|
on Central Banking |
| By: | Alessia De Stefani; Rui Mano |
| Abstract: | We study the two-way relationship between fixed-rate mortgages (FRMs) and monetary policy in a panel of up to 35 countries over the last two decades. The dataset includes quarterly information on the composition of mortgage flows and stock by type of rate-fixation and monetary policy shocks cleaned of information effects. Using instrumental-variablel local projections, we find both path- and state-dependency in monetary transmission. Monetary policy shapes mortgage choice, increasing (decreasing) the share of FRMs during easing (tightening) cycles. Over time, this mechanism alters the composition of the outstanding mortgage stock which, in turn, affects the central bank's ability to stabilize the economy ex-post. A greater (lower) prevalence of FRMs weakens (strengthens) monetary policy transmission to key macro-variables. |
| Keywords: | Monetary Policy; Mortgage Markets |
| Date: | 2025–01–24 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/024 |
| By: | Brühl, Volker |
| Abstract: | The introduction of central bank digital currencies (CBDCs) in general, and of a digital euro in particular, has attracted growing interest from academic research, central banks and political decision-makers. Most of the existing literature is focused on the impact of a digital euro on monetary policy issues, financial stability - especially the potentially enhanced risk of bank runs - and related questions concerning the design options of a digital euro. However, a digital euro could negatively affect the profitability of the European banking sector. Fees from payment transaction services could decline and refinancing costs could increase, as comparatively cheap financing from retail deposits would have to be replaced in part by more expensive financing instruments such as bonds or open market operations with the ECB. This paper deals with these aspects by estimating the potential impact of a digital euro in a simulation model based on current market data. The analysis demonstrates that the annual fee losses could be in the range of €2.1 billion to €4.2 billion. The associated refinancing need due to replacements of deposits by digital euro holdings could be in the range of €324 billion to €650 billion, translating into additional refinancing costs of around €6.5 billion to €19.5 billion p.a.. Therefore, a fair compensation model for banks and payment service providers is needed to avoid adverse consequences for the profitability and resilience of the European financial sector. The paper also discusses the general need for a retail digital euro in light of the expected benefits and risks as well as implications for design options to mitigate inherent risks. |
| JEL: | E42 E51 G21 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:cfswop:308806 |
| By: | Kim, Cholwoo (Department of Economics, University of Warwick) |
| Abstract: | This paper examines Ramsey-type optimal monetary policy in an open economy with a two-country dynamic general equilibrium model where search and matching frictions exist in labor markets along with the limited participation in the financial markets. Monetary policy affects the decision of firms in labor markets because firms finance their wage bills with loans from domestic financial intermediaries in advance. There are two main results associated with optimal monetary policy. The long-term optimal nominal interest rate could be zero suggesting negative optimal inflation rate in the long run because the terms of trade effect on consumption could be weaken by search frictions. As a result of Ramsey optimal monetary policy, dynamics of business cycles in both countries show similar patterns in response to a productivity shock and, in turn, higher cross-country correlations of real variables. |
| Keywords: | labor market frictions ; search and matching ; working capital ; optimal monetary policy JEL Codes: E24 ; E52 ; F41 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:wrk:warwec:1539 |
| By: | Martijn Boermans; Tomás Carrera de Souza; Robert Vermeulen |
| Abstract: | In this study, we analyze the impact of the European Central Bank’s (ECB) sovereign bond purchases on bond demand among euro area investors from 2015 to 2022. By employing a novel demand setup, using ownership shares of individual bonds, we separately estimate investor reactions to (i) ECB bond purchases and (ii) new bond issuances. Utilizing bond level data on securities holdings of euro area investors and the ECB, we show that insurance companies and pension funds act as preferred habitat investors and are reluctant to sell the bonds the ECB is buying. Conversely, non-euro area investors from the private sector primarily serve as counterparties for ECB purchases. Our findings indicate significant differences across bond maturities and credit ratings, but minimal differences across the different stages of the quantitative easing (QE) implementation periods and between domestic and non-domestic euro area bonds. |
| Keywords: | quantitative easing; sovereign bonds; European Central Bank; PSPP; securities holdings statistics; bond demand |
| JEL: | E58 F42 G11 G15 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:dnb:dnbwpp:826 |
| By: | Winnie Coleman; Dieter Nautz |
| Abstract: | This paper investigates the determinants of inflation target credibility (ITC) using a unique survey we designed to measure the credibility of the ECB’s inflation target. Containing over 200, 000 responses from German consumers collected between January 2019 and November 2024, our dataset enables us to estimate the effect of both positive and negative deviations of inflation from the 2% target on ITC. In contrast to the symmetry of the ECB’s inflation target, we find that ITC is asymmetric, i.e. consumers respond significantly and plausibly signed to target deviations only when inflation is above target. When inflation is below target, however, the credibility of the inflation target cannot be improved by raising the inflation rate to close the gap. |
| Keywords: | Credibility of Inflation Targets, Consumer Inflation Expectations, Expectation Formation |
| JEL: | D84 E31 E52 E58 |
| Date: | 2025–01–20 |
| URL: | https://d.repec.org/n?u=RePEc:bdp:dpaper:0060 |
| By: | Maxted, Peter; Laibson, David; Moll, Ben |
| Abstract: | We study the effect of monetary and fiscal policy in a heterogeneous-agent model where households have present-biased time preferences and naive beliefs. The model features a liquid asset and illiquid home equity, which households can use as collateral for borrowing. Because present bias substantially increases households’ marginal propensity to consume (MPC), present bias increases the effect of fiscal policy. Present bias also amplifies the effect of monetary policy, but at the same time, slows down the speed of monetary transmission. Interest rate cuts incentivize households to conduct cash-out refinances, which become targeted liquidity injections to high-MPC households. Present bias also introduces a motive for households to procrastinate refinancing their mortgages, which slows down the speed with which this monetary channel operates. |
| JEL: | E21 E60 |
| Date: | 2025–02–28 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:123935 |
| By: | Eichacker, Nina |
| Abstract: | In recent years, cryptocurrencies have become more salient as speculative assets, and as sources of instability for wider swathes of the public. This has occurred at a global level, with both domestic and international spillover effects for core and peripheral economies. At the same time, analysts of cryptocurrency and blockchains have identified some institutional benefits of these innovations, including the ability to process payments outside of traditional business hours and the potential to provide banking services for households and institutions in regions that lack access to a formal banking sector. This paper considers how central banks’ efforts to create formal digital currencies may stabilize financial and monetary conditions. By offering a formal digital currency, central banks have the potential to diminish payment related demand for cryptocurrencies, and decrease the exposure households have to the volatility of cryptocurrency asset markets as well as to fraud endemic to the cryptocurrency markets. Offering a formal digital currency may be seen as a monetary form of public finance; in this case, the public alternative is a country’s own currency that may be usable in the blockchain, rather than forcing households to search for the most reputable or stable cryptocurrency alternatives. As households and businesses adopt CBDCs, they may leave cryptocurrency markets; while this might induce a brief period of instability in those markets, it would likely leave more volatile crypto asset markets to those best suited to managing the risk and potential reward of betting on existing assets, and insulate the risk averse from that volatility. |
| Date: | 2025–01–15 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:8muc4 |
| By: | Pradhan, Manoj; Goodhart, C. A. E. |
| Abstract: | Ageing societies are likely to face rapidly changing structural macroeconomic trends, with fiscal balances likely to worsen over time. It is widely acknowledged by forecasters and financial markets that debt-to-GDP ratios are tending to rise over t ime, but there are signs that the size and persistence of future deficits and debts may be underestimated. This underestimation comes from three sources: i) incorrect consideration of the medical complications of older cohorts; ii) a demography-driven rise in inflation, real interest rates and interest expenses; and iii) misalignment of f iscal and monetary policy incentives in an inflationary environment. We argue that a new era is starting, when we will have to face complicated relations between demography, and fiscal and monetary policy. |
| JEL: | E20 E30 E40 E50 I11 J11 J14 N10 N30 P10 |
| Date: | 2024–12–31 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:126585 |
| By: | Sebastian Dragoe; Camelia Oprean-Stan |
| Abstract: | The monetary transmission channel is disrupted by many factors, especially securitization and liquidity traps. In our study we try to estimate the effect of securitization on the interest elasticity and to identify if a liquidity trap occurred during 1954Q3-2019Q3. The yield curve inversion mechanism shows us that economic cycles are very sensitive to decreasing profitability of banks. However there is no evidence that restoring their profits will ensure a strong recovery. In this regard, we research the low effect of Quantitative Easing (QE) upon economic growth and analyze whether securitization and liquidity traps posed challenges to QE or is it the mainstream theory flawed. In this regard we will examine the main weaknesses of QE, respectively the speculative behavior induced by artificial low rates and its unequal distribution. We propose a new form of QE that will relief households and not reward banks for their risky behavior before recession. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2501.06575 |
| By: | Abolfazl Rezghi |
| Abstract: | How does rational inattention interact with financial frictions? I provide new empirical evidence from survey data suggesting that this interaction likely plays a critical role in understanding macroeconomic dynamics. In a simple model, I demonstrate that financially constrained firms tend to be more attentive to economic conditions, consistent with my empirical findings. Embedding this mechanism into a DSGE model, I show that the aggregate investment response to a monetary policy shock depends on this interaction. The model further predicts that credit-constrained firms reduce their investment after an expansionary shock due to tighter borrowing constraints and higher production costs, a prediction I empirically confirm. |
| Keywords: | Monetary policy; Rational inattention; Financial frictions; Investment |
| Date: | 2025–01–24 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/025 |