nep-mon New Economics Papers
on Monetary Economics
Issue of 2020‒08‒10
48 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Asymmetric macroeconomic effects of QE-induced increases in excess reserves in a monetary union By Horst, Maximilian; Neyer, Ulrike; Stempel, Daniel
  2. Gains from Anchoring Inflation Expectations: Evidence from the Taper Tantrum Shock By Rudolfs Bems; Francesca G Caselli; Francesco Grigoli; Bertrand Gruss
  3. Monetary Policy Is Not Always Systematic and Data-Driven: Evidence from the Yield Curve By Ales Bulir; Jan Vlcek
  4. Central bank digital currency and informal economy By Eun Young Oh; Shuonan Zhang
  5. Cash Use Across Countries and the Demand for Central Bank Digital Currency By Tanai Khiaonarong; David Humphrey
  6. Effects of Fed policy rate forecasts on real yields and inflation expectations at the zero lower bound By Gabriele Galati; Richhild Moessner
  7. Intervention Under Inflation Targeting--When Could It Make Sense? By David J Hofman; Marcos d Chamon; Pragyan Deb; Thomas Harjes; Umang Rawat; Itaru Yamamoto
  8. Liquidity Management under Fixed Exchange Rate with Open Capital Account By Mariam El Hamiani Khatat; Romain M Veyrune
  9. Central banks' voting contest By Charemza, Wojciech
  10. Central Bank Communication: Information and Policy shocks By Ostapenko, Nataliia
  11. Enabling Deep Negative Rates to Fight Recessions: A Guide By Ruchir Agarwal; Miles Kimball
  12. Monetary Policy Strategies for the Federal Reserve By Svensson, Lars E.O.
  13. One Shock, Many Policy Responses By Rui Mano; Silvia Sgherri
  14. Dollar shortages and central bank swap lines By Eguren-Martin, Fernando
  15. The use of the Eurosystem’s monetary policy instruments and its monetary policy implementation framework between the first quarter of 2018 and the fourth quarter of 2019 By Sylvestre, Julie; Coutinho, Cristina
  16. Determinants of Currency Composition of Reserves: a Portfolio Theory Approach with an Application to RMB By Yinqiu Lu; Yilin Wang
  17. Inefficient Relative Price Fluctuations By Daeha Cho; Kwang Hwan Kim
  18. On the Essentiality of Credit and Banking at the Friedman Rule By Paola Boel; Christopher J. Waller
  19. The impact of real economic activity on the effectiveness of monetary policy transmission: The case of Tunisia By Ons Mastour
  20. Effects of credit restrictions in the Netherlands and lessons for macroprudential policy By Gabriele Galati; Jan Kakes; Richhild Moessner
  21. How Effective is Macroprudential Policy? Evidence from Lending Restriction Measures in EU Countries By Tigran Poghosyan
  22. Mitigating the forward guidance puzzle: inattention, credibility, finite planning horizons and learning By de Groot, Oliver; Mazelis, Falk
  23. China’s Evolving Exchange Rate Regime By Sonali Das
  24. What Matters in Households’ Inflation Expectations? By Philippe Andrade; Erwan Gautier; Eric Mengus
  25. Dynamics of Czech Inflation: The Role of the Trend and the Cycle By Michal Franta; Ivan Sutoris
  26. Household Debt, Consumption, and Monetary Policy in Australia By Elena Loukoianova; Yu Ching Wong; Ioana Hussiada
  27. The Risk-Taking Channel in the US: A GVAR Approach By Alzuabi, Raslan; Caglayan, Mustafa; Mouratidis, Kostas
  28. Trust in the Central Bank and Inflation Expectations By Christelis, Dimitris; Georgarakos, Dimitris; Jappelli, Tullio; Van Rooij, Maarten
  29. Monetary Policy, Price Setting, and Credit Constraints By Balleer, Almut; Zorn, Peter
  30. Monetary policy transmission over the leverage cycle: evidence for the euro area By Rünstler, Gerhard; Bräuer, Leonie
  31. Création du FED : réunir la gestion de la monnaie et de la liquidité By Anne-Marie Rieu-Foucault
  32. How Monetary Policy Shaped the Housing Boom By Drechsler, Itamar; Savov, Alexi; Schnabl, Philipp
  33. Global Demand for Basket-Backed Stablecoins By Garth Baughman; Jean Flemming
  34. Disciplining expectations and the forward guidance puzzle By Christoffel, Kai; Mazelis, Falk; Montes-Galdón, Carlos; Müller, Tobias
  35. ECB Debt Certificates: the European counterpart to US T-bills By Daniel C. Hardy
  36. Bank capital regulation in a zero interest environment By Döttling, Robin
  37. Monetary policy, markup dispersion, and aggregate TFP By Reinelt, Timo; Meier, Matthias
  38. Designing the Policy Mix in a Monetary Union By Hubert Kempf
  39. Has monetary policy made you happier? By Bunn, Philip; Haldane, Andrew; Pugh, Alice
  40. Exchange Rates and Consumer Prices: Evidence from Brexit By Breinlich, Holger; Leromain, Elsa; Novy, Dennis; Sampson, Thomas
  41. Bank Risk-Taking and Monetary Policy Transmission: Evidence from China By Xiaoming Li; Zheng Liu; Yuchao Peng; Zhiwei Xu
  42. The Federal Reserve’s Large-Scale Repo Program By Kevin Clark; Antoine Martin; Timothy Wessel
  43. Fundamental Disagreement about Monetary Policy and the Term Structure of Interest Rates By Shuo Cao; Richard K. Crump; Stefano Eusepi; Emanuel Moench
  44. Measuring the Natural Rate of Interest: The Role of Inflation Expectations By J. David Lopez-Salido; Gerardo Sanz-Maldonado; Carly Schippits; Min Wei
  45. Capital Flows: The Role of Bank and Nonbank Balance Sheets By Yuko Hashimoto; Signe Krogstrup
  46. A Structural Investigation of Quantitative Easing By Gregor Boehl; Gavin Goy; Felix Strobel
  47. Bank instability: Interbank linkages and the role of disclosure By König-Kersting, Christian; Trautmann, Stefan T.; Vlahu, Razvan
  48. Modeling interest rate setting at the European Central Bank with bargaining models and counterfactuals By James McNeil

  1. By: Horst, Maximilian; Neyer, Ulrike; Stempel, Daniel
    Abstract: The Eurosystem's large-scale asset purchases (quantitative easing, QE) induce a strong and persistent increase in excess reserves in the euro area banking sector. These excess reserves are heterogeneously distributed across euro area countries. This paper develops a two-country New Keynesian model { calibrated to represent a high- and a low-liquidity euro area member { to analyze the macroeconomic effects of (QE-induced) heterogeneous increases in excess reserves and deposits in a monetary union. QE triggers economic activity and increases the union-wide consumer price level after a negative preference shock. However, its efficacy is dampened by a reverse bank lending channel that weakens the interest rate channel of QE. These dampening effects are higher in the high-liquidity country. We find similar results in response to a monetary policy shock. Furthermore, we show that a shock in the form of a deposit shift between the two countries, interpreted as capital ight, has negative (positive) effects for the economy of the country receiving (losing) the deposits.
    Keywords: unconventional monetary policy,quantitative easing (QE),monetary policytransmission,excess liquidity,credit lending,heterogeneous monetary union,New Keynesianmodel
    JEL: E51 E52 E58 F41 F45
    Date: 2020
  2. By: Rudolfs Bems; Francesca G Caselli; Francesco Grigoli; Bertrand Gruss
    Abstract: Many argue that improvements in monetary policy frameworks in emerging market economies over the past few decades, have made them more resilient to external shocks. This paper exploits the May 2013 taper tantrum in the United States to study the reaction of 18 large emerging markets to an external shock, conditioning on their degree of inflation expectations' anchoring. We fi nd that while the tapering announcement negatively affected growth prospects regardless of the level of anchoring, countries with weakly anchored inflation expectations experienced larger exchange rate pass-through to consumer prices, hence comparatively higher inflation. We conclude that efforts to improve the extent of anchoring of inflation expectations in emerging markets pay off, as they ease the trade-off that central banks face when external shocks weaken growth prospects and trigger currency depreciations.
    Keywords: Exchange rate pass-through;Consumer price indexes;Inflation expectations;Capital outflows;Monetary policy;Taper Tantrum,Exchange Rate Pass-Through.,inflation expectation,tantrum,pass-through,shaded area,emerge market
    Date: 2019–03–28
  3. By: Ales Bulir; Jan Vlcek
    Abstract: Does monetary policy react systematically to macroeconomic innovations? In a sample of 16 countries – operating under various monetary regimes – we find that monetary policy decisions, as expressed in yield curve movements, do react to macroeconomic innovations and these reactions reflect the monetary policy regime. While we find evidence of the primacy of the price stability objective in the inflation targeting countries, links to inflation and the output gap are generally weaker and less systematic in money-targeting and multiple-objective countries.
    Keywords: Bank rates;Central banks;Monetary policy;Central banking and monetary issues;Central bank policy;Monetary transmission,yield curve,rule-based monetary policy,WP,output gap,inflation expectation,inflation-targeting,policy innovation
    Date: 2020–01–17
  4. By: Eun Young Oh (University of Portsmouth); Shuonan Zhang (University of Portsmouth)
    Abstract: The central bank digital currency (CBDC) attracts discussions on its merits and risks but much less attention is paid to the adoption of a CBDC. In this paper, we show that the CBDC may not be widely accepted in the presence of a sizeable informal economy. Based on a two-sector monetary model, we show an L-shaped relationship between the informal economy and CBDC. The CBDC can formalize the informal economy but this effect becomes marginally significant in countries with significantly large informal economies. In order to promote CBDC adoption and improve its effectiveness, tax reduction and the positive CBDC interest rate can be useful tools. We further show that CBDC policy rate adjustment triggers a reallocation effect between formal and informal sectors, through which improves the effectiveness of both conventional monetary policy and fiscal policy.
    Keywords: Central Bank Digital Currency, Informal Economy, Quantitative Analysis
    JEL: E26 E40 E42 E58
    Date: 2020–07–21
  5. By: Tanai Khiaonarong; David Humphrey
    Abstract: The level and trend in cash use in a country will influence the demand for central bank digital currency (CBDC). While access to digital currency will be more convenient than traveling to an ATM, it only makes CBDC like a bank debit card—not better. Demand for digital currency will thus be weak in countries where cash use is already very low, due to a preference for cash substitutes (cards, electronic money, mobile phone payments). Where cash use is very high, demand should be stronger, due to a lack of cash substitutes. As the demand for CBDC is tied to the current level of cash use, we estimate the level and trend in cash use for 11 countries using four different measures. A tentative forecast of cash use is also made. After showing that declining cash use is largely associated with demographic change, we tie the level of cash use to the likely demand for CBDC in different countries. In this process, we suggest that one measure of cash use is more useful than the others. If cash is important for monetary policy, payment instrument competition, or as an alternative payment instrument in the event of operational problems with privately supplied payment methods, the introduction of CBDC may best be introduced before cash substitutes become so ubiquitous that the viability of CBDC could be in doubt.
    Keywords: Bank credit;Central banks;Central bank policy;Central bank accounting;Bank accounting;digital cash,e-money,physical cash,non-cash,giro
    Date: 2019–03–01
  6. By: Gabriele Galati; Richhild Moessner
    Abstract: We study the effects of quantitative policy rate forecasts by the Federal Reserve on real yields and inflation expectations at the zero lower bound (ZLB). We study the effects of surprises in policy rate forecasts from the Summary of Economic Projections (SEP) on real yields and breakeven inflation rates derived from government bonds for forward rates across the yield curve. We find that surprises in the SEP policy rate forecasts significantly affect real yields in the expected direction across the yield curve. By contrast, breakeven inflation rates are little affected across the yield curve. In particular, five-year breakeven inflation rates five years ahead, a common measure of monetary policy credibility, are not significantly affected by surprises in SEP policy rate forecasts. This suggests that policy rate forecasts by the Fed at the ZLB managed to affect real yields without adversely affecting monetary policy credibility.
    Keywords: forward guidance, policy rate forecasts, zero lower bound
    JEL: E52 E58
    Date: 2020–07
  7. By: David J Hofman; Marcos d Chamon; Pragyan Deb; Thomas Harjes; Umang Rawat; Itaru Yamamoto
    Abstract: We investigate the motives inflation-targeting central banks in emerging markets may have for intervening in foreign exchange markets and evaluate the case for such interventions based on the existing literature. Our findings suggest that the rationale for interventions depends on initial conditions and country-specific circumstances. The case is strongest in the presence of large currency mismatches or underdeveloped markets. While interventions can have benefits in the short-term, sustained over time they could entrench unfavorable initial conditions, though more work is needed to establish this empirically. A first effort to measure the cost of interventions to the credibility of policy frameworks suggests that the negative impact may be smaller than often assumed—at least for the set of more sophisticated inflation-targeting emerging-market central banks considered here.
    Keywords: Central banks;Exchange rate policy;Central bank policy;Exchange markets;Central banking and monetary issues;emerging markets,monetary and exchange rate policies,inflation targeting,foreign exchange intervention,capital flows,WP,EME,inflation target,policy instrument,exchange rate,targeter
    Date: 2020–01–17
  8. By: Mariam El Hamiani Khatat; Romain M Veyrune
    Abstract: This paper introduces a theoretical framework for liquidity management under fixed exchange rate arrangement, derived from the price-specie flow mechanism of David Hume. The framework highlights that the risk of short-term money market rates un-anchoring from the uncovered interest rate parity due to money and foreign exchange market frictions could jeopardize financial stability and market development. The paper then discusses operational solutions that stabilize money market rates close to the level implied by the Uncovered Interest Rate Parity (UIP). Liquidity management under fixed exchange rate with an open capital account presents specific challenges due to: (1) the larger liquidity shocks induced by foreign reserve swings that challenge the development of money markets; and (2) more complicated liquidity forecasts. The theoretical framework is empirically tested based on the estimate of “offset” coefficients for Denmark and Hong Kong SAR.
    Keywords: Central banks;Central bank operations;Monetary policy operational framework;Central bank policy;Bank rates;Fixed exchange rate regime,price-specie flow mechanism,uncovered interest rate parity,offset coefficients,monetary operations,autonomous factors,money and foreign exchange markets,bank reserve,NFA,HKMA,fixed exchange rate,counterparties
    Date: 2019–03–18
  9. By: Charemza, Wojciech
    Abstract: This paper compares how effective different voting algorithms are for the decisions taken by monetary policy councils. A voting activity index is proposed and computed as the ratio of the number of all possible decisions to the total number of different combinations of decisions available to a given composition of an MPC. The voting systems considered are these used by the US Federal Reserve Board and the central banks of the UK, Australia, Canada, Sweden and Poland. In the dynamic simulation model, which emulates voting decisions, the heterogeneous agents act upon individual forecast signals and optimise a Taylor-like decision function. The selection criterion is based on the simulated probability of staying within the bounds that define the inflationary target. The general conclusion is that the voting algorithm used by the Bank of Sweden is the best given the criteria applied, especially when inflation is initially outside the target bounds. It is observed that a decrease in inflation forecast uncertainty, which is inversely proportional to the correlation between the forecast signals delivered to members of the monetary policy board, makes the voting less effective.
    Keywords: voting algorithms, monetary policy, inflation targeting, forecast uncertainty
    JEL: D72 E4 E47 E58
    Date: 2020–05–31
  10. By: Ostapenko, Nataliia
    Abstract: The study proposes an alternative way to decompose Federal Reserve (Fed) information shocks from monetary policy shocks by employing a textual analysis to Federal Open Market Committee (FOMC) statements. I decompose Fed statements into economic topics using Latent Dirichlet Allocation (LDA). The model was trained on the business section from major US newspapers. After decomposing surprises in Fed futures into a part that is explained by topics from the Fed statements and that is not explained, the study employs these purged series as proxies for monetary policy and Fed information shocks. The results show that, compared to surprises in 3-month federal funds futures, a policy shock identified in this study has a more negative effect on GDP and a more prolonged negative effect on inflation. In the short-run it causes S&P500 to decline and the Fed to raise its interest rate. Identified Fed information shock affects the macroeconomy as the standard news shock: it has positive long-run effects on S&P500, interest rates, and real GDP, whereas it has a negative short-run effect on inflation. Moreover, the Fed information shock reduces credit costs.
    Keywords: FOMC, statements, Latent Dirichlet Allocation, monetary policy, information, shocks
    JEL: E52
    Date: 2020–05–22
  11. By: Ruchir Agarwal; Miles Kimball
    Abstract: The experience of the Great Recession and its aftermath revealed that a lower bound on interest rates can be a serious obstacle for fighting recessions. However, the zero lower bound is not a law of nature; it is a policy choice. The central message of this paper is that with readily available tools a central bank can enable deep negative rates whenever needed—thus maintaining the power of monetary policy in the future to end recessions within a short time. This paper demonstrates that a subset of these tools can have a big effect in enabling deep negative rates with administratively small actions on the part of the central bank. To that end, we (i) survey approaches to enable deep negative rates discussed in the literature and present new approaches; (ii) establish how a subset of these approaches allows enabling negative rates while remaining at a minimum distance from the current paper currency policy and minimizing the political costs; (iii) discuss why standard transmission mechanisms from interest rates to aggregate demand are likely to remain unchanged in deep negative rate territory; and (iv) present communication tools that central banks can use both now and in the event to facilitate broader political acceptance of negative interest rate policy at the onset of the next serious recession.
    Keywords: Central bank independence;Reserve requirements;Interest rate policy;Central banks;Negative interest rates;electronic money,monetary policy,negative rate,paper currency,negative interest rate,rental fee,cash withdrawal
    Date: 2019–04–29
  12. By: Svensson, Lars E.O.
    Abstract: The paper finds that the general monetary policy strategy of "forecast targeting" is more suitable for fulfilling the Federal Reserve's dual mandate of maximum employment and price stability than following a simple "instrument" rule such as a Taylor-type rule. Forecast targeting can be used for any of the more specific strategies of annual-inflation targeting, price-level targeting, temporary price-level targeting, average-inflation targeting, and nominal-GDP targeting. These specific strategies are examined and evaluated according to how well they may fulfill the dual mandate, considering the possibilities of a binding effective lower bound for the federal funds rate and a flatter Phillips curve. Nominal-GPD targeting has substantial both principal and practical disadvantages and is found to be inferior to the other strategies. Average-inflation targeting is found to have some advantages over the other strategies.
    JEL: E52 E58
    Date: 2019–12
  13. By: Rui Mano; Silvia Sgherri
    Abstract: Policymakers have relied on a wide range of policy tools to cope with capital flow shocks. And yet, the effects and interaction of these policies remain under debate, as does the motivation for using them. In this paper, quantile local projections are used to estimate the entire distribution of future policy responses to portfolio flow shocks for 20 emerging markets and understand the variety of policy choices across the sample. To assuage endogeneity concerns, estimates rely on the fact that global capital flows are exogenous from the viewpoint of any one of these countries. The paper finds that: (i) policy responses to capital flow shocks are heterogeneous across countries, fat-tailed—“extreme” responses tend to be more elastic than “typical” responses—and asymmetric—“extreme” responses tend to be more elastic with respect to outflows than to inflows; (ii) country characteristics are linked to policy choices—with cross-country differences in forex intervention relating to the size of balance sheet vulnerabilities and the depth of the forex market; (iii) the use of targeted macroprudential policy and capital flows management measures can help “free the hands” of monetary policy by allowing it to focus more squarely on domestic cyclical developments.
    Keywords: Exchange rate policy;International investment position;Foreign exchange reserves;Foreign exchange intervention;Central banks;Capital flows,emerging markets,macroprudential policies,capital flows management.,WP,policy response,policy tool,flow pressure,forex,policy action
    Date: 2020–01–17
  14. By: Eguren-Martin, Fernando (Bank of England)
    Abstract: We explore the role of ‘dollar shortage’ shocks and central bank swap lines in a two-country New Keynesian model with financial frictions. Domestic banks issue both domestic and foreign currency debt and lend in domestic currency. Foreign currency-specific funding shocks, which are amplified via their effect on the exchange rate given balance sheet mismatches, lead to uncovered interest rate parity deviations, a contraction in lending and have a significant negative effect on macroeconomic variables. We show that central bank swap lines can attenuate these dynamics provided they are large enough.
    Keywords: Central bank swap lines; liquidity facilities; dollar shortages; uncovered interest rate parity condition; financial frictions
    JEL: E32 E44 E58 F33 F41 G15
    Date: 2020–07–10
  15. By: Sylvestre, Julie; Coutinho, Cristina
    Abstract: This paper provides a comprehensive overview of the use of the Eurosystem’s monetary policy instruments and the operational framework, from the first quarter of 2018 to the last quarter of 2019. It reviews the context of Eurosystem market operations; the design and operation of the Eurosystem’s counterparty and collateral frameworks; the fulfilment of minimum reserve requirements; participation in credit operations and recourse to standing facilities; and the conduct of outright asset purchase programmes. The paper also discusses the impact of monetary policy on the Eurosystem's balance sheet, excess liquidity and money market liquidity conditions. JEL Classification: D02, E43, E58, E65, G01
    Keywords: central bank collateral framework, central bank counterparty framework, central bank liquidity management, monetary policy implementation, non-standard monetary policy measures
    Date: 2020–06
  16. By: Yinqiu Lu; Yilin Wang
    Abstract: The way central banks manage their foreign reserve assets has evolved over the past decades. One major trend is managing reserves in two or more tranches—liquidity tranche and investment tranche—especially for those with adequate reserves. Incorporating reserve tranching, we have developed in this paper a central bank’s reserve portfolio choice model to analyze the determinants of the currency composition of reserves. In particular, we adopt the classical mean-variance framework for the investment tranche and the asset-liability framework for the liquidity tranche. Building on these frameworks, the roles of currency compositions in imports invoicing and short-term external debt, and risk and returns of reserve currencies can be quantified by our structural model—a key contribution of our paper given the absence of structural models in the literature. Finally, we estimate the potential paths of the share of RMB in reserves under different scenarios to shed light on its status as an international currency.
    Keywords: Central banks;Capital account convertibility;Central bank aggregates;Investment policy;Monetary authorities;currency composition,FX reserves,portfolio theory,RMB,numeraire,domestic currency,reserve currency,invoice
    Date: 2019–03–08
  17. By: Daeha Cho (University of Mellbourne); Kwang Hwan Kim (Yonsei Univ)
    Abstract: We measure inefficient fluctuations in the relative price of investment in the US using an estimated two-sector New Keynesian model. In the presence of these fluctuations, we find that monetary policy faces a quantitatively significant trade-off among the sectoral output gaps and the sectoral price and wage inflation rates. While optimal monetary policy is effective in stabilizing the sectoral inflation rates, it has a limited effect on stabilizing the sectoral output gaps.
    Keywords: Relative price of investment; Policy trade-off;Optimal monetary policy
    JEL: E32 E58 E61
    Date: 2020–03
  18. By: Paola Boel; Christopher J. Waller
    Abstract: We investigate the essentiality of credit and banking in a microfounded monetary model in which agents face heterogeneous idiosyncratic time preference shocks. Three main results arise from our analysis. First, the constrained-efficient allocation is unattainable without banks. Second, financial intermediation can improve the equilibrium allocation even at the Friedman rule because it relaxes the liquidity constraints of impatient borrowers. Third, changes in credit conditions are not necessarily neutral in a monetary equilibrium at the Friedman rule. If the debt limit is sufficiently low, money and credit are perfect substitutes and tightening the debt limit is neutral. As the debt limit increases, however, patient agents always hold money but impatient agents prefer not to since it is costly for them to do so given they are facing a positive shadow rate. Borrowing instead is costless when interest rates are zero and increasing the debt limit improves the allocation.
    Keywords: Money; Credit; Banking; Heterogeneity; Friedman rule
    JEL: E40 E50
    Date: 2020–07
  19. By: Ons Mastour (Central Bank of Tunisia)
    Abstract: We study the relationship between the strength of the bank credit channel (BCC) of monetary policy transmission and real GDP growth in Tunisia using quarterly commercial bank-level data between 2008 and 2019. We find evidence of the existence of the bank credit channel in Tunisia in both its broad and strict senses. Classification of banks by total assets allows us to conclude that funding-constrained banks are very reactive to changes in the policy rate regardless of the economic cycle. However, identification of the strength of the BCC during different economic cycles is not possible in our case due to the lack of significance of the coefficients of interest. Furthermore, we find that the BCC operated exclusively through specific loan categories and banks during the sample period.
    Keywords: Bank lending channel; monetary policy transmission; bank balance sheet channel; GDP growth.
    JEL: E3 E5 G2
    Date: 2020–08–04
  20. By: Gabriele Galati; Jan Kakes; Richhild Moessner
    Abstract: Credit restrictions were used as a monetary policy instrument in the Netherlands from the 1960s to the early 1990s. We study the effects of credit restrictions being active on the balance sheet structure of banks and other financial institutions. We find that banks mainly responded to credit restrictions by making adjustments to the liability side of their balance sheets, particularly by increasing the proportion of long-term funding. Responses on the asset side were limited, while part of the banking sector even increased lending after the installment of a restriction. These results suggest that banks and financial institutions responded by switching to long-term funding to meet the restriction and shield their lending business. Arguably, the credit restrictions were therefore still effective in reaching their main goal, i.e. containing money growth.
    Keywords: credit restrictions, monetary policy, macroprudential policy
    JEL: E42 E51 E52 E58 G28
    Date: 2020–07
  21. By: Tigran Poghosyan
    Abstract: This paper assesses the effectiveness of lending restriction measures, such as loan-to-value and debt-service-to-income ratios, in affecting developments in house prices and credit. We use data on 99 lending standard restrictions implemented in 28 EU countries over 1990–2018. The results suggest that lending restriction measures are generally effective in curbing house prices and credit. However, the impact is delayed and reaches its peak only after three years. In addition, the impact is asymmetric, with tightening measures having weaker association with target variables compared to loosening measures. The association is stronger in countries outside of euro area and for legally-binding measures and measures involving sanctions. The results have practical implications for macroprudential authorities.
    Keywords: Monetary policy instruments;Exchange rate policy;Central banks;Monetary policy;Monetary expansion;macroprudential regulation,financial stability,credit,house price,Kleibl,target variable,type of measure,real GDP growth,dependent variable
    Date: 2019–03–01
  22. By: de Groot, Oliver; Mazelis, Falk
    Abstract: This paper develops a simple, consistent methodology for generating empirically realistic forward guidance simulations using existing macroeconomic models by modifying expectations about policy announcements. The main advantage of our method lies in the exact preservation of all other shock transmissions. We describe four scenarios regarding how agents incorporate information about future interest rate announcements: “inattention”, “credibility”, “finite planning horizon”, and “learning”. The methodology consists of describing a single loading matrix that augments the equilibrium decision rules and can be applied to any standard DSGE, including large-scale policy-institution models. Finally, we provide conditions under which the forward guidance puzzle is resolved. JEL Classification: C63, E32, E52
    Keywords: expectations, monetary policy, unconventional policy
    Date: 2020–06
  23. By: Sonali Das
    Abstract: China’s exchange rate regime has undergone gradual reform since the move away from a fixed exchange rate in 2005. The renminbi has become more flexible over time but is still carefully managed, and depth and liquidity in the onshore FX market is relatively low compared to other countries with de jure floating currencies. Allowing a greater role for market forces within the existing regime, and greater two-way flexibility of the exchange rate, are important steps to build on the progress already made. This should be complemented by further steps to develop the FX market, improve FX risk management, and modernize the monetary policy framework.
    Keywords: Exchange markets;Real effective exchange rates;Central banks;Exchange rate policy;Nominal effective exchange rate;reminbi,exchange rate,foreign exchange market,liquidity,RMB,PBC,central parity,renminbi
    Date: 2019–03–07
  24. By: Philippe Andrade; Erwan Gautier; Eric Mengus
    Abstract: We provide evidence that households discretize their inflation expectations so that what matters for durable consumption decisions is the broad inflation regime they expect. Using survey data, we document that a large share of the adjustment in the average inflation expectation comes from the change in the share of households expecting stable prices; these households also consume relatively less than the ones expecting positive inflation. In contrast, variations of expectations across households expecting a positive inflation rate are associated with much smaller differences in individual durable consumption choices. We illustrate how this mitigates the expectation channel of monetary policy.
    Keywords: Inflation Expectations, Euler Equation, Survey Data, Imperfect Information, Adjustment Costs, Stabilization Policies .
    JEL: D12 D84 E21 E31 E52
    Date: 2020
  25. By: Michal Franta; Ivan Sutoris
    Abstract: We decompose the Czech inflation time series into the trend and short-lived deviations from the trend by means of an unobserved component stochastic volatility model. We then carry out a regression analysis to interpret the two inflation components. The results indicate a fall in the inflation trend since the start of the sample (1998) which coincides with the introduction of the inflation targeting regime and with subsequent changes to the inflation target pursued by the Czech National Bank. Moreover, the regression analysis suggests that inflation expectations play a dominant role in the evolution of the trend. The behavior of the deviations from the trend exhibits features of an open-economy Phillips curve.
    Keywords: Czech inflation, inflation trend, Phillips curve, UCSV
    JEL: E5 E31
    Date: 2020–07
  26. By: Elena Loukoianova; Yu Ching Wong; Ioana Hussiada
    Abstract: This paper discusses the evolution of the household debt in Australia and finds that while higher-income and higher-wealth households tend to have higher debt, lower-income households may become more vulnerable to rising debt service over time. Then, the paper analyzes the impact of a monetary policy shock on households’ current consumption and durable expenditures depending on the level of household debt. The results corroborate other work that households’ response to monetary policy shocks depends on their debt and income levels. In particular, households with higher debt tend to reduce their current consumption and durable expenditures more than other households in response to a contractionary monetary policy shocks. However, households with low debt may not respond to monetary policy shocks, as they hold more interest-earning assets.
    Keywords: Financial statistics;Interest rates on loans;Cost of living;Interest rate increases;Monetary transmission mechanism;household debt,consumption,household survey data,monetary policy,household,consumer debt,full sample,RBA,current consumption,empirical analysis
    Date: 2019–04–05
  27. By: Alzuabi, Raslan; Caglayan, Mustafa; Mouratidis, Kostas
    Abstract: Using a panel of large US banks, we examine banks' risk-taking behaviour in response to monetary policy shocks. Our investigation provides support for the presence of a risk-taking channel: banks' nonperforming loans increase in the medium to long-run following an expansionary monetary policy shock. We also find that banks' capital structure plays an important role in explaining bank's risk-taking appetite. Impulse response analysis shows that shocks emanating from larger banks spillover to the rest of the sector but no such effect is observed for smaller banks. These findings are confirmed for banks' Z-score.
    Keywords: Risk-taking channel: GVAR: Monetary policy shocks; Spillover effects; Impulse response analysis
    JEL: E44 E52 G01
    Date: 2020–06–01
  28. By: Christelis, Dimitris; Georgarakos, Dimitris; Jappelli, Tullio; Van Rooij, Maarten
    Abstract: Using micro data from the 2015 Dutch CentERpanel, we examine whether trust in the European Central Bank (ECB) influences individuals' expectations and uncertainty about future inflation, and whether it anchors inflation expectations. We find that higher trust in the ECB lowers inflation expectations on average, and significantly reduces uncertainty about future inflation. Moreover, results from quantile regressions suggest that trusting the ECB increases (lowers) inflation expectations when the latter are below (above) the ECB's inflation target. These findings hold after controlling for people's knowledge about the objectives of the ECB.
    Keywords: anchoring; Inflation expectations; Inflation uncertainty; subjective expectations; trust in the ECB
    JEL: D12 D81 E03
    Date: 2019–12
  29. By: Balleer, Almut; Zorn, Peter
    Abstract: We estimate the effects of monetary policy on price-setting behavior in administrative micro data underlying the German producer price index. We find a strong degree of monetary non-neutrality. After expansionary monetary policy, the mass of additional price adjustments is economically small and the average absolute size across all price changes falls. The aggregate price level hardly adjusts, and monetary policy has real effects. These estimates rule out quantitative structural models that generate small and transient effects of monetary policy through selection on large price adjustments. We provide evidence that monetary policy propagates primarily through production units with weak financial positions.
    Keywords: credit constraints; extensive margin; intensive margin; local projections; Menu cost; monetary policy; Price Setting
    JEL: E30 E31 E32 E44 E52
    Date: 2019–12
  30. By: Rünstler, Gerhard; Bräuer, Leonie
    Abstract: We study state dependence in the impact of monetary policy shocks over the leverage cycle for a panel of 10 euro area countries. We use a Bayesian Threshold Panel SVAR with regime classifications based on credit and house prices cycles. We find that monetary policy shocks trigger a smaller response of GDP, but a larger response of inflation during low states of the cycle. The shift in the inflation-output trade-off may result from higher macro-economic uncertainty in low leverage states. For an alternative regime classification based on turning points we find larger effects on GDP during contractions. JEL Classification: C32, E32, E44
    Keywords: Bayesian Threshold Panel VAR, financial cycle, monetary policy
    Date: 2020–06
  31. By: Anne-Marie Rieu-Foucault
    Abstract: The process of creating the Federal Reserve System (FED) was the result of a series of monetary and financial dysfunctions, which resulted in a succession of liquidity crises in the second half of the 19th century in the United States. This paper presents these dysfunctions and the means found by clearing houses to manage liquidity crises in the absence of a central bank. He discusses the reasons that ultimately led to the creation of the FED, putting into perspective the political and financial dimensions of this creation. It concludes, with regard to history, on the contributions of the FED and the shortcomings which the central bank faced, when the 2008 crisis broke out.
    Keywords: central banks, money, liquidity, financial crises
    JEL: E58 G01 N21
    Date: 2020
  32. By: Drechsler, Itamar; Savov, Alexi; Schnabl, Philipp
    Abstract: Between 2003 and 2006, the Federal Reserve raised rates by 4.25%. Yet it was precisely during this period that the housing boom accelerated, fueled by rapid growth in mortgage lending. There is deep disagreement about how, or even if, monetary policy impacted the boom. Using heterogeneity in banks' exposures to the deposits channel of monetary policy, we show that Fed tightening induced a large reduction in banks' deposit funding, leading them to contract new on-balance-sheet lending for home purchases by 26%. However, an unprecedented expansion in privately-securitized loans, led by nonbanks, largely offset this contraction. Since privately-securitized loans are neither GSE-insured nor deposit-funded, they are run-prone, which made the mortgage market fragile. Consistent with our theory, the re-emergence of privately-securitized mortgages has closely tracked the recent increase in rates.
    Keywords: banks; deposits; monetary policy; Mortgage lending; Private- label securitization; Securitization
    JEL: E43 E52 G21 G31
    Date: 2019–12
  33. By: Garth Baughman; Jean Flemming
    Abstract: We develop a model where persistent trade shocks create demand for a basket- backed stablecoin, such as Mark Carney's "synthetic hegemonic currency" or Facebook's recent proposal for Libra. In numerical simulations, we find four main results. First, because of general equilibrium effects of the basket currency on the volatility of currency values, overall demand for that currency is small. Second, despite scant holdings of the basket, its global reach may contribute to substantial increases in welfare if the basket is widely accepted, allowing it to complement holdings of sovereign currencies. Third, we calculate the welfare maximizing composition of the basket, finding that optimal weights depend on the pattern of international acceptance, but that basket composition does not significantly affect welfare. Fourth, despite potential welfare improvements, low demand for the basket currency from buyers limits sellers' incentives to invest in accepting it, suggesting that fears of a so-called global stablecoin replacing domestic sovereign currencies may be overstated.
    Keywords: Stablecoins; Money demand; Digital currencies; International monetary system
    Date: 2020–06–22
  34. By: Christoffel, Kai; Mazelis, Falk; Montes-Galdón, Carlos; Müller, Tobias
    Abstract: Forward guidance operates via the expectations formation process of the agents in the economy. In standard quantitative macroeconomic models, the expectations are unobserved state variables and little scrutiny is devoted to analysing the dynamic behaviour of these expectations. We show that the introduction of survey and financial market-based forecasts in the estimation of the model disciplines the expectations formation process in DSGE models. When the model-implied expectations are matched to observed expectations, the additional information of the forecasts restrains the agents’ expectations formation. We argue that the reduced volatility of the agents’ expectations dampens the model reactions to forward guidance shocks and improves the out-of-sample forecast accuracy of the model. Furthermore, we evaluate the case for introducing a discount factor as a reduced form proxy for a variety of microfounded approaches, proposed to mitigate the forward guidance puzzle. Once data on expectations is considered, the empirical support to introduce a discount factor dissipates. JEL Classification: C13, C52, E3, E47, E52
    Keywords: Bayesian estimation, DSGE models, expectations formation, forecasting, monetary policy
    Date: 2020–06
  35. By: Daniel C. Hardy
    Abstract: The role of the euro in financial markets is limited by the scarcity of euro-denominated liquid short-term safe instruments to serve as “near money†and high-quality collateral—a role fulfilled by US Treasury bills in the US dollar financial “ecosystem.†It is argued that the ECB could eliminate this scarcity by issuing a large volume of its own debt certificates, and thereby expand and stabilize demand for the euro. The initiative is shown to be easy to implement and consistent with the monetary implementation framework. The main objections are likely to be political rather than economic.
    Date: 2020–07–02
  36. By: Döttling, Robin
    Abstract: How do near-zero interest rates affect optimal bank capital regulation and risk-taking? I study this question in a dynamic model, in which forward-looking banks compete imperfectly for deposit funding, but households do not accept negative deposit rates. When deposit rates are constrained by the zero lower bound (ZLB), tight capital requirements disproportionately hurt franchise values and become less effective in curbing excessive risk-taking. As a result, optimal dynamic capital requirements vary with the level of interest rates if the ZLB binds occasionally. Higher inflation and unconventional monetary policy can alleviate the problem, though their overall welfare effects are ambiguous. JEL Classification: G21, G28, E44, E58
    Keywords: capital regulation, franchise value, search for yield, unconventional monetary policy, zero lower bound
    Date: 2020–06
  37. By: Reinelt, Timo; Meier, Matthias
    Abstract: We document three new empirical facts: (i) monetary policy shocks increase the markup dispersion across firms, (ii) they increase the relative markup of firms with stickier prices, and (iii) firms with stickier prices have higher markups. This is consistent with a New Keynesian model in which price rigidity is heterogeneous across firms. In the model, firms with more rigid prices optimally set higher markups and their markups increase by more after monetary policy shocks. The consequent increase in markup dispersion explains a negative aggregate TFP response. In a calibrated model, monetary policy shocks generate substantial fluctuations in aggregate productivity. JEL Classification: E30, E50
    Keywords: aggregate productivity, heterogeneous price rigidity, markup dispersion, monetary policy
    Date: 2020–06
  38. By: Hubert Kempf
    Abstract: This paper studies the design of the policy mix in a monetary union, that is, the institutional arrangement specifying the relationships between the various policymakers present in the union and the extent of their capacity of action. It is assumed that policymakers do not cooperate. Detailing several institutional variants imposed on an otherwise standard macromodel of a monetary union, we prove that there is no Pareto-superior design when cooperation between policymakers is impossible.
    Keywords: monetary union, fiscal policy, monetary policy, cooperation, policy mix
    JEL: E58 E62 F45 H76
    Date: 2020
  39. By: Bunn, Philip (Bank of England); Haldane, Andrew (Bank of England); Pugh, Alice (Bank of England)
    Abstract: Concerns were raised about the distributional impact of the loosening in UK monetary policy following the financial crisis. We assess the impact of this loosening on well-being using household-level data and estimated utility functions. The welfare benefits are found to have been positive, in aggregate and across most of the household distribution, relative to what otherwise would have happened. They are significantly larger than when looking at financial factors alone due to the non-financial benefits of lower unemployment and financial distress. Most people were made better-off in welfare terms from the monetary loosening, rich and poor, although the young have benefited more than the old.
    Keywords: Monetary policy; households; inequality; well-being
    JEL: D12 D31 E52 E58
    Date: 2020–07–17
  40. By: Breinlich, Holger; Leromain, Elsa; Novy, Dennis; Sampson, Thomas
    Abstract: This paper studies how the depreciation of sterling following the Brexit referendum affected consumer prices in the United Kingdom. Our identification strategy uses input-output linkages to account for heterogeneity in exposure to import costs across product groups. We show that, after the referendum, inflation increased by more for product groups with higher import shares in consumer expenditure. This effect is driven by both direct consumption of imported goods and the use of imported inputs in domestic production. Our results are consistent with complete pass-through of import costs to consumer prices and imply an aggregate exchange rate pass-through of 0.29. We estimate the Brexit vote increased consumer prices by 2.9 percent, costing the average household £870 per year. The increase in the cost of living is evenly shared across the income distribution, but differs substantially across regions.
    Keywords: Brexit; exchange rate pass-through; import costs; inflation
    JEL: E31 F15 F31
    Date: 2019–12
  41. By: Xiaoming Li; Zheng Liu; Yuchao Peng; Zhiwei Xu
    Abstract: We present evidence that monetary policy easing reduces bank risk-taking but exacerbates capital misallocation in China after implementing the Basel III capital regulationsin2013. Thenewregulationstightenedbankcapitalrequirementsandintroduced a new risk-weighting approach to calculating the capital adequacy ratio (CAR). To meet tightened capital requirements, a bank can boost its effective CAR by raising capital or by increasing the share of lending to low-risk borrowers. Using confidential loan-level data from a large Chinese commercial bank, merged with firm-level data on a large set of manufacturing firms, we document robust evidence that a monetary policy expansion raises the share of new bank loans to state-owned enterprises (SOEs) after 2013, but not before, because SOE loans receive high credit ratings under government guarantees. Since SOEs are on average less productive than private firms, shifts in bank lending toward SOEs exacerbate capital misallocations, reducing aggregate productivity. We construct a two-sector general equilibrium model with bank portfolio choices and show that, under calibrated parameters, an expansionary monetary policy shock raises the share of bank lending to SOEs, leading to persistent declines in total factor productivity that partially offset the expansionary effects of monetary policy.
    Keywords: risk assessment; Monetary policy - China; risk management; china
    JEL: E52 G18 G21 O42
    Date: 2020–08
  42. By: Kevin Clark; Antoine Martin; Timothy Wessel
    Abstract: The repo market faced extraordinary liquidity strains in March amid broader financial market volatility related to the coronavirus pandemic and uncertainty regarding the path of policy. The strains were particularly severe in the term repo market, in which borrowing and lending arrangements are for longer than one business day. In this post, we discuss the causes of the liquidity disruptions that arose in the repo market as well as the Federal Reserve’s actions to address those disruptions.
    Keywords: pandemic; COVID-19; repo market; Federal Reserve inventions
    JEL: G1 E5
    Date: 2020–08–03
  43. By: Shuo Cao; Richard K. Crump; Stefano Eusepi; Emanuel Moench
    Abstract: Using a unique data set of individual professional forecasts, we document disagreement about the future path of monetary policy, particularly at longer horizons. The stark differences in short rate forecasts imply strong disagreement about the risk-return trade-off of longer-term bonds. Longer-horizon short rate disagreement co-moves with term premiums. We estimate an affine term structure model in which investors hold heterogeneous beliefs about the long-run level of rates. Our model fits U.S. Treasury yields and the short rate paths predicted by different groups of professional forecasters very well. About one-third of the variation in term premiums is driven by short rate disagreement.
    Keywords: disagreement; heterogeneous beliefs; noisy information; speculation; survey forecasts; yield curve; term premium
    JEL: D83 D84 E43 G10 G12
    Date: 2020–07–01
  44. By: J. David Lopez-Salido; Gerardo Sanz-Maldonado; Carly Schippits; Min Wei
    Abstract: The "natural" or equilibrium real rate of interest is an important concept in macroeconomics. On the one hand, the natural (real) rate provides a description of the real interest rate path consistent with the eventual full capacity of utilization of available resources in the context of low and stable inflation.
    Date: 2020–06–19
  45. By: Yuko Hashimoto; Signe Krogstrup
    Abstract: This paper assesses the role of bank and nonbank financial institutions’ balance sheet foreign exposures and risk management practices in driving capital flow responses to global risk. Using a unique and previously unexplored dataset on domestic and cross border balance sheet positions of financial institutions collected by the IMF, we show that the response of overall capital flows to global risk shocks is associated with the on-balance sheet foreign exposures of nonbanks, but not with that of banks. A possible interpretation is that risk-averse and dynamically optimizing nonbanks reduce their foreign risk exposure when global risk perceptions increase, leading to capital flows, while banks tend to be hedged against these risks off balance sheet. In advanced countries, the findings suggest that nonbank portfolio adjustment to changing risk conditions may take place through derivatives transactions with banks, the hedging practices of which trigger bank related capital flows rather than portfolio flows.
    Keywords: Bank credit;Central banks;Private capital flows;Foreign currency exposure;International financial markets;foreign exposure,global factor, risk aversion, global financial crisis,forward contract,capital flow management measures,macro prudential policy,VIX,capital flow,risk condition,foreign asset,Tille
    Date: 2019–04–29
  46. By: Gregor Boehl; Gavin Goy; Felix Strobel
    Abstract: Did the Federal Reserves' Quantitative Easing (QE) in the aftermath of the financial crisis have macroeconomic effects? To answer this question, we estimate a large-scale DSGE model over the sample from 1998 until 2020, including data of the Fed's balance sheet. We allow for QE to affect the economy via multiple channels that arise from several financial frictions. Our nonlinear Bayesian likelihood approach fully accounts for the zero lower bound on nominal interest rates. We find that QE increased output by about 1.2 percent, reflecting a net increase in investment of nearly 9 percent accompanied by a 0.7 percent drop in aggregate consumption. Both government bond and capital asset purchases effectively improved financing conditions. Especially capital asset purchases significantly facilitated new investment and increased the production capacity. Against the backdrop of a fall in consumption, supply side effects dominated, leading to a disinflationary effect of about 0.25 percent annually.
    Keywords: Quantitative Easing; Liquidity Facilities; Zero Lower Bound; Nonlinear Bayesian Estimation
    JEL: E63 C63 E58 E32 C62
    Date: 2020–08
  47. By: König-Kersting, Christian; Trautmann, Stefan T.; Vlahu, Razvan
    Abstract: We study the impact of disclosure about bank fundamentals on depositors’ behavior in the presence (and absence) of economic linkages between financial institutions. Using a controlled laboratory environment, we identify under which conditions disclosure is conducive to bank stability. We find that bank deposits are sensitive to perceived bank performance. While banks with strong fundamentals benefit from more precise disclosure, an opposing effect is present for solvent banks with weaker fundamentals. Depositors take information about economic linkages into account and correctly identify when disclosure about one institution conveys meaningful information for others. Our findings highlight both the costs and benefits of bank transparency and suggest that disclosure is not always stability enhancing.
    JEL: D81 G21 G28
    Date: 2020–07–14
  48. By: James McNeil (Department of Economics, Dalhousie University)
    Date: 2020–07–29

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