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on Central Banking |
| By: | Miguel García-Posada (BANCO DE ESPAÑA); Peter Paz (BANCO DE ESPAÑA) |
| Abstract: | We present empirical evidence on the transmission of monetary policy to banks’ credit standards (i.e. loan approval criteria) in loans granted to non-financial corporations (NFCs) in the euro area. To this end, we use a confidential survey in which banks are asked about developments in their respective credit markets, coupled with banks’ balance sheets and high-frequency monetary policy shocks. First, we find that poorly capitalized banks are more likely to tighten their credit standards in loans to NFCs. Second, these banks have tended to tighten their credit standards more in loans to SMEs than in loans to large firms during the current restrictive monetary phase. Third, the transmission of monetary policy to credit standards in loans to NFCs is stronger in poorly capitalized banks. Fourth, the relationship between monetary policy and credit standards is driven by large contractionary monetary policy shocks, which reveals important asymmetries in the bank lending channel. Finally, a tightening of the monetary policy stance also increases rejection rates in loans to NFCs, to a greater extent in poorly capitalized banks. |
| Keywords: | monetary policy, bank capital, credit supply, bank lending channel |
| JEL: | E51 E52 G21 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2430 |
| By: | Alain Paquet (University of Quebec in Montreal); Christophe Barrette (University of Quebec in Montreal) |
| Abstract: | Using US quarterly data from 1967 to 2023, which includes the surge and subsequent decline in inflation following the pandemic, as well as the significant expansionary monetary policy from quantitative easing preceding a renewed focus on bringing inflation back to the 2% target, we resort to both traditional and new econometric tools to assess the stability of the sign and size of key macroeconomic variables’ responses to monetary shocks. Our results reinforce and confirm the importance of a broad Divisia measure for understanding monetary policy transmission and making informed policy decisions. In particular, the overall shape of the price responses to a Divisia-based monetary shock is particularly consistent throughout the entire sample. Monetary policy shocks from the fed funds rate or shadow policy interest rate alone fail to produce responses free from empirical puzzles and consistent with expected intuition, for both earlier and extended sample periods. In contrast, Divisia measures generate IRFs that are puzzle-free and align with economic theory and intuition. They are empirically relevant in explaining output and price dynamics from the late 60s to today. |
| Keywords: | Monetary policy shock, Divisia monetary aggregates, SVAR, Time-Varying Parameter Structural VAR, output and price level |
| JEL: | E5 E51 E52 E3 E31 E32 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:bbh:wpaper:24-04 |
| By: | Christensen, Jens H. E. (Federal Reserve Bank of San Francisco); Mirkov, Nikola (Belgrade Banking Academy); Zhang, Xin (Research Department, Central Bank of Sweden) |
| Abstract: | Through large-scale asset purchases, widely known as quantitative easing (QE), central banks around the world have affected the supply of safe assets by buying quasi-safe bonds in exchange for truly safe reserves. We examine the pricing effects of the European Central Bank’s bond purchases in the 2015-2021 period on an international panel of bond safety premia from four highly rated countries: Denmark, Germany, Sweden, and Switzerland. We find statistically significant negative effects for all four countries. This points to an important international spillover channel of QE programs to bond safety premia that operates by increasing the amount of truly safe assets. |
| Keywords: | term structure modeling; convenience yields; unconventional monetary policy; European Central Bank |
| JEL: | E43 E47 F42 G12 G13 |
| Date: | 2024–09–01 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:rbnkwp:0440 |
| By: | Youming Liu; Francisco Rivadeneyra; Edona Reshidi; Oleksandr Shcherbakov; André Stenzel |
| Abstract: | For an intermediated central bank digital currency (CBDC) to be successful, central banks will need to develop sustainable economic models where intermediaries and end users derive value and central banks achieve their policy goals. This note presents a framework for analyzing different economic models of CBDC ecosystems. We analyze the trade-offs of three main CBDC ecosystem models, each with different levels of central bank involvement in activities of the ecosystem and the usage of different policy levers. The policy levers considered in the framework are control over intermediary access to the CBDC network, prices and quality standards. Our analysis suggests that a central bank provision of network infrastructure enables direct control over intermediary access requirements, prices and quality standards upstream. Providing a central bank digital wallet increases development costs but allows the central bank to set quality standards downstream and to promote competition. Delegating the network service to a regulated entity reduces costs for the central bank but may limit its strategic autonomy to control upstream pricing and intermediary access. Our analysis also suggests several areas of future research: central bank pricing models, intermediary revenue models, and quality and privacy standards. |
| Keywords: | Central bank research; Digital currencies and fintech; Financial services |
| JEL: | E5 E58 E6 E61 L5 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocadp:24-13 |
| By: | Cristina Jude; Grégory Levieuge |
| Abstract: | At the height of the COVID-19 crisis, many countries have reduced their countercyclical capital buffer (CCyB) and cut key policy rates. We exploit this quasi-natural experiment to gauge the combined effects of these two policies on bank lending rates (BLRs). First, we theoretically show that the joint action of CCyB release and monetary policy easing lowers BLRs by more than the sum of their individual effects. We then empirically confirm this synergy by a difference-in-difference analysis. Notably, for a one percentage point release of the CCyB, corporate BLRs decreased by around 11 basis points more compared to countries without CCyB relief. |
| Keywords: | Countercyclical Capital Buffer, Monetary Policy, Policy Complementarity, Lending Rates, Covid-19 |
| JEL: | G21 G28 E52 E44 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:961 |
| By: | Anton Grui (Charles University, National Bank of Ukraine) |
| Abstract: | In this paper, I study Ukraine´s heterogeneous and time-variant pass-through from the money market interest rate to bank deposit and lending rates. I utilize a new panel dataset containing individual banks´ characteristics and prudential indicators over 2019-2023, a period comprising the full-scale Russian invasion. First, using TVPARDL models, I reveal that during the invasion, the pass-through diminished for all examined bank products. It is also weaker to deposits in times of monetary policy tightening. Second, using panel regressions, I show how banks´ characteristics and prudential indicators influence the transmission. Their impacts are asymmetric during monetary policy tightening and loosening. Overall, I track wartime interest rate pass-through for practical monetary policy purposes and contribute to the topic of interactions between monetary and prudential policies. |
| Keywords: | monetary policy transmission mechanism, interest rate pass-through, wartime economy |
| JEL: | C54 E43 E52 G21 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:fau:wpaper:wp2024_33 |
| By: | Lukas Hack; Davud Rostam-Afschar |
| Abstract: | How do firms respond to macroeconomic shocks? To study this question, we construct novel daily time series that measure firms’ plans and expectations based on surveys from Germany. Daily variation allows us to estimate the short-run aggregate responses of firms in short samples. This allows us to analyze the post-pandemic inflation surge without relying on pre-pandemic data. We find that firms’ plans, notably price-setting plans, respond within days to oil supply and monetary policy shocks but not to forward guidance shocks. The effects are especially strong for small and non-tradeable sector firms. Finally, expectations respond strongly and swiftly, but only to monetary policy. |
| Keywords: | Daily data, firms, monetary policy, oil supply, inflation surge |
| JEL: | E31 E43 E52 E58 C83 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_593 |
| By: | Andrea Boitani (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore); Lorenzo Di Domenico (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore); Giorgio Ricchiuti |
| Abstract: | In this paper, we study the impact of contractionary monetary policies on income and wealth inequality. By developing an Agent Based – Stock Flow Consistent model, we show that both the sign and magnitude of monetary policy impacts depend on the heterogeneity characterizing income sources across the population, the composition of households wealth and portfolio preferences, the value of the labor share, and the size of unemployment benefits. Monetary policy can affect inequality through four main transmission channels: saving remuneration, asset prices, aggregate demand and cost-push channels. The paper delivers five main results: i) the impact of monetary policy on income inequality is non-linear and is a function of the degree of symmetry in the distribution of firms and bank shares, markup, and unemployment benefits; ii) the magnitude of the impact is not independent of the inequality measure considered; iii) the short-run effects on wealth inequality due to capital gains and losses (CGL) on long-term bonds are positively correlated with the degree of heterogeneity in the portfolio preferences of households. In the long-run, such effect vanishes. The short-run effect is null in the case of zero heterogeneity; iv) If the monetary shock has an asymmetric impact on portfolio decisions, monetary policy can have a long-lasting impact on wealth inequality through the CGLs in the stock market. In the presence of symmetric shocks, CGLs in the stock market have no effect, neither in the short nor in the long term; v) the higher the labor share, the greater the impact of monetary policy on inequality. Finally, we adopt the income factor decomposition to disentangle how income heterogeneity affect the transmission channels of monetary policies. |
| Keywords: | Monetary policies; income inequality; Agent-Based models; Stock-Flow Consistent models. |
| JEL: | E4 E52 E53 D31 D63 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:ctc:serie1:def133 |
| By: | Joshua Aizenman; Jamel Saadaoui |
| Abstract: | We investigate the resilience of CESEE countries during ECB monetary cycles after the entrance of ten countries to the EU in 2004. Undeniably, these countries have experienced a ‘miracle’ growth during the 2000s decade. However, several obstacles appeared following the global financial crisis and the euro crisis. In many CESEE countries, the quality of institutions has stalled, or even worse, has known a deterioration. Our investigation examines how fundamental and institutional variables influence cross-country resilience regarding exchange rates, interest rates, stock prices, inflation, and growth during the subsequent monetary cycles. Specifically, we focus on five ECB tightening and easing cycles observed during 2005-2023. Cross-sectional regressions reveal that limiting inflation, active management of precautionary buffers of international reserves, current account surpluses, better financial development, and institution quality are important predictors of resilience in the next cycle. The panel regressions show that the US shadow rate strongly influences resilience during the ECB monetary cycles. Besides, various asymmetries are discovered for current account balances, international reserves, and fuel import shares during tightening cycles. Panel quantile regressions detect asymmetries along the distribution of the dependent variables for financial development, central bank independence, and the inflation rate preceding the cycles. These findings may provide guidelines that are useful for returning to the trajectory observed before the euro crisis by identifying the main fundamental and institutional variables that enhance the resilience of CESEE. |
| JEL: | E50 F32 F36 F42 F65 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32957 |
| By: | Denis Gorea; Oleksiy Kryvtsov; Marianna Kudlyak |
| Abstract: | Evidence on the contemporaneous effects of interest rates on house prices has been elusive. We present direct evidence of the high-frequency causal relationship between interest rates and house prices in the United States. We exploit information contained in listings for residential properties for sale in the United States between 2001 and 2019 from the CoreLogic Multiple Listing Service Dataset. Using high-frequency instruments for monetary policy shocks, we estimate that a contractionary monetary policy surprise that raises average 30-year mortgage rates by 0.25 percentage points lowers housing list prices by 1 percent within two weeks. House prices respond to surprises to the expected path of future rates and are insensitive to the federal funds rate surprises. The initial response of list prices is almost entirely passed through to sale prices and persists for at least a year after the announcement. |
| Keywords: | house prices, monetary policy, transmission of monetary policy, list and sales prices |
| JEL: | E52 R21 R31 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1212 |
| By: | Simon C. Smith; Allan Timmermann; Jonathan H. Wright |
| Abstract: | We investigate the effect of uncertainty surrounding the slope of the Phillips curve on optimal monetary policy. To do this, we first account for parameter uncertainty in a time-invariant Bayesian Phillips curve model. Second, we generalize this model to allow for instabilities in the form of breaks. In both the United States (US) and the European Union (EU), we identify a break around the turn of the century, after which the Phillips curve flattened. Finally, we show how breaks amplify uncertainty in the Phillips curve model, significantly impacting optimal monetary policy. Accounting for breaks causes policymakers to respond more cautiously to deviations in the unemployment rate from its natural rate – as they are less certain about the impact of economic slack on inflation – but to compensate for this increased caution by responding more aggressively to deviations of inflation from its target. Our estimates provide a lower bound for the magnitude of the impact of breaks on the change in responsiveness of optimal monetary policy since they are based on the full sample of data, while policymakers face additional uncertainty as they must continuously determine in real time whether a break has occurred. |
| Date: | 2024–08–30 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2024-08-30-1 |
| By: | Piergallini, Alessandro |
| Abstract: | I develop flexible- and sticky-price general equilibrium models that embody corporate financing decisions affecting firm value because of distortionary taxes. Nominal interest-rate variations impact costs of debt and equity capital asymmetrically and induce firms to modify the financial structure, altering the gap between the (optimization-based) weighted average cost of capital and the real interest rate. Under these circumstances, I demonstrate that passive or mildly active monetary policies ensure aggregate stability. Overly aggressive inflation-fighting actions are destabilizing under sticky prices. Macroeconomic dynamics following either interest-rate normalization or temporary monetary tightening critically depend upon the tax structure and the steady-state debt-equity ratio. |
| Keywords: | Corporate Finance; Firm Financial Structure; Corporate and Personal Taxation; Interest Rate Policy; Equilibrium Dynamics; Monetary Policy Shocks. |
| JEL: | E31 E52 G32 H24 H25 |
| Date: | 2024–09–12 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122021 |
| By: | Miriam Braig (University of Erfurt); Sebastian K. Rüth (University of Erfurt); Wouter Van der Veken (National Bank of Belgium, Economics and Research Department and Ghent University) |
| Abstract: | We solve a canonical, estimated, medium-sized, open-economy New Keynesian model, cast it into a small-scale population vector autoregression, and assess whether best-practice structural identifications detect textbook “overshooting” after a monetary policy hike—i.e., an instant real appreciation that monotonically reverts. Our results include “delayed overshooting, ” “exchange rate puzzles, ” “forward discount puzzles, ” and model-consistent overshooting. Identifications that regularly indicate open-economy anomalies in empirics likewise produce them in our controlled setup. Vice versa, identifications that prompt theory-conform conclusions in actual data do so in our experimental data. We infer that less empirical evidence may contradict canonical international macro theory than previously understood. |
| Keywords: | New open economy macroeconomics, population vector autoregression, invertibility, structural identification, exchange rate, overshooting. |
| JEL: | C32 E32 E52 F41 F42 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbb:reswpp:202409-455 |
| By: | Domenico Delli Gatti; Tommaso Ferraresi; Filippo Gusella; Lilit Popoyan; Giorgio Ricchiuti; Andrea Roventini |
| Abstract: | We extend the multi-country, multi-sector agent-based model in Dosi et al. (2019, 2021) by incorporating an exchange rate market where heterogeneous chartist and fundamentalist financial traders exchange foreign currencies. This introduces complex interactions between the real and financial side of the economies that reverberate on the dynamics of the exchange rate, which acts both as a transmission channel of endogenous fluctuation and as a source of shocks. Simulation results show that model is able to account for a rich ensemble of stylized facts (e.g., fat tails, volatility clustering, fluctuations and contagion among others) concerning the exchange market and its interactions with the real economy dynamics at different level of aggregation. Moreover, our findings reveal that speculative behavior in the exchange rate market substantially increases financial turbulence and contributes to real economic fluctuations. On the policy side, we highlight the power and limitations of central bank interventions in the exchange rate market. |
| Keywords: | agent-based model, exchange rate dynamics, financial crises, endogenous business cycles, heterogeneous traders, central bank interventions |
| Date: | 2024–09–19 |
| URL: | https://d.repec.org/n?u=RePEc:ssa:lemwps:2024/24 |
| By: | Soner Baskaya (UNIVERSITY OF GLASGOW); José E. Gutiérrez (BANCO DE ESPAÑA); José María Serena (BANCO DE ESPAÑA); Serafeim Tsoukas (UNIVERSITY OF GLASGOW) |
| Abstract: | This paper studies whether supervisory actions, namely provisioning guidelines on non-performing loans (NPLs), affect banks’ NPL cleansing and lending behaviour, as well as the real economy. Using the supervisory intervention announced by the European Central Bank in the first quarter of 2018 as a quasi-natural experiment, we show that banks disposed of old NPLs at a higher rate after the policy shift. Banks that were more heavily exposed to the policy tightened their lending standards, especially for risky firms. Furthermore, banks with stronger fundamentals were more keen on disposing NPLs and less restrained on lending. We also find that firms borrowing from banks affected by the supervisory actions experienced a decline in the growth rates of their total assets, investment, employment and sales. Our results highlight the importance of supervisory actions on NPL management, and potential beneficial effects on credit allocation. |
| Keywords: | non-performing loans, loan loss provisioning rules, NPL resolution, credit supply, firm outcomes |
| JEL: | E51 E58 G13 G21 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2428 |
| By: | Philemon Kwame Opoku |
| Abstract: | This paper examines the impact on inflation of crude oil import price (COIP), unconventional monetary policy (UMP), and post-pandemic demand shocks for a panel of 21 OECD countries, using panel vector autoregressive (pVAR) and local projection methods. The empirical result provides evidence that COIP shocks significantly contribute to increases in consumer price index (CPI) inflation, GDP deflator inflation and producer price index (PPI) inflation. UMP shocks, although less impactful than COIP shocks, also influence inflation. Furthermore, the most significant inflationary pressures in recent times have arisen from post-pandemic demand shocks, surpassing the effects of COIP and UMP shocks in the post-COIVD period. The findings highlight the critical role of supply-side and demand-side factors in shaping inflation dynamics in the OECD. Keywords: Unconventional Monetary Policy (UMP), Crude Oil Import Price (COIP), Post-pandemic demand Shock, Inflation, panel VARs, Local Projections |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:ise:remwps:wp03412024 |
| By: | Carlos Canizares Martinez (National Bank of Slovakia); Arne Gieseck (European Central Bank) |
| Abstract: | This paper estimates the effects of uncertainty shocks on a large set of economic and financial variables in the euro area. For this purpose, we first build a large monthly macro dataset with euro area-wide data, which we summarize by principal components. Second, we estimate a heteroskedastic factor-augmented vector autoregressive (FAVAR) model using a survey-based measure of macroeconomic uncertainty and a large dataset. Third, we identify five shocks by employing a new identification scheme based on sign restrictions exploiting our large dataset, including uncertainty shocks, financial shocks, standard monetary policy shocks, aggregate demand shocks, and supply shocks. Fourth, we show more than one hundred impulse responses to an uncertainty shock. In this setup, we find that an uncertainty shock has a significantly negative effect on economic activity measures in the euro area, but has no significant effect on savings and inflation. Moreover, uncertainty shocks trigger a contractionary effect on several measures of financial stability. Finally, we discuss the results and possible policy implications |
| JEL: | C55 D80 D81 E32 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:svk:wpaper:1109 |
| By: | Mirza, Harun; Salleo, Carmelo; Trachana, Zoe |
| Abstract: | This study assesses euro area banks’ profitability using granular stress test data from three EU-wide exercises, coordinated by the European Banking Authority, that took place in 2016, 2018, and 2021. We propose a credit portfolio-level risk-adjusted return on assets for the euro area as a whole and for individual countries to assess the profitability of lending activities among euro area banks. Using banks’ own projections under the adverse scenarios of the stress test exercises for a consistent sample of euro area banks, we aim to uncover the effect of severe macroeconomic and financial conditions on the profitability of the various portfolios. We investigate how many country portfolios switch from profitable to loss-making under adverse conditions and show that this number peaks in the 2018 stress test exercise, while the 2021 exercise yields the lowest overall profitability. Overall, around 30% of exposures become unprofitable under stress conditions across the latest two exercises (compared to 20% for the 2016 exercise), mostly concentrated in the non-financial corporations (NFC) segment and, to a lesser extent, in the financial and mortgage portfolios. We also show in a regression analysis that the yield curve is an important determinant of portfolio-level profitability in a stress test setting, while the unemployment rate seems to be relevant in determining portfolio switches and GDP growth seems to influence the change in profitability. The results also point to some portfolio heterogeneity. |
| Keywords: | Bank profitability, cost of risk, net interest income, portfolio analysis, scenario analysis, stress testing |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbops:2024356 |
| By: | Simone Cima (Central Bank of Ireland; Trinity College Dublin); Joseph Kopecky (Trinity College Dublin) |
| Abstract: | Policymakers are reckoning with widening disparities in income and wealth. Perhaps no set of policies have the potential impact the distribution of wealth than those that affect home ownership. In most countries, wealth held by all but the top of the distribution is predominantly housing wealth. Many governments have undertaken measures aimed at helping lower to middle-income households to get on the housing ladder. However, the housing market is very complicated, and such policies could end up hurting households through different channels. We aim to provide guidance on the relative impact of various housing policies and macroeconomic conditions on inequality. To do this we build a life-cycle model where households endogenously choose between buying and renting houses. In this framework we quantify how distributions of income, wealth and consumption, as well as homeownership rates, are affected by a wide range of housing policies or features, specifically: borrower-based macroprudential limits, the presence of institutional investors, taxation of rental income, and measures targeted at the construction sector. We find that all of these policies, and the interactions between them, can lead to substantial movements in inequality and homeownership rates, with supply-side policies being the most impactful. This paper also provides a solid modelling framework for future analysis in this area. |
| Keywords: | Housing policy; Macroprudential policy; Wealth inequality; Inequality; Housing; Renting |
| JEL: | E21 G51 R21 R28 R31 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:tcd:tcduee:tep0724 |
| By: | Simon C. Smith; Allan Timmermann; Jonathan H. Wright |
| Abstract: | The slope of the Phillips curve flattened around the turn of the century. The slope, however, is also kinked (nonlinear) such that it is steeper in a tight labor market than in a more normal one. The magnitude of this kink means that the flattening of the Phillips curve around the turn of the century has not changed much the slope in a tight labor market. This holds for both price and wage Phillips curves and for both the United States (US) and the European Union (EU). Our findings are relevant to policy debates about the costs and benefits of a running a hot labor market. Monetary policy-makers face a fundamentally different inflation-unemployment tradeoff in tight labor markets compared with looser labor markets and should consider this when setting policy. |
| Date: | 2024–09–04 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2024-09-04-1 |
| By: | Bálint Szőke; Francisco Vazquez-Grande; Inês Xavier |
| Abstract: | The natural rate of interest, or r*, corresponds to the short-term real interest rate that is consistent with full employment and price stability, after all temporary shocks have abated. The most popular framework to estimate r* is Laubach and Williams (2003) and Holston, Laubach, and Williams (2017, 2023) (henceforth HLW). |
| Date: | 2024–09–03 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2024-09-03-1 |