nep-cba New Economics Papers
on Central Banking
Issue of 2024‒04‒01
thirteen papers chosen by
Sergey E. Pekarski, Higher School of Economics

  1. Excess reserves and monetary policy tightening By Fricke, Daniel; Greppmair, Stefan; Paludkiewicz, Karol
  2. Monetary Policy Shocks: Data or Methods? By Connor M. Brennan; Margaret M. Jacobson; Christian Matthes; Todd B. Walker
  3. The Natural Rate of Interest in the Euro Area: Evidence from Inflation-Indexed Bonds By Jens H. E. Christensen; Sarah Mouabbi
  4. Central Bank Cooperation 1930-1932, A Reappraisal By Flores Zendejas, Juan; Nodari, Gianandrea
  5. Macroprudential capital regulation and fiscal balances in the euro area By Hristov, Nikolay; Hülsewig, Oliver; Kolb, Benedikt
  7. How Oil Shocks Propagate: Evidence on the Monetary Policy Channel By Wataru Miyamoto; Thuy Lan Nguyen; Dmitry Sergeyev
  8. Monetary Policy Has a Long-Lasting Impact on Credit: Evidence from 91 VAR Studies By Josef Bajzik; Jan Janku; Simona Malovana; Klara Moravcova; Ngoc Anh Ngo
  9. Idiosyncratic Risk, Government Debt and Inflation By Matthias H\"ansel
  10. Modelling Monetary and Fiscal Policy to Achieve Climate Goals By Yener Altunbas; Xiaoxi Qu; John Thornton
  11. Fiscal Events and Anchored Inflation Expectations By Ethan Ilzetzki
  12. What Drives Inflation? Lessons from Disaggregated Price Data By Elisa Rubbo
  13. High Frequency Monitoring of Credit Creation: A New Tool for Central Banks in Emerging Market Economies By Giraldo, Carlos; Giraldo, Iader; Gomez-Gonzalez, Jose E.; Uribe, Jorge M.

  1. By: Fricke, Daniel; Greppmair, Stefan; Paludkiewicz, Karol
    Abstract: We show that the transmission of the European Central Bank's (ECB) recent monetary policy tightening differs across banks depending on their level of excess reserves. Specifically, the net worth of reserve-rich banks may display a boost when the interest rate paid on reserves increases strongly. Focusing on the ECB's 2022 rate hiking cycle, we show that reserve-rich banks' credit supply is less sensitive to the monetary policy tightening compared to other banks. The effect varies in the cross-section of both banks and firms. The results are binding at the firm level, indicating the presence of real effects.
    Keywords: interest rates, bank lending, excess liquidity, monetary policy
    JEL: E43 E44 E52 G21
    Date: 2024
  2. By: Connor M. Brennan; Margaret M. Jacobson; Christian Matthes; Todd B. Walker
    Abstract: Different series of high-frequency monetary shocks can have a correlation coefficient as low as 0.5 and the same sign in only two-thirds of observations. Both data and methods drive these differences, which are starkest when the federal funds rate is at its effective lower bound. Methods that exploit the differential responsiveness of short- and long-term asset prices can incorporate additional information. After documenting differences in monetary shocks, we explore their consequence for inference. We find that empirical estimates of monetary policy transmission from local projections and VARs are less affected by shock choice than forecast revision specifications.
    Keywords: High-frequency monetary policy shocks; Monetary policy transmission; Empirical monetary economics
    JEL: E52 E58 E31 E32
    Date: 2024–02–28
  3. By: Jens H. E. Christensen; Sarah Mouabbi
    Abstract: The so-called equilibrium or natural rate of interest, widely known as r*t, is a key variable used to judge the stance of monetary policy. We offer a novel euro-area estimate based on a dynamic term structure model estimated directly on the prices of bonds with cash flows indexed to the euro-area harmonized index of consumer prices with adjustments for bond-specific risk and real term premia. Despite a recent increase, our estimate indicates that the natural rate in the euro area has fallen about 2 percentage points on net since 2002 and remains negative at the end of our sample. We also devise a related measure of the stance of monetary policy, which suggests that monetary policy in the euro area was not accommodative at the height of the COVID-19 pandemic.
    Keywords: affine arbitrage-free term structure model; financial markets; frictions; monetary policy; rstar; covid19
    JEL: C32 E43 E52 G12
    Date: 2024–03–08
  4. By: Flores Zendejas, Juan; Nodari, Gianandrea
    Abstract: The literature on interwar monetary history has argued that the lack of central bank cooperation contributed to the pervasive economic outcome of the 1930s. The reasons for this failure are still an object of debate. In this paper, we revisit the attitude of individual central banks to the attempts led by the Bank for International Settlements (BIS) to institutionalise central bank cooperation. We present original archival evidence to show that the 1931 crisis in central Europe emerged as an exogenous shock, prompting the BIS to become an international lender of last resort and increase the resources at its disposal. However, the BIS relied on member central banks' discretionary behaviour and did not impose a rules-based system. We observe a contrasting attitude towards international cooperation between central banks from creditor and borrowing countries. Some governments prevented their central banks from supporting the BIS' attempts to increase its financial resources. We conclude that this interference was a relevant means through which politics hindered a multilateral response to the crises of the 1930s.
    Keywords: Central banking, Great Depression, Financial crises, International monetary cooperation.
    JEL: N0
    Date: 2023
  5. By: Hristov, Nikolay; Hülsewig, Oliver; Kolb, Benedikt
    Abstract: We examine the fiscal footprint of macroprudential policy in euro area countries arising through the bond market channel (Reis, 2021). Using local projections, we estimate impulse responses of the fiscal balance to an unexpected tightening in macroprudential capital regulation. Our findings suggest a dichotomy between country groups. In peripheral countries, the cyclically adjusted primary balance ratio deteriorates after a restrictive capital-based macroprudential policy shock. Since banks are important investors in domestic government debt, the shift in the public budget toward higher borrowing after the innovation might pose a threat to financial stability to the extent that sovereign risk increases. By contrast, in core countries, the cyclically adjusted primary balance ratio barely reacts to a sudden tightening in capital regulation.
    Keywords: Fiscal footprint, macroprudential capital regulation, sovereign-bank nexus, local projections
    JEL: C33 G28 H63 K33
    Date: 2024
  6. By: Christophe J. GODLEWSKI (LaRGE Research Center, Université de Strasbourg); Malgorzata OLSZAK (Wydzial Zarzadzania, Uniwersytet Warszawski)
    Abstract: We analyze the impact of macroprudential policies on corporate loans. We utilize a dataset of over 4, 800 syndicated loans from 1999-2017, matched with detailed macroprudential policy data from the European Central Bank. We investigate how overall policy stance and specific tools influence key loan terms at origination, including the amount, maturity, collateral, and covenants. Drawing upon hypotheses related to credit growth, risk-taking, and efficiency transmission channels, we show that a tighter macroprudential policy leads to an increase in loan amounts and collateralization. These effects are most prominent for tools that tighten lending standards and capital buffers, particularly in domestic credit markets. Additionally, we provide insights into the influence of loan, borrower, and lender characteristics on the impact of macroprudential policy on loan terms. Our findings offer novel empirical evidence of macroprudential transmission occurring through risk-shifting and compensating behaviors in private debt markets.
    Keywords: macroprudential policy, bank loans, financial contracting, Europe
    JEL: G21 G28 G32
    Date: 2024
  7. By: Wataru Miyamoto; Thuy Lan Nguyen; Dmitry Sergeyev
    Abstract: Using high-frequency responses of oil futures prices to prominent oil market news, we estimate the effects of oil supply news shocks when systematic monetary policy is switched off by the zero lower bound (ZLB) and when it is not (normal periods) in Japan, the United Kingdom, and the United States. We find that negative oil supply news shocks are less contractionary (and even expansionary) at the ZLB compared to normal periods. Inflation expectations increase during both periods, while the short nominal interest rates remain constant at the ZLB, pointing to the importance of monetary policy for oil shock propagation.
    Keywords: oil price shocks; high-frequency identification; Zero Lower Bound (ZLB); monetary policy
    JEL: E5 E7 G4
    Date: 2023–12–10
  8. By: Josef Bajzik; Jan Janku; Simona Malovana; Klara Moravcova; Ngoc Anh Ngo
    Abstract: We synthesized 3, 175 estimates (454 impulse responses) of the semi-elasticity of credit with respect to changes in the monetary policy rate from 91 vector autoregression studies. We found that monetary policy tightening consistently yields a negative and long-lasting response in both credit volume and credit growth. Several factors contribute to the substantial heterogeneity of the effect sizes in this literature. First, publication selectivity significantly exaggerates the mean reported estimate, because insignificant results are under-reported. Second, researchers' choice of estimation design has a significant impact on the estimated response. Studies using Bayesian methods and including house prices report a smaller decline in credit, while studies with sign restrictions show a larger drop than those using recursive identification.
    Keywords: Bayesian model averaging, credit, interest rates, meta-analysis, monetary policy transmission, publication bias
    JEL: C83 E52 R21
    Date: 2023–12
  9. By: Matthias H\"ansel
    Abstract: How does public debt matter for price stability? If it is useful for the private sector to insure idiosyncratic risk, government debt expansions can increase the natural rate of interest and create inflation. As I demonstrate using a tractable model, this holds in the presence of an active Taylor rule and does not require the absence of future fiscal consolidation. Further analysis using a full-blown 2-asset HANK model reveals the quantitative magnitude of the mechanism to crucially depend on the structure of the asset market: under standard assumptions, the effect of public debt on the natural rate is either overly strong or overly weak. Employing a parsimonious way to overcome this issue, my framework suggests relevant effects of public debt on inflation under active monetary policy: In particular, persistently elevated public debt may make it harder to go the last "mile of disinflation" unless central banks explicitly take its effect on the neutral rate into account.
    Date: 2024–03
  10. By: Yener Altunbas (Bangor University); Xiaoxi Qu (Bangor University); John Thornton (University of East Anglia)
    Abstract: We present and estimate a Bernanke et al. (1999)-type dynamic general equilibrium model modified to allow the authorities to use monetary and fiscal policy to shape bank behavior in support of climate goals. In the model, central bank refinancing and reserve requirements are employed to support bank lending for environmentally friendly projects at lower rates of interest than for other projects. At the same time, fiscal policy supports green bank lending through loan guarantees, which also reduces the relative cost of borrowing by green firms. Under reasonable parameters of the model, rediscount lending is shown to be the most effective policy tool for directing bank lending to support climate goals
    Date: 2024–03
  11. By: Ethan Ilzetzki (London School of Economics (LSE); Centre for Macroeconomics (CFM); Centre for Economic Policy Research (CEPR))
    Abstract: With inflation surging worldwide, some commentators have speculated whether inflation expectations have become unanchored. This policy note presents a framework to evaluate whether an inflationary spike is due to temporary shifts in policy or the real economy on one hand, or due to an unanchoring of inflation expectations. The model is a conventional “textbook” model, but accommodates many of the views of unanchored expectations in the existing literature. I then review several economic shocks of the past few years through the lens of the conceptual framework, with a particular focus on fiscal and other policy shocks. I find little to suggest that inflation expectations have become unanchored in the US, the UK, or Japan, although expectations are stubbornly below the central bank’s target in Japan, and above the target in the UK. In contrast, inflation expectations show substantial signs of unanchoring in some emerging market economies, particularly Brazil and Turkey.
    Date: 2024–03
  12. By: Elisa Rubbo
    Abstract: The Covid pandemic disrupted supply chains and labor markets, with heterogeneous effects on demand and supply across industries. Meanwhile governments responded with unprecedented stimulus packages, and inflation increased to its highest values in 40 years. This paper investigates the contribution of aggregate monetary and fiscal policies to inflation compared to industry-specific disruptions. I argue that, in an economy where multiple industries and primary factors have heterogeneous supply curves, industry-specific shocks to inelastically supplied goods increase aggregate inflation beyond the control of monetary policy. Moreover, industry-specific and aggregate shocks have different effects on relative prices, which allows me to identify their respective contribution to aggregate inflation. For US consumer prices, I find that deflation and subsequent inflation in 2020 were due to industry-specific shocks, while since 2021 inflation is primarily driven by aggregate factors.
    JEL: E30 E5
    Date: 2024–03
  13. By: Giraldo, Carlos (Latin American Reserve Fund); Giraldo, Iader (Latin American Reserve Fund); Gomez-Gonzalez, Jose E. (City University of New York – Lehman College); Uribe, Jorge M. (Universitat Oberta de Catalunya)
    Abstract: This study utilizes weekly datasets on loan growth in Colombia to develop a daily indicator of credit expansion using a two-step machine learning approach. Initially, employing Random Forests (RF), missing data in the raw credit indicator is filled using high frequency indicators like spreads, interest rates, and stock market returns. Subsequently, Quantile Random Forest identifies periods of excessive credit creation, particularly focusing on growth quantiles above 95%, indicative of potential financial instability. Unlike previous studies, this research combines machine learning with mixed frequency analysis to create a versatile early warning instrument for identifying instances of excessive credit growth in emerging market economies. This methodology, with its ability to handle nonlinear relationships and accommodate diverse scenarios, offers significant value to central bankers and macroprudential authorities in safeguarding financial stability.
    Keywords: Credit growth; Machine learning methodology; Excessive credit creation; Financial stability
    JEL: C45 E44 G21
    Date: 2024–03–10

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