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on Central Banking |
| By: | Alice Albonico; Guido Ascari; Qazi Haque |
| Abstract: | We estimate a medium-scale DSGE model for the Euro Area allowing and testing for indeterminacy since the introduction of the euro until mid-2023. Our estimates suggest that monetary policy in the euro area was passive, leading to indeterminacy and self-fulfilling dynamics. Indeterminacy dramatically alters the transmission of fundamental shocks, particularly for inflation whose responses are inconsistent with standard economic theory. Inflation increases following a positive supply or a negative demand shock. Consequently, demand shocks look like supply shocks and vice versa, making the dynamics of the model under indeterminacy challenging to interpret. However, this finding is not robust across different assumptions on the way the sunspot shock is specified in the estimation. Both under determinacy and indeterminacy, the model estimates a natural rate of interest that turned positive after the recent inflation episode. |
| Keywords: | monetary policy, indeterminacy, euro area, business cycle fluctuations, inflation |
| JEL: | E32 E52 C11 C13 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:mib:wpaper:535&r= |
| By: | Tingguo Zheng; Hongyin Zhang; Shiqi Ye |
| Abstract: | This paper introduces a novel multi-moment connectedness network approach for analyzing the interconnectedness of green financial market. Focusing on the impact of monetary policy shocks, our study reveals that connectedness within the green bond and equity markets varies with different moments (returns, volatility, skewness, and kurtosis) and changes significantly around Federal Open Market Committee (FOMC) events. Static analysis shows a decrease in connectedness with higher moments, while dynamic analysis highlights increased sensitivity to event-driven shocks. We find that both tight and loose monetary policy shocks initially elevate connectedness within the first six months. However, the effects of tight shocks gradually fade, whereas loose shocks may reduce connectedness after one year. These results offer insight to policymakers in regulating sustainable economies and investment managers in strategizing asset allocation and risk management, especially in environmentally focused markets. Our study contributes to understanding the complex dynamics of the green financial market in response to monetary policies, helping in decision-making for sustainable economic development and financial stability. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2405.02575&r= |
| By: | Valère Fourel; Alice Schwenninger |
| Abstract: | The Covid-19 crisis triggered a “dash for cash” phenomenon that revealed vulnerabilities on short-term debt markets. To foster monetary policy transmission and indirectly to ensure firms’ short-term financing needs, the Eurosystem effectively bought for the first time corporate commercial paper (CP) market in March 2020, as part of the Pandemic Emergency Purchase Programme (PEPP).Using a difference-in-differences approach that exploits the PEPP eligibility criteria, our findings suggest that the program triggered a shift in the debt composition of eligible firms. Maturity at issuance increased on average by 42 days for eligible issuers, which contributed to a reduction in rollover risk. This asset purchase program was effective in easing financing conditions, which translated into a compression of yields between 8 and 11 basis points for eligible firms. Eligible issuances increased but we do not find that the PEPP fostered issuance at the aggregate level. For issuers whose debt was mainly held by money market funds prior to the crisis, we found that the effect on maturity is more contained, indicating that firms’ investor sector matters. |
| Keywords: | Commercial Paper, Pandemic Emergency Purchase Programme, Eurosystem, Debt Structure, Money Market Funds |
| JEL: | E52 E58 G01 G12 G20 G23 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:946&r= |
| By: | José Cristi; Ṣebnem Kalemli-Özcan; Mariana Sans; Filiz D. Unsal |
| Abstract: | We study the international transmission of U.S. monetary policy (FED hikes) and a strong U.S. dollar. Both of these variables are endogenous and thus we follow the recent developments in the literature to measure the exogenous components of each from the perspective of the rest of the world (ROW). We show that while U.S. monetary policy shocks act as financial shocks increasing risk premia in emerging markets, a shock to U.S. dollar does not generate the same effect. |
| JEL: | F30 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32330&r= |
| By: | Olivier Armantier; Charles Holt |
| Abstract: | A core responsibility of a central bank is to ensure financial stability by acting as the “lender of last resort” through its Discount Window. The Discount Window, however, has not been effective because its usage is stigmatized. In this paper, we study experimentally how such stigma can be cured. We find that, once a Discount Window facility is stigmatized, removing stigma is difficult. This result is consistent with the Federal Reserve’s experiences which have been unsuccessful at removing the stigma associated with its Discount Window. |
| Keywords: | lender-of-last-resort (LOLR); Lender of last resort; discount window; stigma; laboratory experiments |
| JEL: | E58 G01 C92 |
| Date: | 2024–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:98224&r= |
| By: | Daniel A. Dias; Joao B. Duarte |
| Abstract: | Being a homeowner is one of the tenets of the American dream. In general, relative to renting, people see homeownership as a path to wealth through the usual appreciation of the house prices and the forced savings through mortgage payments but also a path to financial stability through more stable and predictable housing costs (Young et al., 2023). |
| Date: | 2024–05–03 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfn:2024-05-03-2&r= |
| By: | Breckenfelder, Johannes; De Falco, Veronica |
| Abstract: | Large-Scale Asset Purchases can impact the price of securities directly, when securities are targeted by the central bank, or indirectly through portfolio re-balancing of private investors. We quantify both the direct and the portfolio re-balancing impact, emphasizing the role of investor heterogeneity. We use proprietary security-level data on asset holdings of different investors. We measure the direct impact on security level, finding that it is smaller for securities predominantly held by more price-elastic investors, funds and banks. Comparing a security at the 90th percentile of the investor elasticity distribution to a security at the 10th percentile, the price impact is only two-thirds as large. To assess the portfolio re-balancing effects, we construct a novel shift-share instrument to measure investors’ quasi-exogenous exposure to central bank purchases, based on investors’ holdings of eligible securities before the QE program was announced. We show that funds and banks sell eligible securities to the central bank and re-balance their portfolios towards ineligible securities, with investors ex-ante more exposed to central bank purchases re-balancing more. Using detailed holdings data of mutual funds, we estimate that for each euro sold to the central bank, the average fund allocates 88 cents to ineligible assets and 12 cents to other eligible assets that the central bank does not buy in that time period. The price of ineligible securities held by more exposed funds increases compared to those held by less exposed funds, underscoring the portfolio re-balancing channel at work. JEL Classification: E52, E58, G11, G12, G23 |
| Keywords: | asset pricing, central bank, financial intermediaries, mutual funds |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242938&r= |
| By: | Budnik, Katarzyna; Ponte Marques, Aurea; Giglio, Carla; Grassi, Alberto; Durrani, Agha; Figueres, Juan Manuel; Konietschke, Paul; Le Grand, Catherine; Metzler, Julian; Población García, Francisco Javier; Shaw, Frances; Groß, Johannes; Sydow, Matthias; Franch, Fabio; Georgescu, Oana-Maria; Ortl, Aljosa; Trachana, Zoe; Chalf, Yasmine |
| Abstract: | This paper provides an overview of stress-testing methodologies in Europe, with a focus on the advancements made by the European Central Bank’s Financial Stability Committee Working Group on Stress Testing (WGST). Over a four-year period, the WGST played a pivotal role in refining stress-testing practices, promoting collaboration among central banks and supervisory authorities and addressing challenges in the evolving financial landscape. The paper discusses the development and application of various stress-testing models, including top-down models, macro-micro models and system-wide models. It highlights the integration of new datasets and model validation efforts as well as the expanded use of stress-testing methodologies in risk and policy evaluation and in communication. The collaborative efforts of the WGST have demystified stress-testing methodologies and fostered trust among stakeholders. The paper concludes by outlining the future agenda for continued improvements in stress-testing practices. JEL Classification: G21, G28, C58, G01, G18 |
| Keywords: | Basel III, communication, COVID-19 mitigation, economic activity, financial system model, impact assessment, lending, macro-financial scenarios, prudential policies, stress testing, uncertainty, Working Group on Stress Testing |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2024348&r= |
| By: | Andrew Binning (The Treasury) |
| Abstract: | Fiscal multipliers provide a way of quantifying the GDP gain for a given (discretionary) fiscal policy intervention. I compute government consumption multipliers for New Zealand, in normal times and when monetary policy is constrained at the effective lower bound, using an estimated monetary-fiscal dynamic stochastic general equilibrium model. Quantifying the impact of discretionary fiscal policy is important when considering the design of fiscal support packages to offset future economic downturns. I calculate multipliers under a number of different monetary policy assumptions when imposing the lower bound on interest rates. I investigate the range of results implied by the model and the features of the policy and economic environments that lead to larger government consumption multipliers. I find that estimated government consumption multipliers are larger when interest rates are at the lower bound, but still smaller than 1, when entry and exit to the lower bound are determined by both economic conditions and the central bank’s reaction function. This implies increases in government consumption crowd out other expenditure. When the central bank can commit to holding interest rates fixed for 2 or more years, independent of economic conditions, government consumption multipliers can exceed 1. Factors that amplify demand shocks are more likely to increase multipliers, especially at the lower bound, though these features may be undesirable for macroeconomic stabilisation more generally. Larger government consumption multipliers are not an end in themselves, rather the size of the multipliers can influence the design of discretionary policy programmes. |
| Keywords: | Government consumption multipliers; monetary policy; effective lower bound; prior predictive analysis; Monte Carlo filtering |
| JEL: | C11 E52 E62 E63 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nzt:nztwps:24/01&r= |
| By: | Porcellacchia, Davide; Sheedy, Kevin D. |
| Abstract: | In financial crises, the premium on liquid assets such as US Treasuries increases alongside credit spreads. This paper explains the link between the liquidity premium and spreads. We present a theory of endogenous bank fragility arising from a coordination friction among bank creditors. The theory’s implications reduce to a single constraint on banks, which is embedded in a quantitative macroeconomic model to investigate the transmission of shocks to spreads and economic activity. Shocks that reduce bank net worth exacerbate the coordination friction. In response, banks lend less and demand more liquid assets. This drives up both credit spreads and the liquidity premium. By mitigating the coordination friction, expansions of public liquidity reduce spreads and boost the economy. Empirically, we identify high-frequency exogenous variation in liquidity by exploiting the time lag between auction and issuance of US Treasuries. We find a causal effect on spreads in line with the calibrated model. JEL Classification: E41, E44, E51, G01, G21 |
| Keywords: | bank-lending channel, bank runs, liquid assets |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242939&r= |
| By: | Mauricio Barbosa-Alves (University of Minnesota); Javier Bianchi (Federal Reserve Bank of Minneapolis); César Sosa-Padilla (University of Notre-Dame/NBER) |
| Abstract: | This paper investigates how a government should manage international reserves whenit faces the risk of a rollover crisis. We ask, should the government accumulate reservesor reduce debt to make itself less vulnerable? We show that the optimal policy entailsinitially reducing debt, followed by a subsequent increase in both debt and reserves asthe government approaches a safe zone. Furthermore, we uncover that issuing additionaldebt to accumulate reserves can lead to a reduction in sovereign spreads. |
| Keywords: | International reserves, sovereign debt, rollover crises. |
| JEL: | E4 E5 F32 F34 F41 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:aoz:wpaper:321&r= |
| By: | Boris Chafwehé; Andrea Colciago; Romanos Priftis |
| Abstract: | This paper proposes a New Keynesian multi-sector industry model incorporating firm heterogeneity, entry, and exit dynamics, while considering energy production from both fossil fuels and renewables. We examine the impacts of a sustained fossil fuel price hike on sectoral size, labor productivity, and inflation. Final good sectors are ex-ante heterogeneous in terms of energy intensity in production. For this reason, a higher relative price of fossil resources affects their profitability asymmetrically. Further, it entails a substitution effect that leads to a greener mix of resources in the production of energy. As production costs rise, less efficient firms leave the market, while new entrants must display higher idiosyncratic productivity. While this process enhances average labor productivity, it also results in a lasting decrease in the entry of new firms. A central bank with a strong anti-inflationary stance can circumvent the energy price increase and mitigate its inflationary effects by curbing rising production costs while promoting sectoral reallocation. While this entails a higher impact cost in terms of output and lower average productivity, it leads to a faster recovery in business dynamism in the medium-term. |
| Keywords: | Energy, productivity, firm entry and exit, monetary policy. |
| JEL: | E62 L16 O33 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:mib:wpaper:534&r= |
| By: | Paduano, Stephen |
| Abstract: | Eurozone countries are financially and politically pivotal to the Special Drawing Rights (SDRs) rechannelling agenda.1 Collectively, they hold $200bn in SDRs (just over 20% of all SDRs), and the Eurozone countries which are G-20 members hold $120bn in SDRs (just under 20% of the G-20’s SDRs). These countries are also the most ambitious and proactive members of the SDR system, with France being the first advocate of SDR rechanneling and Spain being the first to rechannel (to the IMF Resilience and Sustainability Trust - RST). However, the Eurozone’s capacity to lead on and participate in SDR rechanneling has been complicated by the European Central Bank (ECB). President Lagarde has expressed that SDR rechanneling to Multilateral Development Banks (MDBs) may not preserve the reserve asset characteristic of the SDR and may violate the prohibition on monetary financing. Building on Paduano and Maret (2023), this paper demonstrates that certain forms of SDR rechanneling can clearly satisfy the ECB’s concerns — and, more importantly, that the rechanneling of reserve assets to multilateral development banks already occurs. |
| Keywords: | European Central Bank, eurosystem, national central banks, Special Drawing Rights, International Monetary Fund, World Bank, global development, international financial architecture |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpm:notfdl:2305&r= |
| By: | Joerg Mayer |
| Abstract: | Traditional trust-related de-dollarization motives have gained additional impetus from the declining share of the United States in global output, recent upheaval in dollar bond markets, geopolitical tensions, and a “weaponization†of the dollar. Several institutional innovations by China and the BRICS demonstrate the demand for de-dollarization but do not offer credible alternatives to the dollar’s value characteristics. By contrast, new financial technology, including distributed ledger technology (DLT), and related changes in cross-border payment infrastructure could reduce the network effects that have sustained dollar dominance. By allowing for leaner cross-border payment infrastructures and an easier, cheaper, and more transparent use of non-dollar currencies in cross-border payment and settlement, DLT-based wholesale central bank digital currency (wCBDC) platforms with a foreign-exchange conversion layer may indicate a direction of travel. Pilots of multicurrency wCBDC-platforms indicate how to enable interoperability and reduce exposure to foreign-exchange risk. Regarding institutional (legal, regulatory, and supervisory) frameworks required to fully benefit from infrastructural changes, interlinking common multicurrency wCBDC-platforms among limited numbers of like-minded central banks to form an interoperable hub-and-spoke global wCBDC-system could minimize fragmentation risks while accommodating diverging governance preferences, e.g., concerning data protection and developmental aspirations. By augmenting macroeconomic autonomy and reducing the need for costly dollar reserves, de-dollarization promises greater benefits for countries with non-dominant currencies. These countries should sit at the table when outstanding questions on interoperability and related economic, technical, legal and governance questions regarding multicurrency wCBDCs platforms are answered. |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:imk:fmmpap:102-2024&r= |
| By: | Yuliya Rychalovska; Sergey Slobodyan; Raf Wouters |
| Abstract: | The use of survey information on inflation expectations as an observable in a DSGE model can substantially refine identification of the shocks that drive inflation. Optimal integration of the survey information improves the model forecast for inflation and for other macroeconomic variables. Models with expectations based on an Adaptive Learning setup can exploit survey information more efficiently than their Rational Expectations counterparts. The resulting time-variation in the perceived inflation target, in inflation persistence and in the sensitivity of inflation to various shocks provide a rich and consistent description of the joint dynamics of realized and expected inflation. Our framework produces a reasonable interpretation of the post-Covid inflation dynamics. Our learning model successfully identifies the more persistent nature of the recent inflation surge. |
| Keywords: | Inflation, Expectations, Survey data, Adaptive Learning, DSGE models |
| JEL: | C5 D84 E3 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp781&r= |
| By: | Lawrence Christiano; Martin S. Eichenbaum; Benjamin K. Johannsen |
| Abstract: | This paper investigates what features of an economy determine whether convergence under learning is fast or slow. In all of the models that we consider, people's beliefs about model outcomes are central determinants of those outcomes. We argue that under certain circumstances, convergence of a learning equilibrium to the rational expectations equilibrium can be so slow that policy analysis based on rational expectations is very misleading. We also develop new analytic results regarding rates of convergence in learning models. |
| JEL: | E12 E39 E70 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32358&r= |
| By: | Raphael Auer; Mathieu Pedemonte; Raphael Schoenle |
| Abstract: | Is inflation (still) a global phenomenon? We study the international co-movement of inflation based on a dynamic factor model and in a sample spanning up to 56 countries during the 1960-2023 period. Over the entire period, a first global factor explains approximately 58% of the variation in headline inflation across all countries and over 72% in OECD economies. The explanatory power of global inflation is equally high in a shorter sample spanning the time since 2000. Core inflation is also remarkably global, with 53% of its variation attributable to a first global factor. The explanatory power of a second global factor is lower, except for select emerging economies. Variables such as a broad dollar index, the US federal funds rate, and a measure of commodity prices positively correlate with the first global factor. This global factor is also correlated with US inflation during the 70s, 80s, the GFC, and COVID. However, it lags these variables during the post-COVID period. Country-level integration in global value chains accounts for a significant proportion of the share of both local headline and core inflation dynamics explained by global factors. |
| Keywords: | globalization; inflation; Phillips curve; monetary policy; global value chain; international inflation synchronization |
| JEL: | E31 E52 E58 F02 F41 F42 F14 F62 |
| Date: | 2024–05–20 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwq:98253&r= |