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on Central Banking |
| By: | Paul Beaudry; Paolo Cavallino; Tim Willems |
| Abstract: | This paper adds life-cycle features to a New Keynesian model and shows how this places financial wealth at the center of consumption/saving decisions, thereby enriching the determinants of aggregate demand and affecting the transmission of monetary policy. As retirement preoccupations strengthen, the potency of conventional monetary policy declines and depends more on the response of asset prices (supporting central banks closely monitoring the impact of monetary policy on asset prices). Especially “low/high for long” policies are shown to often have only muted effects on economic activity due to offsetting income and substitution effects of interest rates, in a way that can be compounded by Quantitative Easing. We also show why the presence of life-cycle forces can favor a monetary policy strategy which stabilizes asset prices in response to financial shocks. Being explicit about the role of retirement savings in aggregate demand therefore offers new perspectives on several aspects of monetary interventions. |
| JEL: | E21 E43 E52 G51 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32511&r= |
| By: | Gerald P. Dwyer (Banco de España); Biljana Gilevska (Banco de España); María J. Nieto (Banco de España); Margarita Samartín (Banco de España) |
| Abstract: | We examine the effects of all three major European Central Bank (ECB) unconventional monetary policies since 2011 for euro area banks’ holdings of loans, government securities and cash deposited in central banks. The three ECB policies are longer-term refinancing operations (LTROs), the asset purchase programmes and the ECB’s interest rate on its deposit facility. We also compare the responses of non-crisis and crisis countries to these policies. Our evidence indicates that the ECB’s unconventional monetary policy measures increased bank lending across the euro area countries. The second round of LTROs, also known as targeted LTROs (TLTROs), were conditional on banks increasing their lending. This change had a substantially larger effect on total lending by banks. The computed effects of the LTROs and TLTROs, based on average size, indicate that in non-crisis countries LTROs increased bank loans by 7.6% of assets and TLTROs increased bank loans by 16.4% of assets, whereas in crisis countries the increases were 8.4% and 14.6% for LTROs and TLTROs, respectively. We find that both LTROs and TLTROs were associated with decreases in government securities held by banks in non-crisis countries, while the LTROs were associated with increases in government securities held by banks in crisis countries. |
| Keywords: | euro area, unconventional monetary policy, banks, financial crisis |
| JEL: | E44 E52 G01 G21 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:2416&r= |
| By: | Linta, Tanja |
| Abstract: | This paper measures variation in central bank credibility through the level of agree-ment in a monetary policy committee and empirically studies its relevance for the effectiveness of forward guidance. In the European Central Bank’s (ECB) insti-tutional framework, high-frequency identification shows that non-unanimity within the Governing Council makes financial markets doubt the credibility of their com-mitment to forward guidance promises. Instead, they expect a change in policy direction, regardless of the ECB promising the opposite. Reduced credibility of the commitment then dampens the effect the easing bias in communication has on expectations while confirming unanimity does not seem to reinforce it. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:129332&r= |
| By: | Rhys Bidder; Timothy Jackson; Matthias Rottner |
| Abstract: | We examine the impact of central bank digital currency (CBDC) on banks and the broader economy - drawing on novel survey evidence and using a structural macroeconomic model with endogenous bank runs. A substantial share of German respondents would include CBDCs in their portfolio in normal times - replacing, in part, commercial bank deposits. This is hypothetical evidence for `slow’ disintermediation of the banking system. During periods of banking distress, households' willingness to shift to CBDC is even larger, implying a risk of `fast’ disintermediation. Our structural model captures both phenomena and allows for policy prescriptions. We calibrate to the Euro area and then introduce CBDC, exploiting our survey to parameterize its demand. We find two contrasting effects of CBDC on financial stability. `Slow' disintermediation shrinks a run-prone banking system with positive welfare effects. But the ability of CBDC to offer safety at scale makes bank-runs more likely. For reasonable calibrations, this second `fast disintermediation' effect dominates and the introduction of CBDC decreases financial stability and welfare. However, complementing CBDC with a holding limit or pegging remuneration to policy rates can reverse these results such that CBDC is welfare improving. Such policies retain the gains of increased stability arising from `slow' disintermediation while limiting the downsides of `fast' disintermediation. |
| Keywords: | CBDC, Financial Crises, Disintermediation, Run, Banking System, Money |
| JEL: | E42 E44 E51 E52 G21 |
| Date: | 2024–04–30 |
| URL: | https://d.repec.org/n?u=RePEc:liv:livedp:202407&r= |
| By: | Oliver Holtemöller; Alexander Kriwoluzky; Boreum Kwak |
| Abstract: | Exploiting the heteroscedasticity of the changes in short-term and long-term interest rates and exchange rates around the FOMC announcement, we identify three structural monetary policy shocks. We eliminate the predictable part of the shocks and study their effects on financial variables and macro variables. The first shock resembles a conventional monetary policy shock, and the second resembles an unconventional monetary shock. The third shock leads to an increase in interest rates, stock prices, industrial production, consumer prices, and commodity prices. At the same time, the excess bond premium and uncertainty decrease, and the U.S. dollar depreciates. Therefore, this third shock combines all the characteristics of a central bank information shock. |
| Keywords: | Monetary policy, central bank information shock, identification through heteroskedasticity, high-frequency identification, proxy SVAR |
| JEL: | C36 E52 E58 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:diw:diwwpp:dp2084&r= |
| By: | Damjan Pfajfar; Fabian Winkler |
| Abstract: | We document novel facts about U.S. household preferences over inflation and monetary policy. Many households are highly attentive to news about monetary policy and to interest rates. The median household perceives the Federal Reserve's inflation target to be three percent, but would prefer it to be lower. Quantifying the tradeoff between inflation and unemployment, we find an average acceptable sacrifice ratio of 0.6, implying that households are likely to find disinflation costly. Average preferences are well represented by a non-linear loss function with near equal weights on inflation and unemployment. These preferences also exhibit sizable demographic heterogeneity. |
| Keywords: | Household Survey; Attention; Inflation Target; Sacrifice Ratio; Dual Mandate |
| JEL: | D12 E52 E58 |
| Date: | 2024–05–31 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-36&r= |
| By: | Francois de Soyres; Zina Saijid |
| Abstract: | Many central banks are at a critical juncture in their current monetary policy cycles as they assess whether it would be appropriate to embark on an easing phase following one of the most aggressive episodes of monetary tightening in recent history. In this note, we highlight key aspects of past monetary policy easing episodes in selected advanced economies and what lessons we may learn from these past experiences. |
| Date: | 2024–05–31 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2024-05-31-1&r= |
| By: | Changhyun Lee (Department of Economics, University of California Davis) |
| Abstract: | I suggest a new channel through which central bank asset purchase programs could have effects on asset prices: The outside option channel. After the global financial crisis, central banks have widened the variety of assets they can purchase. Secondary markets for the majority of the newly targeted assets are characterized by the OTC market structure with matching frictions and bargaining features. In bargaining, the central bank’s asset purchase announcement could affect the outside option value of the asset seller by providing one more option of selling the asset to the central bank to the seller. The effect of the outside option channel materializes even without actual purchases by the central bank since once the asset seller is matched with the buyer, she would exploit the announcement to require a higher price in the bargaining but not actually sell the asset to the central bank. I show how the outside option channel could work through a two-period model and discuss its empirical relevance by comparing two episodes of the Fed’s asset purchases during the global financial crisis and the COVID crisis. |
| Keywords: | Unconventional monetary policy, OTC markets, Asset pricing |
| JEL: | E50 E58 G12 |
| Date: | 2024–06–08 |
| URL: | https://d.repec.org/n?u=RePEc:cda:wpaper:363&r= |
| By: | Joshua Brault; Qazi Haque; Louis Phaneuf |
| Abstract: | Taylor rules and their implications for monetary policy analysis can be misleading if the inflation target is held fixed while being in fact time-varying. We offer a theoretical analysis showing why assuming a fixed inflation target in place of a time-varying target can lead to a downward bias in the estimated policy rate response to the inflation gap and wrong statistical inference about indeterminacy. Our analysis suggests the bias is stronger in periods where inflation target movements are large. This is confirmed by simulation evidence about the magnitude of the bias obtained from a New Keynesian model featuring positive trend inflation. We further estimate medium-scale NK models with positive trend inflation and a time-varying inflation target using a novel population-based MCMC routine known as parallel tempering. The estimation results confirm our theoretical analysis while favouring a determinacy outcome for both pre and post-Volcker periods and shedding new light about the type of rule the Fed likely followed. |
| Keywords: | Taylor rule estimation, time-varying inflation target, omitted variable bias |
| JEL: | E50 E52 E58 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2024-39&r= |
| By: | Quentin Vandeweyer; Minghao Yang; Constantine Yannelis |
| Abstract: | This paper studies the transmission of monetary policy to the stock market through investors’ discount factors. To isolate this channel, we investigate the effect of US monetary policy surprises on the ratio of prices of the same stock listed simultaneously in Hong Kong and Mainland China, and thereby control for revisions in cash-flow expectations. We find this channel to be strong and asymmetric, with the effect driven by surprise monetary policy interest rate cuts. A 100 basis point surprise cut results in a 30 basis point increase in the ratio of stock prices over 5 days. These results suggest significant slow-moving reductions in stock market risk premia following accommodating monetary policy surprises. |
| JEL: | E5 E51 E58 G12 G14 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32499&r= |
| By: | James Graham; Avish Sharma |
| Abstract: | How does monetary policy affect the homeownership rate? A monetary contraction may have contrasting effects on ownership due to rising interest rates, falling incomes, and lower house prices. To investigate, we build a heterogeneous household life-cycle model with housing tenure decisions, mortgage finance, and an exogenous stochastic process to capture the macroeconomic effects of monetary policy. Following a contractionary shock, homeownership initially falls due to rising mortgage rates, but rises over the medium term given falling house prices. We also show that differences in mortgage credit conditions, mortgage flexibility, and household expectations formation can amplify homeownership dynamics following a shock. |
| Keywords: | Homeownership; monetary policy; interest rates; house prices; heterogeneous households |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:syd:wpaper:2024-11&r= |
| By: | BOUAKEZ, Hafedh; KANO, Takashi |
| Abstract: | The neo-Fisherian effect typically refers to the short-run increase in inflation associated with a permanent increase in the nominal interest rate. This positive comovement between the two variables is commonly viewed — and empirically identified — as being conditional on permanent monetary shocks, which are often interpreted as permanent shifts in the inflation target. Such a view, however, implies that inflation and the nominal interest rate share a common stochastic trend, a property that is hardly supported by the data, especially during episodes of stable inflation. Moreover, in countries that have adopted formal inflation targeting, changes in the inflation target occur very infrequently, if at all, calling into question the interpretation of inflation target shocks identified within standard time-series models based on quarterly data. In this paper, we propose a novel empirical strategy to detect the neo-Fisherian effect, which we apply to U.S. data. Our procedure relaxes the commonly used identifying restriction that inflation and the nominal interest rate are cointegrated, and, more importantly, is agnostic about the nature of the shock that gives rise to a neo-Fisherian effect. We find that the identified shock has no permanent effect on the nominal interest rate or inflation, but moves them in the same direction for a number of quarters. It also accounts for the bulk of their variability at any given forecasting horizon, while explaining a non-negligible fraction of output fluctuations at businesscycle frequencies. Using Bayesian techniques, we show that the data favors the interpretation of the identified shock as a liquidity preference shock rather than an inflation target shock. |
| Keywords: | Identification, Inflation, Liquidity preference, neo-Fisherian effect |
| JEL: | E12 E23 E31 E43 E52 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:hit:hiasdp:hias-e-140&r= |
| By: | Grzegorz Halaj; Ruben Hipp |
| Abstract: | We estimate a structural model derived from the balance sheet identity to evaluate the effects of contagion and common exposure on banks’ capital, which varies endogenously as a function of assets and liabilities. Through a regression approach inspired by the literature on structural vector autoregression, we infer the interdependence of banks’ financial conditions. In this model, contagion can occur through direct exposures, fire sales, and market-based sentiment, while common exposures result from portfolio overlaps. We apply this model to granular balance sheet and interbank exposure data of the Canadian banking market. First, we document that contagion varies over time, with the highest levels around the Great Financial Crisis in 2008 and somewhat lower levels for the pandemic period. Second, we find that since the introduction of Basel III, the relative importance of risks has changed, hinting that sources of systemic risk have changed structurally. Our new framework complements traditional stress-testing exercises focused on single institutions by providing a holistic view of risk transmission. |
| Keywords: | Econometric and statistical methods; Economic models; Financial institutions; Financial stability |
| JEL: | G21 C32 C51 L14 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:24-19&r= |
| By: | Arewa, Moyo |
| Abstract: | This paper explores the potential benefits and risks to tax administrations of implementing central bank digital currencies (CBDCs), a digital version of national currencies that is gaining momentum worldwide. It outlines some of the key features of CBDCs and then considers their implications for tax administration in low- and middle-income countries (LMICs) generally. The emergence of CBDCs provides LMICs with a significant opportunity to improve financial inclusion, improve payment systems and increase tax collection. CBDCs provide greater transparency, security and traceability, which could help tax authorities track income and net worth, detect tax evasion and increase tax revenue. However, there are also complex combinations of risks associated with deploying CBDCs. The revenue authorities need to thoroughly assess how they should adapt to these challenges. Governments must also ensure that CBDCs are developed and implemented transparently, fairly and consistently with broader public policy goals. This will help maximise the potential benefits of CBDC adoption while mitigating the risks – which may be particularly significant in LMICs. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:idq:ictduk:18361&r= |
| By: | Iñaki Aldasoro; Leonardo Gambacorta; Anton Korinek; Vatsala Shreeti; Merlin Stein |
| Abstract: | At the core of the financial system is the processing and aggregation of vast amounts of information into price signals that coordinate participants in the economy. Throughout history, advances in information processing, from simple bookkeeping to artificial intelligence (AI), have transformed the financial sector. We use this framing to analyse how generative AI (GenAI) and emerging AI agents as well as, more speculatively, artificial general intelligence will impact finance. We focus on four functions of the financial system: financial intermediation, insurance, asset management and payments. We also assess the implications of advances in AI for financial stability and prudential policy. Moreover, we investigate potential spillover effects of AI on the real economy, examining both an optimistic and a disruptive AI scenario. To address the transformative impact of advances in AI on the financial system, we propose a framework for upgrading financial regulation based on well-established general principles for AI governance. |
| Keywords: | artificial intelligence, generative AI, AI agents, financial system, financial institutions |
| JEL: | E31 J24 O33 O40 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1194&r= |