E. Pekarski, Higher School of Economics

  1. The external financial spillovers of CBDCs By Alessandro Moro; Valerio Nispi Landi
  2. Regulatory capital requirements, inflation targeting, and equilibrium determinacy. By Chrysanthopoulou Xakousti; Mylonidis Nikolaos; Sidiropoulos Moise
  3. Taylor Rule and Shadow Rates: theory and empirical analysis By Camilla Lupiani
  4. Impact of Excess Reserves on Monetary Policy Transmission in Papua New Guinea By Thomas Wangi
  5. National central banks and the governance of the European system of central banks By Martin F. Hellwig
  6. "Monetary policy tightening in response to uncertain stagflationary shocks: a model-based analysis" By Anna Bartocci; Alessandro Cantelmo; Alessandro Notarpietro; Massimiliano Pisani
  7. On Digital Currencies By Harald Uhlig
  8. Announcement and implementation effects of central bank asset purchases By Marco Bernardini; Antonio M. Conti
  9. Decoding Bank of Sierra Leone's Monetary Policy Communications: A Text Mining Analysis. By Barrie, Mohamed Samba
  10. Monetary and fiscal policy responses to fossil fuel price shocks By Anna Bartocci; Alessandro Cantelmo; Pietro Cova; Alessandro Notarpietro; Massimiliano Pisani
  11. Implications of a U.S. CBDC for International Payments and the Role of the Dollar By Jean Flemming; Ruth A. Judson
  12. Monetary policy and the resilience of the German banking system: From Deutsche Bundesbank to ECB By Sepp, Tim Florian; Israel, Karl-Friedrich; Treitz, Benjamin; Hartl, Tom
  13. Monetary-Fiscal Policy Interactions in Africa: Fiscal Dominance or Monetary Dominance? By Mogaji, Peter Kehinde
  14. The interplay between large banks' prudential and resolution frameworks: do we need further improvements? By Maurizio Trapanese; Sabrina Bellacci; Marcello Bofondi; Giuseppe DE Martino; Sebastiano Laviola; Valerio Vacca
  15. Central bank losses and commercial bank profits: Unexpected and unfair? By Jost, Thomas; Mink, Reimund
  16. What Does the Yield Curve Control Policy Do?* By Shigenori SHIRATSUKA
  17. Borrower based measures analysis via a new agent based model of the Italian real estate sector By Gennaro Catapano
  18. Inflation is not equal for all: the heterogenous effects of energy shocks By Francesco Corsello; Marianna Riggi
  19. Measuring market-based core inflation expectations By Munch Grønlund, Asger; Jørgensen, Kasper; Schupp, Fabian
  20. Mortgage borrowing limits and house prices: evidence from a policy change in Ireland By Higgins, Brian E.
  21. Aggregate uncertainty, HANK, and the ZLB By Lin, Alessandro; Peruffo, Marcel

  1. By: Alessandro Moro (Bank of Italy); Valerio Nispi Landi (Bank of Italy)
    Abstract: Using a DSGE model, we study the macroeconomic consequences of a foreign central bank digital currency (CBDC) being available to residents in a small open economy. We find that a gradual and permanent increase in domestic households' preference for a foreign CBDC leads to a structural reduction in economic activity, especially when the CBDC is designed to be similar to domestic deposits. Imposing capital flow management measures on outflows, relaxing macroprudential policy, or selling foreign reserves can help smooth the transition. A Taylor rule that targets PPI inflation is more effective in limiting the disruptive effects than CPI targeting or an exchange-rate peg. We also show that an economy with a large stock of foreign CBDC is better shielded from exogenous increases in the interest rate on foreign debt if the CBDC remuneration remains constant.
    Keywords: central bank digital currency, DSGE model, open economy macroeconomics, financial globalization
    JEL: E44 E58 F38 F41
    Date: 2023–07
  2. By: Chrysanthopoulou Xakousti; Mylonidis Nikolaos; Sidiropoulos Moise
    Abstract: This paper studies the stability properties of inflation-targeting interest rate rules in an economy with regulatory capital requirements. We derive the conditions for rational expectations equilibrium determinacy in a sticky-price model augmented with the cost channel of monetary policy transmission. We find that when tightening Basel II-type capital regulations, strict inflation targeting leads to significant expansions in regions of determinacy. This result is attributed to the supply side of credit markets, and especially to the procyclical nature of bank leverage and the restricted interest rate pass-through. However, when banks maintain capital ratios beyond the required thresholds, strict inflation targeting suffers from considerable shrinking regions of determinacy. Moreover, excessive bank capital holdings may give rise to self-fulfilling business cycles. The availability of countercyclical capital buffers, as proposed by Basel III, and/or a flexible inflation targeting regime offer an antidote to these problems.
    Keywords: Equilibrium determinacy; Inflation targeting; Monetary policy; Regulatory capital requirements.
    JEL: E44 E52 E58 G28
    Date: 2024
  3. By: Camilla Lupiani
    Abstract: In view of the persistent zero lower bound, which has dominated the European financial landscape since December 2012, the European Central Bank (ECB) has implemented unconventional monetary policies. However, the effects of these unconventional policies have not been fully captured by the traditional reference rates, which have remained anchored at values close to or below the zero lower bound. In order to assess the impact of these measures in more detail, the concept of "shadow rates" was introduced. These shadow rates, often based on financial indicators, provide a more comprehensive view of the overall macroeconomic situation. The present study aims to compare the predictive accuracy of a Taylor rule based on shadow rates with that based on the reference rate, the €str, in an out-of-sample period. The results of this analysis highlight that a Taylor rule based on shadow rates offers a more accurate representation of the stance of the monetary policy, and is even used by monetary analysts to form expectations, especially when the central bank does not provide clear guidance. This study suggests that incorporating the shadow rate into the Taylor rule could provide valuable insights for guiding monetary policy and get a deeper understanding of the macroeconomic landscape.
    Keywords: central bank, ECB, interest rate, shadow rate, GMM, efficiency, zero lower bound, effective lower bound
    JEL: E02 E43 E52 E58 F01
    Date: 2024
  4. By: Thomas Wangi
    Abstract: The accumulation of excess reserves in the banking system of PNG may have undesired implications on the effectiveness of monetary policy transmission. Hence, this paper employs a structural VAR model to measure the flow-on effects of positive shocks to excess reserves and the lending rate on private sector loans, the exchange rate, the CPI and real GDP using quarterly time-series data from March 2001 to December 2020. The study uses quarterly data since high frequency data for some variables are not available. The shocks are measured by the orthogonalized innovations to the monetary policy variables. The impulse response results show that the lending rate and excess reserves shocks have unanticipated effects on the exchange rate and the CPI in the short run. Similarly, in the long run, the response of GDP to the shocks is not consistent with monetary theory. Furthermore, the variance decomposition results indicate that excess reserves account for minimal components of the shocks to all variables in the short horizon. The historical decomposition results suggest that the excess reserves shock contributes weakly to the fluctuations of the CPI and GDP over the sample period. The findings determine that excess reserves reduce the effectiveness of monetary policy transmission mechanism in PNG. The study suggests that in order to promote an effective monetary policy transmission, the central bank should consider improving the monetary policy framework and modernizing the financial market system.
    Keywords: excess reserves, monetary policy transmission, structural VAR
    JEL: C5 E52 G21
    Date: 2024–02
  5. By: Martin F. Hellwig (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: The paper analyses the role of national central banks (NCBs) in the governance of the European System of Central Banks (ESCB). NCBs are the owners of the European Central Bank (ECB), and their governors dominate the ECB’s Governing Council, but in monetary policy operations, NCBs are subordinated to the ECB. The dominance of NCB governors has materially affected Governing Council decisions on relations between NCBs and the ECB, allowing the NCBs to maintain some of their erstwhile glory, sometimes in contradiction to the primary law. Examples involve the monetary funding of investments declared as non-monetary, violations of Treaty provisions for the allocation of income from monetary policy operations, and accounting rules that obfuscate the boundary between ECB-subordinate and independent activities of NCBs. The net effect of these developments is to enlarge the domain of NCB activities.
    Keywords: European Monetary Union, European System of Central Banks, Governance of the Eurosystem, ANFA, ELA, PSPP, Central-Bank Accounting and Balance Sheets
    JEL: E50 E58 F53
    Date: 2024–02
  6. By: Anna Bartocci (Bank of Italy); Alessandro Cantelmo (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: We evaluate the 'robust' monetary policy rate tightening in response to a stagflationary shock of uncertain magnitude using a medium-scale New Keynesian model. Under uncertainty, the tightening should generally be milder than under no uncertainty in order to 'perform well' in different states of the world. The results hold true especially when financial tensions materialize under an excessive tightening of monetary policy. On the contrary, if the policy response to large stagflationary shocks is perceived as insufficient in a context of high inflation persistence, then the tightening of monetary policy should be as strong as in the case of no uncertainty.
    Keywords: monetary policy, uncertainty, robustness, minimax, bayesian decision making.
    JEL: E52 E58 E61
    Date: 2023–12
  7. By: Harald Uhlig
    Abstract: I discuss private and central-bank-issued digital currencies, summarizing my prior research. I argue that prices of private digital currencies such as bitcoin follow random walks or, more generally, risk-adjusted martingales. For central bank digital currencies, I argue that they enhance the “CBDC trilemma” facing a central bank: out of the three objectives, price stability, efficiency, and monetary trust, it can achieve at most two.
    JEL: E31 E42 E44 E52 G12 G21
    Date: 2024–02
  8. By: Marco Bernardini (Bank of Italy); Antonio M. Conti (Bank of Italy)
    Abstract: What is the overall impact of announcement and implementation effects of asset purchases on financial conditions? Existing research lacks a unified approach for answering this question. We fill this gap by estimating a VAR model based on two pillars: a unique daily dataset covering ECB's asset purchases over the period 2014-2021 and a novel identification strategy combining survey-based external instruments and narrative sign restrictions. The findings underscore the relevance of both purchase announcements and actual purchases in influencing bond yields and stock prices. Neglecting how purchases are actually implemented may severely distort the assessment of their effectiveness.
    Keywords: monetary policy, asset purchases, stock effects, and flow effects, high-frequency, VAR.
    JEL: E52 E58 E44 C32 C54
    Date: 2023–12
  9. By: Barrie, Mohamed Samba
    Abstract: This research paper presents the results of a text mining analysis conducted on the quarterly monetary policy statements published by the Bank of Sierra Leone. This study examines the effectiveness and readability of monetary policy communication by the Bank of Sierra Leone. The research focuses on evaluating the clarity and simplicity of the Bank's communication efforts from 2019Q1 to 2023Q1. Utilizing techniques such as word cloud extraction, keyword density analysis, and text readability metrics assessment, we analyzed 17 quarterly monetary policy statements, our corpus consist of 43 pages of text data. The findings reveal insights into the prominent themes, and linguistic characteristics embedded within the Bank's monetary policy statements. Through an examination of keyword frequency and thematic trends, the research shows that the Bank of Sierra Leone's monetary policy statements place emphasis on inflation management, economic growth, and consideration of exogenous factors affecting monetary policy implementation, with language and structure varying across quarters. Moreover, the analysis suggests that understanding these statements typically requires a college-level education, posing accessibility challenges for a significant portion of Sierra Leone’s population. The policy implications drawn from this analysis accentuate the importance of stakeholder engagement, transparency, adoption of digital outreach tools, local language communication, continuous monitoring and evaluation of the Bank’s communication strategy. This research contributes empirical evidence on monetary policy communication in Sierra Leone, offering insights for policymakers on how best to improve its communication strategies to financial market participants and the general public.
    Keywords: Text mining, monetary policy, communication, Bank of Sierra Leone, Effectiveness, Readability, Clarity, Comprehensibility
    JEL: E52 E58 G14 G28 C88
    Date: 2024
  10. By: Anna Bartocci (Bank of Italy); Alessandro Cantelmo (Bank of Italy); Pietro Cova (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: We use a dynamic equilibrium model featuring different sources of energy to assess the macroeconomic effects, in the euro area, of a temporary reduction in excise taxes on fossil fuels and an increase in lump-sum transfers to the poorest ('hand-to-mouth') households, and of raising the monetary policy rate in response to a temporary increase in the global prices of fossil fuels. In the model, the central bank should raise the monetary policy rate to stabilize inflation even if excise taxes are lowered, in particular if price- and wage-setting decisions are not strongly anchored to the central bank's inflation target. Lump-sum transfers to hand-to-mouth households can stabilize their consumption with limited inflationary effects.
    Keywords: monetary policy, fiscal policy, dynamic general equilibrium model, euro area, fossil fuel price shocks
    JEL: D58 E52 E62 Q43
    Date: 2023–12
  11. By: Jean Flemming; Ruth A. Judson
    Abstract: Technological advances in recent decades have brought about a wave of private-sector innovation in payments and have led central banks to explore a variety of improvements to their payment systems, including the possibility of issuing a central bank digital currency (CBDC). Survey evidence from the Bank for International Settlements (BIS) shows that over 90% of central banks are exploring CBDCs (Kosse & Mattei, 2022). The Federal Reserve is also exploring the implications of, and options for, introducing a CBDC.
    Date: 2024–02–16
  12. By: Sepp, Tim Florian; Israel, Karl-Friedrich; Treitz, Benjamin; Hartl, Tom
    Abstract: The resilience of the German banking system is studied on the semiaggregated level from 1968 to 2022. We distinguish between Large Banks, Regional Banks, Landesbanken, Sparkassen and Credit Unions and study their z-scores as a measure of resilience in response to the monetary policy stances of the Bundesbank and the ECB, respectively. We estimate two-way fixed effects panel regression models for both periods separately. The results suggest that monetary policy was more effective in enhancing resilience during the period of a national currency controlled by the Deutsche Bundesbank. The effect across bank types is much more heterogeneous after the inception of the ECB. In particular, decreasing resilience of Large Banks is associated with expansionary (un)conventional monetary policy in recent years.
    Keywords: Resilience, Monetary Policy, Banking, Financial Stability, Germany, Deutsche Bundesbank, ECB, Credit Union, Sparkasse
    JEL: E42 E52 G21
    Date: 2024
  13. By: Mogaji, Peter Kehinde
    Abstract: This paper evaluates the interactions of monetary policy and fiscal policy in countries within regional economic communities and monetary blocs of Africa (AMU, EAC, ECCA, ECOWAS and SADC) as well as establish the extent of monetary dominance and/or fiscal dominance in the 48 African countries assessed by this study. The modelling of monetary policy in this study followed the standard Taylor rule which makes the nominal interest rate a function of inflation and output gap. On the fiscal policy side, this study applied the fiscal rule suggested by Davig and Leeper (2006) and Leeper (2013, 2016) in which government revenue/GDP ratio reacts to government expenditure ratio, public debt ratio and output gap in modelling fiscal policy. This study applied annual data of monetary policy and fiscal policy rules of the 48 African countries spanning over the period of 33 years between 1990 and 2021. The econometric estimation method employed is the regime switching regressions of Markov regime switching models of the Taylor monetary rule (augmented by interest rate smoothing) and of the fiscal rule augmented with lagged values of government revenue scaled by output. Although, many of the determining coefficient of inflation (for monetary policy) and the coefficient of public debt/GDP ratio (for fiscal policy) yielded in this empirical study are not statistically significant at choice level of significance, results generated reflect combinations of passive monetary policy and passive fiscal policy in the two Markov switching regimes, for all the economies evaluated, with the exception of Cape Verde that demonstrated monetary dominance with the interaction ‘active’ monetary policy and ‘passive’ fiscal policy, only in the switching regime 1. Although, there are apparent similarities in monetary policy and fiscal policy direction in all the five economic and monetary areas of Africa as revealed in this work, the failure to record ‘monetary dominance’ by majority of the African countries does not portend positive implications for the adoption and implementation of a single monetary policy and the supra-national level of Africa if the African Monetary Union project and the dream monetary integration of Africa would come into fruition.
    Keywords: Monetary-Fiscal Policy Interaction, Monetary Dominance, Fiscal Dominance, AMU, EAC, ECCA, ECOWAS, SADC
    JEL: E52 E62 E63 F02 F33 F45
    Date: 2023–01–10
  14. By: Maurizio Trapanese (Banca d'Italia); Sabrina Bellacci (Banca d'Italia); Marcello Bofondi (Banca d'Italia); Giuseppe DE Martino (Banca d'Italia); Sebastiano Laviola (Single Resolution Board); Valerio Vacca (Banca d'Italia)
    Abstract: This paper explains the essential features of the too-big-to-fail regulatory framework finalized after the financial crisis of 2007-08 and explores whether the current large banks' prudential and resolution frameworks work as originally intended and whether there is room for further improvements. The aim is to identify the policy areas whose effectiveness could be enhanced through a greater integration between the prudential and the resolution policies. We focus on the banks of the European Banking Union classified as significant. We find that there is a substantial integration between the prudential and resolution frameworks. However, some further improvements could be achieved with reference to: 1) the consistency between the assessments of a bank's systemic importance and its resolvability; 2) the coordination between the recovery and the resolution plans; 3) the interaction between capital buffers and minimum requirements; 4) the information sharing between the micro-prudential and resolution authorities and the macro-prudential ones. In developing our analysis, we make also reference to the recent episodes of banking crises and to the work under way at the international level to draw initial lessons from these episodes.
    Keywords: financial crises, banks, financial policy and regulation, crisis management JEL Classification: G01, G21, G28, H12
    Date: 2023–10
  15. By: Jost, Thomas; Mink, Reimund
    Abstract: The Eurosystem and the Deutsche Bundesbank will incur substantial losses in 2023 that are likely to persist for several years. Due to the massive purchases of securities in the last 10 years, especially of government bonds, the banks' excess reserves have risen sharply. The resulting high interest payments to the banks since the turnaround in monetary policy, with little income for the large-scale securities holdings, led to massive criticism. The banks were said to be making "unfair" profits as a result, while the fiscal authorities had to forego the previously customary transfers of central bank profits. Populist demands to limit bank profits by, for example, drastically increasing the minimum reserve ratios in the Eurosystem to reduce excess reserves are creating new severe problems and are neither justified nor helpful. Ultimately, the EU member states have benefited for a very long time from historically low interest rates because of the Eurosystem's extraordinary loose monetary policy and must now bear the flip side consequences of the massive expansion of central bank balance sheets during the necessary period of monetary policy normalisation.
    Abstract: Das Eurosystem und die Deutsche Bundesbank werden im Jahr 2023 und wahrscheinlich auch in den kommenden Jahren beträchtliche Verluste einfahren. Durch die massiven Wertpapierkäufe der letzten zehn Jahre, insbesondere von Staatsanleihen, sind die Überschussreserven der Banken stark gestiegen. Die daraus resultierenden hohen Zinszahlungen an die Banken seit der Wende in der Geldpolitik, bei zugleich geringer Verzinsung der hohen Wertpapierbestände, führten zu massiver Kritik. Die Banken machten dadurch "unfaire" Gewinne, während der Fiskus auf die bisher üblichen Abführungen von Zentralbankgewinnen verzichten musste. Populistische Forderungen, die Gewinne der Banken zu begrenzen, indem z.B. die Mindestreservesätze im Eurosystem drastisch erhöht werden, um die Überschussreserven zu reduzieren, schaffen neue Probleme und sind weder sachlich gerechtfertigt noch hilfreich. Schließlich haben die EWU-Staaten aufgrund der ultra-expansiven Geldpolitik des Eurosystems sehr lange in beispielloser Weise von historisch niedrigen Zinsen profitiert und müssen nun die fiskalischen Folgen der massiven Ausweitung der Zentralbankbilanzen in der Phase der notwendigen geldpolitischen Normalisierung tragen.
    Keywords: Central Bank Losses, Eurosystem, Quantitative Easing, Minimum Reserves, Monetary Policy
    JEL: E50 E58
    Date: 2024
  16. By: Shigenori SHIRATSUKA (Faculty of Economics, Keio University)
    Abstract: The current monetary policy framework of the Bank of Japan (BOJ) is the Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control (YCC). The YCC framework targets two interest rates with different maturity: the overnight policy interest rate at ?0.1 percent and the longer-term 10-year Japanese Government Bond (JGB) yields at zero percent. It appears to work effectively in stabilizing interest rates from short- to long-term at low levels. This paper addresses the question of what the BOJ fs YCC policy does through the lens of the yield curve dynamics in the JGB market and the overnight index swap (OIS) market, with due consideration of practical details of the BOJ fs JGB market operations. Empirical evidence shows two points. First, the BOJ fs JGB market interventions amplify the fluctuations of the overall yield curves, in contrast to its policy purpose of fostering the smooth formation of a mild upwardsloping shape of the JGB yield curve. Second, the BOJ fs outright JGB purchases in highstress times are seemingly aggressive but actually reactive to counter the market pressure on the YCC cap. These findings indicate that the YCC policy is carried out to sustain the YCC policy framework without producing effective easing effects but with significant side effects.
    Keywords: Unconventional Monetary Policy, Yield Curve Control, Nelson-Siegel Model, OIS-JGB Spread
    JEL: E43 E52 E58 G12
    Date: 2024–02–05
  17. By: Gennaro Catapano (Bank of Italy)
    Abstract: This paper presents a new agent-based model (ABM) of the real estate and credit sectors. The main purpose of the model is to study the effects of introducing a borrower-based macroprudential policy on the banking system, households, and the real estate market. The paper describes a comprehensive set of policy experiments simulating the effects of introducing different loan-to-value (LTV) caps on newly issued mortgages. The analysis sheds light on the relevance of the degree of heterogeneity in household indebtedness tolerance and its mean level. Moreover, it studies the impact of the phase-in period length and of the timing of the introduction of such a measure. While generally effective in reducing credit risk and curbing both house prices and household indebtedness growth, these measures may also have transitory negative side effects on banks’ balance sheets and real estate markets. The results suggest the scenarios, calibration, and timing under which the introduction of an LTV cap might have the most favorable outcomes.
    Keywords: agent based model, housing market, macroprudential policy
    JEL: D1 D31 E58 R2 R21 R31
    Date: 2023–12
  18. By: Francesco Corsello (Bank of Italy); Marianna Riggi (Bank of Italy)
    Abstract: Energy price shocks broaden inflation inequality, measured by the gap between consumer prices for households at the bottom and top of the expenditure distribution, which is due to different consumption baskets. We provide a VAR-based quantification of the impact of energy shocks on inflation inequality. We then develop and estimate a general equilibrium two-agent model with imported energy to rationalize the empirical results and show why this effect becomes stronger when monetary policy responds aggressively to inflation. Indeed, though less affluent consumers too benefit from the containment of inflation resulting from monetary policy action, they do so to a lesser extent than more affluent ones, given the relatively lower share of consumption spent on items whose prices are sensitive to cyclical conditions. Our results call for the need to complement the monetary policy response with targeted fiscal measures.
    Keywords: energy shocks, inflation inequality, VAR, dynamic general equilibrium, two-agent model
    JEL: E31 E32 E50 E52
    Date: 2023–11
  19. By: Munch Grønlund, Asger; Jørgensen, Kasper; Schupp, Fabian
    Abstract: We build a novel term structure model for pricing synthetic euro area core inflation-linked swaps, a hypothetical swap contract indexed to core inflation. Our approach relies on a term structure model of traded headline inflation-linked swap rates, which we assume span core inflation. The model provides estimates of market-based expectations for core inflation, as well as core inflation risk premia, at daily frequency, whereas core inflation expectations from surveys or macroeconomic projections are typically only available monthly or quarterly. We find that core inflation-linked swap rates are generally less volatile than headline inflation linked swap rates and that market participants expected core inflation to be substantially more persistent than headline inflation following the 2022 energy price spike. Using an event-study methodology, we also find that monetary policy shocks significantly lower core inflation expectations. JEL Classification: E31, E44, E52
    Keywords: affine term structure model, inflation-linked swaps, inflation expectations
    Date: 2024–02
  20. By: Higgins, Brian E.
    Abstract: This paper studies how mortgage borrowers and house prices react to a tightening of mortgage limits following a policy change in Ireland in 2015. The policy introduced limits to the loan-to-income and loan-to-value ratios of new mortgages issued. In response to a tightening borrowing constraint, borrowers can choose to purchase a cheaper house or to reduce the leverage (LTV) of the mortgage. Using a difference-in-difference methodology, I find that groups of (poorer) borrowers, who were more likely to be above the loan-to-income threshold before the policy, responded primarily by buying cheaper houses after the policy change. On the other hand, groups of (richer) borrowers, who were more likely to be above the loan-to-value threshold, responded primarily by reducing the LTV of the mortgage. Borrowers who purchase cheaper houses could be buying smaller houses or the same size houses at a lower equilibrium price. To test for changes in equilibrium prices, I compare prices across postcodes and find that houses prices fell after the policy change in postcodes where a higher fraction of borrowers were above the loan-to-income threshold before the policy. JEL Classification: G21, E21, E44, E58, R21, R30
    Keywords: household leverage, house prices, macroprudential regulation, residential housing markets
    Date: 2024–02
  21. By: Lin, Alessandro; Peruffo, Marcel
    Abstract: We propose a novel methodology for solving Heterogeneous Agents New Keynesian (HANK) models with aggregate uncertainty and the Zero Lower Bound (ZLB) on nominal interest rates. Our efficient solution strategy combines the sequence-state Jacobian methodology in Auclert et al. (2021) with a tractable structure for aggregate uncertainty by means of a two-regimes shock structure. We apply the method to a simple HANK model to show that: 1) in the presence of aggregate non-linearities such as the ZLB, a dichotomy emerges between the aggregate impulse responses under aggregate uncertainty against the deterministic case; 2) aggregate uncertainty amplifies downturns at the ZLB, and household heterogeneity increases the strength of this amplification; 3) the effects of forward guidance are stronger when there is aggregate uncertainty. JEL Classification: D14, E44, E52, E58
    Keywords: computational methods, liquidity traps, monetary policy, new-Keynesian models, zero lower bound
    Date: 2024–02

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