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on Central Banking |
| By: | Motto, Roberto; Özen, Kadir |
| Abstract: | We identify a novel dimension of monetary policy from high-frequency changes in asset prices around ECB policy events, orthogonal to surprises extracted from risk-free interest rates. We find that it is present in policy events that were interpreted by real-time market commentaries as containing information about asset purchase programmes aimed to stabilise financial markets and safeguard the monetary policy transmission by implementing asset purchases in a flexible manner across asset classes and euro area countries. We label this dimension of policy “market-stabilization QE” to contrast it with conventional QE programmes such as the APP launched by the ECB in 2015 aimed to extract duration risk. When including our market-stabilization QE, the R2 for the regression of sovereign yields during the sovereign debt crisis increases by about 50 percentage points and the one of the stock market by 35 percentage points; during the COVID-19 pandemic by 25 and 15 percentage points, respectively. Although it moves euro area stressed-country sovereign yields down and German sovereign yields up as a result of the reversal of flight-to-safety dynamics, it generates strong expansionary macroeconomic effects in all euro area countries including Germany. JEL Classification: E43, E44, E52, E58, E65, G01, G14 |
| Keywords: | Central Bank Communication, COVID-19 pandemic, European debt crisis, monetary policy shocks, unconventional monetary policies |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20222640&r= |
| By: | Hongyi Chen; Pierre Siklos |
| Abstract: | Central Bank Digital Currency (CBDC) has attracted considerable interest and its deployment on a global scale is imminent. However, digital currencies face several challenges. They include: legal, technological, and political considerations. We summarize those challenges and add a few more that have not received much attention in the literature. We then consider two forms of CBDC: a narrow version that only replaces notes and coins and a broader form with a deposit feature. The narrow CBDC is the most likely one to be first introduced. Next, relying on evidence of past episodes of financial innovation, and using cross-country data, we explore the hypothetical impact of CBDC on inflation and financial stability, based on the historical behaviour of the velocity of circulation and incorporating a CBDC’s impact in McCallum’s policy rule which defines the stance of monetary policy based on money growth. Our simulations suggest that CBDC need not produce higher inflation, but financial stability remains at risk. We provide some policy implications. |
| Keywords: | Central Bank Digital Currency, Velocity, Money Demand, Monetary Policy, McCallum Rule |
| JEL: | O31 O33 E41 E42 E51 E52 |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2022-12&r= |
| By: | Christian Bittner (Bundesbank & Goethe University); Diana Bonfim (Banco de Portugal & Católica Lisbon); Florian Heider (ECB & CEPR); Farzad Saidi (University of Bonn & CEPR); Glenn Schepens (ECB); Carla Soares (Banco de Portugal) |
| Abstract: | This paper studies how banks’ balance sheets and funding costs interact in the transmission of monetary-policy rates to banks’ credit supply to firms. To do so, we use creditregistry data from Germany and Portugal together with the European Central Bank’s policy-rate cuts in mid-2014. The pass-through of the rate cuts to banks’ funding costs differs across the euro-area currency union because deposit rates vary in their distance to the zero lower bound (ZLB). When the distance is shorter, banks’ financing constraints matter less for the supply of credit and there is more risk taking. To rationalize these findings, we provide a simple model of an augmented bank balance-sheet channel where in addition to costly external financing, there is screening of borrowers and a ZLB on retail deposit rates. An impaired pass-through of monetary policy to banks’ funding costs reduces their ability to lever up and weakens their lending standards. |
| Keywords: | transmission of monetary policy, bank lending, bank risk taking, bank balance sheets, euro-area heterogeneity |
| JEL: | E44 E52 E58 E63 F45 G20 G21 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:ajk:ajkdps:149&r= |
| By: | Dräger, Lena; Lamla, Michael J.; Pfajfar, Damjan |
| Abstract: | By providing numerical inflation projections. Many central banks currently face inflation well above their targets and with that the challenge to prevent spillovers on inflation expectations. We study the effect of different communication about the 2021 inflation surge on German consumers' inflation expectations using a randomized control trial. We show that information about rising inflation increases short- and long-term inflation expectations. This initial increase in expectations can be mitigated using information about inflation projections, where numerical information about professional forecasters' projections seems to reduce inflation expectations by more than policymaker’s characterization of inflation as a temporary phenomenon. |
| Keywords: | Short-run and long-run inflation expectations; inflation surge; randomized control trial; survey experiment; persistent or transitory in inflation shock |
| JEL: | E31 E52 E58 D84 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:han:dpaper:dp-694&r= |
| By: | Couaillier, Cyril; Lo Duca, Marco; Reghezza, Alessio; Rodriguez d’Acri, Costanza |
| Abstract: | While regulatory capital buffers are expected to be drawn to absorb losses and meet credit demand during crises, this paper shows that banks were unwilling to do so during the pandemic. To the contrary, banks engaged in forms of pro-cyclical behaviour to preserve capital ratios. By employing granular data from the credit register of the European System of Central Banks, we isolate credit supply effects and find that banks with little headroom above regulatory buffers reduced their lending relative to other banks, also when controlling for a broad range of pandemic support measures. Firms’ inability to reallocate their credit needs to less constrained banks had real economic effects, as their headcount went down, although state guarantee schemes acted as partial mitigants. These findings point to some unintended effects of the capital framework which may create incentives for pro-cyclical behaviour by banks during downturns. They also shed light on the interactions between fiscal and prudential policies which took place during the pandemic. JEL Classification: E61, G01, G18, G21 |
| Keywords: | bank lending, Buffer usability, coronavirus, credit register, macroprudential policy, MDA distance |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20222644&r= |
| By: | Nina Boyarchenko; Giovanni Favara; Moritz Schularick |
| Abstract: | This paper reviews literature on the empirical relationship between vulnerabilities in the financial system and the macroeconomy, and how monetary policy affects that connection. Financial vulnerabilities build up over time, with both risk appetite and risk taking rising during economic expansions. To some extent, financial crises are predictable and have severe real economic consequences when they occur. Empirically it is difficult to link monetary policy to financial vulnerabilities, in part because financial cycles have long durations, making it difficult to separate effects of changes in monetary policy from other business cycle effects. |
| Keywords: | Monetary Policy; Financial Stability; Financial Crises; Credit; Leverage; Liquidity; Asset Prices |
| JEL: | E44 E52 E58 G20 |
| Date: | 2022–02–15 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2022-06&r= |
| By: | Luigi Bonatti,; Andrea Fracasso; Roberto Tamborini |
| Abstract: | We examine the role of inflation expectations in conditioning monetary policy, addressing three of its facets. The first concerns the channels through which inflation expectations impinge upon actual inflation, and their policy implications. The second facet regards the technical and empirical issues involved in keeping track of inflation expectations for monetary policy purposes. The final facet is an assessment of inflation expectations vis-à-vis the current upsurge of inflation, wondering whether, after being unanchored on the downside, can now become unanchored on the upside. |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwprg:2022/1&r= |
| By: | Arlene Wong (Princeton University) |
| Abstract: | This paper examines the role of the refinancing channel and the mortgage market structure for the transmission of monetary policy to consumption. First, I document heterogeneous consumption responses to monetary policy shocks. I find a large consumption response for homeowners who refinance or enter new loans, which is concentrated among younger people. Second, I develop a life-cycle model with fixed rate mortgages that explains these facts. Moving from a fixed to a variable rate mortgage structure reduces the heterogeneous effects of monetary policy on consumption by age. At the same time, the aggregate effects of monetary policy on consumption are increased substantially. |
| Keywords: | Consumption; monetary policy; refinancing; heterogeneous responses; age |
| JEL: | E52 E21 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:pri:econom:2021-57&r= |
| By: | Gelfer, Sacha; Gibbs, Christopher |
| Abstract: | We evaluate the dynamics of conventional and unconventional monetary policy using an estimated two-region dynamic stochastic general equilibrium (DSGE) model. In addition to traditional nominal frictions the open-economy model also includes financial frictions, international portfolio balance effects, and correlated global financial shocks. We find that both conventional and unconventional monetary policy is effective in stimulating output and in inflation. However, the type of expansionary monetary policy used has heterogeneous effects on domestic investment, imports, exports and hours worked. Further, including a financial accelerator to the DSGE model significantly dampens the impact of aggregate investment that is expected to occur with quantitative easing. This is because unconventional monetary policy in the model is associated with an expansion in banking deposits and a minimal impact on loan demand, thus creating a fall in the loan to deposit ratio as was seen after the global financial crisis. Using historical decompositions, we find that unconventional monetary policy had a significant positive impact on output and hours worked during the global financial crisis and the preceding years after, but becomes negligible after 2014. Yet, its impact on equity and bond markets remained through 2019. |
| Keywords: | Unconventional Monetary Policy; Quantitative Easing; International Bond Portfolio; DSGE; Financial accelerator |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:syd:wpaper:2021-13&r= |
| By: | Xiang-li Lim (Green Templeton College, and Saïd Business School, University of Oxford); Vatcharin Sirimaneetham (Economic Affairs Officer, Macroeconomic Policy and Analysis Section, Macroeconomic Policy and Financing for Development Division, ESCAP) |
| Abstract: | This paper discusses how central banks and financial supervisory authorities (CBFSAs) can foster green development in Asia and the Pacific. It argues that while fiscal policy has received much attention, CBFSAs can certainly play a complementary role in speeding up the transition towards low-carbon, climate-resilient economies. Indeed, CBFSAs are obliged to act as inaction could compromise their mandate of maintaining economic and price stability given that climate change poses an emerging risk to the financial system. The paper first shows that around half of Asia-Pacific central banks either have sustainability-oriented mandates or began integrating climate issues into their policy conduct. It then demonstrates that while the region remains at the early stage of green monetary and financial policies, some CBFSAs are at the forefront in deploying monetary policy tools, prudential measures, and broader initiatives to support green finance. To further promote green central banking, having clear guiding principles, effective communication, and adequate technical capacity to customize the green approach is critical. Moving forward, CBFSAs should be mindful about possible unintended, adverse impacts of sustainable central banking, such as interfering with market neutrality, supporting greenwashing, and crowding out green private investments. |
| Keywords: | central banking, monetary policy, green development, green finance, climate risks |
| JEL: | E52 E58 |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:unt:wpmpdd:wp/21/10&r= |
| By: | Mehdi El Herradi (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Aurélien Leroy (UB - Université de Bordeaux) |
| Abstract: | This paper examines the distributional effects of monetary policy in 12 OECD economies between 1920 and 2016. We exploit the implications of the macroeconomic policy trilemma with an external instrument approach to analyze how top income shares respond to monetary policy shocks. The results indicate that monetary tightening strongly decreases the share of national income held by the top 1 percent and vice versa for a monetary expansion, irrespective of the position of the economy. This effect (i) holds for the top percentile and the ultrarich (top 0.1 percent and 0.01 percent income shares), while (ii) it does not necessarily induce a decrease in income inequality when considering the entire income distribution. Our findings also suggest that the effect of monetary policy on top income shares is likely to be channeled via real asset returns. |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-03513433&r= |
| By: | Christopher A. Sims (Princeton University) |
| Abstract: | When the interest rate on government debt is low enough, it becomes possible to roll it over indefinitely, never taxing to retire it, without producing a growing debt to GDP ratio. This has been called a situation with zero "fiscal cost" to debt. But when low interest on debt arises from its providing liquidity services, zero fiscal cost is equivalent to finance through seigniorage. Some finance through seigniorage is generally optimal, however, despite results in the literature seeming to show that this is not so. |
| Keywords: | monetary policy, fiscal policy |
| JEL: | E52 E62 |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:pri:econom:2021-6&r= |
| By: | Firmin Doko Tchatoka; Qazi Haque; Madison Terrell |
| Abstract: | In this paper we provide new insights on the dynamics between monetary policy shocks and real exchange rates in small open economies using a time-varying structural vector autoregression model with stochastic volatility. Identification is achieved using a combination of short-run and long-run restrictions while preserving the contemporaneous interaction between monetary policy and the exchange rate. For several small open economies, we find no evidence of the ‘exchange rate puzzle’ or the ‘delayed overshooting puzzle,’ in line with recent studies on this topic (see e.g. Bj rnland, 2009). However, there is evidence of the ‘forward discount puzzle’ in some countries, suggesting that the uncovered interest parity (UIP) is violated. In addition, a substantial decrease in the volatility of monetary policy shocks is evident in most countries, accompanied by a decline in the importance of policy shocks in explaining the volatility of exchange rates and other macroeconomic variables since the 1990s. |
| Keywords: | Monetary policy shocks, Exchange rate, TVP-VARs, UIP |
| JEL: | C32 E52 F31 F41 |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2022-15&r= |
| By: | Stefano Ugolini (LEREPS - Laboratoire d'Etude et de Recherche sur l'Economie, les Politiques et les Systèmes Sociaux - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées - UT2J - Université Toulouse - Jean Jaurès - Institut d'Études Politiques [IEP] - Toulouse - ENSFEA - École Nationale Supérieure de Formation de l'Enseignement Agricole de Toulouse-Auzeville) |
| Abstract: | Nowadays, the idea that lending of last resort is necessarily conducive to moral hazard appears to be generally accepted. This chapter questions this received wisdom by tracking the evolution of monetary theory and practice over the very long term. While most economists have seen as inevitable the association between lending of last resort and moral hazard, others (especially Walter Bagehot) have claimed that the two may be separable if "constructive ambiguity" surrounds the conditions at which emergency liquidity may be accessed by banks. A brief overview of the practices adopted by monetary authorities over the centuries tends to confirm that the separability between lending of last resort and moral hazard may be attainable, but only through a correct design of banking regulation and liquidity-injecting operations. |
| Keywords: | Central banking,Moral hazard,Lending of last resort |
| Date: | 2021–12–13 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-03510871&r= |
| By: | James A. Clouse |
| Abstract: | This paper develops a simple framework that helps to draw out some of the potential connections between ex-ante liquidity risk management tools such as liquidity requirements or mandatory fees and ex-post liquidity tools such as a lender of last resort. A central message of this analysis is that policy actions that expand the lender of last resort function so as to better address periods of financial distress are likely to be most effective when accompanied by regulations or other mechanisms that encourage socially-responsible ex-ante liquidity risk management on the part of financial firms. Regulation in the form of a liquidity coverage requirement can be helpful in moving private sector outcomes toward a social optimum. A mandatory fee schedule also emerges as a potentially very useful tool. The structure of the optimal fee schedule depends on both the scale of volatile liabilities and the extent of “liquidity coverage” maintained to cover potential funding shortfalls. Both liquidity requirements and mandatory fees can help to address a form of time consistency problem in connection with the provision of ex-post liquidity support through a lender of last resort. The framework also provides some potentially useful benchmarks in evaluating the distribution of liquidity risks across different classes of financial firms. |
| Keywords: | Lender of Last Resort; Liquidtiy Regulation; Treasury Market |
| JEL: | G21 G28 G23 |
| Date: | 2022–02–10 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2022-04&r= |
| By: | Francesco Ferrante; Nils Gornemann |
| Abstract: | We study the aggregate and re-distributive effects of currency devaluations in a small open economy heterogeneous households model with leverage-constrained banks. Our framework captures three stylized facts about liability dollarization in emerging economies: i) banks and firms borrow in foreign currency; ii) households save in dollar-denominated local bank deposits; and iii) such deposits are mainly held by wealthier households. The resulting currency mismatch causes an erosion of banks' net worth during a devaluation, depressing credit supply. The ensuing macroeconomic downturn is amplified by a strong reduction of consumption among poorer households in response to rising borrowing costs and falling labor income. Richer households are partially insured, as they are holding a larger share of their wealth in foreign currency denominated assets. We show that a larger currency hedging by wealthier households deepens the recession and amplifies the negative spillovers for poorer agents. When deposit dollarization is high, welfare gains can arise if monetary policy dampens a depreciation. |
| Keywords: | Dollarization; Currency Depreciation; Household Heterogeneity; Redistribution |
| JEL: | E21 F32 F41 |
| Date: | 2022–02–16 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1336&r= |
| By: | Reiche, Lovisa; Meyler, Aidan |
| Abstract: | Consumers’ inflation expectations play a key role in the monetary transmission mechanism. As such, it is crucial for monetary policymakers to understand what they are and how they are formed. In this paper we introduce the (un)certainty channel as means to shed light on some of the more puzzling aspects of reported quantitative inflation perceptions and expectations. These include the apparent overestimation of inflation by consumers as well as the negative correlation observed between the economic outlook and inflation expectations. We also show that the uncertainty framework fits with some of the stylised facts of consumers’ inflation expectations, such as their correlation with socio-demographic characteristics and economic sentiment. JEL Classification: D11, D12, D84, E31, E52 |
| Keywords: | consumers, expectations, inflation, uncertainty |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20222642&r= |
| By: | Janda, Karel; Marek, Petr |
| Abstract: | This paper applies a model of bank run based on game theory analysis of options to the real world case of the Czech retail bank Air Bank a. s. We discuss the main factors affecting the susceptibility of Czech banks to bank run. We estimate the equity value which triggers bank run for Air Bank´s a. s. clients. We also simulate a possible bank run, using a liquidity stress test, which is similar to stress tests used by some European supervisory authorities. We provide alternative estimates of critical value of bank’s equity after the attainment of which depositors withdraw their deposits and by doing so trigger a bank run. |
| Keywords: | Bank run,liquidity,game theory,option pricing |
| JEL: | C72 G01 G21 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:249677&r= |
| By: | Ruben Tarne (Macroeconomic Policy Institute IMK and Faculty of economics and Business, University of Groningen); Dirk Bezemer; Thomas Theobald (Macroeconomic Policy Institute IMK) |
| Abstract: | This paper analyses the effects of borrower-specific credit constraints on macroeconomic outcomes in an agent-based housing market model, calibrated using U.K. household survey data. We apply different Loan-to-Value (LTV) caps for different types of agents: first-time-buyers, second and subsequent buyers, and buy-to-let investors. We then analyse the outcomes on household debt, wealth inequality and consumption volatility. The households' consumption function, in the model, incorporates a wealth term and income-dependent marginal propensities to consume. These characteristics cause the consumption-to-income ratios to move procyclically with the housing cycle. In line with the empirical literature, LTV caps in the model are overall effective while generating (distributional) side effects. Depending on the specification, we find that borrower-specific LTV caps affect household debt, wealth inequality and consumption volatility differently, mediated by changes in the housing market transaction patterns of the model. Restricting investors' access to credit leads to substantial reductions in debt, wealth inequality and consumption volatility. Limiting first-time and subsequent buyers produces only weak effects on household debt and consumption volatility, while limiting first-time buyers even increases wealth inequality. Hence, our findings emphasise the importance of applying borrower-specific macroprudential policies and, specifically, support a policy approach of primarily restraining buy-to-let investors' access to credit. |
| Keywords: | Agent-based modeling, Macroprudential regulation, Household indebtedness, Housing market, Wealth inequality |
| JEL: | G51 E58 C63 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:imk:wpaper:212-2021&r= |
| By: | Boris Hofmann; Nikhil Patel; Steve Pak Yeung Wu |
| Abstract: | Many emerging markets (EMs) have graduated from "original sin" and are able to borrow from abroad in their local currency. Using a two-country model, this paper shows that the shift from foreign currency to local currency external borrowing does not eliminate the vulnerability of EMs to foreign financial shocks but instead results in "original sin redux" (Carstens and Shin (2019)). Even under local currency borrowing from foreign lenders, a monetary tightening abroad is propagated to EM financial conditions through a tightening of foreign lenders' financial constraints. Moreover, local currency borrowing does not eliminate currency mismatches, but shifts them from the balance sheets of EM borrowers to the balance sheets of financially constrained global lenders, so that amplifying financial effects of exchange rate fluctuations remain. We provide empirical evidence in line with this prediction of the model using data on currency composition of external debt of emerging and advanced economies. Our model-based analysis further suggests that foreign exchange intervention and capital flow management measures can mitigate the adverse effects of capital flow swings in the short run and that a larger domestic investor base can reduce the vulnerability to such swings in the longer run. |
| Keywords: | emerging market, capital flows, exchange rate, currency mismatch. |
| JEL: | E3 E5 F3 F4 F6 G1 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1004&r= |
| By: | Gunda Alexandra Detmers; Sui-Jade Ho; Özer Karagedikl |
| Abstract: | We study how individuals’ formation of inflation expectations are affected by the stringent containment and economic support measures put in place during the Covid-19 pandemic. Using the New York Fed Survey of Consumer Expectations (SCE) and the Oxford Covid-19 Government Response Tracker (OxCGRT), we find that policies aimed to contain the pandemic lead to an increase in individuals’ inflation expectations and inflation uncertainty. We also find some heterogeneity in the impact across different demographic groups. |
| JEL: | J31 J64 |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2022-11&r= |
| By: | Olivier Armantier; Leo Goldman; Gizem Koşar; Giorgio Topa; Wilbert Van der Klaauw; John C. Williams |
| Abstract: | The United States has experienced a considerable rise in inflation over the past year. In this post, we examine how consumers’ inflation expectations have responded to inflation during the pandemic period and to what extent this is different from the behavior of consumers’ expectations before the pandemic. We analyze two aspects of the response of consumers’ expectations to changing conditions. First, we examine by how much consumers revise their inflation expectations in response to inflation surprises. Second, we look at the pass-through of revisions in short-term inflation expectations to revisions in longer-term inflation expectations. We use data from the New York Fed’s Survey of Consumer Expectations (SCE) and from the Michigan Survey of Consumers to measure these responses. We find that over the past two years, consumers’ shorter-horizon expectations have been highly attuned to current inflation news: one-year-ahead inflation expectations are very responsive to inflation surprises, in a pattern similar to what we witnessed before the pandemic. In contrast, three-year-ahead inflation expectations are now far less responsive to inflation surprises than they were before the pandemic, indicating that consumers are taking less signal from the recent movements in inflation about inflation at longer horizons than they did before. We also find that the pass-through from revisions in one-year-ahead expectations to revisions in longer-term expectations has declined during the pandemic relative to the pre-pandemic period. Taken together, these findings show that consumers expect inflation to behave very differently than it did before the pandemic, with a smaller share of short-term movements in inflation expected to persist into the future. |
| Keywords: | inflation expectations; inflation; monetary policy |
| JEL: | E31 D84 |
| Date: | 2022–02–14 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:93706&r= |