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on Central Banking |
| By: | Max Breitenlechner; Martin Geiger; Mathias Klein |
| Abstract: | This paper empirically quantifies the importance of fiscal policy in shaping the monetary policy transmission mechanism and derives implications for monetary-fiscal interactions. First, we document that a contractionary monetary policy shock, besides lowering output and prices, leads to a pronounced adjustment in fiscal measures and a significant increase in the fiscal deficit. We then construct different structural counterfactuals, in which we shut down the endogenous responses of fiscal measures following a monetary policy shock. The impact of a monetary policy shock on output is more than halved by the endogenous adjustment in tax revenues, whereas the public transfer system significantly reduces the impact on prices. Thus, the tax system considerably improves the trade-off between price and output stabilization the central bank faces, whereas the transfer system worsens it. Finally, we show that changes in the fiscal framework can enhance monetary policy effectiveness. |
| Keywords: | Monetary policy, fiscal channel, monetary fiscal policy interaction, structural counterfactuals, Bayesian proxy structural VAR models. |
| JEL: | E32 E52 E63 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:inn:wpaper:2024-07 |
| By: | Laura Castillo-Martinez (Duke University); Ricardo Reis (London School of Economics (LSE)) |
| Abstract: | Central banks have a primary goal of price stability. They pursue it using tools that include the interest they pay on reserves, the size and the composition of their balance sheet, and the dividends they distribute. We describe the economic theories that justify the central bank’s ability to control inflation and discuss their relative effectiveness, in light of both theory and the historical record. We present alternative approaches as consistent with each other, as opposed to conflicting ideological camps. While interest-rate setting is often superior, having both a monetarist pillar and fiscal support is essential, and at times pegging the exchange rate or monetizing the debt is inevitable. |
| Keywords: | monetary policy, policy rules, determinacy, effectiveness |
| JEL: | E31 E52 E61 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:cfm:wpaper:2433 |
| By: | Ding Dong; Zheng Liu; Pengfei Wang; Min Wei |
| Abstract: | Households often disagree in their inflation outlooks. We present novel empirical evidence that inflation disagreement weakens the power of forward guidance and conventional monetary policy. These empirical observations can be rationalized by a model featuring heterogeneous beliefs about the central banks’ inflation target. An agent who perceives higher future inflation also perceives a lower real interest rate and thus would like to borrow more to finance consumption, subject to borrowing constraints. Higher inflation disagreement would lead to a larger share of borrowing-constrained agents, resulting in more sluggish responses of aggregate consumption to changes in both current and expected future interest rates. This mechanism also provides a microeconomic foundation for Euler equation discounting that helps resolve the forward guidance puzzle. |
| Keywords: | inflation uncertainty and disagreement; inflation expectations; heterogeneous beliefs; borrowing constraints; monetary policy; forward guidance |
| JEL: | E21 E31 E52 E71 |
| Date: | 2024–08–05 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:98689 |
| By: | Bluwstein, Kristina (Bank of England); Patozi, Alba (Bank of England) |
| Abstract: | We construct a new data set of macroprudential policy announcements for the United Kingdom and estimate their effect on systemic risk, using a high-frequency identification approach. First, by examining a sample of the largest UK-listed banks, we identify macroprudential policy announcement shocks that were unanticipated by the financial markets. Second, we study the effects of market-based macroprudential policy surprises on systemic risk in a local projection framework. We find that tighter than expected macroprudential policy announcements contribute to a substantial reduction in perceived systemic risk in the short run, with effects persisting for several months. The reduction is mostly attributed to the reaction in equity and bond markets. |
| Keywords: | Macroprudential policy; systemic risk; high-frequency identification; policy announcements |
| JEL: | E58 G14 G18 G21 |
| Date: | 2024–08–06 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1080 |
| By: | Joachim Jungherr; Matthias Meier; Timo Reinelt; Immo Schott |
| Abstract: | We provide novel empirical evidence that firms’ investment is more responsive to monetary policy when a higher fraction of their debt matures. In a heterogeneous firm New Keynesian model with financial frictions and endogenous debt maturity, two channels explain this finding: (1.) Firms with more maturing debt have larger roll-over needs and are therefore more exposed to fluctuations in the real interest rate (roll-over risk). (2.) These firms also have higher default risk and therefore react more strongly to changes in the real burden of outstanding nominal debt (debt overhang). Unconventional monetary policy, which operates through long-term interest rates, has larger effects on debt maturity but smaller effects on output and inflation than conventional monetary policy. |
| Keywords: | monetary policy; investment; corporate debt; debt maturity |
| JEL: | E32 E44 E52 |
| Date: | 2024–08–16 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:98708 |
| By: | Škrinjarić, Tihana (Bank of England) |
| Abstract: | This is a survey of the literature on Growth-at-Risk (GaR) for macroprudential policy stance assessment. After acknowledging the main findings and contributions, we focus on the current challenges that are present in the literature. Key challenges are the measurement and intensity of the policy variable, and the mitigation of endogeneity issues. We suggest improvements on ways to measure the policy itself and its intensity, review policy endogeneity adjustment and different sources of data. Finally, we conclude the review providing insights on future pathways of GaR macroprudential methodology. |
| Keywords: | Systemic risk; financial conditions; quantile regression; policy assessment; policy stance |
| JEL: | C22 E32 E44 E58 G01 G28 |
| Date: | 2024–08–05 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1075 |
| By: | Okan Akarsu; Emrehan Aktug |
| Abstract: | We document the demand and supply driven components of inflation in Türkiye following the decomposition of Shapiro (2022). The results suggest that the recent acceleration in inflation starts with supply-driven inflation, but over time it transitioned into an inflationary environment driven by demand. Consistent with the theory, oil-supply and exchange rate shocks act to increase the supply-driven contribution, whereas monetary policy tightening acts to reduce the demand-driven contribution of inflation. This decomposition can potentially be a useful real-time tracker for policymakers. |
| Keywords: | Inflation decomposition, Demand, Supply, Exchange rate pass-through |
| JEL: | E12 E24 E31 E52 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:tcb:wpaper:2410 |
| By: | Peter Karadi; Anton Nakov; Galo Nuno Barrau; Ernesto Pasten; Dominik Thaler |
| Abstract: | We study the Ramsey optimal monetary policy within the Golosov and Lucas (2007) state-dependent pricing framework. The model provides microfoundations for a nonlinear Phillips curve: the sensitivity of inflation to activity increases after large shocks due to an endogenous rise in the frequency of price changes, as observed during the recent inflation surge. In response to large cost-push shocks, optimal policy leverages the lower sacrifice ratio to reduce inflation and stabilize the frequency of price adjustments. At the same time, when facing total factor productivity shocks, an efficient disturbance, the optimal policy commits to strict price stability, similar to the prescription in the standard Calvo (1983) model. |
| Keywords: | state-dependent pricing, large shocks, nonlinear Phillips curve, optimal monetary policy |
| JEL: | E31 E32 E52 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1203 |
| By: | Andres Sanchez-Jabba; Erick Villabon-Hinestroza |
| Abstract: | This study examines the effect of different measures of inflation expectations on inflation dynamics in Colombia from 2009 to 2024. We estimate New Keynesian Phillips Curves (NKPC) and Structural VAR (SVAR) models using data from economic surveys and sovereign bond yields. Our results show that survey-based expectations have a greater passthrough to inflation, with a one percentage-point increase leading to a 0.8 percentage-point rise in inflation, compared to a 0.67 percentage-point rise from market-based expectations. These differences are attributed to how economic agents form expectations, influenced by asymmetric losses, forecasting costs, and information rigidities. Our findings provide crucial insights for monetary authorities, who increasingly rely on various measures of inflation expectations for policy analysis. Understanding the distinct effects of these measures helps central banks implement policies that avoid unintended consequences, such as unnecessary contractions in economic activity. |
| Keywords: | inflation expectations, inflation dynamics, new-Keynesian Phillips curve, generalised method of moments |
| JEL: | C26 D84 E12 E31 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1205 |
| By: | Адилханова Зарина // Adilkhanova Zarina (National Bank of Kazakhstan) |
| Abstract: | Данная работа исследует значимость степени жесткости заработной платы в контексте формирования денежно-кредитной политики в Казахстане. Оценка влияния жесткости заработной платы на инфляцию проведена в рамках новой кейнсианской модели, в которой рынок труда характеризуются трениями поиска и сопоставления, описанной в работе Christoffel et al. (2008). Результаты показали, что рынок труда, характеризующийся более низкой степенью жесткости заработной платы, существенно изменяет трансмиссию шоков. Например, инфляция проявляет более быстрый отклик на шок денежно- кредитной политики и становится менее устойчивой при более гибкой заработной плате. // This work investigates the significance of wage rigidity in the context of formulating monetary policy in Kazakhstan. The assessment of the impact of wage rigidity on inflation was conducted within the framework of a New Keynesian model, in which the labor market is characterized by search and matching frictions, as described in the work of Christoffel et al. (2008). The results showed that a labor market characterized by lower wage rigidity significantly alters the transmission of shocks. For example, inflation responds more quickly to a monetary policy shock and becomes less stable with more flexible wages. |
| Keywords: | жесткость заработных плат, инфляция, рынок труда, wage rigidity, inflation, labor market |
| JEL: | E12 E32 E52 J30 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:aob:wpaper:54 |
| By: | Giorgio Calcagnini; Germana Giombini; Edgar J. Sanchez Carrera |
| Abstract: | We consider a green monetary policy framework implemented by the central bank. Under this framework, firms and commercial banks decide whether or not to apply a green (environmentally friendly) or brown (conventional) investment and policy, respectively. We develop an evolutionary game to study the conditions under which a stable or unstable equilibrium is reached. If the green firms' revenues minus their bank loans and their transition costs are strictly greater than the brown firms' revenues and their pollution costs, together with (primary or subsidized) green interest rates such that the default risk is lower for green firms compared to brown ones, then the economy evolves to a asymptotically stable green state. In the green state all banks give green loans and all firms invest in green investment. If the condition is reversed the economy converges to a brown state. If the banks and the firms are indifferent towards the green and brown policy and investment respectively, the economy fluctuates from green to brown state. There may be multiple equilibria. Through a transcritical bifurcation we show how stability (instability) of the equilibria changes with the parameters. |
| Keywords: | Climate Change; Evolutionary Dynamics; Green monetary policies; Firms Pollution |
| JEL: | C70 C72 D21 K42 L21 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:frz:wpaper:wp2024_16.rdf |
| By: | Kristin Forbes; Jongrim Ha; M. Ayhan Kose |
| Abstract: | We analyse cycles in policy interest rates in 24 advanced economies over 1970-2024, combining a new application of business cycle methodology with rich time-series decompositions of the shocks driving rate movements. “Rate cycles†have gradually evolved over time, with less frequent cyclical turning points, more moderate tightening phases, and a larger role for global shocks. Against this backdrop, the 2020-24 rate cycle has been unprecedented in many dimensions: it features the fastest pivot from active easing to a tightening phase, followed by the most globally synchronized tightening, and an unusually long period of holding rates constant. It also exhibits the largest role for global shocks— with global demand shocks still dominant, but an increased role for global supply shocks in explaining interest rate movements. Inflation and the growth in output and employment have, on average, largely returned to historical norms for this stage in a tightening phase. Any recalibration of interest rates going forward should be gradual, however, taking into account the interactions between increasingly important global factors and domestic circumstances, combined with uncertainty as to whether rate cycles have reverted to pre-2008 patterns. |
| Keywords: | monetary policy, oil prices, demand shocks, supply shocks, ECB, Federal Reserve |
| JEL: | E52 E31 E32 Q43 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2024-54 |
| By: | Rüdiger Fahlenbrach; Minsu Ko; René M. Stulz |
| Abstract: | Bank payout policy is strongly affected by regulation and politics, especially for the largest banks. Banks, but not industrial firms, have consistently lower payouts in times of high regulation uncertainty and under democratic presidents. After the Global Financial Crisis, bank regulators’ influence on payout policies of the largest banks increases sharply and repurchases become more important than dividends for these banks. Repurchases respond more to regulatory climate changes than dividends. The stock-price reaction of the largest banks to the election of Donald Trump is larger than for small banks or industrial firms, and their repurchases increase sharply afterwards. |
| JEL: | G21 G28 G35 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32770 |
| By: | Noritaka Fukuma (Bank of Japan); Tomiyuki Kitamura (Bank of Japan); Kohei Maehashi (Bank of Japan); Naoki Matsuda (Bank of Japan); Keita Takemura (Bank of Japan); Kota Watanabe (Bank of Japan) |
| Abstract: | This paper examines the impact of the Bank of Japan (BOJ)’s Quantitative and Qualitative Easing (QQE) and Yield Curve Control (YCC) on the functioning of the Japanese government bond (JGB) market using panel data for JGB issues. The main results can be summarized in the following three points. First, regarding the impact on transaction volume in the JGB market, JGB purchases by the BOJ (i.e. increase in flow) increase transaction volume on average, while the BOJ’s increased holdings of JGBs (i.e. increase in stock) and its conduct of continuous fixed-rate purchase operations decrease transaction volume. However, if the BOJ conducts JGB purchases when its share of JGB holdings exceeds a certain threshold, transaction volume will decrease. Second, regarding the impact on bid-ask spreads in the JGB market, while JGB purchases by the BOJ reduce these spreads, the increase in the share of JGBs held by the BOJ will lead to a nonlinear widening of the spreads. Third, regarding the impact on the shape of the yield curve, an increase in the BOJ’s holdings of certain JGB issues and its conduct of continuous fixed-rate purchase operations will lead to a downward distortion in the yield curve. |
| Keywords: | QQE; YCC; JGB market; market functioning; market liquidity |
| JEL: | C23 D4 D53 E58 G12 |
| Date: | 2024–08–30 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojwps:wp24e09 |
| By: | Alfaro, Laura (Harvard Business School); Bahaj, Saleem (University College London); Czech, Robert (Bank of England); Hazell, Jonathon (London School of Economics); Neamțu, Ioana (Bank of England) |
| Abstract: | We introduce a framework to understand and quantify a form of liquidity risk that we dub Liquidity After Solvency Hedging or ‘LASH’ risk. Financial institutions take LASH risk when they hedge against losses, using strategies that lead to liquidity needs when the value of the hedge falls, even as solvency improves. We focus on LASH risk relating to interest rate movements. Our framework implies that institutions with longer duration liabilities than assets – eg pension funds and insurers – take more LASH risk as interest rates fall, because solvency concerns rise in a low rate environment. Using UK regulatory data from 2019–22 on the universe of sterling repo and swap transactions, we measure, in real time and at the institution level, LASH risk for the non‑bank sector. We find that at peak LASH risk, a 100 basis points increase in interest rates would have led to liquidity needs close to the cash holdings of the pension fund and insurance sector. Using a cross‑sectional identification strategy, we find that low interest rates caused increases in LASH risk. We then find that the pre‑crisis LASH risk of non‑banks predicts their bond sales during the September 2022 LDI crisis, contributing to the yield spike in the bond market. |
| Keywords: | Liquidity; monetary policy; non‑bank financial intermediaries; hedging |
| JEL: | E44 G10 G22 G23 |
| Date: | 2024–08–05 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1073 |
| By: | Martín Almuzara; Argia M. Sbordone |
| Abstract: | We discuss the concept of core inflation and its relevance for policymakers and then review a variety of approaches that have been pursued for the construction of informative core measures. After illustrating some empirical patterns displayed by U.S. inflation data and discussing conceptual issues around measurement, we provide a unified framework to interpret various widely used core measures and compare their relative properties. |
| Keywords: | inflation; core inflation |
| JEL: | E31 E32 E52 |
| Date: | 2024–08–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:98692 |
| By: | Andres Alonso-Robisco (BANCO DE ESPAÑA); Jose Manuel Carbo (BANCO DE ESPAÑA); Emily Kormanyos (DEUTSCHE BUNDESBANK); Elena Triebskorn (DEUTSCHE BUNDESBANK) |
| Abstract: | Central banks and international supervisors have identified the difficulty of obtaining climate information as one of the key obstacles to the development of green financial products and markets. To bridge this data gap, the use of satellite information from Earth Observation (EO) systems may be necessary. To better understand this process, we analyse the potential of applying satellite data to green finance. First, we summarise the policy debate from a central banking perspective. We then briefly describe the main challenges for economists in dealing with the EO data format and quantitative methodologies for measuring its economic materiality. Finally, using topic modelling, we perform a systematic literature review of recent academic studies to identify the research areas in which satellite data are currently being used in green finance. We find the following topics: physical risk materialisation (including both acute and chronic risk), deforestation, energy and emissions, agricultural risk and land use and land cover. We conclude with a comprehensive analysis on the financial materiality of this alternative data source, a mapping of these application domains to new green financial instruments and markets under development, such as thematic bonds or carbon credits, and some key considerations for policy discussion. |
| Keywords: | satellite data, sensors, green finance, central banking |
| JEL: | C8 C55 Q56 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:bde:opaper:2428e |