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on Central Banking |
| By: | Rafael Guerra; Steven Kamin; John Kearns; Christian Upper; Aatman Vakil |
| Abstract: | This paper estimates empirical Taylor rules to analyze the recent monetary policy of the five main Latin American inflation-targeting central banks. We find that during the inflationary surge of 2021–23, monetary policy reacted more strongly and more quickly to changes in inflation than predicted by a standard linear Taylor rule, estimated on data from the pre-pandemic period. Although this appears to represent a shift in the monetary reaction function, we think it more likely that Latin American central banks have been following a non-linear strategy, responding more aggressively to inflation, the higher it rose. We confirmed this by adding the square of inflation to the Taylor rule model: its coefficient was positive and significant, indicating that policy interest rates exhibited a non-linear response to inflation, even during the pre-pandemic period, and the model did a better job of predicting the sharp rise in interest rates during 2021–23. |
| Keywords: | Latin America, central banks, monetary policy, Covid-19, interest rates |
| JEL: | E52 E58 E50 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1209 |
| By: | Mariana García-Schmidt |
| Abstract: | Central Bank policy decisions affect the economy not only by influencing market conditions through its market interventions but also by shaping the people’s expectations of economic conditions via the announcement of those decisions. This paper studies how forecasts of inflation and output growth respond to unexpected policy rate decisions using datasets for Brazil and Chile that satisfy three conditions: high enough frequency, short-term horizons, and the same source for the dependent and independent variables. The results show that inflation and output forecasts increase in the short run after an unexpected increase in the policy rate, which supports the existence of an information shock behind the monetary policy decision. These results can be explained by a baseline Neo-Keynesian model only when the interest rate provides information about shocks other than the monetary policy shock. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:chb:bcchwp:1017 |
| By: | Velasco, Sofia |
| Abstract: | This paper introduces a Bayesian Quantile Factor Augmented VAR (BQFAVAR) to examine the asymmetric effects of monetary policy throughout the business cycle. Monte Carlo experiments demonstrate that the model effectively captures non-linearities in impulse responses. Analysis of aggregate responses to a contractionary monetary policy shock reveals that financial variables and industrial production exhibit more pronounced impacts during recessions compared to expansions, aligning with predictions from the ’financial accelerator’ propagation mechanism literature. Additionally, inflation displays a higher level of symmetry across economic conditions, consistent with households’ loss aversion in the context of reference-dependent preferences and central banks’ commitment to maintaining price stability. The examination of price rigidities at a granular level, employing sectoral prices and quantities, demonstrates that during recessions, the contractionary policy shock results in a more pronounced negative impact on quantities compared to expansions. This finding provides support for the notion of stronger downward than upward price rigidity, as suggested by ’menu-costs models’. JEL Classification: C11, C32, E32, E37, E52 |
| Keywords: | asymmetric effects of monetary policy, Bayesian Quantile VAR, disaggregate prices, FAVAR, non-linear models |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242983 |
| By: | Barry Eichengreen (University of California, Berkeley); Poonam Gupta (National Council of Applied Economic Research, Delhi) |
| Abstract: | We assess India’s inflation-targeting regime at the eight-year mark. The Reserve Bank of India continues to be a flexible inflation targeter: it responds to both the output gap and inflation when setting policy rates. It has become neither more hawkish nor more reactive with the transition to inflation-targeting. Evidence points to improved outcomes: inflation is lower and less volatile; inflation expectations are better anchored; and the transmission of monetary policy is more effective. Given this record, radical changes such as broadening the RBI’s monetary mandate, abandoning the target in favor of a more discretionary regime, targeting core instead of headline inflation, or altering the target and tolerance band would be risky and counterproductive. One obvious area for improvement entails updating the weight of food prices in the CPI basket. We estimate the correct weight of food at today’s per capita income to be closer to 40 percent instead of the current 45.8 percent. This would likely fall further to around 30 percent in a decade from now due to the projected increase in per capita incomes. This correction should ameliorate concerns about the design and practice of the current inflation targeting regime. |
| Keywords: | Inflation Targeting, Monetary Policy, India |
| JEL: | E5 E52 |
| Date: | 2024–05–24 |
| URL: | https://d.repec.org/n?u=RePEc:nca:ncaerw:174 |
| By: | Kim, Minseong |
| Abstract: | We show that the first-order optimality conditions in the baseline New Keynesian model relating to central bank reserves become invalid due to a corner solution, with future budget constraints plus rational expectation requiring zero central bank reserves today even for a disequilibrium. The use of a multiple-agent variant does not resolve the issue. The corrected understanding of the baseline New Keynesian model supports the MMT view that despite endogenous money, HPM can be crucial for efficacy of monetary and government policies. We leave the question of whether a fully Post-Keynesian analysis invalidates such a conclusion to future works. |
| Date: | 2024–09–12 |
| URL: | https://d.repec.org/n?u=RePEc:osf:osfxxx:dzjsc |
| By: | Dominic Cucic; Denis Gorea |
| Abstract: | We analyze the role of nonbank lenders in the transmission of monetary policy using data on the universe of unsecured credit to firms and households in Denmark. Nonbanks increase their credit supply after a monetary contraction, both relative to banks and in absolute terms. The nonbank credit expansion is driven by long-term debt funding flowing to nonbanks. The attenuation of the traditional bank lending channel of monetary policy has real effects: nonbank credit insulates corporate investment and household consumption from adverse consequences of monetary contractions. |
| Keywords: | monetary policy, nonbanks, shadow banks, banks, real effects |
| JEL: | E51 E52 G23 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1211 |
| By: | Antoine Ebeling |
| Abstract: | This paper study the impact of the European Central Bank’s (ECB) climate related speeches on European stock markets. Using the database of 2594 speeches between 1997 and 2022 of the European Central Bank, we employ advanced textual analysis techniques, including keyword identification and topic modeling, to isolate speeches related to climate change. We then conduct an event study to estimate the differences in abnormal returns of a large panel of listed companies in response to the European Central Bank’s speeches on climate change. Our analysis reveals that the ECB’s communication on climate issues has intensified significantly since 2015. Using topic modelling methods, we classify climate speeches into two main themes: (i) green finance and economic policies, and (ii) climate-related risks The event study shows that financial markets tend to reallocate portfolios towards greener ones in the days following the ECB’s climate speeches. Our results show that following a climatic speech by the ECB, green financial markets are benefiting from positive abnormal returns by around 1 percentage point. More specifically, we find that climate speeches dealing with green monetary policy and other economic policy instruments have a larger effect on green stock prices than speeches dealing with different types of climate risk. |
| Keywords: | Central bank communication ; Climate change ; Event Study ; Textual Analysis. |
| JEL: | E52 G14 Q54 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ulp:sbbeta:2024-38 |
| By: | Lydia Cox; Jiacheng Feng; Gernot Müller; Ernesto Pastén; Raphael Schoenle; Michael Weber |
| Abstract: | The jointly optimal monetary and fiscal policy mix in a multi-sector New Keynesian model with sectoral government spending and productivity shocks entails a separation of roles: Sectoral government spending optimally adjusts to sectoral output gaps and inflation rates---a policy supported by evidence from sectoral federal procurement data. Monetary policy optimally focuses on aggregate stabilization, but deviates from a zero-inflation target; in a model calibration to the U.S., however, it effectively approximates a zero-inflation target. Because monetary policy is a blunt instrument and government spending trades off stabilization against the optimal-level public good provision, the first best is not achieved. |
| JEL: | E32 E62 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32914 |
| By: | Elias Albagli; Luis Ceballos; Sebastian Claro; Damian Romero |
| Abstract: | We evaluate the behavior of the UIP relationship around monetary policy and global uncertainty shocks using event studies. We find that the covariance between exchange rate movements and changes in long-term yield differentials is conditional on the nature of shocks. A model of partial arbitrage between domestic and US bond markets predicts that tighter US monetary policy appreciates the dollar while increasing US yields relative to domestic bonds, a response that is consistent with UIP forces, while global uncertainty shocks appreciate the dollar while raising domestic yields relative to US bonds, exacerbating the widely documented UIP violation. The empirical analysis supports these mechanisms, specially for developed economies. For emerging economies, both relationships are weaker, consistent with more pervasive currency stabilization policies that mute the FX response at the expense of higher volatility in longer yields. Our results suggest a more nuanced interpretation of the unconditional failure of the UIP. |
| Date: | 2024–03 |
| URL: | https://d.repec.org/n?u=RePEc:chb:bcchwp:1007 |
| By: | Jennifer La'O; Wendy A. Morrison |
| Abstract: | We study optimal monetary policy in a general equilibrium economy with heterogeneous agents and nominal rigidities. Households differ in type-specific, state-contingent labor productivity and initial firm ownership, yet markets are complete. The fiscal authority has access to a linear tax schedule with non-state-contingent tax rates and uniform, lump-sum taxes (or transfers). We derive sufficient conditions under which implementing flexible-price allocations is optimal. We then show that when there are fluctuations in relative labor productivity across households, it is optimal for monetary policy to abandon the flexible-price benchmark and target a state-contingent markup. The optimal markup covaries positively with a sufficient statistic for labor income inequality. In a calibrated version of the model, countercyclical earnings inequality implies countercyclical optimal markups. |
| JEL: | D61 D63 E32 E52 E63 H21 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32921 |
| By: | Kevin L. Kliesen |
| Abstract: | At their September 2024 meeting, the FOMC began reducing the federal funds target rate and indicating the likelihood of additional reductions by the end of the year and into 2025. The FOMC took this action because of favorable inflation trends and some developing weakness in labor markets. A similar dynamic was at work from 1994 to early 1996. During this period, the FOMC undertook, first, a pre-emptive tightening in policy to combat emerging price pressures and then, second, a pre-emptive easing of monetary policy to counter the expectations of slower real GDP growth or outright recession. One key difference between the two episodes was the marked acceleration in inflation rate in 2021-2022 compared to 1994-95. Nevertheless, the end result of the 1994-96 episode was that the US economy avoided a recession and inflation by the end of 1997 was effectively at a level that is now deemed price stability. The purpose of this article is to outline the key arguments that Chairman Greenspan and the other FOMC participants deployed during the 1995-96 pre-emptive easing episode. |
| Keywords: | Federal Open Market Committee (FOMC); monetary policy; macroeconomy; inflation; recession |
| JEL: | E3 E4 E5 N1 |
| Date: | 2024–09–26 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedlwp:98865 |
| By: | Titouche Souhila (UMBB - Université M'Hamed Bougara Boumerdes); Arkoub Nabila (UMBB - Université M'Hamed Bougara Boumerdes) |
| Abstract: | Monetary policy in Algeria aims to control money supply to stimulate economic growth. This study examines the role of monetary policy tools in achieving economic growth from 1990 to 2020, focusing on the impact of Law 90-10. The findings suggest that monetary policy has had limited success in boosting growth due to the economy's heavy dependence on oil revenue for financing development projects. Despite efforts in implementing reforms and developmental schemes, desired growth rates have not been achieved. |
| Keywords: | Monetary policy economic growth money supply code of money and credit JEL Classification Codes: E52 E63 F43 O23 O40 The Theoretical Framework of Economic Growth. Third Axis: The Reality, Monetary policy, economic growth, money supply, code of money and credit JEL Classification Codes: E52, E63, F43, O23, O40 The Theoretical Framework of Economic Growth. Third Axis: The Reality |
| Date: | 2023–12–30 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04680589 |
| By: | Mosk, Benjamin; Vassallo, Danilo |
| Abstract: | This paper presents an event-study methodology that combines market data and survey-based probabilities to infer the full effect of a policy decision, as seen through the lens of financial markets. The market reaction to an event’s outcome reflects its surprise or announcement effect, and generally not its full effect. However, under certain conditions, the unobserved full effect can be derived from the observed surprise effect. Most importantly, the ex-ante probabilities of different outcomes must be known. We apply this methodology to a real-world example: the European Central Bank’s announcement of its third series of targeted longer-term refinancing operations (TLTROIII). The introduction of TLTROIII was highly anticipated, and therefore partially priced in, as market participants feared a “cliff effect” with the preceding operations under TLTROII coming due. We estimate the announcement’s full effect, focusing on its impact on a set of asset prices, as compared to a baseline wherein TLTROIII would not have been introduced. The full market impact surpasses the surprise effect by a factor of fifteen. We also find that the announcement had a highly heterogeneous impact on euro area sovereign bond yields. JEL Classification: G12, G13, G14 |
| Keywords: | event-study, targeted longer-term refinancing operations |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242982 |
| By: | Lambert, Claudia; Larkou, Chloe; Pancaro, Cosimo; Pellicani, Antonella; Sintonen, Meri |
| Abstract: | By applying a structural demand model to unique consumer-level survey data from the euro area, we assess how different CBDC design options, combined with individual (revealed) preferences, influence the potential demand for a digital euro. Estimating the demand for a digital euro, we find that if it were unconstrained, it could range, in steady state, between 3-28% of household liquid assets or €0.12 - €1.11 trillion, depending on whether consumers would perceive the digital euro to be more cash-like or deposit-like. With an illustrative €3, 000 holding limit per person, it could instead range between 2-9% or €0.10 -€0.38 trillion. Privacy, automatic funding, and instant settlement raise its potential demand. JEL Classification: E41, E50, E58 |
| Keywords: | Central bank digital currency, demand estimation, design attributes, structural model |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242980 |
| By: | Mario Tamez; Hans Weenink; Akihiro Yoshinaga |
| Abstract: | Well-designed legal frameworks and institutional arrangments support the legitimacy of central banks’ autonomous decision-making when grounded on sound legal basis and can prevent over-stepping in the remit of other authorities. This paper explores the key legal intersections of climate change and central banks. Climate change could impact price and finanical stability, which are at the core of a central bank’s mandate. While central banks’ legal frameworks can support climate change efforts they also determine the boundaries of the measures they can adopt. Central banks need to assess their mandate and authority under their current legal frameworks when considering measures to contribute to the global response to climate change, while taking actions to fulfill their legal mandates. |
| Keywords: | Climate Change; Central Bank; Legal Framework |
| Date: | 2024–09–09 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/192 |
| By: | Chetan Ghate (Indian Statistical Institute – Delhi); Kenneth Kletzer (University of California); Mahima Yadav (Indian Statistical Institute – Delhi) |
| Abstract: | India accumulated a sizable stock of foreign reserves over the past two decades, in common with many other emerging economies. Its current reserves comfortably surpass conventional thresholds for adequacy used by the International Monetary Fund and others. An assessment of whether the stock of reserves is appropriate should depend on an evaluation of the benefits and costs of reserves looking forward. Reserves provide self-insurance against sudden financial outflows by non-resident investors or resident savers and liquidity for managing exchange rates. While India’s reserves appear to be ample for meeting both these needs, additional reserves can reduce vulnerability to capital flow reversals that can be crisis inducing. The empirical analysis of India’s external portfolio capital flows finds that reserves lower outflows in the event of global financial distress at the margin. Reserve holdings reduce the volatility of portfolio debt flows in response to relative policy interest rate shocks. The results indicate that additions to reserves reduce the economy’s exposure to global financial risk. The precautionary benefits of reserves could well increase as India becomes further integrated to international financial markets. Estimates of the costs of holding reserves give evidence that increases in the reserves to output ratio reduce the risk premium on reserves, so that the sovereign interest rate spread overestimates the marginal cost of reserves. |
| Keywords: | Foreign exchange reserves, foreign portfolio flows, precautionary reserves, global financial shocks. |
| JEL: | F31 F32 E52 |
| Date: | 2024–05–24 |
| URL: | https://d.repec.org/n?u=RePEc:nca:ncaerw:168 |
| By: | Bonga-Bonga, Lumengo |
| Abstract: | This paper makes a significant contribution to the literature on the policy trilemma by evaluating potential policy combinations that are relevant for the BRICS grouping within the context of the Impossible Trinity. Additionally, the paper introduces a new modeling approach for assessing the policy trilemma, based on establishing a boundary for the linear combination of variables related to the trilemma. The findings reveal that adopting a fixed exchange rate system presents considerable challenges for BRICS countries within the framework of the Impossible Trinity. Specifically, the results suggest that if BRICS countries opt for a fixed exchange rate system, they would likely have to forgo free capital flow. This loss of flexibility could be particularly detrimental, given their significant international influence and their role as major recipients of capital flows for trade and financial transactions. |
| Keywords: | impossible trinity; exchange stability; monetary policy independence; BRICS. |
| JEL: | C2 E61 F4 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121839 |
| By: | Ms. Maria-Angels Oliva; Nika Khinashvili |
| Abstract: | In a 157 emerging markets and developing countries sample, remittances continue to grow fast, outpacing other financial inflows (as a share of GDP), particularly in Asia. Without alternative policy instruments, foreign exchange interventions (FXIs) have often been the authorities’ go-to tool to manage the short-term effects of these remittance inflows. However, this practice comes at a cost. This paper shows that FXIs are quick, temporary solutions that often may hinder the development of the recipient country’s financial sector and may not support financial stability over the medium term. The analysis suggests that FXIs act as an insurance tool that, by mitigating FX volatility, protect remittance recipients and tradable sectors from FX risks, encouraging less bank deposits (consistent with more spending) and lower buffers in the banking sector. These costs add to other direct FXI-related costs already identified in the literature. The development of private sector market risk management tools should support longer-term structural reforms required to increase the absorptive capacity of additional FX inflows. |
| Date: | 2024–09–06 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/191 |