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on Central Banking |
| By: | E Philip Davis; Dilruba Karim; Dennison Noel |
| Abstract: | The advent of macroprudential policy alongside monetary policy raises the issue whether macroprudential policy has an additional effect on bank interest rate margins to that of monetary policy, and if so, whether it accentuates or offsets the interest rate effect. In light of this, we estimate combined effects of macroprudential policies and monetary policies on bank interest margins for up to 3, 723 banks from 35 advanced countries over 1990-2018. In the short run, tightening of both types of policy tends to narrow the margin, while in the long run, monetary policy typically widens the margin while effects of macroprudential policies are mostly zero or positive, suggestive of countervailing action by banks. There are also significant interactions between macroprudential and monetary policy for several macroprudential policies; a tighter monetary stance is widely found to offset the negative effect of macroprudential policies on margins while a loose monetary policy leaves the negative effects intact, with potential consequences for financial stability. These results are of considerable relevance to policymakers, regulators and bank managers, not least when monetary policies are tight to reduce inflationary pressures. |
| Keywords: | Macroprudential policy, monetary policy, short-term interest rate, yield curve, bank interest margin |
| JEL: | E44 E52 E58 G21 G28 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nsr:niesrd:560 |
| By: | Bonciani, Dario (Sapienza University of Rome); M Masolo, Riccardo (Universitá Cattolica del Sacro Cuore, Milano); Sarpietro, Silvia (University of Bologna) |
| Abstract: | Food price changes have a strong and persistent impact on UK consumers’ inflation expectations. Over 60% of households report that their inflation perceptions are heavily influenced by food prices and display a stronger association between their inflation expectations and perceptions. We complement this finding with a Structural Vector Autoregression (SVAR) analysis, illustrating that food price shocks have a larger and more persistent effect on expectations compared to a ‘representative’ inflation shock. Finally, we augment the canonical New-Keynesian model with behavioural expectations that capture our empirical findings and show that monetary policy should respond more aggressively to food price shocks. |
| Keywords: | Inflation expectations; inflation perceptions; monetary policy |
| JEL: | D10 D84 E31 E52 E58 E61 |
| Date: | 2024–10–11 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1094 |
| By: | HA, JONGRIM; Kim, Dohan; Kose, Ayhan M. |
| Abstract: | Conventional empirical models of monetary policy transmission in emerging market economies produce puzzling results: monetary tightening often leads to an increase in prices (the price puzzle) and depreciation of the currency (the FX puzzle). We show that incorporating forward-looking expectations into standard open economy structural VAR models resolves these puzzles. Specifically, we augment the models with novel survey-based measures of expectations based on consumer, business, and professional forecasts. We find that the rise in prices following monetary tightening is related to currency depreciation, so eliminating the FX puzzle helps solve the price puzzle. |
| Keywords: | monetary policy; emerging market economies; prize puzzle; foreign exchange puzzle |
| JEL: | E31 E32 E43 E47 E52 E58 Q43 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122624 |
| By: | Kumhof, Michael (Bank of England); Salgado-Moreno, Mauricio (Bank of England) |
| Abstract: | We develop a DSGE model in which commercial banks interact with the central bank through the reserves market, with each other through reserves and interbank markets, and with the real economy through retail loan and deposit markets. Because banks disburse loans through deposit creation, they never face financing risks (being unable to fund new loans), only refinancing risks (being unable to settle net deposit withdrawals in reserves). Permanent quantitative tightening, while reducing the equilibrium real interest rate, has significant negative effects on financial and real variables, by increasing the cost at which reserves-scarce parts of the banking sector create money. Temporary net deposit withdrawals, which affect the funding cost and loan extension of one part of the banking sector at the expense of another part, have highly asymmetric financial and real effects. The quantity and distribution of central bank reserves, and the extent of frictions in the interbank and reserves markets, critically affect the size of these effects, and can matter even in a regime of ample aggregate reserves. Countercyclical reserve injections can help to smooth the business cycle. We find that countercyclical reserve quantity rules can make sizeable contributions to welfare that can reach a similar size to the Taylor rule. |
| Keywords: | Quantitative easing; quantitative tightening; monetary policy; central bank reserves; interbank loans; bank deposits; bank loans; money demand; money supply; credit creation |
| JEL: | E51 E52 E58 |
| Date: | 2024–08–09 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1090 |
| By: | Renzhi, Nuobu (Capital University of Economics and Business); Beirne, John (Asian Development Bank) |
| Abstract: | This paper empirically investigates how the level of peer-to-peer (P2P) lending affects monetary policy transmission in the People’s Republic of China (PRC). Using state-dependent local projection methods, we find that the macroeconomic effects of unanticipated changes in monetary policy are dampened during the boom phase of the P2P lending market. The impulse responses of industrial production and inflation are significantly negative in the non-boom state. In contrast, the responses of industrial production and inflation are muted in the boom state. Set against the context of stricter regulation on P2P lending since 2017, our results indicate that the significant scaling back of P2P lending activity and its gradual decline in the PRC could enhance the effectiveness of monetary policy transmission. Our paper also suggests that further work is needed to study the interaction between financial innovation and monetary policy |
| Keywords: | peer-to-peer lending; monetary policy transmission; fintech |
| JEL: | E44 E52 F33 F42 |
| Date: | 2024–11–05 |
| URL: | https://d.repec.org/n?u=RePEc:ris:adbewp:0749 |
| By: | Sebastiao OLIVEIRA (University of Illinois at Urbana-Champaign); Jay RAFI (University of Illinois at Urbana-Champaign); Pedro SIMON (University of Illinois at Urbana-Champaign) |
| Abstract: | We provide novel evidence that corporate debt maturity plays an important role in the transmission of United States (US) monetary policy to foreign firms. Using an identification strategy that explores the ex-ante maturity structure of long-term debt to predict firms’ financial positions in a given year, we show that the effect of US monetary policy shocks on foreign firms is amplified by financing constraints. After a contractionary shock, financial conditions in foreign countries become tighter, and firms with a high proportion of long-term debt maturing right after the shock significantly decrease investment and sales. We find that firms in emerging economies are much more affected by these shocks compared to those in advanced economies, and the amplification effect of US monetary policy shocks by financing constraints is present only in emerging economies. |
| Keywords: | Monetary policy, financial constraints, foreign firms |
| JEL: | E52 F30 G32 |
| Date: | 2024–09–26 |
| URL: | https://d.repec.org/n?u=RePEc:era:wpaper:dp-2024-27 |
| By: | Neepa Gaekad (Department of Economics, State University of New York, Fredonia, NY 14063, USA); William A. Barnett (Department of Economics, University of Kansas, Lawrence, KS 66045, USA and Center for Financial Stability, New York City) |
| Abstract: | Keywords: In light of the "two-pillar strategy" of the European Central Bank, good measures of aggregated money across countries in the Euro area are policy relevant. The objective of this paper is to focus on the multilateral Divisia monetary aggregates for the Euro area. Based on theory developed in Barnett (2007), this paper produced the multilateral Divisia monetary aggregates for the economic union of all the 19 Euro area countries, EMU-19, (and the Divisia monetary aggregates for the individual 19 Euro area countries), which is a theoretically consistent measure of monetary services for the Euro area monetary union. The multilateral Divisia monetary aggregate indices for EMU-19 is found to provide a better signal of recession, when compared to the corresponding simple sum monetary aggregates. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:kan:wpaper:202416 |
| By: | E Philip Davis; Dilruba Karim; Dennison Noel |
| Abstract: | Macroprudential policies have become crucial tools for maintaining financial stability, but their effect on banks' noninterest income has not yet been examined. This is a paradox in light of results in the literature linking noninterest income to bank performance indicators such as risk and profitability. Using a global sample of 7, 368 banks over 1990-2022, we find macroprudential policies have a significant positive effect on noninterest income. Similar results are found for disaggregated samples by type of noninterest income, country development, bank size and pre and post the Global Financial Crisis, and in three robustness checks. However, the extent to which such positive effects feed through to overall profitability depends on the type of noninterest income. Furthermore, stimulus from macroprudential policies to noninterest income, and especially its nonfee component, is found to affect bank risk adversely. Our findings have important implications for central bankers, regulators and commercial bank management. |
| Keywords: | Macroprudential policy, bank profitability, noninterest income, bank risk |
| JEL: | E44 E58 G21 G28 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nsr:niesrd:561 |
| By: | Ha, Jongrim (World Bank); Kim, Dohan (World Bank); Kose, M. Ayhan (World Bank); Prasad, Eswar (Cornell University) |
| Abstract: | Conventional empirical models of monetary policy transmission in emerging market economies produce puzzling results: monetary tightening often leads to an increase in prices (the price puzzle) and depreciation of the currency (the FX puzzle). We show that incorporating forward-looking expectations into standard open economy structural VAR models resolves these puzzles. Specifically, we augment the models with novel survey-based measures of expectations based on consumer, business, and professional forecasts. We find that the rise in prices following monetary tightening is related to currency depreciation, so eliminating the FX puzzle helps solve the price puzzle. |
| Keywords: | monetary policy, emerging market economies, prize puzzle, foreign exchange puzzle |
| JEL: | E31 E32 Q43 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17431 |
| By: | Alicia Aguilar (National Bank of Slovakia) |
| Abstract: | This paper provides a novel and high-frequency index of sovereign fragmentation in the euro area. The proposed methodology offers a decomposition of sovereign yields into the common trend, market conditions, and fundamentals-based divergence, which are uncorrelated to fragmentation. Therefore, the fragmentation index constitutes a bottom-line indicator for euro area Central Banks, as measuring disorderly market dynamics in sovereign markets not warranted by fundamentals. In that sense, this paper provides relevant conclusions about the effectiveness of monetary policy interventions, pointing to a significant effect of market stabilization announcements, such as TPI, in reducing sovereign fragmentation. I contribute to the literature as estimating the uncorrelated drivers of euro area yields divergence using a Restricted Principal Components Analysis. The estimated factors are later used to assess the effect of fragmentation, market and fundamentals on country's yields through several economic regimes, pointing to differences across countries and time. |
| JEL: | C38 E52 E58 H63 G01 G12 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:svk:wpaper:1113 |
| By: | Victor Le Coz; Michael Benzaquen; Damien Challet |
| Abstract: | We propose a minimal model of the secured interbank network able to shed light on recent money markets puzzles. We find that excess liquidity emerges due to the interactions between the reserves and liquidity ratio constraints; the appearance of evergreen repurchase agreements and collateral re-use emerges as a simple answer to banks' counterparty risk and liquidity ratio regulation. In line with prevailing theories, re-use increases with collateral scarcity. In our agent-based model, banks create money endogenously to meet the funding requests of economic agents. The latter generate payment shocks to the banking system by reallocating their deposits. Banks absorbs these shocks thanks to repurchase agreements, while respecting reserves, liquidity, and leverage constraints. The resulting network is denser and more robust to stress scenarios than an unsecured one; in addition, the stable bank trading relationships network exhibits a core-periphery structure. Finally, we show how this model can be used as a tool for stress testing and monetary policy design. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.18145 |
| By: | Hugo Spring-Ragain (HEIP) |
| Abstract: | This article examines how emerging economies use countercyclical monetary policies to manage economic crises and fluctuations in dominant currencies, such as the US dollar and the euro. Global economic cycles are marked by phases of expansion and recession, often exacerbated by major financial crises. These crises, such as those of 1997, 2008 and the disruption caused by the COVID-19 pandemic, have a particular impact on emerging economies due to their heightened vulnerability to foreign capital flows and exports.Counter-cyclical monetary policies, including interest rate adjustments, foreign exchange interventions and capital controls, are essential to stabilize these economies. These measures aim to mitigate the effects of economic shocks, maintain price stability and promote sustainable growth. This article presents a theoretical analysis of economic cycles and financial crises, highlighting the role of dominant currencies in global economic stability. Currencies such as the dollar and the euro strongly influence emerging economies, notably through exchange rate variations and international capital movements. Analysis of the monetary strategies of emerging economies, through case studies of Brazil, India and Nigeria, reveals how these countries use tools such as interest rates, foreign exchange interventions and capital controls to manage the impacts of crises and fluctuations in dominant currencies. The article also highlights the challenges and limitations faced by these countries, including structural and institutional constraints and the reactions of international financial markets.Finally, an econometric analysis using a Vector AutoRegression (VAR) model illustrates the impact of monetary policies on key economic variables, such as GDP, interest rates, inflation and exchange rates. The results show that emerging economies, although sensitive to external shocks, can adjust their policies to stabilize economic growth in the medium and long term. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.23002 |
| By: | Hilpert, Hanns Günther; Tokarski, Paweł |
| Abstract: | The number of digital currencies has increased significantly in recent years. So-called central bank digital currencies (CBDCs), created by central banks, are at the forefront of this development. Combining the advantages of an electronic means of payment - namely the speed and efficiency of transactions - with the stability and confidence that central banks enjoy, CBDCs will surely have a significant influence on the development of international payment systems in the coming years. Work on this topic has accelerated significantly in many parts of the world following the imposition of sanctions against Russia by the G7. The European Union (EU) and China are also engaged in planning and shaping their own CBDCs, but there are significant differences in the motivations, pace of progress and ambitions associated with these projects. |
| Keywords: | Central Bank, money, digitalisation, digital currencies, central bank digital currencies (CBDCs), sanctions against Russia, G7, European Union (EU), China, eurozone, blockchain technologies, People's Bank of China (PBoC), e-CNY, European Central Bank (ECB) |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:swpcom:305241 |
| By: | George-Marios Angeletos; Chen Lian; Christian K. Wolf |
| Abstract: | In HANK models, fiscal deficits drive aggregate demand and thus inflation because households are non-Ricardian; in the Fiscal Theory of the Price Level (FTPL), they instead do so via equilibrium selection. Because of this difference, the mapping from deficits to inflation in HANK is robust to active monetary policy and free of the controversies surrounding the FTPL. Despite this difference, a benchmark HANK model with sufficiently slow fiscal adjustment predicts just as much inflation as the FTPL. This is true even in the simplest FTPL scenario, in which deficits are financed entirely by inflation and debt erosion. In practice, however, unfunded deficits are likely to trigger a persistent boom in real economic activity and thus the tax base, substituting for debt erosion. In our quantitative explorations, this reduces the inflationary effects of unfunded deficits by about half relative to that simple FTPL arithmetic. |
| JEL: | E3 E6 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33102 |
| By: | Hinh T. Dinh |
| Abstract: | The current banking crisis in the United States began with the Silicon Valley Bank (SVB) run in March 2023 and was followed by other bank failures, raising concerns about the health and stability of the financial sector. This Policy Paper traces the root causes of these bank failures and examines the U.S. monetary policy decisions during this period. These bank failures were caused by the poor risk management practices of the failed banks, the sector’s weak regulatory structure, and the failure of bank supervisors. However, a key factor that contributed to the extent and speed of the current bank crisis is the U.S. Federal Reserve’s (Fed) actions. The Fed's decisions to keep zero or near-zero interest rates over the long period of 2009-2022, to continue with the zero-reserve requirement for banks after the pandemic, and to delay raising the Federal Funds rate in 2021, despite emerging inflationary signs, have contributed to the risk-taking behavior of the banks and to the current banking crisis. The Fed's decision in 2021 also diverged from Taylor rule prescriptions, which it had adhered to since 1995. Given the long lag between Fed decisions and actual results on the ground, a question may be asked if it is time to go back and rely more on rules-based monetary policy, as Milton Friedman (1968) suggested over half a century ago. |
| Date: | 2023–05 |
| URL: | https://d.repec.org/n?u=RePEc:ocp:rpaeco:pp_10-23 |
| By: | Anna Burova (Bank of Russia, Russian Federation); Tatiana Grishina (Bank of Russia, Russian Federation); Natalia Makhankova (Bank of Russia, Russian Federation) |
| Abstract: | Currently newly issued loans with fixed rates, excluding loans to affiliates, are used to calculate Russian loan aggregates of interest rates on loans to non-financial organisations, which is generally in line with international practice. The structure of loans is evolving over times, the share of loans with floating interest rates is increasing. Data on the volumes and rates of such loans can be valuable for analysing and forecasting economic trends. This paper looks at approaches to calculating weighted average interest rates on loans to Russian companies with the division of loans for analytical purposes into separate lending segments: by rate type (fixed and floating), affiliation type, and the time of rate-setting relative to the moment of disbursement of funds. We assess the amplitude of variation between the rates calculated using different approaches. The use of a wider range of aggregates can be used for analytical and research purposes to assess changes in certain types of interest rates, as well as to clarify the effect of the interest rate channel of the monetary policy transmission mechanism. |
| Keywords: | loan rates, non-financial organisations, floating rate, prolongations, quarterly projection model, error correction model |
| JEL: | E43 E44 G21 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:bkr:wpaper:wps137 |
| By: | Victor Le Coz; Nolwenn Allaire; Michael Benzaquen; Damien Challet |
| Abstract: | Using the secured transactions recorded within the Money Markets Statistical Reporting database of the European Central Bank, we test several stylized facts regarding interbank market of the 47 largest banks in the eurozone. We observe that the surge in the volume of traded evergreen repurchase agreements followed the introduction of the LCR regulation and we measure a rate of collateral re-use consistent with the literature. Regarding the topology of the interbank network, we confirm the high level of network stability but observe a higher density and a higher in- and out-degree symmetry than what is reported for unsecured markets. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.16021 |
| By: | Zhengyang Jiang |
| Abstract: | I propose a model of the reserve currency paradigm that centers on liquidity demand for safe assets. In global recessions, the demand for U.S. safe assets increases and raises their convenience yields, giving rise to stronger dollar and countercyclical seigniorage revenues. The seigniorage revenues raise the U.S. wealth and consumption shares in recessions, despite the U.S. suffering portfolio losses from external positions. This asset demand channel also connects exchange rates to bond holdings, which provides new perspectives on exchange rate disconnect and the exchange rate-capital flow relationship. Under this safe-asset view, exorbitant privilege does not require exorbitant duty. |
| Keywords: | exorbitant privilege, reserve assets, international monetary system, capital flows |
| JEL: | E44 F32 G15 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11279 |
| By: | L. Deidda; E. Panetti |
| Abstract: | We study how regulation shapes the interaction between financial fragility and bank liquidity management, and propose a rationale for the complementarity between bank recovery and resolution planning. To this end, we analyze an economy in which a benevolent resolution authority sets a bank resolution plan to suspend deposit withdrawals and create a "good bank" at a cost in the event of a depositors' run. In such a framework, banks maximize expected welfare if deciding ex ante how to manage liquidity during runs. However, this choice is time inconsistent. Therefore, regulators need to force banks to commit to it through recovery planning. |
| Keywords: | banks;Liquidity;financial fragility;financial regulation;resolution |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:cns:cnscwp:202420 |
| By: | Fulvia Fringuellotti; Thomas Kroen |
| Abstract: | What are the effects of payout restrictions on bank risk-shifting? To answer this question, we exploit the restriction policies imposed during the Covid-crisis on US banks as a natural experiment. Using a high-frequency differences-in-differences empirical strategy, we show that, when share buybacks are banned and dividends restricted, banks’ equity prices fall while their CDS spreads and bond yields decline. These results indicate that payout restrictions shift risk from debtholders into equityholders. Consistent with a risk-shifting channel, we find that these effects revert once restrictions are lifted. Moreover, banks that are ex-ante more reliant on share buybacks than dividends in their payout policies, decrease risk-taking relative to banks that are ex ante more dividends reliant, with those effects reverting when the restrictions are relaxed. These results indicate that payout and risk-taking choices are complementary and that regulatory payout restrictions endogenously affect bank risk-shifting incentives. |
| Keywords: | banking; payout restrictions; risk-shifting; prudential regulation |
| JEL: | G21 G28 G35 G38 |
| Date: | 2024–09–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:98924 |