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on Central Banking |
| By: | Bjarni G. Einarsson |
| Abstract: | This paper presents a framework for testing the optimality of monetary policy decisions made by a central bank in a monetary union. Applying the framework to test the European Central Bank’s monetary policy decisions we find several instances of optimization failures in its use of the Forward Guidance and Quantitative Easing instruments. We cannot reject optimality in its use of the Target Rate instrument. We find signs of heterogeneity in the optimal prescriptions for the individual member countries with respect to the union level prescription. Additionally, we find many instances of optimization failure at the country level for all instruments. Assuming each country has a country specific version of the union loss function we provide a measure of the cost of abandoning independent monetary policy by joining a union. The results indicate that the price of Euro membership is higher for the peripheral economies. |
| JEL: | C32 E31 E32 E52 E58 E61 E65 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:ice:wpaper:wp96 |
| By: | Hudepohl, Tom; Malderez, Suzanne |
| Abstract: | The Eurosystem implements its monetary policy through a set of monetary policy instruments (MPIs). The period covered by this report (2022-23) was dominated by high inflation, which led to a change from an easing to a tightening monetary policy environment in line with the mandate of the European Central Bank (ECB) to pursue price stability. This report focuses on the accompanying shift in the use of MPIs. Key ECB interest rates were hiked to an unprecedented extent and at exceptional speed, leading to an exit from negative interest rates. This was accompanied by a gradual phasing-out of reinvestments under the asset purchase programmes, revisions to the conditions of targeted longer-term refinancing operations (TLTROs) and their subsequent substantial early repayments, and a phasing-out of pandemic collateral easing measures. This report discusses these developments and provides a full overview of the Eurosystem’s monetary policy implementation from 2022-23. JEL Classification: D02, E43, E58, E65, G01 |
| Keywords: | asset purchase programmes, central bank collateral framework, central bank counterparty framework, central bank liquidity management, monetary policy implementation, non-standard monetary policy measures, refinancing operations |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbops:2024355 |
| By: | Hamza Bennani (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Nantes Univ - IAE Nantes - Nantes Université - Institut d'Administration des Entreprises - Nantes - Nantes Université - pôle Sociétés - Nantes Univ - Nantes Université); Davide Romelli (Trinity College Dublin) |
| Abstract: | This paper examines the informativeness and drivers of the tone used by FOMC members to gain insights into the decision-making process of the FOMC. We use a bag-of-words approach to measure the tone of transcripts at the speaker-meeting-round level from 1992-2009 and find persistent differences in tone among FOMC members. We also document how Presidents of regional Federal Reserve Banks use a more volatile and positive tone than the members of the Federal Reserve Bank Board of Governors. Next, we investigate whether the tone used during FOMC deliberations is associated with future monetary policy decisions and study the drivers of differences in tone among FOMC members. Our results suggest that tone is useful to predict future policy decisions and that differences in tone are mainly associated with the differences in the individual inflation projections of FOMC members. |
| Keywords: | Central banks, Federal Reserve, FOMC, monetary policy committees, text analysis |
| Date: | 2024–08–12 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04670309 |
| By: | Domenico Giannone; Giorgio Primiceri |
| Abstract: | Post-covid inflation was predominantly driven by unexpectedly strong demand forces, not only in the United States, but also in the Euro Area. In comparison, the inflationary impact of adverse supply shocks was less pronounced, even though these shocks significantly constrained economic activity. With output already weakened by these unfavourable supply conditions, any attempt by the European Central Bank to further mitigate the demand-driven inflationary pressures---to maintain inflation near its 2-percent target---would have severely hampered an already anaemic recovery. |
| JEL: | E30 E31 E32 E37 E52 E58 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32859 |
| By: | Rong-An Chou (Kyoto University) |
| Abstract: | The secretive Taiwanese foreign exchange intervention (FXI) and hidden reserve issue have posed difficulties for studying the exchange rate policy taken by the Central Bank of Taiwan. To get a clear grasp of the Taiwanese exchange rate policy even in lack of officially disclosed FXI records, firstly, I find out the most accurate proxy for the Taiwanese FXI in the existing literature. Secondly, I estimate the central bank's FXI policy reaction function, using the most accurate proxy. It turns out that there exists one structural change within the central bank's FXI around December 2011. Before December 2011, the central bank basically adopted lean-against-the-wind intervention in the short run, enhanced the New Taiwan Dollar's value in the long run, and asymmetrically conducted the interventions. In contrast, after December 2011, the central bank became less engaged in the outright purchasing/selling operations in the FX spot market. |
| Keywords: | Foreign exchange intervention; Hidden reserves; Exchange rate policy; Structural change |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:kyo:wpaper:1107 |
| By: | Seo, Jinyoung (Wake Forest University, Economics Department) |
| Abstract: | I show that Treasuries’ role as hedge assets is determined by the level of trend inflation and the conduct of monetary policy, using a Generalized New Keynesian habit model. A novel prediction from the model is that when trend inflation is high, nominal bonds exhibit a positive correlation with stock returns, making them risky assets. As trend inflation rises, inflation becomes more countercyclical because any transitory inflation generates temporary output loss due to endogenous cost-push effects, which emerge under positive trend inflation. When countercyclical inflation prevails, bond returns drop when stocks underperform, leading to a positive bond-stock correlation. The model explains the shift in US bond-stock correlation from positive to negative in 1997 as a consequence of stabilized trend inflation. |
| Keywords: | Bond-stock correlation; trend inflation; monetary policy; output gap-inflation correlation; bond risk premium |
| JEL: | E31 E43 E44 E52 G12 |
| Date: | 2024–08–30 |
| URL: | https://d.repec.org/n?u=RePEc:ris:wfuewp:0115 |
| By: | Takashi Nakazawa (Bank of Japan); Mitsuhiro Osada (Bank of Japan) |
| Abstract: | This paper quantitatively examines the effects of the Bank of Japan's (BOJ's) purchases of Japanese government bonds (JGBs) - especially the large-scale purchases since the introduction of Quantitative and Qualitative Monetary Easing in 2013 - on the formation of long-term interest rates in Japan using time series analysis. The results can be summarized as follows. First, having quantified the effect of BOJ JGB purchases taking market participants' expectations about the future path of such purchases into account, we find that the effect of JGB purchases on interest rates has been driven by the increase in JGB holdings (i.e., the stock effect), which affects market participants' risk allocation, rather than by the daily conduct of JGB purchases (i.e., the flow effect), which affects supply and demand in the secondary market. Second, in addition to the flow and stock effects, the Yield Curve Control framework introduced in September 2016 had the effect of restraining interest rate increases when long-term interest rates approached the upper bound of the announced range. This effect tended to be larger when the BOJ took countermeasures and market participants expected such countermeasures. Finally, our analysis of interest rates at different maturities suggests that the framework of government bond purchases and Yield Curve Control had an effect on interest rates across a wide range of maturities, and that the recent large-scale monetary easing had the effect of pushing down the entire yield curve. |
| Keywords: | unconventional monetary policy; long-term interest rates; government bond purchases; flow effect; stock effect; announcement effect; yield curve control |
| JEL: | G12 E44 E52 E58 |
| Date: | 2024–09–10 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojwps:wp24e10 |
| By: | Saleem Bahaj (University College London); Marie Fuchs (London School of Economics (LSE)); Ricardo Reis (London School of Economics (LSE)) |
| Abstract: | At the end of 2023, there were 175 cross-border connections between central banks in a global network of liquidity lines that gave access to foreign currency for countries accounting for 79% of world GDP. This paper presents a comprehensive dataset of this network and its characteristics between 2000 and 2023. While the Federal Reserve drove growth in 2007-09, the network expanded as much between 2010 and 2015 through bilateral arrangements involving the ECB and the People’s Bank of China. The network structure means that banks without direct access to a source central bank can still have indirect access to its currency. The central intermediaries in the network for all major currencies are the PBoC and the ECB. We find support using cross-country data that the lines reduce CIP deviations at the tails. Liquidity lines are often signed to substitute for a bleeding of FX reserves, but once in place they complement reserves. |
| Keywords: | swap lines, capital flows, financial crises, IMF, cross-currency basis |
| JEL: | E44 F33 G15 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:cfm:wpaper:2423 |
| By: | Jean-Charles Bricongne; Baptiste Meunier; Raquel Caldeira |
| Abstract: | As text mining has expanded in economics, central banks appear to also have ridden this wave, as we review use cases of text mining across central banks and supervisory institutions. Text mining is a polyvalent tool to gauge the economic outlook in which central banks operate, notably as an innovative way to measure inflation expectations. This is also a pivotal tool to assess risks to financial stability. Beyond financial markets, text mining can also help supervising individual financial institutions. As central banks increasingly consider issues such as the climate challenge, text mining also allows to assess the perception of climate-related risks and banks’ preparedness. Besides, the analysis of central banks’ communication provides a feedback tool on how to best convey decisions. Albeit powerful, text mining complements – rather than replaces – the usual indicators and procedures at central banks. Going forward, generative AI opens new frontiers for the use of textual data. |
| Keywords: | Text Mining, Sentiment Analysis, Central Banking, Generative AI, Language Models |
| JEL: | C38 C55 C82 E58 L82 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:950 |
| By: | Maria Teresa Punzi (Singapore Management University) |
| Abstract: | This paper analyses the effectiveness of macroprudential policy on macro-financial fluctuations when the government enforces carbon pricing to reduce carbon emissions and achieve the net-zero target. A carbon tax policy alone can reduce carbon emissions by 2030, but at the cost of a deep and prolonged recession, with consequential financial instability due to a higher probability of default on entrepreneurs in the brown sector. This result suggests that carbon pricing should be coupled with complementary policies, such as macroprudential policy. In particular, differentiated LTV ratios and differentiated capital requirements that penalise the brown sector in favour of the green sector tend to decrease the probability of default in the green sector and encourage green lending in supporting the transition to a green economy. However, such policies have little contribution in offsetting the negative impact on the macroeconomy. More stringent levels of prudential regulations are needed to reduce the fall in GDP and consumption. More specifically, the “one-forone†prudential capital requirements on fossil fuel financing can effectively reduce defaults and move to a greener economy. |
| JEL: | E32 E44 E52 G18 G50 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:svk:wpaper:1107 |
| By: | Stefania D'Amico; Corey Feldman |
| Abstract: | Using textual analysis of the largest dealers’ newsletters to their clients, we construct a measure of uncertainty about the Federal Reserve’s balance sheet policy (BSP). This measure of uncertainty tends to spike during the introduction of novel aspects of BSP or at its turning points, with the largest spike occurring during the “Taper Tantrum” period. We find that positive shocks to BSP uncertainty increase longer-term Treasury yields, private borrowing costs, private MBS duration, and reduce mortgage refinance volumes. As a result, an increase in BSP uncertainty has contractionary effects similar to those of a monetary-policy tightening shock. Further, post-2008, these effects seem quite different from those of broader monetary policy uncertainty and fiscal policy uncertainty. Overall, our findings suggest that explicit forward guidance about the Fed’s balance-sheet path might be warranted. |
| Keywords: | Macroeconomics; Interest rates |
| JEL: | E40 E50 |
| Date: | 2024–07–28 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedhwp:98724 |
| By: | Marco Moreno (Central Bank of Ireland and Department of Economics, Trinity College Dublin); Simone Cima (Central Bank of Ireland and Department of Economics, Trinity College Dublin) |
| Abstract: | We use new data on the distribution of wealth in the euro area and employ panel local projections to estimate the different impact of ECB monetary policy shocks on households across the wealth distribution. We look at how policy affects the composition of their balance sheets, their investment decisions, and overall wealth inequality. We find that in response to a contractionary shock, poorer households display a substantial decline in their assets and a reduction in their debt. Conversely, the balance sheet of the very wealthiest shows the opposite evolution, ultimately leading to an increase in overall wealth inequality. Evidence also suggests that the investment behaviour of poorer and wealthier households differs in response to the shock. Our results further indicate that contractionary shocks lead to a shift in balance sheet composition towards housing assets across the whole wealth distribution, at the expense of financial assets. |
| Keywords: | Wealth Inequality; Monetary Policy; Distributional Wealth Accounts; Local Projections |
| JEL: | D31 E44 E52 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:tcd:tcduee:tep0524 |
| By: | Tobias Berg; Jan Keil; Felix Martini; Manju Puri |
| Abstract: | We analyze the effect of a major central bank digital currency (CBDC) – the digital euro – on the payment industry to find remarkably heterogeneous effects. Stock prices of U.S. payment firms decrease, while stock prices of European payment firms increase in response to positive announcements on the digital euro. Bank stocks do not react. We estimate a loss in market capitalization of USD 127 billion for U.S. payment firms, vis-à-vis a gain of USD 23 billion for European payment firms. Our results emphasize the medium-of-exchange function of CBDCs and point to a novel geopolitical dimension of CBDCs: enhanced autonomy in payments. |
| JEL: | G1 G20 G21 G22 G23 G24 G28 G29 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32857 |
| By: | Stefan Nagel; Zhengyang Xu |
| Abstract: | We show that the stock market price reaction to monetary policy surprises upon announcements of the Federal Open Market Committee (FOMC) is explained mostly by changes in the default-free term structure of yields, not by changes in the equity premium. We reach this conclusion based on a new model-free method that uses dividend futures prices to obtain the counterfactual stock market index price change that results purely from the change in the default-free yield curve induced by the monetary policy surprise. The yield curve change in turn partly reflects a change in expected future short-term interest rates, as measured by changes in professional forecasts, and partly a change in the term premium. We further find that the even/odd week FOMC cycle in stock index returns is also largely due to an FOMC cycle in the yield curve rather than the equity premium. |
| JEL: | E52 G12 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32884 |
| By: | Chris Murphy |
| Abstract: | The health policies the government introduced in March 2020 to contain the COVID-19 pandemic led to recession in the restricted industries. This recession was treated with a very large expansion of fiscal policy and the monetary policy interest rate was reduced to its assessed effective lower bound (ELB). This paper evaluates this macro policy response from the three related perspectives of pandemic macro policy principles, scenario analysis and optimal control of unemployment and inflation. Using scenario analysis, we find that the macro policy response was successful initially, reducing the peak rate of unemployment in mid-2020 by 2.0% points. However, the stimulus lingered for too long, in the end providing $2 of compensation for every $1 of private income lost to COVID. Under the macro policy principles for a pandemic, a shorter stimulus scenario is developed in which fiscal stimulus provides $1 for $1 compensation for income lost to COVID and the policy interest rate begins rising a year earlier, in May 2021. This reduces the peak inflation rate during 2022 by a simulated 2.1% points. Using optimal control, we find that the macro policy stimulus continued for too long irrespective of whether we place a high or low weight on controlling unemployment relative to inflation. In future pandemics, fiscal policy should compensate, but not over-compensate, economic agents for income losses due to restrictions and should not stimulate aggregate demand.The monetary authorities should focus on inflation in the industries not subject to restrictions. |
| JEL: | E37 E52 E62 E63 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:pas:papers:2024-9 |
| By: | Hiroya Tanaka (Kyoto University); Keiichi Hori (Kwansei Gakuin University); Akihisa Shibata (Kyoto University) |
| Abstract: | This study analyzes the impact of investors' search-for-yield behavior on home bias in the bond market. We conduct a regression analysis using data from 27 countries, including both developed and emerging economies, for 2001–2021. We use two types of home bias indicators as dependent variables and the yield on 5-year government bonds denominated in the local currency as independent variables to analyze search-for-yield behavior. Considering that central banks in many countries, including major advanced economies, have made substantial domestic bond purchases over the past 20 years, we examine the effect of excluding central banks' domestic bond holdings from the home bias calculation. The results show that, with a few exceptions, both domestic and foreign investors in advanced and emerging economies tend to increase their demand for higher-yield bonds, which is consistent with the search-for-yield behavior. This trend is further reinforced when the central banks' domestic bond holdings are excluded. Specifically, we found that the significance of bond yields for foreign investors’ home bias in emerging economies increased after the global financial crisis. This indicates that emerging economies became more attractive to yield-seeking investors in a post-crisis low-interest-rate environment. In addition, by excluding the domestic bond holdings of central banks from the home bias calculation, we observed a higher coefficient of bond yields for the home bias of domestic investors in advanced economies. This suggests that when excluded, central banks' substantial domestic bond holdings in developed countries allow investors' decisions to be better reflected in the country's overall asset composition. |
| Keywords: | search for yield, monetary policy, home bias, foreign bond investment, portfolio selection |
| JEL: | E52 G11 G15 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:kyo:wpaper:1106 |
| By: | Marco Bassetto; Luca Benzoni; Jason Hall |
| Abstract: | The goal of this paper is twofold. First, we wish to better explain the relationship between Sargent and Wallace’s (1981) unpleasant monetarist arithmetic, the closely connected fiscal theory of the price level (FTPL), and the monetarist view of inflation. Second, we discuss how the recent inflationary episode has contributed to redistributing real resources from holders of government debt to the public purse. In particular, financial prices before the onset of the Covid pandemic suggest that investors viewed an inflationary shock such as the one we experienced as extremely unlikely, so the magnitude of this redistribution caught them by surprise. |
| Keywords: | Macroeconomics; Monetary Economics; Financial Economics |
| JEL: | E31 E51 E62 G10 |
| Date: | 2024–07–05 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedhwp:98723 |