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on Central Banking |
| By: | Caccia, Enea; Tapking, Jens; Vlassopoulos, Thomas |
| Abstract: | This paper discusses the impact that a retail central bank digital currency (CBDC) could have on the implementation of monetary policy. Monetary policy implementation could be affected if the introduction of the retail CBDC changes the volume of commercial bank deposits held by customers, which would, in turn, affect central bank reserves. While it is often assumed that customer deposits would decrease if a CBDC was introduced, we provide arguments why this is by no means clear cut and deposits could even increase. If bank deposits do decrease, banks would need to draw on, and therefore reduce, their central bank reserve holdings. Moreover, uncertainty as to the timing and extent of any conversions of deposits into CBDC might prompt banks to scale up their demand for central bank reserves in order to hold larger precautionary buffers. Consequently, central banks might need to adjust their reserve supply and other features of their monetary policy implementation, depending, for example, on whether they use a floor or a corridor system for monetary policy implementation. In the specific case of the digital euro, the features already envisaged for its design would make it possible to minimise the risk of negative consequences for monetary policy implementation. JEL Classification: E41, E42, E43, E52, E58, G21 |
| Keywords: | central bank digital currency, central bank reserves, monetary policy implementation |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2024345&r=cba |
| By: | Sepp, Tim Florian; Israel, Karl-Friedrich; Treitz, Benjamin; Hartl, Tom |
| Abstract: | This paper examines the heterogeneous effects of the ECB's monetary policies on the resilience of the German banking system between 1999 to 2022. We distinguish between the main bank types in Germany: Large Banks, Regional Banks, Sparkassen, Landesbanken and Credit Unions. We proxy bank-type resilience by a zscore measure. We use structural monetary policy shocks relying on high-frequency identification methods. Unconventional monetary policy shocks are decomposed into three parts: timing shocks, forward guidance, and quantitative easing. We estimate the resilience of German bank types in response to expansionary monetary policy shocks by producing impulse response functions through local projections. Conventional monetary easing is associated with weakened resilience for all bank types. Unconventional monetary policies have heterogeneous effects on German bank types. Shocks to short-term interest rate expectations (i.e. timing shocks) are associated with increasing resilience of Large Banks, Regional Banks and Landesbanken, but with decreasing resilience of the others. Forward guidance only has a positive impact on the resilience of Sparkassen. Large-scale asset purchases through quantitative easing tend to the increase resilience of Large Banks and Sparkassen, but decrease the resilience of Regional Banks, Credit Unions and Landesbanken, in both, the short and long run. |
| Keywords: | Resilience, Financial Stability, Monetary Policy, Unconventional Monetary Policy, Banking System, Germany |
| JEL: | E42 E52 G21 M41 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:leiwps:289620&r=cba |
| By: | Luca Fornaro; Christoph Grosse-Steffen |
| Abstract: | We provide a theory of financial fragmentation in monetary unions. Our key insight is that currency unions may experience of symmetry: that is episodes in which identical countries react differently when exposed to the same shock. During these events part of the union suffers a capital flight, while the rest acts as a safe haven and receives inflows. The central bank then faces a difficult trade-off between containing unemploymnet in capital-flight countries, and inflationary pressures in safe-haven ones. By counteracting private capital flows with public ones, unconventional monetary interventions mitigate the impact of financial fragmentation on employment and inflation, thus helping the central bank to fulfill its price stability mandate. |
| Keywords: | Monetary unions, euro area, fragmentation, optimal monetary policy in openeconomies, Capital flows, fiscal crises, unconventional monetary policies, inflation, endogenous breaking of symmetry, Optimum |
| JEL: | E31 E52 F32 F41 F42 F45 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:1437&r=cba |
| By: | Christensen, Jens H. E. (Federal Reserve Bank of San Francisco,); Zhang, Xin (Research Department, Central Bank of Sweden) |
| Abstract: | We assess the impact of large-scale asset purchases, commonly known as quantitative easing (QE), conducted by Sveriges Riksbank and the European Central Bank (ECB) on bond risk premia in the Swedish government bond market. Using a novel arbitrage-free dynamic term structure model of nominal and real bond prices that accounts for bond- specific safety premia, we find that Sveriges Riksbank's bond purchases raised inflation and short-rate expectations, lowered nominal and real term premia and inflation risk premia, and increased nominal bond safety premia, suggestive of signaling, portfolio rebalance, and safe asset scarcity effects. Furthermore, we document spillover effects of ECB's QE programs on Swedish bond markets that are similar to the Swedish QE effects only after controlling for exchange rate fluctuations, highlighting the importance of exchange rate dynamics in the transmission of QE spillover effects. |
| Keywords: | term structure modeling; nancial market frictions; safety premium; unconventional monetary policy |
| JEL: | C32 E43 E52 E58 F41 F42 G12 |
| Date: | 2024–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0434&r=cba |
| By: | Marco Cipriani; Daniel Fricke; Stefan Greppmair; Gabriele La Spada; Karol Paludkiewicz |
| Abstract: | As shown in a past Liberty Street Economics post, in the United States, the yields of money market fund (MMF) shares respond to changes in monetary policy rates much more than the rates of bank deposits; in other words, the MMF beta is much higher than the deposit beta. Consistent with this, the size of the U.S. MMF industry fluctuates over the interest rate cycle, expanding during times of monetary policy tightening. In this post, we show that the relationship between the policy rates of the European Central Bank (ECB) and the size of European MMFs investing in euro-denominated securities is also positive—as long as policy rates are positive; after the ECB introduced negative policy rates in 2015, that relationship broke down, as MMFs received large inflows during this period. |
| Keywords: | monetary policy; euro-denominated money market funds; Pass-through |
| JEL: | G23 E4 E5 |
| Date: | 2024–04–11 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:98056&r=cba |
| By: | Scott, David (Central Bank of Ireland); Pratap Singh, Anuj (Central Bank of Ireland) |
| Abstract: | Mortgage switching, and the choice of contract type, can have important implications for borrower resilience to interest rate movements. In this Note, we focus on switching in the Irish mortgage market in the run-up to (August 2018-June 2022) and early phase of the European Central Bank’s (ECB) contractionary monetary policy from July to December 2022. Using the Central Credit Register (CCR), we find that mortgage switching had been steadily increasing in the period of falling interest rates since 2018 but grew particularly quickly during the early months of the ECB’s monetary policy tightening cycle. The increase in switching was primarily to and from fixed-rate contracts, and remained strong even as the immediate short-term monetary gains from switching were reducing, signifying borrower’s forward-looking choices in seeking to avoid future increases in monthly repayments. We also find that non-banks were particularly important in leading interest rates downwards from 2019 to 2022, a trend which reversed abruptly once ECB policy rates rose. In terms of borrowers’ financial outcomes, we find interest rate gains from mortgage switching of up to 1.3 pp, equating to annual savings worth €2, 000 on average. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:fsnote:2/fs/24&r=cba |
| By: | Nocciola, Luca; Zamora-Pérez, Alejandro |
| Abstract: | We shed light on the demand for a central bank digital currency (CBDC) as a means of payment, based on survey payment data. We provide a quantitative framework to assess transactional demand for CBDC at the point of sale, accommodating a wide range of design choices. We develop a structural model of payment means adoption and usage and estimate CBDC demand based on individuals’ preferences for payment method attributes. We disentangle the friction potentially associated to CBDC adoption, assessing two of its potential drivers: information frictions and gradual diffusion of digital payment methods. We find that modelling adoption is key to understanding CBDC demand. Finally, we show that optimal CBDC design, information campaigns, and network effects can substantially boost demand. JEL Classification: E41, E42, E47 |
| Keywords: | CBDC, money demand, payments, Random utility, structural model |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242926&r=cba |
| By: | Hassan Afrouzi; Marina Halac; Kenneth S. Rogoff; Pierre Yared |
| Abstract: | We present a simple long-run aggregate demand and supply framework for evaluating long-run inflation. The framework illustrates how exogenous economic and political economy factors generate central bank pressures that can impact long-run inflation as well as transitions between steady states. We use the analysis to provide a fresh perspective on the forces that drove global inflation downward over the past four decades. We argue that for inflation to remain low and stable in the future, political economy factors, such as strengthened central bank independence or more credible public debt policy, would need to offset the global economic pressures now pushing average long-run inflation upwards. |
| JEL: | E5 E6 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32308&r=cba |
| By: | Joshua Aizenman; Donghyun Park; Irfan A. Qureshi; Gazi Salah Uddin; Jamel Saadaoui |
| Abstract: | We investigate the determinants of emerging markets performance during five U.S. Federal Reserve monetary tightening and easing cycles during 2004–2023. We study how macroeconomic and institutional conditions of an Emerging Market (EM) at the beginning of a cycle explain EM resilience during each cycle. More specifically, our baseline cross-sectional regressions examine how those conditions affect three measures of resilience, namely bilateral exchange rate against the USD, exchange rate market pressure, and country-specific Morgan Stanley Capital International index (MSCI). We then stack the five cross-sections to build a panel database to investigate potential asymmetry between tightening versus easing cycles. Our evidence indicates that macroeconomic and institutional variables are associated with EM performance, determinants of resilience differ during tightening versus easing cycles, and institutions matter more during difficult times. Our specific findings are largely consistent with economic intuition. For instance, we find that current account balance, international reserves, and inflation are all important determinants of EM resilience. |
| JEL: | E58 F32 F36 F44 G12 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32303&r=cba |
| By: | Frantisek Brazdik; Tatiana Keseliova; Karel Musil; Radek Snobl; Jan Solc; Stanislav Tvrz; Jan Zacek |
| Abstract: | We investigate inflation expectations and their measures in the context of the 2022 inflation surge in the Czech Republic. Using data and econometric analyses, we explore how inflation expectations are formed and how they may affect inflation developments. To capture the overall trend of inflation expectations in the Czech economy, we develop a Common Inflation Expectations index. Additionally, we extend the CNB's g3+ core projection model by incorporating endogenous expectation premiums that reflect elevated inflation expectations. Utilizing the Common Inflation Expectations index and the modified model, we construct a simulation that provides policy-relevant outcomes when addressing high inflation. By presenting the simulation, we emphasize the importance and relevance of our research for practical policymaking. |
| Keywords: | Forecasting, inflation, inflation expectations, inflation expectations index, structural modelling |
| JEL: | C32 C50 E31 E37 E50 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2024/3&r=cba |
| By: | Srichander Ramaswamy (The South East Asian Central Banks (SEACEN) Research and Training Centre) |
| Abstract: | The view that cryptocurrencies can be a substitute for fiat currencies in an interconnected and digitised world appears to be gaining some traction. Such views are reinforced by the high fee banks charge on cross-border money transfers and for certain other financial services. The belief that cryptocurrencies will define the future of money is entrenched among millennials, and this belief has been driving up the demand for cryptocurrencies. Stablecoins in this ecosystem has taken on the role of the unit of account for crypto assets and is instrumental in providing liquidity as well as in facilitating trading of crypto assets. To play this role, stablecoins are being extensively used as collateral in crypto transactions with trading platforms holding such collateral in omnibus accounts. The global regulatory community is taking note of this and has expressed concerns that as the market for stablecoins and cryptocurrencies grow, potential risks to the broader financial system from runs on stablecoins can be damaging. This paper reviews these developments and provides some suggestions for policy drawing on the regulatory debates and initiatives from standard setters to address the risks identified. |
| Keywords: | Central banks, collateral, cryptocurrencies, financial stability, regulation, stablecoins |
| JEL: | E42 E58 G21 G23 G28 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:sea:wpaper:wp54&r=cba |
| By: | Christina Anderl; Guglielmo Maria Caporale |
| Abstract: | This paper investigates the inflation effects of oil price expectations shocks constructed as functional shocks, i.e. as shifts in the entire oil futures term structure (both standard and risk-adjusted). The latter are then included in a vector autoregressive model with exogenous variables (VARX) to examine the US case. Counterfactual analysis is also carried out to investigate second-round effects on inflation through the inflation expectations channel. These are found to be significant, in contrast to earlier studies based on standard oil price shocks. Additional nonlinear local projections including a shock decomposition exercise show that inflation and inflation expectations are primarily driven by changes in the curvature (level and slope) factor when the latter are anchored (unanchored). These findings provide useful information to policymakers concerning the impact of oil price expectations on inflation and inflation expectations. |
| Keywords: | functional shocks, oil price expectations, inflation anchoring, counterfactual analysis |
| JEL: | C32 E31 Q43 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10998&r=cba |
| By: | Aurélien Goutsmedt (UCL - Université Catholique de Louvain = Catholic University of Louvain, FNRS - Fonds National de la Recherche Scientifique [Bruxelles]); Francesco Sergi (UPE - Université Paris-Est, LIPHA - Laboratoire Interdisciplinaire d'étude du Politique Hannah Arendt Paris-Est - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12 - Université Gustave Eiffel); Béatrice Cherrier (ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique, X - École polytechnique, CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique); François Claveau (UdeS - Université de Sherbrooke, CIRST - Centre interuniversitaire de recherche sur la science et la technologie - UdeM - Université de Montréal - UQAM - Université du Québec à Montréal = University of Québec in Montréal); Clément Fontan (Université Saint-Louis - Bruxelles, UCL - Université Catholique de Louvain = Catholic University of Louvain); Juan Acosta (Univalle - Universidad del Valle [Cali]) |
| Abstract: | Why do policymakers and economists within a policymaking institution choose to throw away a model and to develop an alternative one? Why do they choose to stick to an existing model? This article contributes to the literature on the history and philosophy of modelling by answering these questions. It delves into the dynamics of persistence, change, and building practices of macroeconomic modelling, using the case of forecasting models at the Bank of England (1974-2014). Based on archives and interviews, we document the multiple factors at play in model building and model change. We identify three sets of factors: the agency of modellers, institutional factors, and the material factor. Our investigation shows the diversity of explanations behind the decision to change a model: each time, model replacement resulted from a different combination of the three types of factors. |
| Keywords: | Central bank, Forecasting, Macroeconomic modeling, Bank of England, Models |
| Date: | 2024–01–31 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04181871&r=cba |
| By: | Jean-Francois Mercier |
| Abstract: | Economists generally agreed that neutral real interest rates (r*) had declined in the decades preceding the Covid-19 crisis, in both advanced and emerging economies. However, analyses differed as to the drivers of that decline. While past pandemics generally tended to depress neutral rates, policy responses and low mortality among the active population limited the direct impact of Covid-19 on r*, at least in major economies. Beyond Covid-19, trends in other drivers of neutral rates (demographics, potential growth, public debt) suggest that r* should remain low in coming years. However, r* may not be declining further and could even edge up modestly in the short term. That said, the latest supply shocks have increased challenges in measuring short-term changes to r*. Hence, central banks may place less focus on r* in the near term, at least until the current inflation shock has abated. |
| Date: | 2023–06–29 |
| URL: | http://d.repec.org/n?u=RePEc:rbz:oboens:11046&r=cba |
| By: | Stefanie Stantcheva |
| Abstract: | This paper provides new evidence on a long-standing question asked by Shiller (1997): Why do we dislike inflation? I conducted two surveys on representative samples of the US population to elicit people’s perceptions about the impacts of inflation and their reactions to it. The predominant reason for people’s aversion to inflation is the widespread belief that it diminishes their buying power, as neither personal nor general wage increases seem to match the pace of rising prices. As a result, respondents report having to make costly adjustments in their budgets and behaviors, especially among lower-income groups. Inflation also provokes stress, emotional responses, and a sense of inequity, as the wages of high-income individuals are perceived to grow more rapidly amidst inflation. Many respondents believe that firms have considerable discretion in setting wages, opting not to raise them in order to boost profits, rather than being compelled by market dynamics. The potential positive associations of inflation, such as with reduced unemployment or enhanced economic activity, are typically not recognized by respondents. Inflation ranks high in priority among various economic and social issues, with respondents blaming the government and businesses for it. I also highlight a substantial polarization in attitudes towards inflation along partisan lines, as well as across income groups. |
| JEL: | E12 E40 E50 E70 G5 P43 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32300&r=cba |