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on Central Banking |
| By: | Damast, Dominik; Kubitza, Christian; Sørensen, Jakob Ahm |
| Abstract: | We document a novel transmission channel of monetary policy through the homeowners insurance market. On average, contractionary monetary policy shocks result in higher homeowners insurance prices. Using granular data on insurers' balance sheets, we show that this effect is driven by the interaction of financial frictions and the interest rate sensitivity of investment portfolios. Specifically, rate hikes reduce the market value of insurers' assets, tightening insurers' balance sheet constraints and increasing their shadow cost of capital. These frictions in insurance supply amplify the effects of monetary policy on real estate and mortgage markets by making housing less affordable. We find that monetary policy shocks have a stronger impact on home prices and mortgage applications when local insurers are more sensitive to interest rates. This channel is particularly pronounced in areas where households face high climate risk exposure. Our findings highlight the role of insurance markets in amplifying macroeconomic shocks and the interconnections between homeowners insurance, residential real estate, and mortgage lending |
| Keywords: | Insurance Markets, Monetary Policy, Financial Frictions, Housing Markets |
| JEL: | E5 E44 G21 G22 G5 R3 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:icirwp:312410 |
| By: | Adam, Klaus; Weber, Henning |
| Abstract: | Many central banks worldwide announce numerical inflation targets, typically ranging from zero to two percent in advanced economies and higher in developing countries. Historically, a significant gap existed between the inflation targets pursued by central banks and those recommended by academic studies. This paper reviews traditional economic forces advocating for zero or negative inflation targets and surveys new forces justifying positive targets. Key factors include (i) trends in relative prices, (ii) the lower bound constraint on nominal interest rates, (iii) (downward) wage rigidity, and (iv) effects of product entry and aggregation. By examining these forces, we assess whether current inflation targets are optimal or require adjustment, and identify areas for future research on optimal inflation targets. |
| Keywords: | Optimal inflation rate, relative price trends, effective lower bound, nominal rigidities, product aggregation |
| JEL: | E31 E52 E58 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:311841 |
| By: | Andreea Maura Bobiceanu (Babes-Bolyai University); Simona Nistor (Babes-Bolyai University - Department of Finance); Steven Ongena (University of Zurich - Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)) |
| Abstract: | We leverage differences in central bank independence and financial stability sentiment across countries to investigate the variability in banks' stock market reactions to prudential policy announcements during the COVID-19 crisis. Our findings reveal that the relaxation of both macro and micro-prudential policies leads to negative cumulative abnormal returns (CARs), the reaction being attenuated in countries where the central bank is more independent or communicates deteriorations in financial stability. The CARs around the announcement dates are 0.75 percentage points (pp) and 6.89 pp higher in countries with greater versus lesser central bank independence, for macro- and micro-prudential policy announcements. The difference is close to 3.73 pp and 5.65 pp between banks based in countries where the central bank communicates a negative versus a positive sentiment about financial stability. The positive effect of higher degrees of central bank independence and deteriorations in financial stability sentiment on bank market valuation is enhanced for smaller banks, and in countries characterized by greater fiscal flexibility, and a higher prevalence of privately owned banks. |
| Keywords: | stock market reaction, macro-prudential regulation, micro-prudential regulation, central bank independence, financial stability sentiment |
| JEL: | E61 G14 G21 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2511 |
| By: | Priftis, Romanos; Schoenle, Raphael |
| Abstract: | We construct a New-Keynesian E-DSGE model with energy disaggregation and financial intermediaries to show how energy-related fiscal and macroprudential policies interact in affecting the euro area macroeconomy and carbon emissions. When a shock to the price of fossil resources propagates through the energy and banking sector, it leads to a surge in inflation while lowering output and carbon emissions, absent policy interventions. By contrast, imposing energy production subsidies reduces both CPI and core inflation and increases aggregate output, while energy consumption subsidies only lower CPI inflation and reduce aggregate output. Carbon subsidies instead produce an intermediate effect. Given that both energy subsidies raise carbon emissions and delay the “green transition, ” accompanying them with parallel macroprudential policy that taxes dirty energy assets in bank portfolios promotes “green” investment while enabling energy subsidies to effectively mitigate the adverse effects of supply-type shocks, witnessed in recent years in the EA. JEL Classification: E52, E62, H23, Q43, Q58 |
| Keywords: | DSGE model, energy sector, energy subsidies, financial frictions, macroprudential policy |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253032 |
| By: | Beyer, Andreas; Dautović, Ernest |
| Abstract: | This paper explores the impact of bank transparency on market efficiency by comparing banks that disclose supervisory capital requirements to those that remain opaque. Due to the informational content of supervisory capital requirements for the market this opacity might hinder market efficiency. The paper estimates an average 11.5% reduction in funding costs for transparent versus opaque banks. However, there is some heterogeneity in those effects. Transparency helps the market to sort across safer and riskier banks. Conditional on disclosure, the safest quartile of banks, those with a CET1 P2R lower than 1.5% of risk-weighted assets, benefits in average from 31.1% lower funding costs. The paper concludes that supervisory transparency is beneficial, supporting the view that supervisory transparency enhances market discipline by allowing markets to better evaluate and price the risk associated with each bank. JEL Classification: D5, E5, E58, G18, G21 |
| Keywords: | bank transparency, market discipline, market efficiency, supervisory effectiveness |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253031 |
| By: | James A. Clouse; Sebastian Infante; Zeynep Senyuz |
| Abstract: | Over time, the Committee intends to maintain securities holdings in amounts needed to implement monetary policy efficiently and effectively in its ample reserves regime. To ensure a smooth transition, the Committee intends to slow and then stop the decline in the size of the balance sheet when reserve balances are somewhat above the level it judges to be consistent with ample reserves. |
| Date: | 2025–01–31 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2025-01-31-1 |
| By: | Christopher Anderson |
| Abstract: | Regulating bank risk-taking is challenging since banks know more than regulators about the risks of their portfolios and can make adjustments to game regulations. To address this problem, I build a tractable model that incorporates this information asymmetry. The model is flexible enough to encompass many regulatory tools, although I focus on taxes. These taxes could also be interpreted as reflecting the shadow costs of other regulations, such as capital requirements. I show that linear risk-sensitive taxes should not generally be set more conservatively to address asymmetric information. I further show the efficacy of three regulatory tools: (1) not disclosing taxes to banks until after portfolio selection, (2) nonlinear taxes that respond to information contained in banks' portfolio choice, and (3) taxes on banks' realized pro ts that incentivize banks to reduce risk. |
| Keywords: | Symmetric information; Bank portfolio choice; Capital regulation; Bank regulation |
| JEL: | G21 G28 G18 G11 |
| Date: | 2025–02–04 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2025-09 |
| By: | Schmidt, Kirsten; Tonzer, Lena |
| Abstract: | We study whether the low interest rate environment paired with booming housing markets affected banks' foreign activities in terms of commercial and residential real estate backed lending. Using a unique dataset covering systemically relevant banks in the euro area over the period 2015-2022, we find that banks expand their foreign real estate backed lending in the presence of higher lending spreads. The result is especially present given a lack of or misalignment in macroprudential policies across home and destination country. Furthermore, we assess whether banks disclose potential losses conditional on higher lending spreads and borrowing country exposure. We find only better capitalized banks to show higher forbearance ratios. In line with search-for-yield motives, we find that during the COVID-19 crisis low capitalized banks experienced larger loan losses on real-estate backed loans in countries having offered higher rates. |
| Keywords: | International banking, real estate backed loans, macroprudential regulation, financial stability |
| JEL: | F21 F34 G10 G21 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:311839 |