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on Central Banking |
| By: | Simone Auer (Bank of Italy); Nicola Branzoli (Bank of Italy); Giuseppe Ferrero (Bank of Italy); Antonio Ilari (Bank of Italy); Francesco Palazzo (Bank of Italy); Edoardo Rainone (Bank of Italy) |
| Abstract: | This paper describes the role of central bank and commercial bank money in a modern monetary system and the possible implications of the introduction of a central bank digital currency (CBDC) for the banking system and the economy as a whole. The analysis shows that the impact of a CBDC depends on a number of design choices and on how credit institutions re-optimize their balance sheets in response to the outflow of deposits caused by the substitution of private money with public digital money. We provide a set of illustrative simulations on the impact of a CBDC on the funding structure and profitability of credit institutions using data on Italian banks between June 2021 and March 2023. The analysis suggests that the overall impact on banks' funding could be manageable in the presence of individual holding limits and in an environment characterized by ample liquidity and stable funding for credit institutions. The cost of covering the reduction of deposits would be relatively higher for intermediaries with low excess reserves and for those that may need to issue long-term liabilities to maintain stable funding levels above regulatory requirements. |
| Keywords: | central bank digital currency, monetary policy, financial stability, banks, money |
| JEL: | E41 E42 E43 E44 E51 E58 G21 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_829_24&r=cba |
| By: | Dr. Tobias Cwik; Dr. Christoph Winter |
| Abstract: | In the aftermath of the Great Financial Crisis (GFC), central banks from several advanced, small, open economies have used FX interventions (FXI) in order to stimulate inflation, given that their policy rates were very low. We present a quantitative DSGE model that allows us to study the effectiveness of this unconventional monetary policy tool. We apply the model to Switzerland, a country that has seen frequent and sizable central bank interventions. The model implies that FXI are effective and long-lasting: FXI of approximately CHF 27 billion (5% of annual GDP) are necessary to prevent the Swiss franc from appreciating by 1.1%. The effect is stronger the longer the central bank can commit to keep its policy rate constant in response to the inflationary effect of the interventions. We also find that FXI create significant additional leeway for monetary policy in small, open economies. This effect can be shown by the "shadow rate", the policy rate required to keep CPI inflation on its realised path without FXI. This "shadow rate" was up to 1 pp below the realised policy rate and close to -1.5% from 2015 to mid-2022 in Switzerland. Our framework also allows us to study the sensitivity of the shadow rate in an environment in which the policy rate is at (or close to) its lower bound. If the persistence of the policy rate increases at the lower bound, the shadow rate rises in absolute terms. |
| Keywords: | Monetary policy, FX intervention, Shadow rate, DSGE model |
| JEL: | C54 E52 F41 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2024-04&r=cba |
| By: | Mr. Luis Brandão-Marques; Mr. Lev Ratnovski |
| Abstract: | This paper reviews the trade-offs involved in the choice of the ECB’s monetary policy operational framework. As long as the ECB’s supply of reserves remains well in excess of the banks’ demand, the ECB will likely continue to employ a floor system for implementing the target interest rate in money markets. Once the supply of reserves declines and approaches the steep part of the reserves demand function, the ECB will face a choice between a corridor system and some variant of a floor system. There are distinct pros and cons associated with each option. A corridor would be consistent with a smaller ECB balance sheet size, encourage banks to manage their liquidity buffers more tightly, and facilitate greater activity in the interbank market. But it would require relatively more frequent market operations to ensure the money markets rate stays close to the policy rate and could leave the banking system vulnerable to intermittent liquidity shortages that may have financial stability implications and impair monetary transmission. The floor, on the other hand, would allow for more precise control of the overnight rate and a lower risk of liquidity shortages, but it would entail a somewhat larger ECB balance sheet, weaken the incentives for banks to manage their liquidity buffers, and discourage interbank market activity. The analysis of tradeoffs suggests that, on balance, in steady state, a hybrid system that combines the features of the “parsimonious floor” (with a minimal volume of reserves) with a lending facility or frequent short-term full-allotment lending operations priced at or very close to the deposit rate, making it a “zero (or near-zero) corridor”, would be most conducive for achieving the ECB’s monetary policy objective. |
| Keywords: | Central bank operations; Monetary policy; The ECB |
| Date: | 2024–03–15 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/056&r=cba |
| By: | Callum Jones; Mariano Kulish; James Morley |
| Abstract: | We propose a shadow interest rate for structural macroeconomic models that measures the interest-rate-equivalent stance of monetary policy at the zero lower bound. The lower bound constraint, if expected to bind, is contractionary and increases the shadow rate compared to an unconstrained systematic policy response. By contrast, forward guidance that extends the expected duration of zero-interest-rate policy beyond the lower bound constraint is expansionary and decreases the shadow rate. Quantitative easing that shortens the expected duration of the binding constraint also decreases the shadow rate. We find that the estimated shadow federal funds rate from a workhorse structural model of the US economy better captures the stance of monetary policy than a shadow rate based only on the term structure of interest rates. Furthermore, both forward guidance and quantitative easing appear to be important drivers of our shadow federal funds rate. |
| Keywords: | zero lower bound; forward guidance; quantitative easing; shadow rate; monetary policy |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:syd:wpaper:2024-04&r=cba |
| By: | Linda S. Goldberg; Oliver Zain Hannaoui |
| Abstract: | The share of U.S. dollar assets in the official foreign exchange reserve portfolios of central banks is sometimes taken as an indicator of dollar status. We show that the observed decline in the aggregate share of U.S. dollar assets does not stem from a systematic shift in currency preferences away from holding dollar assets. Instead, a small group of countries with large foreign exchange reserve balances drive the dollar share decline observed in aggregate statistics. This arises either due to countries conducting monetary policy vis-à-vis the euro or due to preference shifts away from dollars. Regression analysis shows that interest rate differentials between traditional and nontraditional reserve currencies can tilt portfolio composition, particularly in relation to the scale of investment tranches within overall central bank portfolios. Geopolitical distance from the United States and financial sanctions are associated with lower U.S. dollar shares, especially if the primary foreign currency liquidity needs of the central bank are already satisfied. |
| Keywords: | foreign exchange reserves; dollar; liquidity; convenience yields; currency of international debt; Foreign Exchange Reserves |
| JEL: | F3 F31 F33 |
| Date: | 2024–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:97928&r=cba |
| By: | Glas, Alexander; Müller, Lena |
| Abstract: | We use data on speeches held by members of the European Central Bank's (ECB) Executive Board to analyze whether clarity of central bank communication has increased over time. Employing readability measures as proxy variables, we find that clarity of information provision is trending upward since the inception of the ECB. The increase is gradual, rather than being induced by changes in the board composition or major macroeconomic events. Clarity is higher for speeches aimed at general audiences and for speeches by female speakers. We also show that media sentiment about the ECB is negatively related to complexity. |
| Keywords: | Central Bank Communication, Monetary Policy Transparency, Clarity, Readability |
| JEL: | E52 E58 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:283611&r=cba |
| By: | Michael Kiley; Frederic S. Mishkin |
| Abstract: | The world economy has experienced the largest financial crisis in generations, a global pandemic, and a resurgence in inflation during the first quarter of the 21st century, yielding important insights for central banking. Price stability has important benefits and is the responsibility of a central bank. Achieving price stability in a complex and uncertain environment involves a credible commitment to a nominal anchor with a strong response to inflation and pre-emptive leaning against an overheating economy. Associated challenges imply that central bank communication and transparency are key elements of monetary policy strategies and tactics. Crises have emphasized the role of central banks in promoting financial stability, as financial stability is key to achieving price and economic stability, but this role increases risks to independence. Goals for central banks other than price and economic stability, complemented by financial stability, can make it more difficult for them to stabilize both inflation and economic activity. |
| JEL: | E4 E5 E52 E58 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32237&r=cba |
| By: | Mr. Luis Brandão-Marques; Mr. Roland Meeks; Vina Nguyen |
| Abstract: | When uncertain about inflation persistence, central banks are well-advised to adopt a robust strategy when setting interest rates. This robust approach, characterized by a "better safe than sorry" philosophy, entails incurring a modest cost to safeguard against a protracted period of deviating inflation. Applied to the post-pandemic period of exceptional uncertainty and elevated inflation, this strategy would have called for a tightening bias. Specifically, a high level of uncertainty surrounding wage, profit, and price dynamics requires a more front-loaded increase in interest rates compared to a baseline scenario which the policymaker fully understands how shocks to those variables are transmitted to inflation and output. This paper provides empirical evidence of such uncertainty and estimates a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model for the euro area to derive a robust interest rate path for the ECB which serves to illustrate the case for insuring against inflation turning out to have greater persistence. |
| Keywords: | Robust policy; monetary policy; uncertainty; inflation persistence; wage and price dynamics.; Monetary Policy stance; policy rule parameter; price Persistence; IMF working paper 2024/47; inflation expectation; Inflation; Central bank policy rate; Output gap; Wages; Europe; Central and Eastern Europe; Eastern Europe |
| Date: | 2024–03–08 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/047&r=cba |
| By: | Makram El-Shagi (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan) |
| Abstract: | In this paper, we assess the impact of monetary policy shocks on the income distribution in the Eurozone after the Global Financial Crisis, i.e., a time of unconventional monetary policy. Unlike previous papers that focus on the precrisis era, where monetary policy was primarily conducted through interest rates, expansionary policy typically increases inequality. This can be mitigated by highly developed financial markets and sound institutions that limit rent seeking. |
| Keywords: | monetary policy, inequality, Eurozone |
| JEL: | D33 E52 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:fds:dpaper:202402&r=cba |
| By: | Bertsch, Christoph (Research Department, Central Bank of Sweden); Hull, Isaiah (BI Norwegian Business School; CogniFrame); Lumsdaine, Robin L. (Kogod School of Business, American University; Erasmus University Rotterdam; National Bureau of Economic Research (NBER); Tinbergen Institute; Center for Financial Stability); Zhang, Xin (Research Department, Central Bank of Sweden) |
| Abstract: | This paper introduces a novel database of text features extracted from the speeches of 53 central banks from 1996 to 2023 using state-of-the-art NLP methods. We establish four facts: (1) central banks with floating and pegged exchange rates communicate differently, and these differences are particularly pronounced in discussions about exchange rates and the dollar, (2) communication spillovers from the Federal Reserve are prominent in exchange rate and dollar-related topics for dollar peggers and in hawkish sentiment for others, (3) central banks engage in FX intervention guidance, and (4) more transparent institutions are less responsive to political pressure in their communication. |
| Keywords: | Exchange Rates; Natural Language Processing (NLP); International Spillovers; Monetary Policy |
| JEL: | C55 E42 E50 F31 F42 |
| Date: | 2024–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0432&r=cba |
| By: | Westermeier, Carola |
| Abstract: | The European Central Bank (ECB) has entered the preparation phase for the potential issuance of a digital euro. The digital euro under consideration represents a retail Central Bank Digital Currency (CBDC), a digital representation of central bank money that is intended for use by the general public. This article foregrounds the digital euro as an infrastructure that furthers European security ambitions. It argues that the development of the digital euro is a materialization of European (in)security rationales that aim to secure pan-European financial transactions amid growing geopolitical tensions. It focuses on the development of the technology and analyses how central bankers’ scenarios of the future manifest in the anticipated design and prototypes. While the provision of a financial infrastructure is the most decisive security-related implication of the digital euro, the introduction of a new form of public money is the decisive financial feature with potentially wide-ranging implications for banks. Although the ECB seeks to balance the interests of banks and other financial actors in the development of the digital euro, its plans are still met with criticism. Finally, the paper argues that the European Central Bank exerts itself more explicitly than before as geopolitical actors in its own regard. |
| Date: | 2024–03–21 |
| URL: | http://d.repec.org/n?u=RePEc:osf:socarx:x45eg&r=cba |
| By: | Masao Fukui; Niels Joachim Gormsen; Kilian Huber |
| Abstract: | We show that firms' nominal required returns to capital (i.e., their discount rates) are sticky with respect to expected inflation. Such nominally sticky discount rates imply that increases in expected inflation directly lower firms' real discount rates and thereby raise real investment. We analyze the macroeconomic implications of sticky discount rates using a New Keynesian model. The model naturally generates investment-consumption comovement in response to household demand shocks and higher investment in response to government spending. Sticky discount rates imply that inflation has real effects, even absent other nominal rigidities, making them a distinct source of monetary non-neutrality. At the same time, sticky discount rates make the short-term interest rate less effective at stimulating investment. Optimal monetary policy focuses on inflation expectations and permanently lowers the long-run inflation target in response to expansionary shocks, even when shocks are temporary. |
| JEL: | D22 E22 E23 E31 E32 E43 E44 E52 E58 G12 G31 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32238&r=cba |
| By: | Amina Enkhbold |
| Abstract: | I investigate how monetary policy transmits to mortgage rates via the mortgage market concentration channel for both traditional and shadow banks in the United States from 2009 to 2019. On average, shadow and traditional banks exhibit only a slight disparity in transmitting monetary shocks to mortgage rates. Nonetheless, in highly concentrated mortgage markets, shadow banks transmit marginally 35 basis points (bps) more, whereas traditional banks transmit marginally 25 bps less in response to a monetary policy surprise of more than 100 bps. Lastly, banks serve different parts of the mortgage rate distribution: (i) fintech lenders compete with traditional banks for the highest rates, (ii) traditional banks target primarily the middle of the mortgage rate distribution, and (iii) non-fintech lenders specialize in the lowest rates by transmitting monetary policy the least. |
| Keywords: | Monetary policy transmission; interest rates; financial institutions |
| JEL: | E44 E52 G21 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:24-8&r=cba |
| By: | Sheila Dow (Department of Economics, University of Victoria) |
| Abstract: | In order to consider the problem of the relationship between central banks and governments, it is necessary to go back to first principles and consider what society needs from central banks. The role of the central bank is explored as being to provide a stable financial environment as a basis for real economic activity. This involves the provision of a safe money asset; an appropriate level and composition of lending to the corporate sector to finance capital investment; and lending to government as required, subject to maintaining the value of the currency. The evolution of this traditional role in relation to banks and government is analysed in terms of collateral, emphasising their interdependencies. The argument developed here is that the problem of insufficient collateral for the financial system is a product of weak economic conditions and financial instability which has eroded confidence in the valuation of assets, and that this has been compounded by central bank independence. As a result, it is argued that central banks should not be independent of government, but rather that the traditional constructive mutual relationships between central banks and government (and retail banks) be restored. |
| Keywords: | central banks, monetary policy, bank regulation |
| Date: | 2024–03–21 |
| URL: | http://d.repec.org/n?u=RePEc:vic:vicddp:2014&r=cba |
| By: | Nghiem, Giang; Dräger, Lena; Dalloul, Ami |
| Abstract: | This paper explores communication strategies for anchoring households' medium-term inflation expectations in a high inflation environment. We conducted a survey experiment with a representative sample of 4, 000 German households at the height of the recent inflation surge in early 2023, with information treatments including a qualitative statement by the ECB president and quantitative information about the ECB's inflation target or projected inflation. Inflation projections are most effective, but combining information about the target with a qualitative statement also significantly improves anchoring. The treatment effects are particularly pronounced among respondents with high financial literacy and high trust in the central bank. |
| Keywords: | anchoring of inflation expectations, central bank communication, survey experiment, randomized controlled trial (RCT) |
| JEL: | E52 E31 D84 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:han:dpaper:dp-719&r=cba |
| By: | Makram El-Shagi (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan); Kiril Tochkov (Texas Christian University, Fort Worth, TX, US) |
| Abstract: | Unitary monetary policy in large emerging economies with substantial regional disparities is likely to have heterogeneous effects with unintended consequences. This paper explores the regional effects of monetary policy in China by estimating the response of a series of provincial variables to a national monetary policy shock using quarterly data over the period 1999-2022. Regional heterogeneity is assessed by comparing the results from a fixed-effects and a mean-group estimator. The response of consumer prices and loans is found to be homogeneous across provinces, while that of output and property prices exhibits significant regional variation. Further analysis of the differential response for two provincial clusters indicates that output in Western China experiences faster drops after a contractionary monetary policy shock and takes longer to recover than in Eastern and Central China. In the same context, property prices react with a delay and endure a more gradual recovery after the shock. The advancement of market institutions, the share of state-owned enterprises, and the size of the private sector are identified as potential determinants of the differential response across the two regional clusters. |
| Keywords: | monetary policy, regional effects, China |
| JEL: | E52 E58 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:fds:dpaper:202401&r=cba |
| By: | Stefano Neri (Bank of Italy) |
| Abstract: | In the summer of 2021, inflation woke up for the first time in many years. The period of low inflation in the euro area ended abruptly with the recovery from the Covid-19 pandemic and the energy crisis. Supply bottlenecks and energy prices played an important role in pushing up core inflation. Despite the rise in consumer prices, the ECB's monetary policy response helped to re-anchor long-term inflation expectations to the new symmetric 2 per cent target. With expectations well anchored, the risks of second-round effects limited and the downside risks to growth heightened, it is time to take stock of the effects of monetary policy so far and those still to come, and wait for the effects of past shocks on inflation to fade. |
| Keywords: | inflation energy prices, supply bottlenecks, long-term inflation expectations, monetary policy |
| JEL: | C32 E31 E32 E37 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_834_24&r=cba |
| By: | Gianluca Pallante; Mattia Guerini; Mauro Napoletano; Andrea Roventini |
| Abstract: | We extend the Schumpeter meeting Keynes (K+S; see Dosi et al., 2010, 2013, 2015) to model the emergence and the dynamics of an interbank network in the money market. The extended model allows banks to directly exchange funds, while evaluating their interbank positions using a network- based clearing mechanism (NEVA, see Barucca et al., 2020). These novel adds on, allow us to better measure financial contagion and systemic risk events in the model and to study the possible interactions between micro-prudential and macro-prudential policies. We find that the model can replicate new stylized facts concerning the topology of the interbank network, as well as the dynamics of individual banks’ balance sheets. Policy results suggest that the economic system at large can benefit from the introduction of a micro-prudential regulation that takes into account the interbank network relationships. Such a policy decreases the incidence of systemic risk events and the bankruptcies of financial institutions. Moreover, a trade-off between financial stability and macroeconomic performance does not emerge in a two-pillar regulatory framework grounded on i) a Basel III macro-prudential regulation and ii) a NEVA-based micro-prudential policy. Indeed, the NEVA allows the economic system to achieve financial stability without overly stringent capital requirements. |
| Keywords: | Financial contagion, Systemic risk, Micro-prudential policy, Macro-prudential policy, Macroeconomic stability, Agent-based computational economics |
| Date: | 2024–03–25 |
| URL: | http://d.repec.org/n?u=RePEc:ssa:lemwps:2024/08&r=cba |
| By: | Makram El-Shagi (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan); Steven Yamarik (Department of Economics, California State University Long Beach, CA) |
| Abstract: | This paper examines the impact of Federal Reserve policy on income inequality across US states. We use the local projections method of Jordà to estimate impulse response functions for each state. We find that a restrictive monetary policy increases income inequality in almost all states, but with different magnitudes. Subsequent panel analysis examines the possible transmission mechanisms that can account for these differences. Our empirical results confirm the theoretical predictions – inequality is increased by higher inflation, home ownership, and earnings in the finance, insurance and real estate (FIRE) sector; but decreased by higher housing prices, unionization rates, educational attainment and minimum wage. |
| Keywords: | monetary policy, inequality, US states, local projections |
| JEL: | D31 D63 E52 R19 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:fds:dpaper:202404&r=cba |
| By: | Jeremy Samer Srouji (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis (1965 - 2019) - CNRS - Centre National de la Recherche Scientifique - UniCA - Université Côte d'Azur, Erasmus University Rotterdam) |
| Abstract: | The evolution of the international monetary system towards a more multipolar configuration is not only reflective of fundamentals but of increasing fragilities and uncertainty. In this paper, we map the trajectories of the big four (EUR, GBP, JPY, USD) and secondary currencies (AUD, CAD, CHF, CNY) in the past decade and argue that the system is increasingly illadapted to thereconfiguration of the globaleconomy, bringing to theforefront the need, in particular, for a reliable alternative international reserve asset. |
| Keywords: | currency internationalization, functions of money, international monetary system, international reserves, payments |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04459960&r=cba |
| By: | Laurent Kemoe; Moustapha Mbohou; Hamza Mighri; Mr. Saad N Quayyum |
| Abstract: | This paper provides new evidence on the exchange rate passthrough to domestic inflation in Sub-Saharan Africa (SSA) using both bilateral US dollar exchange rate and the nominal effective exchange rate (NEER), and monthly data. We find that depreciations cause sizable increases in domestic inflation. The passthrough in SSA is higher than in other regions and its magnitude depends on the exchange rate regime, type of exchange rate (bilateral versus NEER), natural resource endowment and domestic market competitiveness. The passthrough is found to be disproportionately larger and more persistent for large depreciation shocks, and for exchange rate changes that are more persistent. We also find evidence of asymmetry, with passthrough eight times stronger during depreciations than appreciations. Additional findings suggest that improved monetary policy effectiveness is an important driver of our observed declining estimates of exchange rate passthrough over time, supporting the long-standing view that strengthening monetary policy frameworks and credibility helps mitigate the impact of depreciations on inflation. |
| Keywords: | Exchange rage passthrough; inflation; nonlinearities; Sub-Saharan Africa |
| Date: | 2024–03–15 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/059&r=cba |
| By: | Giorgio Massari (University of Pavia); Luca Portoghese (University of Pavia); Patrizio Tirelli (University of Pavia) |
| Abstract: | We show that popular models of (flight-to-) liquidity shocks rely on strongly counterfactual implications for asset returns and the composition of firms’ liabilities, including the return spread between bank deposits and T-bills and the share of bank loans on corporate debt. We also uncover some counterfactual/implausible interpretations of the Fed’s monetary policy stance during recession periods, as hinted by the estimated gap between policy and natural rates. By including the relevant financial variables as observables in our empirical model, we find that liquidity shocks played a negligible role and became virtually irrelevant after 2010. Our estimates also imply that the slowdown in productivity growth, not liquidity shocks, caused the post-2010 fall in the natural rate. Finally, our estimates provide a quite different interpretation of the monetary policy stance. |
| Keywords: | natural rate of interest, DSGE models, liquidity shocks, flight-to-quality, financial frictions |
| JEL: | C11 C32 C54 E43 E44 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:pav:demwpp:demwp0217&r=cba |
| By: | De Santis, Roberto A.; Tornese, Tommaso |
| Abstract: | We use nonlinear empirical methods to uncover non-linearities in the propagation of monetary policy shocks. We find that the transmission on output, goods prices and asset prices is stronger in a low growth regime, contrary to the findings of Tenreyro and Thwaites (2016). The impact is stronger on private investment and durables and milder on the consumption of nondurable goods and services. In periods of low growth, a contractionary monetary policy implies lower expected Treasury rates and higher premia along the entire Treasury yield curve. Similarly, the corporate excess bond premium rises and the stock market drops substantially during recessions. We use the monetary policy surprises and their predictors provided by Bauer and Swanson (2023a), and identify an additional predictor, the National Financial Condition Index (NFCI), which is relevant in the nonlinear setting. A Threshold VAR, a Smooth-Transition VAR and nonlinear local projection methods all corroborate the findings. JEL Classification: C32, E32 |
| Keywords: | asset prices, business cycles, local projections, monetary policy, non-linearities, STVAR, TVAR |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242919&r=cba |
| By: | Makram El-Shagi (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan) |
| Abstract: | In this paper, we reinterpret a novel approach that was designed to assess policy optimality given a known objective function. In the spirit of Uhlig’s “quantitative interpretation†, we reverse engineer the results to allow the estimation of the objective function, assuming that the policymaker aims for optimality. We show, that the Fed – despite its dual mandate – places far greater weight on business cycle stabilization than on combating inflation. |
| Keywords: | monetary policy, objective function |
| JEL: | E52 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:fds:dpaper:202403&r=cba |
| By: | Mr. Antonio David; Samuel Pienknagura; Juan Yepez |
| Abstract: | In this paper, we use quarterly data and a novel database on fiscal policy consolidation announcements, for a sample of advanced economies and emerging markets to quantify the effects of fiscal tightening on inflation expectations. We find that fiscal consolidation announcements reduce inflation expectations over the medium-term (three and five-years ahead), but not in the short-term (one-year ahead). There is also some evidence that consolidation announcements reduce “disagreement” about expected future inflation at longer horizons. The inflation anchoring role of consolidation announcements is enhanced by the strength of a country’s fiscal and monetary frameworks, and when fiscal and monetary policy work in tandem. In addition, we find that initial conditions matter—inflation expectation’s response to consolidation announcements is larger in periods of high contemporaneous inflation. With these results in hand, we show that the effectiveness of fiscal consolidation in controlling realized inflation depends greatly on the response of inflation expectations to consolidation announcements. These results show that fiscal policy is crucial to anchor inflation expectations and a key element of a credible disinflationary process. |
| Keywords: | Fiscal Consolidations; Fiscal Policy; Inflation Expectations; Narrative Approach |
| Date: | 2024–03–15 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/060&r=cba |
| By: | Malgorzata OLSZAK (Wydzial Zarzadzania, Uniwersytet Warszawski); Christophe J. GODLEWSKI (LaRGE Research Center, Université de Strasbourg); Gracjan BACHUREWICZ (Wydzial Zarzadzania, Uniwersytet Warszawski) |
| Abstract: | This study investigates income-smoothing through loan-loss provisions among European Economic Area banks, with a focus on the Covid-19 crisis. Results indicate a pandemic-induced rise in income-smoothing, particularly in countries receiving substantial liquidity support from fiscal schemes and the European Central Bank’s Pandemic Emergency Purchase Program. This trend is mitigated in nations with robust governance and financial openness. Market structure and financial development, while not affecting income-smoothing, influence loan-loss provision levels. Macroprudential vulnerabilities also play a role, as a stricter macroprudential oversight correlates with reduced earnings management via loan-loss provisions. Notably, banks in countries with heightened pre-crisis countercyclical buffers did not engage in income-smoothing during the pandemic, but a zero-buffer rate was associated with a higher degree of income-smoothing. The findings underscore the significance of macroprudential policies in curbing opportunistic financial reporting during economic downturns. |
| Keywords: | loan-loss provisions, income-smoothing, Covid-19 crisis, liquidity support, governance, finance and macroprudential vulnerabilities |
| JEL: | E44 E58 G21 G28 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:lar:wpaper:2024-03&r=cba |
| By: | Boran Plong; Neil Maru |
| Abstract: | From the autumn of 2023 into early 2024, the Canadian Overnight Repo Rate Average (CORRA), a measure of the cost of overnight general collateral Canadian dollar repos, was consistently well above the Bank’s target for the overnight rate. We find that, among several factors, long bond positions that require repo financing are the main driver of the recent upward pressure on CORRA. |
| Keywords: | Financial markets; Interest rates; Lender of last resort; Monetary policy implementation |
| JEL: | D4 D5 D53 E4 E43 E44 E5 E52 G1 G12 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocsan:24-4&r=cba |
| By: | Barrie, Mohamed Samba; Jackson, Emerson Abraham; Pessima, Joseph |
| Abstract: | This study examines the duality of the exchange rate market in Sierra Leone, delving into the distinct impacts of the official and parallel exchange rates (between the Leone and the United States Dollar) on inflation. Employing the Autoregressive Distributed Lag (ARDL) approach and utilizing annual time series data from 1980 to 2020, the research reveals that the depreciation of the Leone significantly influences inflation. This effect is more pronounced in the case of the parallel exchange rate, where a 1% depreciation results in a 1.26 percentage point increase in inflation, gradually decreasing to 0.92 percentage point over two years. Conversely, the depreciation of the official rate leads to a 0.43 percentage point increase inflation and subsequently to 0.52 percentage point increase in inflation for every 1% depreciation of the official exchange rate in the second year. The findings confirm the significance of both official and parallel exchange rates in influencing inflation, highlighting a substantial difference in their effects on the economy. Nevertheless, the results indicate no statistically significant long-term relationship between inflation and both the official and parallel exchange rates in Sierra Leone. Exchange rate depreciation, particularly in the parallel market, is shown to have a pronounced impact on inflation, necessitating careful oversight and regulation of the parallel market to ensure price stability. The study also uncovers the presence of foreign exchange market fragmentation, posing challenges to effective monetary policy and exchange rate management. Policy implications drawn from the research underscore the importance of regulating the parallel market to enhance transparency and stability. Integrating fragmented foreign exchange markets is deemed crucial for minimizing exchange rate pass through to inflation. Acknowledging the data limitations, the research suggests enriching future investigations by incorporating recent data, global economic factors, and investor sentiments, all of which have the tendency to affect exchange rate movements. |
| Keywords: | Official Exchange Rate, Parallel Exchange Rate, Inflation, exchange-rate-market-duality, Sierra Leone |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:287775&r=cba |
| By: | Oscar Volij (BGU) |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:bgu:wpaper:2402&r=cba |
| By: | Kenneth G. Stewart (Department of Economics, University of Victoria) |
| Abstract: | The quantity theory of money hypothesizes that the price level is determined through the equilibration of money supply and demand. Predicated on this causal structure, a single-equation error correction model decomposes from a larger vector autoregressive system so as to make available bounds tests for a levels relationship that are robust to the univariate integration properties of the variables. This model is estimated using three alternative money stock measures and three standard specifications for money demand. The hypothesis of a long run relationship between the levels of money, prices, and income is generally supported by a century of U.S.\ data. Across this range of models and aggregates, the classic quantity theory proposition of one-for-one associations between prices and each of money and income is best satisfied when M2 is the monetary aggregate. Based on a preferred model in which money demand is loglinear in the rate of interest, and with structural change treated by indicator saturation, the welfare cost of inflation is estimated to have ranged between 0.362 and 1.326 percent of national income at interest rates experienced by the United States during the past century. |
| Keywords: | quantity theory of money, money demand, bounds tests, indicator saturation, welfare cost of inflation |
| Date: | 2023–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:vic:vicddp:2023&r=cba |