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on Central Banking |
| By: | Simona Bozhinovska (CEPN) |
| Abstract: | The present article proposes to draw on the recent experiences of many central banks of advanced economies and the evolution of their operational frameworks in the new context of increased domestic liquidity, when analysing the operations of central banks that engage in exchange rate management and increase their official foreign reserves as a result. It argues that the theoretical literature on endogenous money set within the context of an open economy with an exchange rate objective needs to be amended to account for such developments, as it would be entirely possible for a central bank that accumulates substantial foreign reserves to adopt a floor system and thus maintain a near-perfect control over its policy interest rate without the need for any compensating measure. On the grounds of the reverse causation argument, establishing a direct link between the foreign reserves and the monetary base should not entail any quantitative effect on other economic variables. |
| Keywords: | central bank balance sheets, endogenous money theory, foreign exchange accumulation, monetary policy implementation |
| JEL: | E58 E42 E50 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:imk:fmmpap:87-2023&r= |
| By: | Granziera, Eleonora; Jalasjoki, Pirkka; Paloviita, Maritta |
| Abstract: | We test for state-dependent bias in the European Central Bank's inflation projections. We show that the ECB tends to underpredict when the observed inflation rate at the time of forecasting is higher than an estimated threshold of 1.8%. The bias is most pronounced at intermediate forecasting horizons. This suggests that inflation is projected to revert towards the target too quickly. These results cannot be fully explained by the persistence embedded in the forecasting models nor by errors in the exogenous assumptions on interest rates, exchange rates or oil prices. The state-dependent bias may be consistent with the aim of managing inflation expectations, as published forecasts play a central role in the ECB's monetary policy communication strategy. |
| Keywords: | Inflation Forecasts, Forecast Evaluation, ECB, Central Bank Communication |
| JEL: | C12 C22 C53 E31 E52 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bofrdp:295738&r= |
| By: | Tänzer, Alina |
| Abstract: | Central bank intervention in the form of quantitative easing (QE) during times of low interest rates is a controversial topic. This paper introduces a novel approach to study the effectiveness of such unconventional measures. Using U.S. data on six key financial and macroeconomic variables between 1990 and 2015, the economy is estimated by artificial neural networks. Historical counterfactual analyses show that real effects are less pronounced than yield effects. Disentangling the effects of the individual asset purchase programs, impulse response functions provide evidence for QE being less effective the more the crisis is overcome. The peak effects of all QE interventions during the Financial Crisis only amounts to 1.3 pp for GDP growth and 0.6 pp for inflation respectively. Hence, the time as well as the volume of the interventions should be deliberated. |
| Keywords: | Artificial Intelligence, Machine Learning, Neural Networks, Forecasting and Simulation: Models and Applications, Financial Markets and the Macroeconomy, Monetary Policy, Central Banks and Their Policies |
| JEL: | C45 E47 E44 E52 E58 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:imfswp:295732&r= |
| By: | Li, Boyao |
| Abstract: | Monetary policy operations affect bank balance sheets (BBSs). This study develops a balance sheet model to examine the impacts of monetary policy operations on banks’ ability to supply funds. That ability is assessed using the balance sheet capacities provided by regulatory risk management instruments. The balance sheet approach views a monetary policy operation as a transaction between the central bank and a commercial bank, modeling the transaction as multiple changes to the BBS. This study identifies and distinguishes the effects of multiple changes in the BBS on balance sheet capacity. A balance sheet change resulting from a monetary policy operation may positively or negatively affect balance sheet capacity. Thus, a monetary policy may have a positive and a negative effect simultaneously. Positive (negative) effects result from balance sheet changes that reduce (increase) bank risks, as measured by regulations. As regulatory stringency decreases, the positive effects increase, whereas the negative effects remain unchanged. A BBS capacity channel of monetary policy is also shown. |
| Keywords: | Balance sheet; Banking; Monetary policy; Monetary transmission; Regulation |
| JEL: | E51 E52 E58 G21 G28 |
| Date: | 2024–04–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120882&r= |
| By: | Beckers, Benjamin; Bernoth, Kerstin |
| Abstract: | We investigate the role of monetary policy in stock price misalignments and explore whether central banks can attenuate excessive mispricing as suggested by the proponents of a “leaning against the wind” monetary policy. Decomposing stock prices into expected excess dividends, an equity risk premium, and a mispricing component, we find that prices fall more strongly in response to an increase in the policy rate than what is implied by their underlying fundamentals. This systematic overreaction suggests that tighter monetary policy may contain emerging asset price misalignments. Our findings are at odds with the predictions of a rational bubble framework, but can be explained by mispricing arising from false subjective expectations of irrational investors. |
| Keywords: | Asset pricing, bubbles, leaning against the wind, mispricing, monetary policy, stock prices |
| JEL: | E44 E52 G12 G14 |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120502&r= |
| By: | S. Borağan Aruoba; Thomas Drechsel |
| Abstract: | We develop a novel method for the identification of monetary policy shocks. By applying natural language processing techniques to documents that Federal Reserve staff prepare in advance of policy decisions, we capture the Fed's information set. Using machine learning techniques, we then predict changes in the target interest rate conditional on this information set and obtain a measure of monetary policy shocks as the residual. We show that the documents' text contains essential information about the economy which is not captured by numerical forecasts that the staff include in the same documents. The dynamic responses of macro variables to our monetary policy shocks are consistent with the theoretical consensus. Shocks constructed by only controlling for the staff forecasts imply responses of macro variables at odds with theory. We directly link these differences to the information that our procedure extracts from the text over and above information captured by the forecasts. |
| JEL: | C10 E31 E32 E52 E58 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32417&r= |
| By: | Korhonen, Iikka; Newby, Elisa; Elonen-Kulmala, Jonna |
| Abstract: | This article looks into global central bank messaging on the Twitter social media platform. At the end of 2021, a total of 122 central banks and monetary authorities had registered accounts on Twitter At that time, approximately two-thirds of world's central banks and monetary author- ities were using Twitter. Drawing on a database of central bank tweets up to the end of 2021, we document Twitter interactions of central banks by such measures as influence, connections and hashtag use. In addition to similarities among central bank strategies, we also find striking differences in influence and willingness to connect with the public. Tweeting activity during the Covid-19 pandemic provides insight in central bank crisis responses. |
| Keywords: | central banks, communications, Twitter, Covid-19 |
| JEL: | E58 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bofecr:294868&r= |
| By: | Meri Papavangjeli (Institute of Economic Studies, Charles University, Prague, Czech Republic & Bank of Albania, Tirana, Albania); Adam Gersl (Institute of Economic Studies, Charles University, Prague, Czech Republic) |
| Abstract: | Given the prevailing global circumstances, characterized by tightening global financial conditions and substantial macro-financial vulnerabilities, the significance of monitoring financial conditions becomes even more pronounced and calls for heightened attention to the assessment and surveillance of financial indicators. This paper introduces a Financial Conditions Index (FCI) tailored for Albania, spanning from 2000 to 2022, using a factor augmented vector autoregressive models with time-varying coefficients (TVP-FAVAR) and incorporating a wide range of indicators, grounded in the empirical literature. By aligning with the main financial dynamics during this timeframe, the constructed index emerges as a robust gauge for monitoring and assessing the financial landscape of the country. Additionally, through a threshold Bayesian VAR model, the paper examines the transmission of monetary policy and financial conditions shocks to the real economy, by capturing non-linear dynamics through differentiating between periods characterized by different stands of financial fragilities. The findings suggest that the credit-to-GDP gap could potentially function as an early warning indicator of financial vulnerabilities, with a positive gap possibly reflecting excessive risk-taking by financial institutions. Furthermore, the transmission of monetary policy and financial conditions shocks to the real economy depends non-linearly on the private nonfinancial sector credit and is not symmetric throughout the considered period, with monetary policy transmission being attenuated during periods of heightened vulnerabilities. |
| Keywords: | financial conditions, monetary policy, credit gap stance, macro-financial vulnerabilities |
| JEL: | E52 E51 E61 E63 E65 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2024_20&r= |
| By: | Stephen G. Cecchetti; Jens Hilscher |
| Abstract: | In response to the Global Financial Crisis, central banks engaged in large-scale asset purchases funded by the issuance of reserves. These “unconventional” policies continued during the pandemic, so that by 2022 central banks’ balance sheets had grown up to ten-fold. As a result of rapidly increasing interest rates, these massive portfolios began producing substantial losses. We interpret these losses as fiscal policy consequences of quantitative easing and stress that they must be balanced against the prior benefits of implementing purchase policies. Importantly, losses differ qualitatively depending on whether the central bank chooses to buy domestic or foreign assets, thus resulting in transfers either within or between countries. Effects of losses may differ due to accounting rules (when losses are realized) and when the fiscal authority compensates for losses (the structure of indemnification agreements). Data from the Federal Reserve, the Eurosystem, and the Bank of England show that maximum annual losses are between 0.3 and 1.5 percent of GDP. By contrast, the Swiss National Bank is sustaining losses up to 17 percent of GDP. |
| JEL: | E42 E52 E58 E63 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32478&r= |
| By: | Ricciutelli, Francesco |
| Abstract: | Recent research unveiled the heterogeneous effects of rising energy prices for low-income and high-income European households, as they tend to purchase distinct consumption baskets. We explore the effects of energy inflation on consumption inequality in a Two-Agent New Keynesian (TANK) model with an exogenous energy sector, and look for the optimal monetary policy response to an energy price shock. We find that rising energy prices widen consumption inequality through the expansions of inflation and income gaps. The effects of a maximizing welfare monetary policy are partially approximated by a core inflation targeting Taylor rule. |
| Keywords: | TANK Models; Energy; Consumption Inequality; Monetary Policy |
| JEL: | E52 I14 Q43 |
| Date: | 2024–05–13 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120899&r= |
| By: | Ben S. Bernanke (Brookings Institution); Olivier J Blanchard (Peterson Institute for International Economics) |
| Abstract: | In a collaborative project with ten central banks, Bernanke and Blanchard investigate the causes of the pandemic-era global inflation, building on their work for the United States. Globally, as in the United States, pandemic-era inflation was due primarily to supply disruptions and sharp increases in the prices of food and energy; however, the inflationary effects of these supply shocks have not been persistent, in part due to the credibility of central bank inflation targets. As the effects of supply shocks have subsided, tight labor markets, and the resulting rises in nominal wages, have become relatively more important sources of inflation in many countries. In a number of countries, including the United States, curbing wage inflation and returning price inflation to target may require a period of modestly higher unemployment. |
| Keywords: | Inflation, monetary policy, aggregate demand, Beveridge curve, commodity prices, energy prices, food prices, shortages, inflation expectations |
| JEL: | E30 E31 E52 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:iie:wpaper:wp24-11&r= |
| By: | Thomas I. Palley |
| Abstract: | This paper introduces the notion of monetary disorder. The underlying theory rests on a twin circuits view of the macro economy. The idea of monetary disorder has relevance for understanding the experience and consequences of the recent decade-long period of monetized large budget deficits and ultra-easy monetary policy. Current policy rests on Keynesian logic whereby a large fall in aggregate demand warrants robust offsetting monetary and fiscal policy actions. That logic neglects potential monetary disorder being bred within the financial circuit in the form of inflated asset prices and leveraged balance sheets. That disorder is likely to develop long before inflation accelerates so that inflation targeting fails to protect against it. Political factors increase the policy danger as the benefits of disorder are front-loaded and the costs backloaded. The paper concludes with a policy discussion regarding how to prevent Keynesian goods market counter-cyclical stabilization policy from causing monetary disorder. |
| Keywords: | Monetary disorder, twin circuits, inflation, asset price bubbles, budget deficits, modern money theory (MMT) |
| JEL: | E00 E12 E30 E40 E63 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:imk:fmmpap:93-2023&r= |
| By: | Sandra Eickmeier; Luba Petersen |
| Abstract: | We examine public trust in the European Central Bank (ECB) and its determinants using data from the Bundesbank Household Panel survey for Germany. Employing an interdisciplinary approach that integrates insights from political science and psychology, we offer a fresh perspective on the factors influencing central bank trust that is more holistic than the conventional one. Our primary findings can be summarized as follows. Households who state that competence, which we define as the ECB’s performance in maintaining stable prices and making decisions grounded in rules, science, and data, matters for their trust in the ECB, tend to express higher trust in the ECB. Conversely, those who place greater importance on values, particularly the integrity of top central bankers, honest communication and broader concern, tend to trust the ECB less. Trust in the ECB also hinges on trust in political institutions more generally and, to a lesser extent, on generalized trust (i.e. trust in others). |
| Keywords: | central banks, trust, survey, trust, central bank communication, values, experiences, credibility |
| JEL: | E7 E58 E59 C93 D84 Z13 Z18 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2024-31&r= |
| By: | António Afonso; Jorge Braga Ferreira |
| Abstract: | Using a panel data approach with bank-fixed effects, we study the impact of Targeted Longer-Term Refinancing Operations (TLTRO) on banks’ risk, given by their distance to default (DtD). The study aims to determine if the liquidity from TLTROs influences banks' risk-taking behaviour. For the period from 2012:Q1 to 2018:Q4, covering 90 listed banks from 16 Eurozone countries, our findings show that TLTRO is associated with an increase in banks' default risk. However, banks that participated in TLTRO experienced a positive effect on their default risk, indicating that they may have used liquidity to strengthen their financial position. Furthermore, we found no evidence that TLTRO liquidity encouraged banks to significantly increase lending or invest in riskier assets. Finally, our results also suggest that TLTRO’s impact is consistent across banks of different sizes and that the competition within the banking sector does not influence how banks utilize TLTRO liquidity. |
| Keywords: | ECB, TLTRO, Unconventional Monetary Policy, Bank Risk, Moral Hazard, Risk-Taking Channel |
| JEL: | C23 E52 E58 G21 G32 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:ise:remwps:wp03202024&r= |
| By: | Emre Yoldas |
| Abstract: | Most central banks tightened monetary policy considerably over the past few years as inflation surged globally. Though effects of the COVID pandemic on global supply chains and labor markets was a common factor driving inflation higher across economies, domestic factors led to notable variation in the timing and extent of monetary policy responses. |
| Date: | 2024–05–10 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfn:2024-05-10-2&r= |
| By: | Bartsch, Florian; Busies, Iulia; Emambakhsh, Tina; Grill, Michael; Simoens, Mathieu; Spaggiari, Martina; Tamburrini, Fabio |
| Abstract: | Amid the growing financial vulnerabilities posed by climate change, we investigate macroprudential capital buffers to mitigate systemic risks and increase the resilience of the banking sector. Leveraging granular data and state-of-the-art stress testing methods, we quantify potential bank losses attributed to climate-related transition risks. Focusing on short-term transition scenarios, we document a significant variance among banks in their risk exposure, with the most exposed institutions being those characterized by lower excess capital. Subsequently, we introduce a methodological framework for tailoring bank-specific buffer requirements to cover these losses, offering macroprudential authorities a practical method for calibrating climate-related macroprudential capital buffers, complementing microprudential policies. While we focus our application on transition risks, the framework can be extended to capture all climate risks in general. The study demonstrates the potential of macroprudential capital buffers to mitigate potential climate-related losses and contributes to the understanding of the appropriate prudential policy response to these challenges. JEL Classification: E61, G21, G28, Q54 |
| Keywords: | climate change, climate risk, macroprudential policy, transition risk |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242943&r= |
| By: | Olena Kostyshyna; Tolga Özden; Yang Zhang |
| Abstract: | Elevated inflation can threaten the credibility of central banks and increase the risk that inflation expectations do not remain anchored. Wage-price spirals might develop in such an environment, and high inflation could become entrenched. We quantitively assess the risks of a wage-price spiral occurring in Canada over history by using a medium-scale dynamic stochastic general equilibrium model enhanced with heterogenous expectation and learning. This mechanism generates time-varying propagation of inflationary shocks that improves forecasting performance of inflation and wage growth. Central bank credibility is endogenous in our model and depends on several notions of the learning mechanism. Weaker credibility and a higher risk of inflation expectations not remaining anchored increase the risk of a wage-price spiral. |
| Keywords: | Business fluctuations and cycles; Credibility; Inflation and prices; Monetary policy |
| JEL: | E00 E7 E47 C22 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:24-14&r= |
| By: | Marco Lorusso (University of Perugia, Newcastle University Business School); Francesco Ravazzolo (BI Norwegian Business School, Free University of Bozen-Bolzano, Italy); Claudia Udroiu (Free University of Bozen-Bolzano, Italy) |
| Abstract: | In this paper, we investigate the use of money supply issued by the central bank to support expansionary fiscal interventions. We develop and estimate a New Keynesian model using US data for the sample 1960Q1 - 2019Q4. We conduct a quantitative counterfactual analysis to assess the effects of a fiscal stimulus that does not result in an increase in public debt, as it is financed by money supply. Our impulse response analysis indicates that both increases in government spending and transfers that are monetary financed have positive effects on private consumption, investment and output. However, the expansionary impact of monetary-financed fiscal shocks comes at a cost: an increase in inflation. Our sub-sample analysis indicates that monetary-financed fiscal stimuli would have had a greater positive impact on the economy during the Great Moderation. Lastly, we find that as the debt burden increases, the positive effects of a monetary-financed fiscal stimulus diminish |
| Keywords: | Fiscal Policy, Monetary Policy, Bayesian Estimation. |
| JEL: | C11 E32 E52 E62 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:bzn:wpaper:bemps105&r= |
| By: | Aikman, David; Angotti, Romain; Budnik, Katarzyna |
| Abstract: | This paper proposes an operational approach to stress testing, allowing one to assess the banking sector’s vulnerability in multiple plausible macro-financial scenarios. The approach helps identify macro-financial risk factors of particular relevance for the banking system and individual banks and searches for scenarios that could push them towards their worst outcomes. We demonstrate this concept using a macroprudential stress testing model for the euro area. By doing so, we show how multiple-scenario stress testing can complement single-scenario stress tests, aid in scenario design, and evaluate risks in the banking system. We also show how stress tests and scenarios can be optimized to accommodate different mandates and instruments of supervisory and macroprudential agencies. JEL Classification: E37, E58, G21, G28 |
| Keywords: | banking sector risks, financial stability, macroprudential stress test, multiple scenarios, reverse stress testing, systemic risks |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242941&r= |
| By: | Philemon Kwame Opoku |
| Abstract: | This paper uses a structural vector autoregressive model (SVAR) to study the effect of monetary policy and bank lending standards on business loans. The results are consistent with a dynamic model of bank behaviour that explicitly considers a bank’s soundness position. According to the results of the empirical estimation and prediction of the theoretical model, increases in loans, particularly non-performing loans or delinquency rates due to a monetary policy shock, deteriorate a bank’s health, causing it to apply more stringent lending standards. Thus, the results show that banks raise their lending standards in response to the tightness of money, defined as increases in the demand for the bank’s loans while its resources (reserves or deposits) remain constant. Furthermore, lending standards dominate loan rates in explaining loans and output dynamics. |
| Keywords: | Monetary Policy, Credit Standards, Bank Behaviour, SVAR model; Monetary Policy, Credit Standards, Bank Behaviour, SVAR model. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:ise:remwps:wp03232024&r= |
| By: | Martin, Ertl (Institute for Advanced Studies Vienna, Austria); Rabitsch, Katrin (Vienna University of Economics and Business) |
| Abstract: | We explore the natural rate of interest, shortly r*, in emerging economies. If economic growth originates from convergence, then growth, say, from technological progress will be lower than we ï¬ nd in the data and, hence, r* will be lower. Ignoring convergence upwardly biases our estimates of r*. We extend the New Keynesian small open economy model to take account of convergence. The model is estimated with Bayesian techniques for four emerging economies in Central and Eastern Europe: Poland, Czech Republic, Hungary and Romania. The estimation process is informed by empirical evidence about a rapid catch-up of our example economies during the period from 2003 to 2019. We conï¬ rm the decline in r* over the last decades. When we account for capital deepening, we ï¬ nd meaningful differences with non-negligible implications for monetary policy. |
| Keywords: | natural rate of interest; convergence; New Keynesian DSGE model; Central and Eastern Europe |
| JEL: | E3 E4 E5 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:ihs:ihswps:number55&r= |
| By: | Marco Di Maggio; Pulak Ghosh; Soumya Kanti Ghosh; Andrew Wu |
| Abstract: | Interest in central bank digital currencies (CBDCs) has been burgeoning with 134 countries now exploring its implementation. In December 2022, India started its CBDC pilot program to continue its transition towards a digitized payments economy. This paper presents the first empirical analysis utilizing detailed transaction data to explore the dynamics between CBDCs and existing digital payment methods, as well as the implications of increased CBDC usage on traditional bank deposits. Our findings reveal that policies which increase transaction costs for current digital payment methods catalyze a substitution effect, bolstering CBDC adoption. Furthermore, an uptick in CBDC usage is associated with a notable decline in bank, cash, and savings deposits, suggesting potential paths to bank disintermediation. This study contributes critical insights into the evolving competition between digital currencies and established financial infrastructures, highlighting the transformative potential of CBDCs on the broader economy. |
| JEL: | E42 G21 G38 G51 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32457&r= |
| By: | Tendai Gwatidzo |
| Abstract: | Using data on South Africas commercial banks in the period 20052018, this paper investigates the impact of bank regulation on bank performance. The study uses a fixed effects model to run the regression model as well as the data envelopment analysis approach to estimate efficiency scores. We find a number of interesting results. First, we find a negative relationship between capital stringency and bank performance, suggesting that increased capital requirements force banks to increase their reserves, adversely affecting their performance. Second, we find a positive relationship between activity restrictions and bank performance, indicating that this kind of regulation, which may well be good for the public, as argued by the public interest view of regulation, is also good for the regulated banks. Third, we find a negative and significant relationship between supervisory power and bank performance. Fourth, we find a positive and significant relationship between the market discipline index and bank performance, suggesting that by creating environments characterised by high market discipline, the regulatory regime enhances the ability and incentives of private investors to efficiently monitor banks. This ensures better management of banks, ultimately increasing profitability. Overall, the study finds that regulation matters for bank performance. |
| Date: | 2024–06–03 |
| URL: | https://d.repec.org/n?u=RePEc:rbz:wpaper:11064&r= |
| By: | Tanju Capacioglu; Hakan Kara |
| Abstract: | We analyze the impact of a unique macroprudential regulation, which has been implemented in Türkiye since May 2018. The regulation requires that, for firms holding total FX loans below USD 15 million, FX loans should be capped by their past three years’ FX revenues. The regulation aims to contain corporate FX mismatches through a natural hedging requirement by linking their FX borrowing to FX revenues. Using a rich data set at the firm-bank level and their matched universe, we find that, following the regulation, FX loans of the firms targeted by the regulation (exposed firms) declined more, and non-renewed FX loans were only partly replaced with local currency loans, suggesting imperfect substitution between local currency and FX borrowing. Exposed firms exhibit weaker investment but stronger export growth. The regulation has indirect effects on the composition of bank balance sheets in the form of increased currency swaps and/or reduced external FX borrowing. Overall, our findings suggest that macroprudential tools that directly target corporate balance sheet mismatches can be viable alternatives to lender-based restrictions in mitigating currency risk. |
| Keywords: | Macroprudential regulation, FX mismatch, Natural hedging, Currency risk, Corporate sector, Banking sector |
| JEL: | F31 F34 G30 G38 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:2406&r= |
| By: | Jung, Alexander |
| Abstract: | This study re-assesses the validity of the quantity theory of money (QTM) for the very long sample, 1870 to 2020, for 18 industrial countries using the dataset from Jordà et al. (2017). It considers structural changes in the economic and financial sectors and changes in monetary policy rameworks. Three findings are presented. First, the results from panel cointegration tests show that the long-run relationship between excess money growth and inflation holds if longer runs of data are used. Second, panel regressions confirm the presence of long and variable lags in the monetary policy transmission, as predicted by Milton Friedman. For the full sample, the average speed of adjustment from excess money growth to inflation in industrial countries was about two years amid heterogeneity across time and countries. Third, the results show that over recent decades, structural change - coinciding with the Great Moderation and, in part, reflecting changes in payment technologies - has led to a collapse of QTM. JEL Classification: B16, B23, E40, E50, N1 |
| Keywords: | excess money growth, great moderation, panel cointegration tests, payment technologies, structural change |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242940&r= |
| By: | Knut Are Aastveit; Jamie L. Cross; Francesco Furlanetto; Herman K. Van Dijk |
| Abstract: | The Fed’s policy rule switches during the different phases of the business cycle. This finding is established using a dynamic mixture model to estimate regime-dependent Taylor-type rules on US quarterly data from 1960 to 2021. Instead of exogenously partitioning the data based on tenures of the Fed chairs, a Bayesian framework is introduced in order to endogenously select timing and number of regimes in a data-driven way. This agnostic approach favors a partitioning of the data based on two regimes related to business cycle phases. Estimated policy rule coefficients differ in two important ways over the two regimes: the degree of gradualism is substantially higher during normal times than in recessionary periods while the output gap coefficient is higher in the recessionary regime than in the normal one. The estimate of the inflation coefficient largely satisfies the Taylor principle in both regimes. The results are substantially reinforced when using real-time data. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:bny:wpaper:0130&r= |
| By: | Zhiyu Cao; Zachary Feinstein |
| Abstract: | This study explores the innovative use of Large Language Models (LLMs) as analytical tools for interpreting complex financial regulations. The primary objective is to design effective prompts that guide LLMs in distilling verbose and intricate regulatory texts, such as the Basel III capital requirement regulations, into a concise mathematical framework that can be subsequently translated into actionable code. This novel approach aims to streamline the implementation of regulatory mandates within the financial reporting and risk management systems of global banking institutions. A case study was conducted to assess the performance of various LLMs, demonstrating that GPT-4 outperforms other models in processing and collecting necessary information, as well as executing mathematical calculations. The case study utilized numerical simulations with asset holdings -- including fixed income, equities, currency pairs, and commodities -- to demonstrate how LLMs can effectively implement the Basel III capital adequacy requirements. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2405.06808&r= |
| By: | Bingxin Ann Xing; Bruno Feunou; Morvan Nongni-Donfack; Rodrigo Sekkel |
| Abstract: | This paper investigates the importance of U.S. macroeconomic news in driving low-frequency fluctuations in the term structure of interest rates in Canada, Sweden and the United Kingdom. We follow two complementary approaches: First, we apply a regression-based framework that aggregates the impact of daily macroeconomic news on bond yields to a lower quarterly frequency. Next, we estimate a macro-finance affine term structure model linking the daily news to lower-frequency changes in bond yields and their expectations and term premia. Both approaches show that U.S. macroeconomic news is an important source of lower-frequency quarterly fluctuations in bond yields in these small open economies—even more important than the respective countries’ domestic macroeconomic news. Furthermore, the macro-finance model shows that U.S. macroeconomic news is particularly important to explain low-frequency changes in the expectation components of the nominal, real and break-even inflation rates. |
| Keywords: | Central bank research, Econometric and statistical methods |
| JEL: | E43 E44 E47 G14 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:24-12&r= |