|
on Central Banking |
| By: | Junko Koeda; Bin Wei |
| Abstract: | This study evaluates the effectiveness of Japan's unconventional monetary policies over the past quarter century within a unified term structure framework. It specifically examines the impact of the Bank of Japan's (BOJ) outcome-based forward guidance and yield curve control (YCC) and incorporates other policy types into the framework. The findings show that the BOJ’s forward guidance and YCC have both had a significant impact on the shadow rate. Forward guidance accounted for most of the policy impact in the early stages of unconventional monetary policies and remained influential throughout. YCC, since its introduction in 2016 until March 2022, contributed to more than a third of the policy impact. Furthermore, these policies have been effective in raising output and inflation. |
| Keywords: | forward guidance; effective lower bound (ELB); liftoff; term structure; shadow rate; macro finance; unspanned macro factors; yield curve control; Japan |
| JEL: | E43 E44 E52 E58 |
| Date: | 2024–09–23 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedawp:99037 |
| By: | Chamon Wieles; Jan Kwakkel; Willem L. Auping; Jan Willem van den End |
| Abstract: | We analyse shock and parameter uncertainty in a Dynamic Stochastic General Equilibrium (DSGE) model by exploratory modelling and analysis (EMA). This method evaluates in a novel way the performance of monetary policy under deep uncertainty about the shock and model parameters. Scenarios are designed based on the outcomes of interest for the policymaker. We assess the performance of different policies on their objectives in the scenarios. This maps out the policy trade-offs and supports the central bank in making robust policy decisions. We find that in response to a negative supply shock, policies with low interest rate smoothing and a strong response to inflation most obviously contribute to price stability under deep uncertainty. |
| Keywords: | Monetary policy; Scenarios; Exploratory modelling; Deep uncertainty |
| JEL: | E52 E58 G12 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:dnb:dnbwpp:818 |
| By: | Julien Bengui; Lu Han; Gaelan MacKenzie |
| Abstract: | Large swings in the expenditure shares of goods and services at the start of the pandemic have contributed to the inflation surge, posing new challenges for monetary policy. Using a multi-sector model featuring upward labor adjustment frictions, we analyze the transmission of monetary policy during a demand reallocation episode, focussing on sectoral heterogeneity in inflation and output responses. Following an unexpected contractionary monetary policy shock, (constrained) expanding sectors respond primarily by lowering prices, while (unconstrained) contracting sectors reduce output more significantly. At the aggregate level, monetary policy is thus more effective at curbing inflation when a larger proportion of sectors are expanding or expected to be expanding in the near future. |
| Keywords: | Domestic demand and components; Inflation and prices; Monetary policy transmission |
| JEL: | E52 E31 E24 E12 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:24-42 |
| By: | Pauline Gandré; Margarita Rubio |
| Abstract: | Macroprudential policy is traditionally characterized by countercyclical rules responding to credit variables. In this paper, we augment macroprudential rules with additional indicators, including the credit spread. First, we empirically assess the validity of this extra variable by providing evidence on the correlation of a credit spread measure with credit booms. Then, we explicitly introduce this variable into a Dynamic Stochastic General Equilibrium (DSGE) model. We use our model to determine to which extent having countercyclical macroprudential measures also responding to credit spreads may be welfare improving, for both a capital requirement ratio (CRR) rule and a loan-to-value (LTV) rule. We find that the spread is a relevant indicator for credit-supply measures but not for borrower-based ones. For the latter, an additional response to house prices is more appropriate. We also find that the augmented rules deliver more financial stability, but at the expense of more inflation volatility, which reduces the welfare of the savers. Overall, the augmented rules improve welfare. |
| Keywords: | Credit spreads, financial stability, macroprudential policy. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:not:notcfc:2024/05 |
| By: | Jing Cynthia Wu; Yinxi Xie; Ji Zhang |
| Abstract: | We assess whether unconventional monetary and fiscal policy implemented in response to the COVID-19 pandemic contribute to the 2021-2023 inflation surge through the lens of several different empirical methodologies—event studies, vector autoregressions, and regional panel regressions using granular data—and establish a null result. The key economic mechanism works through a disinflationary channel in the Phillips curve while monetary and fiscal stimuli put positive pressure on inflation through the usual demand channel. We illustrate this negative supply-side channel both theoretically and empirically. |
| JEL: | E31 E52 E63 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33044 |
| By: | Xavier Gabaix; Ralph S J Koijen; Robert Richmond; Motohiro Yogo |
| Abstract: | Asset demand systems specify the demand of investors for financial assets and the supply of securities by firms. We discuss how realistic models of the asset demand system are essential to assess ex post, and predict ex ante, how central bank policy interventions impact asset prices, the distribution of wealth across households and institutions, and financial stability. Due to the improved availability of big holdings data and advances in modelling techniques, estimating asset demand systems is now a practical reality. We show how demand systems provide improved information for policy decisions (eg in the context of financial contagion, convenience yield or the strength of the dollar) or to design optimal policies (eg in the context of quantitative easing or designing climate stress tests). We discuss how recent AI methods can be used to improve models of the asset demand system by better measuring asset and investor similarity through so-called embeddings. These embeddings can for instance be used for policymaking by central banks to understand the rebalancing channel of asset purchase programs and to measure crowded trades. |
| Keywords: | asset prices, central bank policies, artificial intelligence, embeddings |
| JEL: | C5 G11 G12 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1222 |
| By: | Silvana Tenreyro; Ludovica Ambrosino; Jenny Chan |
| Abstract: | How does trade fragmentation affect inflationary pressures? What is the response of monetary policy needed to sustain inflation at target? To answer these questions, we develop a heterogeneous agent, open-economy model featuring imperfect international risk-sharing. The model captures both the demand and supply side effects of fragmentation. It illustrates how the impact of fragmentation on inflationary pressures and the appropriate policy response depends not only on the direct effect of higher import prices on supply but, crucially, on how aggregate demand adjusts in response to lower real incomes and productivity stemming from fragmentation. |
| Keywords: | monetary policy, trade fragmentation, open economies, inflation, heterogeneity, globalisation |
| JEL: | F12 F15 F41 F62 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1225 |
| By: | Povilas Lastauskas; Julius Stak\.enas |
| Abstract: | Do labor market policies initiated in periods of loose monetary policy yield different outcomes from those introduced when monetary tightening prevails? Using data from 11 euro-area members up to 2010 -- and extending to 17 countries up to 2020 -- we analyze three labor market policies: replacement rates, spending on active labor market policies (ALMPs), and employment protection. We find that these policies deliver different macroeconomic outcomes in low- and high-interest rate environments. In particular, ALMPs reduce unemployment if implemented under a loose monetary policy but not otherwise, whereas higher employment protection delivers expansionary effects under a tight monetary policy. These findings highlight that the effectiveness of labor market policies is significantly influenced by the monetary policy environment, emphasizing the need for coordinated policy design. Methodologically, we contribute by proposing to average local projections using Mallow's $C_{p}$ criterion, allowing for inferences that are robust to mis-specification and accommodate non-linearities. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.12024 |
| By: | Bhavesh Garg (Indian Institute of Technology Ropar, India) |
| Abstract: | This paper employs a two-economy model, which incorporates New Keynesian features, to examine the impact of a coronavirus disease (COVID-19) induced supply shock on economic recovery in large net oil-importing Asian countries. It examines whether and to what extent monetary and fiscal policies are effective in mitigating such supply shock risks. Our calibrations and estimations reveal that a COVID-19 induced supply shock negatively impacted both the global and domestic economies alike and delayed their economic recovery. Specifically, shocks to total factor productivity and world output negatively affected domestic macroeconomic variables such as domestic output, inflation rate, interest rate, and government expenditure, amongst others. We show that monetary and fiscal policies efficiently mitigate the adverse effects arising from the supply shock. |
| Keywords: | COVID-19, supply shock, two-economy model, NK-DSGE, monetary policy, fiscal policy |
| JEL: | C63 D58 E47 E52 E62 |
| Date: | 2023–12–22 |
| URL: | https://d.repec.org/n?u=RePEc:era:wpaper:dp-2023-20 |
| By: | Rodrigo Sekkel; Tamon Takamura; Yaz Terajima |
| Abstract: | This paper analyzes the dynamic and heterogeneous responses of loan performance to a monetary-policy shock using loan-level panel data for small-scale private firms in Canada. Our dataset contains detailed loan characteristics information that allows us to distinguish the effects of the aggregate-demand channel, which affects loan performance through general-equilibrium effects, and the cash-flow channel that directly impacts debt service of firms through variable rates. We find that the effects on loan performance through both channels materialize with a delay and are persistent over time. The peak effect of the cash-flow channel is as large as that of the aggregate-demand channel. Moreover, we investigate whether collateral can reduce the sensitivity of variable-rate loan performance to a policy-rate shock through an ex post disciplinary effect that incentivizes loan repayment by small firms. We find that collateral induces repayment incentives of borrowers relative to unsecured loans but only for ex ante safe loans that are used for investment rather than for other purposes such as working capital. This implies that collateral has a limited impact on reducing financial frictions of small firms. |
| Keywords: | Monetary policy transmission; firm dynamics |
| JEL: | C32 E17 E37 E52 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:24-41 |
| By: | Maximilian Gödl; Isabel Gödl-Hanisch |
| Abstract: | The recent surge in inflation led many unions and firms to alter their bargaining and wage-setting policies. Using novel German firm-level survey data, we document the extent of state dependence in wage setting across firms and workers during periods of high and low inflation. We find state dependence along the extensive and intensive margins: the average duration of wage agreements shortens from 14.2 to 12.9 months, and the adjustment per pay round increases from 2-4% to 4-6%. We complement these findings with newly compiled union-level panel data on collective bargaining outcomes. We show that the observed state dependence can be rationalized in menu cost and Calvo models of wage setting with heterogeneous firms. We examine the implications of state-dependent wage setting for the long-run effects of trend inflation, the transmission of monetary policy shocks, and the slope of the Phillips curve in an otherwise standard New Keynesian model. |
| Keywords: | state-dependent wage setting, New Keynesian model, heterogeneous firms, Phillips curve |
| JEL: | E24 E31 E50 E60 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11319 |
| By: | Florian Huber; Karin Klieber; Massimiliano Marcellino; Luca Onorante; Michael Pfarrhofer |
| Abstract: | This paper analyzes nonlinearities in the international transmission of financial shocks originating in the US. To do so, we develop a flexible nonlinear multi-country model. Our framework is capable of producing asymmetries in the responses to financial shocks for shock size and sign, and over time. We show that international reactions to US-based financial shocks are asymmetric along these dimensions. Particularly, we find that adverse shocks trigger stronger declines in output, inflation, and stock markets than benign shocks. Further, we investigate time variation in the estimated dynamic effects and characterize the responsiveness of three major central banks to financial shocks. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.16214 |
| By: | Liu, Liyuan; Wang, Xianshuang; Zhou, Zhen |
| Abstract: | This paper examines the consequences of Chinese regulators deviating from a long-standing full bailout policy in addressing the distress of a city-level commercial bank. This policy shift led to a persistent widening of credit spreads and a significant decline in funding ratios for negotiable certificates of deposit issued by small banks relative to large ones. Our empirical analysis reveals a novel contagion mechanism driven by reduced confidence in future bailouts (implicit non-guarantee), contributing to the subsequent collapse of other small banks. However, in the longer term, this policy shift improved price efficiency, credit allocation, and discouraged risk-taking among small banks. |
| Keywords: | Implicit guarantee, Bailout, Contagion, Price efficiency, Credit allocation, TBTF |
| JEL: | G14 G21 G28 H81 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofitp:305281 |