|
on Central Banking |
| By: | Thiel, Luzie; Schwanebeck, Benjamin |
| JEL: | E50 E52 E58 E61 F41 F45 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc24:302405 |
| By: | Ojasvita Bahl; Chetan Ghate; Debdulal Mallick |
| Abstract: | Governments in EMDEs routinely intervene in agriculture markets to stabilize food prices in the wake of adverse shocks. Such interventions involve a large increase in the procurement and redistribution of agriculture output, which we refer to as a redistributive policy shock. What is the impact of a redistributive policy shock on inflation and the distribution of consumption amongst rich and poor households? We build a two-sector-two-agent NK-DSGE model (2S-TANK) to address these questions. Using Indian data, we estimate the model using a Bayesian approach. We characterize optimal monetary policy. We show that the welfare costs of redistributive policy shocks are substantially higher when non-optimized rules are used to set monetary policy in response to such shocks. |
| Keywords: | TANK models, inflation targeting, emerging market and developing economies, procurement and redistribution, NK-DSGE, welfare costs |
| JEL: | E31 E32 E44 E52 E63 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2024-59 |
| By: | Gebauer, Stefan; Pool, Sebastiaan; Schumacher, Julian |
| Abstract: | This paper examines the impact of rising interest rates on central bank profitability. Using a stylized income model, we demonstrate that changes in interest rates in combination with expansive balance sheet policies introduce a cyclical component into the central bank’s profit and loss statement. Ourfindings reveal, however, that while the interplay of such policies may dampen short-term profitability if interest rates rise, they do not undermine a central bank’s financial strength, because higher interest rates also raise the value of future seigniorage income. Using data for the euro area, we quantify the consequences for inflation of setting interest rates aimed at mitigating financial losses, showing that such a strategy would lead to substantially higher inflation rates. Overall, our findings confirm that a central bank’s willingness to accept temporary losses reflects a commitment to price stability, rather than a hindrance. JEL Classification: E31, E43, E52, E58, E63 |
| Keywords: | central bank independence, central bank profitability, monetary policy |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242985 |
| By: | Brigitte Desroches; Sharon Kozicki; Laure Simon |
| Abstract: | Monetary policy governance—how monetary policy objectives are determined, how decisions are made and who makes them—determines the quality and effectiveness of monetary policy decisions. In this paper, we examine some desirable and some adverse outcomes associated with different governance structures. We discuss the roles of legislation, institutional features, and processes and practices in establishing various aspects of governance. We highlight the importance of the domestic context in determining what governance structure works best for a given central bank. Finally, we provide an update on monetary policy governance at the Bank of Canada and how it has evolved over time. |
| Keywords: | Credibility; Monetary policy communications; Monetary policy framework |
| JEL: | E02 E5 E58 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocadp:24-14 |
| By: | Solikin M. Juhro; Denny Lie |
| Abstract: | Should macroprudential policy be countercyclical or procyclical? Using an estimated medium-scale DSGE model with a wide array of shocks, we show that the optimal macroprudential (capital-requirement) response could be procyclical, in contrast to the standard recommendation of a countercyclical response. This finding is due to the existence of many shocks in the economy that imply a trade-off between achieving macroeconomic stability and financial stability. Our main, general finding on the possible desirability of a procyclical macroprudential policy response applies to any economy, even though the model for the analysis is fitted to the Indonesian economy. The only requirements are that there exists a shock that induces a trade-off between the two stability measures and that the objective of the policymakers is to maximize the welfare of economic agents. Under the scenario, the welfare loss from adopting a conventional, countercyclical macroprudential response could be sizeable. |
| Keywords: | monetary policy, macroprudential policy, policy mix, financial system procyclicality, capital requirement, countercyclical or procyclical policy, |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:syd:wpaper:2024-22 |
| By: | Joseph H. Haslag (Department of Economics, University of Missouri-Columbia); Dong Ho Kang (Center for Macroeconomic Research, University of Cologne, Germany) |
| Abstract: | Over the past decade, researchers have identified monetary policy surprises using highfrequency movements in futures contract prices. Based on this identification strategy, the evidence suggests that contractionary monetary policy surprises are significantly related to decreases in output and the price level. In other words, monetary policy is relevant. With more than a decade of data with nominal rates at or near the zero lower bound and interest on reserves, the open question is whether this relevance depends on the opportunity cost of holding money. We test this hypothesis, reporting impulse responses that are relevant when opportunity costs are greater than zero, but irrelevant when opportunity costs are close to zero. Hence, we conclude that monetary policy is conditionally relevant. |
| Keywords: | high-frequency, monetary policy surprises, interest on reserves, conditional relevanc |
| JEL: | E32 E44 E52 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:umc:wpaper:2410 |
| By: | Bernoth, Kerstin; Herwartz, Helmut; Trienens, Lasse |
| Abstract: | Using a data-driven identification approach of structural vector autoregressive models, we analyse the factors driving the US dollar exchange rate for a sample of eight advanced countries over the period 1980M1 to 2022M6. We find that the exchange rates are significantly affected not only by US monetary policy, but also by shocks to inflation expectations associated with shifts in fiscal sustainability concerns. In addition, external shocks related to global risk aversion and the convenience yield that investors are willing to give up to hold US dollar assets have a significant impact on the US dollar exchange rate. All three shocks considered make an important contribution to explaining US dollar exchange rate changes, with external shocks being the most impactful on average. Moreover, we find evidence that the monetary policy response to shocks to long-run inflation expectations has changed over time, suggesting shifts in monetary policy reaction functions. |
| JEL: | E52 C32 E43 F31 G15 F41 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc24:302351 |
| By: | Aldasoro, Iñaki; Ferrari Minesso, Massimo; Gambacorta, Leonardo; Habib, Maurizio Michael; Cornelli, Giulio |
| Abstract: | Using a new series of crypto shocks, we document that money market funds’ (MMF) assets under management, and traditional financial market variables more broadly, do not react to crypto shocks, whereas stablecoin market capitalization does. U.S. monetary policy shocks, in contrast, drive developments in both crypto and traditional markets. Crucially, the reaction of MMF assets and stablecoin market capitalization to monetary policy shocks is different: while prime-MMF assets rise after a monetary policy tightening, stablecoin market capitalization declines. In assessing the state of the stablecoin market, the risk-taking environment as dictated by monetary policy is much more consequential than flight-to-quality dynamics observed within stablecoins and MMFs. JEL Classification: E50, F30 |
| Keywords: | Bitcoin, crypto, monetary policy shocks, money market funds, stablecoins |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242987 |
| By: | Natalie Dvorakova; Tomas Sestorad |
| Abstract: | This paper examines the drivers of the post-pandemic surge in inflation in four small open economies: Czechia, Hungary, Poland, and Slovakia. For this purpose, a Bayesian structural vector autoregressive model with sign-zero restrictions and block exogeneity is employed. The results show that both foreign demand and foreign supply shocks have contributed significantly to inflation in the post-2020 period across countries, alongside notable contributions from domestic factors explaining differences among economies. Specifically, supply-side shocks are identified as the primary domestic factor across all countries, whereas domestic demand shocks were much less influential. Exchange rate shocks were pronounced in Hungary only, while monetary policy shocks have had a minimal impact on inflation since 2022 in all the countries considered. Additionally, we provide decompositions of core inflation, highlighting the predominance of domestic factors. |
| Keywords: | Bayesian VAR, extraordinary events, inflation, sign-zero restrictions, small open economies |
| JEL: | C32 E31 E32 E52 F41 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:cnb:wpaper:2024/5 |
| By: | Elton Beqiraj; Stefano Di Bucchianico; Mario Di Serio; Michele Raitano |
| Abstract: | This study examines the impact of monetary policy on wage inequality in Italy from 1999m1 to 2018m12, using a newly assembled dataset based on high-frequency administrative data on private-sector employees from the Italian Social Security Institute (INPS). By applying the Smooth Local Projection (SLP) method, we derive the impulse responses to exogenous monetary policy shocks of average wages and of the Gini index of wage inequality and other indicators of the wage distribution. Our findings show that expansionary monetary policy significantly reduces wage inequality while stimulating economic activity. Furthermore, distinguishing workers’ subgroups according to sector of activity, occupation and firm’s size, we find that expansionary monetary policy decreases wage inequality both 'between' and 'within' subgroups |
| Keywords: | Monetary policy shocks, Wage inequality, Italian data, Earnings heterogeneity, Labour market |
| JEL: | D63 E50 E52 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:usi:wpaper:912 |
| By: | Volha Audzei; Ivan Sutoris |
| Abstract: | In this paper, we investigate whether inflation-targeting monetary policy affects households' incentives to build resilience against energy price shocks. We utilize a stylized heterogeneous agent New Keynesian model with search and matching frictions in the labor market and nominal asset holdings. We modify the model to include energy in consumption and production, and energy conservation capital, so that energy price fluctuations affect both the supply and demand side of the economy. In such a framework, we study the responses of energy conservation to monetary policy, rising energy prices, and their interaction. We find that monetary policy influences energy intensity of consumption through both the intertemporal elasticity of substitution and labor market allocations. Our model predicts that a weaker policy response to rising energy prices is beneficial in terms of welfare to firm owners, borrowers and workers despite higher consumer price inflation. Such a policy stimulates energy conservation, and results in lower energy intensity and higher resilience against energy price fluctuations. We further find that a policy of looking through energy prices does not yield welfare benefits as it underreacts to consumer prices initially, but overreacts in later periods. Ramsey optimal policy predicts a strong immediate rise in the policy rate with a decline afterwards. |
| Keywords: | Distributional aspects of monetary policy, energy intensity of consumption, energy prices, heterogeneous agent New Keynesian models |
| JEL: | E12 E24 E52 Q43 Q50 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:cnb:wpaper:2024/4 |
| By: | Sandra Eickmeier; Luba Petersen |
| Abstract: | Central banks, including the European Central Bank (ECB), are increasingly involved in climate-related initiatives. This study uses a June 2023 survey of German households to gauge public support for the ECB’s climate engagement. Our findings reveal that 69% of households report increased trust in the ECB due to its climate actions, with most noting a mild boost in trust. These households primarily value the ECB’s broader scope and concern. A minority, comprising 17% and 20% respectively of all households, express concerns about potential compromises to price stability or independence. In contrast, a larger group (23% of all households) believes that the ECB’s climate efforts help the institution better achieve its core objectives. Additionally, our analysis of an information intervention reveals that the ECB’s climate actions have minimal effect on overall household inflation expectations. Finally, an internal survey of central bankers reveals that while they accurately gauge the ECB’s climate activities’ effect on households’ trust, they tend to overestimate their impact on inflation expectations. In sum, our results indicate public endorsement of the ECB’s climate-related endeavors. |
| Keywords: | central bank trust, central bank credibility, inflation expectations, cli-mate change, green policies, survey, central bank communication, uncertainty |
| JEL: | E7 E59 C93 D84 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2024-62 |
| By: | Shogo Nakano (Bank of Japan); Yu Sugioka (Bank of Japan); Hiroki Yamamoto (Bank of Japan) |
| Abstract: | The natural rate of interest (r*) is the real interest rate that is neutral to the economy and prices, and is one of the benchmarks for evaluating the stance of monetary policy. r* cannot be observed directly and must be estimated based on some assumptions. In this paper, we survey various methods that have been developed for estimating r*, summarize their characteristics, and apply them to the Japanese economy. We confirm all estimates of r* showed a downward trend in the long run. However, the estimated results of r* vary widely, depending on the method used, and current estimates can alter when new data are added to the estimation. Therefore, it is necessary to consider estimation uncertainties when conducting monetary policy. |
| Keywords: | Natural rate of interest; Equilibrium real interest rate; Equilibrium yield curve; Term-structure |
| JEL: | C32 E43 E52 |
| Date: | 2024–10–11 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojwps:wp24e12 |
| By: | Lee Braine; Shreepad Shukla; Piyush Agrawal |
| Abstract: | In the UK, the Bank of England and HM Treasury are exploring a potential UK retail CBDC, the digital pound, with one of their motivations being the potential role of the digital pound as an anchor for monetary and financial stability. In this paper, we explore three elements for anchoring money (singleness of money, official currency as the unit of account, and safety and soundness of financial institutions and payment systems) that maintain public trust and confidence in private UK retail digital money and the financial system. We also identify core capabilities (comprising on-demand interoperability across issuers and forms of private money, settlement finality in wholesale central bank money, and access to physical cash) and appropriate measures (comprising customer funds protection, robust regulation, effective supervision, safe innovation in money and payments, and the central bank as the lender of last resort) that together provide the foundations for the three elements for anchoring money. Our preliminary analysis concludes that anchoring private UK retail digital money is supported by these elements, capabilities and measures. Further work could include public-private collaboration to explore anchoring all forms of UK retail digital money. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2409.18532 |
| By: | Pablo Aguilar Perez |
| Abstract: | This paper examines the global spillovers of US monetary policy through the remittance channel. We use Jordà (2005) local projections to assess the effects of a US monetary policy tightening on 8 major remittance-sending countries and 41 recipient countries over the period from January 1997 to December 2017. Our findings reveal that such monetary tightening significantly impacts not only the US economy but also key remittance-sending nations, resulting in a global contractionary effect. The impact on recipient countries varies based on their reliance on remittances, underscoring the dual role of these personal transfers as both an amplifier and a mitigator of the global business cycle. Specifically, countries with high dependency on remittances experience heightened pro-cyclicality, leading to declines in both output and inflation, while those with moderate or low reliance exhibit counter-cyclical behavior. |
| Keywords: | Global spillovers, Remittances, US monetary policy |
| JEL: | F24 E52 F41 F44 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:drm:wpaper:2024-27 |
| By: | Witte, Niklas |
| Abstract: | The results of this paper provide empirical evidence that regulatory capital ratios drive bank Credit Default Swaps (CDS) and that markets react more to changes in capital requirements if implemented via direct adjustments to Pillar 1 risk weights than imposed as a percentage of Risk-Weighted Assets (RWAs) under Pillar 2. In other words, market discipline on bank capital adequacy is sensitive to the composition of the capital requirement stack. Therefore, this paper contributes novel insights to existing research on the market relevance of regulatory capital ratios, on the functioning of the Basel framework, and on market discipline along with its relationship with Pillar 1 and Pillar 2 capital requirements. The findings are relevant in light of the continuous discussions around the capital regulation for Interest Rate Risk in the Banking Book (IRRBB) and other Pillar 2 risks because they suggest that risks are more disciplined by markets if they are reflected in regulatory capital ratios via RWAs. Moreover, the results suggest that further regulatory alignment within the EU can impact the comparability of regulatory capital ratios and affect pricing decisions. In the first empirical step, the research investigates the drivers of CDS and identifies a significant relationship between CDS spreads and regulatory capital ratios. In the second step, the paper researches a quasi-natural experiment based on an event in the EU banking sector. In 2018, the Swedish supervisory authority changed the implementation approach of a risk weight floor on Swedish mortgages by shifting it from Pillar 2 to Pillar 1 while keeping total capital requirements stable. To assess if this merely technical regulatory adjustment triggered an unexpected reaction by markets, a two-step system Generalised Method of Moments (GMM) regression is applied to a sample of CDS spreads of 21 European banks between 2014 and 2020. JEL Classification: F36, G12, G21, G28 |
| Keywords: | bank default risk, banking regulation, capital requirements, European integration, funding costs, IRRBB, market discipline |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242988 |
| By: | Matteo Barigozzi; Claudio Lissona; Lorenzo Tonni |
| Abstract: | We present and describe a new publicly available large dataset which encompasses quarterly and monthly macroeconomic time series for both the Euro Area (EA) as a whole and its ten primary member countries. The dataset, which is called EA-MD-QD, includes more than 800 time series and spans the period from January 2000 to the latest available month. Since January 2024 EA-MD-QD is updated on a monthly basis and constantly revised, making it an essential resource for conducting policy analysis related to economic outcomes in the EA. To illustrate the usefulness of EA-MD-QD, we study the country specific Impulse Responses of the EA wide monetary policy shock by means of the Common Component VAR plus either Instrumental Variables or Sign Restrictions identification schemes. The results reveal asymmetries in the transmission of the monetary policy shock across countries, particularly between core and peripheral countries. Additionally, we find comovements across Euro Area countries' business cycles to be driven mostly by real variables, compared to nominal ones. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.05082 |
| By: | Thorarinn Petursson |
| Abstract: | The yield spread between a conventional nominal bond and a corresponding inflation-indexed bond – the so-called breakeven inflation rate – is a common measure of investors’ inflation expectations. But the spread also includes two risk premia that can distort the breakeven rate as a measure of inflation expectations. I use a signal-extraction approach is used to jointly estimate underlying inflation expectations and the inflation and liquidity risk premia from Icelandic data on 2-year breakeven inflation rates. The estimated 2-year inflation expectations are much smoother than the breakeven rate and remain above the official 2.5% inflation target for most of the sample period. The two risk premia are found to be large and time-varying, highlighting the need for caution when interpreting the breakeven rate as a direct measure of inflation expectations. Finally, I find that the three subcomponents of the breakeven rate react differently to an unanticipated monetary tightening. The tightening leads to a gradual and persistent decline in inflation expectations and the inflation risk premium partly offset by a temporary increase in the liquidity premium, consistent with the “risk-taking” channel of monetary policy. |
| JEL: | C32 E31 E43 E44 G12 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:ice:wpaper:wp97 |
| By: | Nelson R. Ramírez-Rondán; Luis Yépez |
| Abstract: | Uncertainty can affect monetary policy through its influence on macroeconomic variables. In this paper, we examine the extent to which economic policy uncertainty influences the effectiveness of monetary policy in the 1965:1-2023:12 period for the U.S. economy. Using a threshold regression model, we find evidence of threshold effects where an uncertainty threshold of around 145 of the economic policy uncertainty variable is estimated –the 62th percentile of the economic policy uncertainty variable distribution–, which defines two regimes: high and low uncertainty. By estimating a Structural Vector Autoregression (SVAR) model with sign and zero restrictions in each uncertainty regime, we find that the monetary policy is effective during low-uncertainty periods but loses its effectiveness during high-uncertainty ones. These results are robust to the addition of more restrictions. |
| Keywords: | monetary policy, economic uncertainty, threshold model, SVAR |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:apc:wpaper:204 |
| By: | Di Nino, Virginia; Aprigliano, Valentina |
| Abstract: | We use inflation and income growth expectations from the ECB Consumer Expectations Survey to measure the subjective expected pass-through of inflation to income in the main euro area countries. By aggregating consumers’ responses to probabilistic questions, we obtain significantly higher estimates of the pass-through than those obtained from micro data. Our methodology allows one to examine how the pass-through varies along the probability distribution of expected inflation, which turns out to be particularly large for moderate inflation expectations. We find significant heterogeneity in the inflation pass-through across countries, ages and income groups, consistent with different wage and pension indexation regimes. JEL Classification: C10, C22, E31, E66 |
| Keywords: | consumer expectations survey, price-wage spiral, regression across quantiles, subjective probability forecasts aggregation |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242986 |
| By: | Laurence Scialom; Gaëtan Le Quang; Thomas Lagoarde Segot |
| Abstract: | This paper explores the implications of ecosystemic macroprudential regulations on sustainability in an ecological PK-SFC framework. We first discuss the link between banks and global warming; and present the case for connecting prudential regulation with planetary boundaries. We then report a set of simulations suggesting that in the short run, such ecosystemic prudential regulations could effectively green banks’ balance sheets, credit flows, and curtail brown investment, at the cost, however, of significant short-run losses. In the longer run, the induced green transition appears to set the economy on a more sustainable pathway, to decrease inflationary pressures, and to maintain real GDP at the baseline level, with distributional effects favourable to wage-earners. These results highlight the relevance of ecosystemic prudential regulation to tackle climate change and call for adopting a holistic approach to sustainability policies. |
| Keywords: | ecological finance, SFC modelling |
| JEL: | G00 G28 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:drm:wpaper:2024-28 |