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on Central Banking |
| By: | Pirovano, Mara; Azzone, Michele |
| Abstract: | We examine the issue of the appropriate selection of macroprudential instruments according to the vulnerabilities identified and the policymakers’ objectives using a version of the 3D DSGE model following Mendicino et al. (2020) and Hinterschweiger et al. (2021) calibrated for the euro area. We consider a broad set of macroprudential instruments, including broad and sectoral countercyclical capital requirements, LTV and LTI limits and assess their transmission channels as well as their effectiveness in mitigating rising broad and sectoral vulnerabilities. We find that sectoral instruments are most effective to increase bank resilience to sectoral risks, limiting spillover effects. LTI limits are superior to LTV limits in containing the growth of mortgage credit and household indebtedness. Finally, we find that macroprudential policy is better suited than monetary policy to address emerging real estate-related imbalances. JEL Classification: E44, E58, G21, G28 |
| Keywords: | banking regulation, countercyclical capital buffer, DSGE, financial stability, macroprudential policy |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242979 |
| By: | Bindseil, Ulrich; Senner, Richard |
| Abstract: | Over the last decades, macro-economists have renewed their efforts to reduce the gap between monetary macroeconomics and real-world central banking. This paper reviews how macroeconomics has since 2016 approached the possible introduction of retail central bank digital currencies (CBDC). A review of the literature reveals that macroeconomic models of CBDC often rely on CBDC design features and narratives which are no longer in line with the one of central banks actually working on CBDC. In particular, the literature often (i) does not take into account the nature of central banks’ CBDC issuance plans as a “conservative” reaction to profound technological and preferential shifts in the use of money as a means of payments, (ii) does not start from design features communicated by central banks, such as no-remuneration, quantity limits, access restrictions, and automated sweeping functionality linking CBDC wallets with commercial bank accounts; (iii) does not explain well enough the difference between CBDC and banknotes within their macro-economic models, apart from remuneration (which central banks actually do not foresee); and (iv) assume that CBDC will lead to a significant increase in the total holdings of central bank money in the economy, although (i) and (ii) make this unlikely. JEL Classification: E3, E5, G1 |
| Keywords: | central bank digital currencies, central bank money, financial stability, macroeconomics |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242978 |
| By: | Douglas Laxton (NOVA School of Business and Economics, Saddle Point Research, The Better Policy Project); Haykaz Igityan (Head of Model Improvement Division, Central Bank of Armenia); Shalva Mkhatrishvili (Head of Macroeconomics and Statistics Department (Chief Economist), National Bank of Georgia.) |
| Abstract: | This paper introduces the Forecasting and Policy Analysis System (FPAS) Mark II, which incorporates Mervyn King's imperative for economic models to reflect the endogenous nature of central bank credibility based on policy actions. The original FPAS, predominantly utilized by inflation-targeting central banks, has been constrained by its focus on baseline projections and local approximations. These limitations hinder its capacity to accurately reflect the evolving credibility of central banks in response to their policy choices. Credibility specifically refers to how anchored are long term inflation expectations in bond markets and by wage and price setters but also a broader consideration is whether long-term real interest rates and the exchange rate operate as shock absorbers. FPAS Mark II integrates "Monetary Policy as Risk Management" (MPRM), enhancing the framework's ability to address significant uncertainties and adapt to changing economic conditions. This new approach advocates a shift from a baseline projection to a scenario-based strategy that attempts to anticipate a diverse range of economic outcomes including non-linear such as time-varying policy credibility. By doing so, FPAS Mark II not only adheres to King's vision by embedding endogenous credibility into the fabric of monetary policy but also equips policymakers to navigate complex financial landscapes more effectively, avoiding potential pitfalls and better managing periods of uncertainty |
| Keywords: | Endogenous Credibility, FPAS, Monetary Policy as Risk Management |
| JEL: | E17 E47 E52 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:aez:wpaper:2024-04 |
| By: | Daniel R. Ringo |
| Abstract: | Despite the widespread use of fixed-rate mortgages in the United States, I show that monetary policy is effectively passed through to aggregate outstanding mortgage debt service. Using credit bureau, lender, and servicer data on mortgage payments and originations and exogenous monetary policy shocks, I estimate a mortgage rate semi-elasticity of payments over 10. Inframarginal borrowers---households whose choice to buy a home or refinance does not depend on the particular monetary policy decision under consideration---are the most important conduit, explaining over half of the pass-through. Consistently large flows of inframarginal borrowing relative to the stock of outstanding debt account for the strength of this channel. Households with adjustable-rate mortgages and marginal refinancers, the focus of much of the literature on monetary policy's effect on mortgage borrowers, each explain about 20 percent of the pass-through. I show the mortgage payment channel induces a lag in the operation of policy, as the cumulative effects on debt service build over time in response to persistent shocks to longer-term rates. Estimated magnitudes suggest that mortgage payments are a primary channel by which monetary policy affects consumption. |
| Keywords: | Monetary policy; Interest rates; Refinancing channel; Debt service |
| JEL: | G21 E43 E52 |
| Date: | 2024–08–23 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-69 |
| By: | Peter Bofinger |
| Abstract: | The paper discusses central digital currencies (CBDCs) with an analytical focus on the European Central Bank's Digital Euro (D€) project, which provides a unique lens for assessing the potential and challenges of CBDCs. The paper differs from the literature on CBDCs and the D€ by adopting a systemic perspective that distinguishes between the role of CBDCs as a new payment object and as a new payment system based on CBDC accounts. In a worst-case scenario, the D€ project could be a total flop, with people not opening accounts and the system failing to compete with existing platforms. This would be in line with the dismal experience of countries that have already introduced CBDCs. In a more positive scenario, many households would open D€ accounts alongside commercial bank accounts, potentially reducing the dominance of US platforms. However, even in this scenario, it is unlikely that there will be significant holdings of D€ deposits as a means of payment, making the D€ payment system an inefficient and costly detour between existing commercial bank accounts. The offline version remains difficult to justify. Our CBDC tracker shows that the ECB's strong commitment to the D€ is unique among central banks in advanced economies. Many of them, including the Federal Reserve, currently rule out the option of a retail CBDC. Thus, the ECB's unconditional commitment to the D€ carries a high risk of failure. It is therefore unclear why the ECB is not considering a scheme based on the existing SEPA infrastructures. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:imk:studie:95-2024 |
| By: | Yadavindu Ajit (Indira Gandhi Institute of Development Research); Taniya Ghosh (Indira Gandhi Institute of Development Research) |
| Abstract: | This study investigates historical inflation persistence in India under three distinct regimes: monetary targeting, multiple indicator, and inflation targeting (IT). Previous stud- ies for India relied heavily on mean-based estimation techniques, which are biased when inflation has a skewed distribution and do not account for the tail behavior of inflation. As a result, we use a quantile-based estimation approach to test for persistence in in- flation, gaining insights into the stationary properties of various parts of the distribution rather than just the mean. Our regime-specific results point to asymmetric inflation behavior with varying persistence depending on the inflation-affecting shock. We observe high inflation persistence during the multiple indicator regime, which declines with the implementation of IT, particularly in the Pre-COVID sample. Our findings show that imple- menting IT has been beneficial in reducing inflation persistence in developing countries such as India. However, the IT regime was not very effective during COVID-19 in reducing inflation persistence. Therefore, given the intransient nature of inflation in emerging economies, central banks should exercise more caution and patience. |
| Keywords: | Inflation persistence, Monetary regime, Quantile regression |
| JEL: | C21 E31 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:ind:igiwpp:2024-015 |
| By: | Aabid Karim; Heman Das Lohano |
| Abstract: | This research examines whether sentiments conveyed in the State Bank of Pakistan's (SBP) communications impact financial market expectations and can act as a monetary policy tool. To achieve our goal, we first use sentiment analysis techniques to quantify the tone of SBP monetary policy documents and second, we use short time window, high frequency methodology to approximate the impact of tone on stock market returns. Our results show that positive (negative) change in the tone positively (negatively) impacts stock returns in Karachi Stock Exchange. Further extension shows that the communication of SBP still has a statistically significant impact on stock returns when controlling for different variables and monetary policy tool. Also, the communication of SBP does not have a long term constant effect on stock market. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2408.03328 |
| By: | Linderoth, Gabriella (Uppsala Universitet); Meuller, Malte |
| Abstract: | This paper provides novel estimations of a non-linear exchange rate pass-through dependent on inflation for Sweden using a logistic smooth transition vector autoregressive model. The model enables smooth transitions between high and low inflation regimes, mirroring the dynamics of the economy and capturing regime-specific effects. The results show that the pass-through from an exchange rate depreciation shock to consumer prices depends on the level of inflation, reaching 17.4% in the high inflation regime and 6.9% in the low inflation regime. The estimations utilize data from the period 1995Q1 to 2023Q2, covering periods of both low and high inflation, as well as substantial exchange rate depreciations. The pass-through is also estimated for producer and import prices, establishing a decreasing pass-through along the pricing chain. We find limited evidence of a regime dependent pass-through to producer prices and no evidence for import prices. The findings suggest stronger monetary policy reactions following a depreciation of the exchange rate in high-inflation environments to limit the pass-through and, by extension, the impact on consumer prices. |
| Keywords: | Exchange Rate Pass-Through; Sweden; Inflation; Non-Linear; Logistic Smooth Transition Vector Autoregressive |
| JEL: | C32 E31 E52 |
| Date: | 2024–08–01 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:rbnkwp:0439 |