|
on Central Banking |
| By: | Saroj Bhattarai; Mohammad Davoodalhosseini; Zhenning Zhao |
| Abstract: | How does the transmission of monetary policy change when a central bank digital currency (CBDC) is introduced in the economy? Do aspects of CBDC design, such as how substitutable it is with bank deposits and whether it is interest bearing, matter? We study these questions in a general equilibrium model with nominal rigidities, liquidity frictions, and a banking sector where commercial banks face a leverage constraint. In the model, CBDC and commercial bank deposits can be used as a means of payments, and they provide liquidity services to households. Banks issue deposits and extend loans to firms, and bank deposits are backed by loans and central bank reserves. We find that the effects of a canonical monetary policy shock, a shock to the Taylor rule that governs interest on central bank reserves, is magnified with the introduction of a fixed-interest-rate CBDC. More generally, whether CBDC magnifies or abates the response of the economy depends on the type of shock (e.g., interest rate or quantity of reserves shock). We also find that the response of the economy depends on the monetary policy framework—whether the central bank implements monetary policy through reserves or through CBDC—as well as central bank balance sheet rules that govern the quantity of CBDC and reserves. |
| Keywords: | Digital currencies and fintech; Monetary policy; Monetary policy framework; Monetary policy transmission; Interest rates |
| JEL: | E31 E4 E50 E58 G21 G51 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:24-27 |
| By: | Francesco Casalena (Geneva Graduate Institute) |
| Abstract: | We study the effects of the Federal Reserve's two Quantitative Tightening (QT) programmes implemented over the last decade. We use a high frequency identification strategy to distinguish between conventional monetary policy shocks, Treasury borrowing announcement shocks and the unwinding of the balance sheet. Further, we analyse both QT announcements and operations. Our results show that the Fed was successful in muting the signalling effect of its Balance Sheet Policy (BSP) announcements, as statements not containing quantitative information about QT did not impact significantly asset prices. Conversely, communications disclosing information over the size and the pace of QT had an effect on financial markets. We also find that QT operations have a significant and persistent deflationary effect on interest rates and asset prices. A 1-trillion USD reduction in securities holdings by the Fed is associated with an increase in 10-year Treasury yields by 2 percentage points. While the contractionary effects of QT have so far been at least partially offset by liquidity operations that have expanded the supply of reserves, our results suggest that balance sheet reductions entail in principle strong negative effects on financial markets. Although QT does not represent in the policymakers' view the primary tool to achieve price stability, it is yet far from running quietly in the background of the monetary policy stance. |
| Keywords: | Quantitative Tightening; Central Bank Balance Sheet; Unconventional Monetary Policy; Local Projections |
| JEL: | E52 E58 |
| Date: | 2024–07–18 |
| URL: | https://d.repec.org/n?u=RePEc:gii:giihei:heidwp14-2024 |
| By: | Aurélien Espic; Lisa Kerdelhué; Julien Matheron |
| Abstract: | This paper studies the role of capital requirements in a context of monetary tightening. We build a new Keynesian model featuring costly defaults for banks, households and firms, and estimate it on Euro Area data between 2002 and 2023. We first identify the sources of this unprecedented episode before studying its propagation along financial variables. We then build various counterfactuals to assess how capital requirements have affected the transmission of this shock. We find that although capital requirements reduced the post-Covid expansion, they preserved macroeconomic stability by reducing banks probability of default. More generally, we show that capital requirements do not need to be countercyclical to be efficient: in an inflationary context, they act as automatic stabilizers, by limiting the amplitude of expansionary as well as recessionary shocks. |
| Keywords: | Monetary Tightening, Financial Stability, Macroprudential Policy. |
| JEL: | E44 E52 G21 G28 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:947 |
| By: | Taeyoung Doh; JiHyung Lee; Woong Yong Park |
| Abstract: | We empirically characterize the heterogeneity in the conditional distribution of household inflation expectations across demographic groups using the Survey of Consumer Expectations and investigate how monetary policy shocks affect the conditional distribution. We find that across all demographic groups, the peak of the group-specific distribution of household inflation expectations aligns closely with the Federal Reserve’s 2 percent target. However, we also find substantial heterogeneity both within and across groups, primarily on the right end of the distribution. Nevertheless, we show that a contractionary monetary policy shock identified by high-frequency financial market response reduces inflation expectations of households more vulnerable to the risk of unanchoring. |
| Keywords: | Household Inflation Expectations Project (HIEP); monetary policy; high frequency identification; quantile regression |
| JEL: | E31 E52 E58 |
| Date: | 2024–07–15 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedkrw:98545 |
| By: | Donggyu Lee |
| Abstract: | This paper studies how quantitative easing (QE) affects household welfare across the wealth distribution. I build a Heterogeneous Agent New Keynesian (HANK) model with household portfolio choice, wage and price rigidities, endogenous unemployment, frictional financial intermediation, an effective lower bound (ELB) on the policy rate, forward guidance, and QE. To quantify the contribution of the various channels through which monetary policy affects inequality, I estimate the model using Bayesian methods, explicitly taking into account the occasionally binding ELB constraint and the QE operations undertaken by the Federal Reserve during the 2009-15 period. I find that the QE program unambiguously benefited all households by stimulating economic activity. However, it had nonlinear distributional effects. On the one hand, it widened the income and consumption gap between the top 10 percent and the rest of the wealth distribution by boosting profits and equity prices. On the other hand, QE shrank inequality within the lower 90 percent of the wealth distribution, primarily by lowering unemployment. On net, it reduced overall wealth and income inequality, as measured by the Gini index. Surprisingly, QE has weaker distributional consequences compared with conventional monetary policy. Lastly, forward guidance and an extended period of zero policy rates amplified both the aggregate and the distributional effects of QE. |
| Keywords: | unconventional monetary policy; inequality; Heterogeneous-agent New Keynesian (HANK) model; quantitative easing; Bayesian estimation; effective lower bound |
| JEL: | E12 E30 E52 E58 |
| Date: | 2024–07–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:98524 |
| By: | Coste, Charles-Enguerrand |
| Abstract: | This paper explores the relationship between banks and stablecoins and their issuers, focusing on the mechanical effects on banks’ capital and liquidity ratios when issuing stablecoins or collecting deposits from stablecoin issuers.The analysis reveals that converting retail deposits into stablecoin issuers’ deposits weakens a bank’s liquidity coverage ratio (LCR), turning a retail deposit into a wholesale deposit, even when these funds are reinvested in high-quality liquid assets. If a credit institution issues its own stablecoins, the impact on its LCR depends on whether it can identify the stablecoin holders; unknown holders weaken the LCR which could incentivise banks to issue stablecoins where they can continually identify the holders to benefit from more favourable liquidity treatment. Additionally, banks must either hold the reserves backing the stablecoins as central bank reserves or reinvest them in low-risk assets, making these funds a less effective source for economic financing and maturity transformation compared with traditional retail deposits. The study also finds that when retail customers of bank A buy a stablecoin issued by a non-bank that keeps reserves at bank B, both banks could see an unexpected decline in their liquidity ratios, as bank A loses stable retail deposits and bank B gains volatile wholesale deposits. These insights are crucial to understanding the dynamics between banks and stablecoins in the evolving financial landscape. JEL Classification: E40, E42, E49, G11, G15, G18, G20, G21, G23, G28 |
| Keywords: | bank, bank’s balance sheet, crypto-asset, e-money, MiCAR, prudential regulation, stablecoin |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbops:2024353 |
| By: | Julien Pascal |
| Abstract: | This paper reviews the literature examining the consequences of heterogeneity in macroeconomic modeling, especially within the context of monetary and fiscal policy transmission. This review reveals that heterogeneity can significantly alter the transmission mechanisms of monetary policy in macroeconomic models and suggests possible advantages from collaboration between fiscal and monetary policies. The paper also provides a critical evaluation of various analytical and numerical methods to solve macroeconomic models with heterogeneity, underscoring the need for a careful methodological choice based on specific circumstances. |
| Keywords: | Literature review, Heterogeneity, Monetary Policy, Fiscal Policy, Macroeconomic Modeling, HANK model. |
| JEL: | E32 E52 E62 D31 C61 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:bcl:bclwop:bclwp185 |
| By: | Aizenman , Joshua (University of Southern California); Park, Donghyun (Asian Development Bank); Qureshi , Irfan (Asian Development Bank); Saadaoui, Jamel (Université Paris 8); Uddin, Gazi Salah (Linköping University) |
| Abstract: | We investigate the determinants of the performance of emerging markets (EMs) during five United States (US) Federal Reserve monetary tightening and easing cycles from 2004 to 2023. We study how macroeconomic and institutional conditions of an 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: bilateral exchange rate against the US dollar, exchange rate market pressure, and economy-specific Morgan Stanley Capital International (MSCI) index. 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. |
| Keywords: | monetary policy cycle; emerging markets; resilience; macroeconomic fundamentals; Federal Reserve |
| JEL: | E58 |
| Date: | 2024–08–02 |
| URL: | https://d.repec.org/n?u=RePEc:ris:adbewp:0735 |
| By: | Francisco G. Dakila Jr.; Dennis M. Bautista; Jasmin E. Dacio; Rosemarie A. Amodia; Sarah Jane A. Castañares; Paul Reimon R. Alhambra; Jan Christopher G. Ocampo; Charles John P. Marquez; Mark Rex S. Romaraog; Mr. Philippe D Karam; Daniel Baksa; Mr. Jan Vlcek |
| Abstract: | The Bangko Sentral ng Pilipinas (BSP) has enhanced its macroeconomic modeling through the Forecasting and Policy Analysis System (FPAS), transitioning from a multi-equation econometric model to a modernized system centered on the Quarterly Projection Model (QPM). In its new version, the Policy Analysis Model for the Philippines (PAMPh2.0) integrates forward-looking projections, endogenous monetary policy, fiscal and macroprudential considerations, labor dynamics, and addresses complex shocks and policy trade-offs, facilitating effective policy mix determination and supporting real-time policy evaluation. The BSP’s modernization efforts also include refining forecast calendars and strengthening communication channels to accommodate the operationalization of PAMPh2.0. Detailed validation methods ensure empirical consistency. Finally, future refinements will align the model with evolving empirical findings and theoretical insights, ensuring its continued relevance. |
| Keywords: | Forecasting and Policy Analysis; Quarterly Projection Model; Monetary Policy; Fiscal Policy; Macroprudential Policies |
| Date: | 2024–07–12 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/148 |
| By: | Carlos de Resende; Alexandra Solovyeva; Moez Souissi |
| Abstract: | The paper explores the nexus between the financial and business cycles in a semi-structural New Keynesian model with a financial accelerator, an active banking sector, and an endogenous macroprudential policy reaction function. We parametrize the model for Luxembourg through a mix of calibration and Bayesian estimation techniques. The model features dynamic properties that align with theoretical priors and empirical evidence and displays sensible data-matching and forecasting capabilities, especially for credit indicators. We find that the credit gap, which remained positive during COVID-19 amid continued favorable financial conditions and policy support, had been closing by mid-2022. Model-based forecasts using data up to 2022Q2 and conditional on the October 2022 WEO projections for the Euro area suggest that Luxembourg's business and credit cycles would deteriorate until late 2024. Based on these insights about the current and projected positions in the credit cycle, the model can guide policymakers on how to adjust the macroprudential policy stance. Policy simulations suggest that the weights given to measures of credit-to-GDP and asset price gaps in the macroprudential policy rule should be well-calibrated to avoid unwarranted volatility in the policy response. |
| Keywords: | Macroprudential policy; credit cycle; banks; forecasting and simulation; Luxembourg |
| Date: | 2024–07–09 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/140 |
| By: | Capasso, Salvatore; Foresti, Pasquale |
| Abstract: | This paper analyzes the design of monetary and fiscal policies in a currency union by focusing on the capacity to react to symmetric and asymmetric financial shocks. The model is constructed in order to mimic the institutional design adopted for the policy making in the EMU. The paper shows how a currency union set-up like the one adopted by the EMU can easily cope with symmetric financial shocks. However, it shows how in the face of asymmetric shocks more space for fiscal interventions is crucial, especially in more peripheral member countries. |
| Keywords: | financial shocks; monetary union; monetary-fiscal policy; EMU |
| JEL: | E52 E61 F36 |
| Date: | 2024–07–18 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:124371 |
| By: | Stéphane Lhuissier; Aymeric Ortmans; Fabien Tripier |
| Abstract: | We introduce an approach to measure the risk of inflation dispersion among euro area countries. Our measure reflects the dissimilarity between the full predictive inflation distributions of member countries, and thus captures how "far" apart inflation levels are expected to be. The risk of inflation dispersion exhibits a countercyclical behavior along the business cycle. We document that the rising risk of inflation dispersion is mainly driven by a deterioration in financial conditions, while a robust anchoring of inflation expectations in each country tends to mitigate this risk. We further demonstrate that our measure has predictive power for future euro area inflation realizations as well as for variations in the monetary authority's interest rate. |
| Keywords: | Inflation Dispersion, Kullback-Leibler, Euro area, Quantile Regression, Phillips Curve |
| JEL: | D80 E31 E58 F45 G12 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:954 |
| By: | Takuji Fueki (Hitotsubashi University (E-mail: takuji.fueki@r.hit-u.ac.jp)); Takeshi Shinohara (Deputy Director and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: takeshi.shinohara@boj.or.jp)); Mototsugu Shintani (The University of Tokyo (E-mail: shintani@e.u-tokyo.ac.jp)) |
| Abstract: | We construct a Climate Change News (CCN) index which measures attention to climate change risk for Japan, based on text information from newspaper articles. We compare our index with the original WSJ Climate Change News index of Engle et al. (2020) for the U.S. (WSJ-CCN index), as well as other measures of macroeconomic uncertainty. We find that the correlation between the CCN indexes of the U.S. and Japan is much higher than the correlation between the CCN index and other uncertainty measures in either of those countries. We also find that shocks to the CCN indexes have significantly negative effects on economic sentiment, but have ambiguous effects on industrial production. This contrasts with the fact that, for both the U.S. and Japan, other uncertainty shocks have negative effects on both economic sentiment and industrial production. As an application of the CCN indexes, we investigate if the effectiveness of monetary policy depends on the degree of attention to climate change risks. |
| Keywords: | Climate Change, Text Analysis, Monetary Policy, Nonlinear Local Projection |
| JEL: | E32 E52 Q54 |
| Date: | 2024–04 |
| URL: | https://d.repec.org/n?u=RePEc:ime:imedps:24-e-03 |
| By: | Morgan Maneely; Mr. Lev Ratnovski |
| Abstract: | Since 2022, EU banks have been enjoying historically high profits. The profits are mostly driven by the delayed pass-through of the rapid monetary policy tightening to deposit rates and as such are likely transitory. Against this background, almost half of EU countries have introduced new taxes on banks. This paper documents the significant diversity in the design of the new bank taxes—in terms of their tax base, rate, duration, and burden. The paper discusses several trade-offs in the design of bank taxes and argues that an alternative or complementary policy response to temporarily high bank profits is to lock them in as usable bank capital, for example through an increase in countercyclical capital buffer rates. |
| Keywords: | European banks; bank profits; bank taxation; credit supply; bank capital; CCyB; European Union; the ECB |
| Date: | 2024–07–09 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/143 |
| By: | Behn, Markus; Forletta, Marco; Reghezza, Alessio |
| Abstract: | Using granular data from the European corporate credit register, we examine how increases in macroprudential capital buffer requirements since the pandemic have affected bank lending behaviour in the euro area. Our findings reveal that, for the average bank, the buffer requirement increases did not have a statistically significant impact on lending to non-financial corporations. Furthermore, while we document relatively slower loan growth for banks with less capital headroom, also these banks did not decrease lending in absolute terms in response to higher requirements. These findings are robustin various specifications and emerge for both loan growth at the bank-firm level and the propensity to establish new bank-firm relationships. At the firm level, we document some heterogeneity depending on firm type and firm size. Firms with a single bank relationship and small and micro enterprises experienced a relative reduction in lending following buffer increases, although substitution effects mitigated real effects at the firm level. Overall, the results suggest that the pronounced macroprudential tightening since late 2021 did not exert substantial negative effects on credit supply.Hence, activating releasable capital buffers at an early stage of the cycle appears to be a robust policy strategy, since the costs of doing so are expected to be low. JEL Classification: E5, E51, G18, G21 |
| Keywords: | bank lending, capital buffers, credit supply, macroprudential policy |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242951 |
| By: | Bruno Feunou; Zabi Tarshi |
| Abstract: | We present two models for long-term inflation expectations and inflation risk premiums for Canada. First, we estimate inflation expectations using a vector autoregressive model based on the relationship of inflation with both the unemployment gap and the term structure of the Government of Canada nominal bond yields. Then we estimate the inflation risk premium by regressing the nominal term premium on a set of inflation risk factors. We find that our model-implied measure of inflation expectations generally follows a trend similar to that of break-even inflation rates. We also find that the estimated inflation risk premium is negative or near zero through most of the sample period because most of this period was dominated by low inflation and low growth, with investors concerned about deflation. However, the model-implied inflation risk premium becomes positive in 2021. Because real return bonds will eventually disappear in Canada, a market-derived indicator for long-term inflation expectations is particularly relevant for central bankers. Similarly, capturing the individual components of the nominal term premium can be highly useful from a policy perspective. |
| Keywords: | Econometric and statistical methods |
| JEL: | C58 E43 E47 G12 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocadp:24-09 |
| By: | Fernando Cerezo (BANCO DE ESPAÑA); Pablo Girón (BANCO DE ESPAÑA); María T. González-Pérez (BANCO DE ESPAÑA); Roberto Pascual (BANCO DE ESPAÑA) |
| Abstract: | This paper studies the impact of the sovereign bond purchase programmes implemented by the ECB since 2014, focusing on the dynamics of Spain to Portugal’s sovereign bond yield spread. The analysis confirms that, although fundamental fiscal, macroeconomic, and financial factors effectively explain the bond yield spread dynamics for most of the period, the ECB asset purchase programmes and the stock of long-term debt outstanding in bonds in both countries contribute to explaining the bond yield spread dynamics observed since 2020. |
| Keywords: | bond yield differentials, asset purchase programmes, quantitative easing, quantitative tightening, credit risk, liquidity risk, Eurosystem |
| JEL: | E43 E51 E58 C3 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2422 |
| By: | Jonathan Hoddenbagh (Johns Hopkins University) |
| Abstract: | I develop a novel and tractable test of the degree of fiscal dominance characterizing the relationship between a country's fiscal and monetary authorities. The government's long-run fiscal rule stipulates that a given fraction of the outstanding public debt is backed by the present discounted value of current and future primary surpluses, and the remainder is backed by seigniorage revenue. The larger the proportion of debt backed by seigniorage revenue, the stronger the degree of fiscal dominance. I use my test to construct an index of |
| Date: | 2024–06–29 |
| URL: | https://d.repec.org/n?u=RePEc:boc:fsug24:20 |
| By: | Qichun He (China Economics and Management Academy, Central University of Finance and Economics); Xin Yang (China Economics and Management Academy, Central University of Finance and Economics); Heng-fu Zou (China Economics and Management Academy, Central University of Finance and Economics) |
| Abstract: | This paper explores the growth and welfare ects of monetary policy in a Schumpeterian vertical innovation model with automation. Money is introduced into the model via the cash-in-advance (CIA) constraints on consumption, production, automation and vertical innovation. We find that the relative strength of the cash constraints on automation and vertical innovations is crucial. If the CIA constraint is stronger (weaker) for automation, a higher nominal interest rate will lead to an increase (a decrease) in the amount of high-skilled labor allocated to vertical innovation. As a result, the automation level will decline (rise), but the vertical innovation and thereby aggregate economic growth will be faster (slower). We calibrate the model to the US economy and find a stronger cash constraint on automation. Our quantitative analysis shows that rising nominal interest rates are detrimental to automation but favorable to growth. In addition, higher nominal interest rates improve the welfare of dierent households and the aggregate welfare. As an empirical test, we find a signifficant, negative effect of the nominal interest rate on automation using cross-country panel data, consistent with our model prediction. |
| Keywords: | Monetary policy; Automation; Cash-in-advance; Schumpeterian model |
| JEL: | O42 E42 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:cuf:wpaper:640 |
| By: | Zhang, Ying; Gong, Bing; Zhou, Peng (Cardiff Business School) |
| Abstract: | This paper presents a thorough examination of centralized use of a decentralized technology (blockchain) in monetary and financial systems at the national level. A comparative study is conducted to summarize the regulatory and legislative frameworks of currency/asset tokenization in seven major economies (US, EU, UK, Switzerland, Australia, Japan, and South Korea). China is then used as a case study to explore how blockchain technology is adopted to enable central bank digital currency, bond tokenization, and “currency bridge†. Based on various contexts analyzed, we extend the Technology Acceptance Model, highlighting the roles of perceived benefits, perceived risks, and collaborative leadership in building trust in and promoting adoption of tokenization. Policymakers and practitioners are recommended to follow a gradual, eclectic, and collaborative approach to tokenization. |
| Keywords: | Blockchain; Tokenization; CBDC; Decentralization; Collaborative Leadership |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:cdf:wpaper:2024/14 |
| By: | Chakraborty, Lekha (National Institute of Public Finance and Policy) |
| Abstract: | Using high-frequency macrodata from a financially deregulated regime, the paper examines whether there is any evidence of financial crowding out in India. The macroeconomic channel through which financial crowding out occurs is the link between the fiscal deficit and interest rate determination. Using ARDL models, it is established that the interest rate is affected by inflationary expectations, not by the fiscal deficit. The term structure of interest rates in India is also incorporated into loanable fund models to analyze the transmission mechanism of the links between long-term and short-term interest rates, which is found to be affirmative, and the financial markets in India are not highly segmented. This result has significant policy implications for interest rate determination in India, especially when fiscal policy has remained accommodative for economic growth recovery through high public capital expenditure investment. |
| Keywords: | fiscal deficit ; interest rate determination ; asymmetric vector autoregressive model ; financial crowding out |
| JEL: | E62 C32 H6 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:npf:wpaper:24/414 |
| By: | Alexander Mechanick; Jacob P. Weber |
| Abstract: | Legal academics, journalists, and senior executive branch officials alike have assumed that the cost of imposing new regulatory requirements is higher in severe recessions that drive the central bank’s policy rate to zero than in other times. This is not correct; the aggregate output costs of regulatory requirements decrease, not increase, in such recessions. This article is the first to analyze how this effect arises, drawing on both conventional macroeconomic models and empirical findings from the econometrics literature. Scholars and policymakers have likely missed the countercyclical benefits of regulatory costs because of informal, ad hoc macroeconomic assumptions embedded in regulatory analysis. |
| Keywords: | law and economics; law and macroeconomics; zero lower bound; zero lower bound (ZLB) |
| JEL: | E02 E6 K2 K3 |
| Date: | 2024–07–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:98568 |
| By: | Costas Milas (University of Liverpool, UK; Rimini Centre for Economic Analysis); Theologos Dergiades (University of Macedonia, Greece); Theodore Panagiotidis (University of Macedonia, Greece); Georgios Papapanagiotou (University of Macedonia, Greece) |
| Abstract: | The effectiveness of inflation targeting is linked to the stationarity properties of inflation. Without making apriori assumptions about the order of integration, we examine whether there is a change in the inflation persistence in one hundred and twenty-seven countries (developed and developing) using monthly data over the 1970-2021 period. For the inflation targeters, we find that the endogenously identified break dates are not consistent with the formal adoption of IT. Logit analysis reveals that inflation targeters do not experience an increased probability of a change in inflation persistence. The quality of institutions emerges as more significant for taming inflation. |
| Keywords: | persistence change, inflation targeting |
| JEL: | C12 E4 E5 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:rim:rimwps:24-12 |
| By: | Financial System and Bank Examination Department (Bank of Japan) |
| Abstract: | This paper analyzes the effects of the monetary easing measures over the past 25 years on the financial system from three perspectives: (1) financial cycles, (2) banks' lending in the low interest rate environment, and (3) potential risk factors. (Financial cycles) Banks' lending attitudes have been active except for the periods immediately after the financial crises around 2000 and in the late 2000s. The financial gap, which quantifies changes in the financial cycle, does not show that the large financial imbalances seen around the bubble period have accumulated in the low interest rate environment. A contracting phase in the financial cycle after the bursting of the bubble economy ended by the mid-2000s. The expansion of the financial cycle has been continuing since the 2010s due to the increase in private debt. That said, the effects of increasing real investment and rising asset prices have been limited so far. (Banks' lending under the low interest rate environment) Looking at financial intermediation activities, corporate loans decreased in the first half of the 2000s, mainly due to balance sheet adjustments by banks and firms and the disposal of non-performing loans. Thereafter, the balance between corporate credit and the level of economic activity has been more or less stable. That said, the amount outstanding of real estate-related loans, which are highly sensitive to interest rates, has remained at its historical peak range. With regard to the increase in loans, there were cases where the borrowers' resilience to a decline in income or a rise in loan interest rates was relatively low. The counterfactual simulation on the financial system suggests that, in addition to lower interest rates and faster economic improvement, the effect of improving collateral value stemming from stable land prices has contributed to the increase in lending over the past 10 years. Competition among banks in the lending market has intensified as they faced a structural decline in loan demand and tried to increase loan volume to cover the decline in profits due to lower interest rates. These changes have contributed to the narrowing interest margins and the increase in lending. (Potential risk factors) Under the smooth functioning of financial intermediation, the borrowing term of firms has become longer, which has become a factor that increases the interest rate risk. Firms have secured stable funding at long-term fixed interest rates and contained refinancing risk. This borrowing behavior by firms has also contributed to an increase in banks' duration risk, while it has helped banks secure interest margins in a low interest rate environment. Among the firms that have increased borrowings, there are firms that have improved their profitability and financial conditions while others have not been able to improve their sluggish performance. The former firms have been proactive in investment and have contributed to economic improvement. On the other hand, there has always been a certain proportion of firms of the latter type, even during the period of low interest rates and economic improvement. They are less resilient to stress than other firms. In a future phase of rising interest rates, these borrower firms could be subject to downgrading. Banks' profitability has declined significantly over the past 25 years. Although their return on equity (ROE), based on pre-provision net revenue (PPNR) excluding trading income, has recently started to increase, it remains at a historically low level at regional and shinkin banks. Consequently, there are banks that have become less resilient to stress. If interest rates rise significantly in a short period of time, the valuation losses on securities holdings could be a constraint on banks' financial intermediation activities. In addition, if the external environment changes, credit costs could increase. |
| Date: | 2024–07–18 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojron:ron240718a |
| By: | Elena Deryugina (Bank of Russia, Russian Federation); Andrey Leonidov (Lebedev Physical Institute, Russian Federation); Alexey Ponomarenko (Bank of Russia, Russian Federation); Stanislav Radionov (Lebedev Physical Institute, Russian Federation); Ekaterina Vasilyeva (Lebedev Physical Institute, Russian Federation) |
| Abstract: | We calibrate a network model and monetary shocks based on empirical data from inputoutput tables for the Russian economy. We examine various aspects of the propagation of monetary shocks, such as the dispersion of relative prices and the local peak values of the aggregated price index achieved during the convergence to the new equilibrium. We show that these developments depend significantly on the way new money is injected into the economy. |
| Keywords: | money supply, inflation, Cantillion effects, networks, input-output tables |
| JEL: | C63 C67 D57 E31 E51 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:bkr:wpaper:wps130 |