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on Central Banking |
| By: | Michael McLeay; Silvana Tenreyro |
| Abstract: | Several academics and practitioners have pointed out that inflation follows a seemingly exogenous statistical process, unrelated to the output gap, leading some to argue that the Phillips curve has weakened or disappeared. In this paper we explain why this seemingly exogenous process arises, or, in other words, why it is difficult to empirically identify a Phillips curve, a key building block of the policy framework used by central banks. We show why this result need not imply that the Phillips curve does not hold – on the contrary, our conceptual framework is built under the assumption that the Phillips curve always holds. The reason is simple: if monetary policy is set with the goal of minimising welfare losses (measured as the sum of deviations of inflation from its target and output from its potential), subject to a Phillips curve, a central bank will seek to increase inflation when output is below potential. This targeting rule will impart a negative correlation between inflation and the output gap, blurring the identification of the (positively sloped) Phillips curve. We discuss different strategies to circumvent the identification problem and present evidence of a robust Phillips curve in US data. |
| JEL: | E31 E52 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25892&r=all |
| By: | James D. Hamilton |
| Abstract: | The Federal Reserve characterizes its current policy decisions in terms of targets for the fed funds rate and the size of its balance sheet. The fed funds rate today is essentially an administered rate that is heavily influenced by regulatory arbitrage and divorced from its traditional role as a signal of liquidity in the banking system. The size of the Fed’s balance sheet is at best a very blunt instrument for influencing interest rates. In this paper I compare the current operating system with the historical U.S. system and the procedures of other central banks. I then examine strategies for transitioning from the current system to one that would give the Federal Reserve more accurate tools with which to achieve its strategic objective of influencing inflation and output. |
| JEL: | E4 E5 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25911&r=all |
| By: | INOUE Tomoo; OKIMOTO Tatsuyoshi |
| Abstract: | This paper examines the effects of unconventional monetary policies (UMPs) by the Bank of Japan (BOJ) and the Federal Reserve (Fed) on the financial markets, taking international spillovers and a possible regime change into account. To this end, we apply the smooth-transition global VAR model to a set of major financial variables for 10 countries and one Euro zone. Our results suggest that the BOJ and the Fed's expansionary UMPs have had significant positive effects on domestic financial markets, particularly in more recent years. Our results also indicate that the BOJ's UMPs have rather limited effects on international financial markets and that the effect of the Fed's UMPs is approximately ten times larger. |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:19031&r=all |
| By: | Altavilla, Carlo; Burlon, Lorenzo; Giannetti, Mariassunta; Holton, Sarah |
| Abstract: | Exploiting confidential data from the euro area, we show that sound banks can pass negative rates on to their corporate depositors without experiencing a contraction in funding. These pass-through effects become stronger as policy rates move deeper into negative territory. Banks offering negative rates provide more credit than other banks suggesting that the transmission mechanism of monetary policy is not hampered. The negative interest rate policy (NIRP) provides further stimulus to the economy through firms’ asset rebalancing. Firms with high current assets linked to banks offering negative rates appear to increase their investment in tangible and intangible assets and to decrease their cash holdings to avoid the costs associated with negative rates. Overall, our results challenge the commonly held view that conventional monetary policy becomes ineffective when policy rates reach the zero lower bound. JEL Classification: E52, E43, G21, D22, D25 |
| Keywords: | corporate channel, lending channel, monetary policy, negative rates |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20192289&r=all |
| By: | Melo-Velandia, Luis Fernando; Loaiza, Rubén; Villamizar-Villegas, Mauricio |
| Abstract: | Typically, central banks use a variety of individual models (or a combination of models) when forecasting inflation rates. Most of these require excessive amounts of data, time, and computational power; all of which are scarce when monetary authorities meet to decide over policy interventions. In this paper we use a rolling Bayesian combination technique that considers inflation estimates by the staff of the Central Bank of Colombia during 2002-2011 as prior information. Our results show that: 1) the accuracy of individual models is improved by using a Bayesian shrinkage methodology, and 2) priors consisting of staff's estimates outperform all other priors that comprise equal or zero-vector weights. Consequently, our model provides readily available forecasts that exceed all individual models in terms of forecasting accuracy at every evaluated horizon. |
| Keywords: | Bayesian shrinkage; Inflation forecast combination; Internal forecasts; Rolling window estimation |
| JEL: | C22 C53 C11 E31 |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:rie:riecdt:9&r=all |
| By: | Charles W. Calomiris; Matthew S. Jaremski; David C. Wheelock |
| Abstract: | Liquidity shocks transmitted through interbank connections contributed to bank distress during the Great Depression. New data on interbank connections reveal that banks were much more likely to close when their correspondents closed. Further, after the Federal Reserve was established, banks’ management of cash and capital buffers was less responsive to network liquidity risk, suggesting that banks expected the Fed to reduce that risk. Because the Fed’s presence removed the incentives for the most systemically important banks to maintain capital and cash buffers that had protected against liquidity risk, it likely contributed to the banking system’s vulnerability to contagion during the Depression. |
| JEL: | G21 L14 N22 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25897&r=all |
| By: | Hibiki Ichiue (Bank of Japan); Maiko Koga (Bank of Japan); Tatsushi Okuda (Bank of Japan); Tatsuya Ozaki (Bank of Japan) |
| Abstract: | We theoretically and empirically investigate the implications of heterogeneity in households' inflation expectations formation within an economy. We develop a rational inattention model in which households attempt to minimize the expected loss from insufficient bargain-hunting and inefficient inter-temporal consumption allocation. The model focuses on households' allocation of attention to two variables: the cheapest price of a particular product they can find, and the inflation rate the central bank aims to achieve in the long run. The model yields the clear prediction that households with a tighter liquidity constraint will allocate more attention to finding the cheapest price of a good by visiting different stores and less attention to information on the inflation rate the central bank aims to achieve in the long run including messages sent out by the central bank. Using a unique and rich micro dataset of Japanese households, we find empirical support for the testable prediction of our model. The model provides the important policy implication that households pay more attention to messages emitted by the central bank if monetary easing successfully relieves households' liquidity constraints. |
| Keywords: | Rational inattention; inflation expectations; anchoring; liquidity constraints; Euler equation |
| JEL: | E50 E21 E61 |
| Date: | 2019–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:boj:bojwps:wp19e08&r=all |
| By: | Rybacki, Jakub |
| Abstract: | During the period of policy easing in 2013 and prospective tightening in 2017-2019 the National Bank of Poland (NBP) applied the forward guidance to manage expectations of market participants. The goal of such a policy was to lower the uncertainty related to the future decisions of the Monetary Policy Council. We attempt to verify whether the central bank’s communication indeed reduced disagreement, based on the results of the professional forecasters’ survey. We found that the forward guidance policy introduced in 2013 lowered the perceived interest rate risk in both one-year and two-year horizons. On the other hand, abandoning the policy in 2014 increased the disagreement in the disproportionately large manner. The more pronounced forward guidance reintroduced in 2017 again allowed to reduce short-term uncertainty. However, it took over a year to strengthen the impact reducing the disagreement especially in case of two-year forecasts. The forward guidance most likely prevented increase of disagreement during the so called NBP image crisis in the late 2018 and in the first quarter of 2019. Overall our research highlights that it is relatively easy to lose confidence with ill-considered communication, but building credibility requires systematic long work. |
| Keywords: | forward guidance, density forecasts, survey of professional forecasters |
| JEL: | E52 E58 |
| Date: | 2019–06–13 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:94465&r=all |
| By: | Bahaj, Saleem Abubakr; Foulis, Angus; Pinter, Gabor; Surico, Paolo |
| Abstract: | This paper uses a detailed firm-level dataset to show that monetary policy propagates via asset prices through corporate debt collateralised on real estate. Our research design exploits the fact that many small and medium sized firms use the homes of the firm’s directors as a key source of collateral, and directors’ homes are typically not in the same region as their firm. This spatial separation of firms and firms’ collateral allows us to separate the propagation of monetary policy via fluctuations in collateral values from that via demand channels. We find that younger and more levered firms who have collateral values that are particularly sensitive to monetary policy show the largest employment response to monetary policy. The collateral channel explains a sizeable share of the aggregate employment response. |
| JEL: | J1 |
| Date: | 2018–12–16 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:100934&r=all |
| By: | Georgarakos, Dimitris (Goethe University Frankfurt); Tatsiramos, Konstantinos (University of Luxembourg, LISER) |
| Abstract: | We examine the effects of monetary policy on household self-assessed financial stress and durable consumption using panel data from eighteen annual waves of the British Household Panel Survey. For identification, we exploit random variation in household exposure to interest rates generated by the random timing of household interview dates with respect to policy rate changes. After accounting for household and month-year-of-interview fixed effects, we uncover significant heterogeneities in the way monetary policy affects household groups that differ in housing and saving status. In particular, an increase in the interest rate induces financial stress among mortgagors and renters, while it lessens financial stress of savers. We find symmetric effects on durable consumption, mainly driven by mortgagors with high debt burden or limited access to liquidity and younger renters who are prospective home buyers. |
| Keywords: | monetary policy, mortgage debt, debt burden, financial stress, consumption |
| JEL: | G21 E21 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp12359&r=all |
| By: | Caio Ferreira; Nigel Jenkinson; Christopher Wilson |
| Abstract: | Developing economies can strengthen their financial systems by implementing the main elements of global regulatory reform. But to build an effective prudential framework, they may need to adapt international standards taking into account the sophistication and size of their financial institutions, the relevance of different financial operations in their market, the granularity of information available and the capacity of their supervisors. Under a proportionate application of the Basel standards, smaller institutions with less complex business models would be subject to a simpler regulatory framework that enhances the resilience of the financial sector without generating disproportionate compliance costs. This paper provides guidance on how non-Basel Committee member countries could incorporate banks’ capital and liquidity standards into their framework. It builds on the experience gained by the authors in the course of their work in providing technical assistance on—and assessing compliance with—international standards in banking supervision. |
| Date: | 2019–06–14 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:19/127&r=all |
| By: | Kontogeorgos, Georgios; Lambrias, Kyriacos |
| Abstract: | The Eurosystem/ECB staff macroeconomic projection exercises constitute an important input to the ECB's monetary policy. This work marks a thorough analysis of the Eurosystem/ECB projection errors by looking at criteria of optimality and rationality using techniques widely employed in the applied literature of forecast evaluation. In general, the results are encouraging and suggest that Eurosystem/ECB staff projections abide to the main characteristics that constitute them reliable as a policy input. Projections of GDP - up to one year - and inflation are optimal - in the case of inflation they are also rational. A main finding is that GDP forecasts can be substantially improved, especially at long horizons. JEL Classification: C53, E37, E58 |
| Keywords: | Eurosystem/ECB forecasts, forecast errors, forecast evaluation |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20192291&r=all |
| By: | Goodhart, C. A. E.; Kabiri, Ali |
| Abstract: | There is a debate about the effect of the extremely low, or even negative, interest rate regime on bank profitability. On the one hand it raises demand and thereby adds to bank profits, while on the other hand it lowers net interest margins, especially at the Zero Lower Bound. In this paper we review whether the prior paper by Altavilla, Boucinha and Peydro (2018) on this question for the Eurozone can be generalized to other monetary blocs, i.e. USA and UK. While our findings have some similarity with their earlier work, we are more concerned about the possible negative effects of this regime, not only on bank profitability but also on bank credit extension more widely. |
| Keywords: | Bank profitability; Low interest rates; Net interest margin; credit extension |
| JEL: | E52 G18 G21 G28 |
| Date: | 2019–05–23 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:100968&r=all |
| By: | Hohberger, Stefan (European Commission – JRC); Priftis, Romanos (Bank of Canada); Vogel, Lukas (European Commission) |
| Abstract: | This paper compares the distributional effects of conventional monetary policy and quantitative easing (QE) within an estimated open-economy DSGE model of the euro area. The model includes two groups of households: (i) wealthier households, who own financial assets and are able to smooth consumption over time, and (ii) poorer households, who only receive labor and transfer income and live ‘hand to mouth’. We use the model to compare the impact of policy shocks on constructed measures of income and wealth inequality (net disposable income, net asset position, and relative per-capita income). Except for the short term, expansionary conventional policy and QE shocks tend to mitigate income and wealth inequality between the two population groups. In light of the coarse dichotomy of households that abstracts from richer income and wealth dynamics at the individual level, the analysis emphasizes the functional distribution of income. |
| Keywords: | Bayesian estimation; distributional effects; open-economy DSGE model; portfolio rebalancing; quantitative easing |
| JEL: | E44 E52 E53 F41 |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:jrs:wpaper:201812&r=all |
| By: | Ely, Regis Augusto; Tabak, Benjamin Miranda; Teixeira, Anderson Mutter |
| Abstract: | In this article, we analyze the effect of a set of 12 macroprudential policies on the risk-taking of banks using a large number of countries and banks. Our empirical results show that, although on average these policies reduce risk-taking, the effects are quite heterogeneous and vary considerably depending on the instrument implemented, market concentration, size of banks, liquidity, leverage and different levels of risk. Structural policies, such as limits on asset concentration and interbank exposures, are the most effective in terms of financial stability. Borrower based policies, such as loan-to-value and debt-to-income ratios, also have a positive effect on stability. Concentration limits tend to be more effective for larger and more leveraged banks, while loan-to-value and debt-to-income ratios are more effective in concentrated markets. We also show that there seems to be a greater effect through the leverage channel for policies that are most effective in reducing risk-taking. |
| Keywords: | financial stability, macroprudential policies, bank regulation |
| JEL: | G21 G28 L10 |
| Date: | 2019–06–17 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:94546&r=all |
| By: | Gary B. Gorton |
| Abstract: | Financial crises are bank runs. At root the problem is short-term debt (private money), which while an essential feature of market economies, is inherently vulnerable to runs in all its forms (not just demand deposits). Bank regulation aims at preventing bank runs. History shows two approaches to bank regulation: the use of high quality collateral to back banks’ short-term debt and government insurance for the short-term debt. Also, explicit or implicit limitations on entry into banking can create charter value (an intangible asset) that is lost if the bank fails. This can create an incentive for the bank to abide by the regulations and not take too much risk. |
| JEL: | G2 G21 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25891&r=all |