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on Central Banking |
| By: | Karau, Sören |
| Abstract: | I show that the majority of short-term nominal exchange rate fluctuations among large economies can be explained by changes in the relative stance of their monetary policies. Adapting recently developed instrumental variable techniques for shock identification, I find that monetary policy shocks of the US relative to the euro area account for 76 percent of the short-term fluctuations of the USD-EUR exchange rate over a one-month horizon - substantially more than previously documented. Similar results are obtained for exchange rates involving the British pound and Japanese yen. Relative monetary policy shocks explain a larger fraction of variability of the exchange rate than of interest rate differentials throughout the yield curve, and small changes in risk-free rates are associated with sizable jumps in the exchange rate. Identifying US and euro area shocks separately reveals that both are important for the USD-EUR rate. Taken together, these findings speak to the significance of (not only US) monetary policy in driving frictions in interest parity relations that have recently been found to be crucial for understanding exchange rate behavior from a theoretical perspective. |
| Keywords: | Monetary Policy, Exchange Rates, Proxy VAR |
| JEL: | E44 E52 F31 F41 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:305278 |
| By: | Swapan-Kumar Pradhan; Elod Takats; Judit Temesvary |
| Abstract: | We use a rarely accessed BIS database on bilateral cross-border bank claims by bank nationality to examine the interaction of monetary and fiscal policies. We find significant interactions: the transmission of the monetary policies of major currency issuers is significantly influenced by the fiscal stance of source (home) lending banking systems. Fiscal consolidation in a source country amplifies the effect of currency issuers' monetary policy on lending. For instance, a reduction in the German debt-to-GDP ratio amplifies the negative impact of US monetary policy tightening on USD-denominated cross-border bank lending. |
| Keywords: | monetary policy, government debt, cross-border claims, difference-in-differences |
| JEL: | E63 F34 F42 G21 G38 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1226 |
| By: | Jonathan Hartley; Nuno Paixão |
| Abstract: | This note analyzes mortgage stress tests, a macroprudential tool. We find that when mortgage stress tests are applied to all mortgage purchase originations, they improve credit quality and reduce credit and house price growth. They also improve the resilience of borrowers to financial shocks, such as the large increase in interest rates during 2022–23. |
| Keywords: | Credit and credit aggregates; Financial institutions; Financial system regulation and policies; Monetary policy |
| JEL: | E5 E52 G2 G21 G28 G5 G50 G51 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsan:24-25 |
| By: | Michael J. Lamla; Damjan Pfajfar; Lea Rendell |
| Abstract: | We explore the consequences of losing confidence in the price stability objective of central banks by studying the resulting inflation and deflationary biases in medium-run inflation expectations. In a model with heterogeneous household perceptions of an occasionally binding zero-lower-bound constraint and of monetary policy objectives, we show that the estimated model-implied distribution of households' inflation expectations matches several characteristics of the empirical distribution when featuring both inflation and deflationary biases. We then directly identify these biases using unique individual-level survey data on medium-run inflation expectations across nine countries and over time. Both inflation and deflationary biases are important features of the distribution of medium-run inflation expectations. |
| Keywords: | inflation bias; deflationary bias; confidence in central banks; effective lower bound; inflation expectations; microdata |
| JEL: | E31 E37 E58 D84 |
| Date: | 2024–11–21 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedcwq:99150 |
| By: | Janet Hua Jiang; Rupal Kamdar; Kelin Lu; Daniela Puzzello |
| Abstract: | We disentangle the channels through which inflation expectations affect household spending. We conduct a survey featuring hypothetical scenarios that generate a controlled increase in inflation expectations. For 74% of households, current spending is unresponsive, typically due to fixed budget plans or irrelevance of inflation expectations. About 20% of households reduce spending, often citing wealth effects, nominal income rigidity, and inflation hedging. Only 6% increase spending, mostly due to intertemporal substitution or stockpiling. Respondents who expect other economic variables to deteriorate are more likely to reduce spending. Our findings suggest manipulating inflation expectations to boost consumer spending may not be an effective policy tool. |
| Keywords: | Central bank research; Inflation and prices; Inflation targets; Monetary policy; Monetary policy transmission |
| JEL: | D15 D84 E2 E52 E7 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:24-44 |
| By: | Yang, Dianyi |
| Abstract: | Since 2022, central bank losses have been prevalent in advanced economies due to previous quantitative easing and recent inflationary pressures. This paper focuses on the unique case of the United Kingdom, where the government promised in advance to cover any central bank losses arising from quantitative easing. This promise is known as the indemnity. A game-theoretical model is proposed to explain the causes and effects of such indemnity. The model's predictions about the indemnity's effect on central bank profitability are empirically examined. Using the novel Dynamic Multilevel Latent Factor Model (DM-LFM), the indemnity is found to have significantly boosted the Bank of England's profits in the deflationary environment after 2008, but exacerbated its losses under the recent inflationary pressure since 2022. The theoretical model suggests the pronounced effects are due to the Bank of England's high sensitivity to losses and the UK government's moderate fiscal liberalism. Therefore, the British experience should not be generalised. Nevertheless, the theoretical and empirical lessons can inform policy-makers about future institutional designs concerning the fiscal-monetary interactions and the public finance-price stability trade-off. |
| Date: | 2024–08–20 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:wz75m |
| By: | Samuel Mann; Alexis Meyer-Cirkel |
| Abstract: | In early 2021, as monetary policy tightening reversed a multi-year trend of Metical depreciation, the exchange rate vis-à-vis the US dollar de facto stabilized. This report discusses elements of the market structure and other drivers of Metical stability since mid-2021. The particularities of Mozambique, a small open economy with an export sector that has a strong foreign currency cost structure, provide important insights into that discussion, as does the structure and development of the Foreign Exchange (FX) market. |
| Keywords: | Mozambique; Foreign Exchange Stability; Exchange Rate Regimes; Central Bank Policy; FX Market Structure; Market Intervention |
| Date: | 2024–11–08 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/233 |
| By: | John Muellbauer |
| Abstract: | Housing has been heavily implicated in many financial crises, e.g. in the Global Financial Crisis of 2008-9. Since the GFC, new macroprudential frameworks have been introduced across the globe, with housing-related tools prominent. This paper explains how the housing-related financial accelerator operates, and discusses institutional differences affecting the transmission and amplification of house price and credit shocks and therefore risks to the financial system and to the resilience of households. The objectives of housing-related macroprudential policy are discussed and research on diagnosing potential housing risk critically reviewed. Limitations of the literature on the effectiveness of housing-related macroprudential tools in international panel studies are examined, including from the neglect of country-heterogeneity, except in fixed effects. How aggregate cost-benefit analyses of the consequences of macroprudential policies has benefitted from the development of the Growth-at-Risk framework is explained. Research is reviewed on the distributional implications, often negative in the short-run, for example, on access to credit of lower income and first-time buyer households, but beneficial in the longer run. The importance of a general equilibrium approach integrating micro and macro data is emphasised, and developments in the agent-based modelling approach are discussed. The need to coordinate macroprudential policies with other housing-related policies is highlighted. |
| Date: | 2024–11–12 |
| URL: | https://d.repec.org/n?u=RePEc:oxf:wpaper:1056 |
| By: | Jamie L. Cross; Aubrey Poon; Wenying Yao; Dan Zhu |
| Abstract: | The Dynamic Nelson-Siegel (DNS) model implies that the instantaneous bond yield is a linear combination of yield curve’s level and slope factors. However, this constraint is not used in practice because it induces a singularity in the state covariance matrix. We show that this problem can be resolved using Bayesian methods. The key idea is to view the state equation as a prior distribution over missing data to obtain a hyperplane truncated multivariate normal conditional posterior distribution for the latent factors. This distribution can then be reparameterized as a conditional multivariate normal distribution given the constraint. Samples from this distribution can be obtained in a direct and computationally efficient manner, thus bypassing the Kalman filter recursions. The empirical significance of the resulting Yield-Macro Constrained DNS (YM-CDNS) model is demonstrated through both a reduced form analysis of the US Treasury yield curve, and a structural analysis of functional conventional and unconventional monetary policy shocks on the yield curve and the broader macroeconomy. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:bny:wpaper:0133 |
| By: | Thomadakis, Apostolos; Lannoo, Karel; Shamsfakhr, Farzaneh |
| Abstract: | A new study highlights that to ensure widespread adoption, the digital euro must offer a compelling value proposition and clear benefits to consumers and merchants in the EU, while the EU’s legislative framework should allow for these benefits to gradually emerge over time. There is a need to minimise the risk of crowding out European private solutions, which would impact competition and the attractiveness of the European payments market, while at the same time hinder the digital euro’s adoption. Formed in April 2023, a CEPS-ECMI-ECRI Round Table brought together a working group of market operators and infrastructure providers, central bank representatives, regulators, and academics to take part in research and in-depth discussions over a six-month period. Prior to deciding whether to proceed with the digital euro project, the study argues that: The benefits of an eventual digital euro and its added value for end users (i.e. individuals, merchants and businesses), compared with existing payment solutions, should be crystal clear, well understood and clearly communicated. The digital euro should be cost efficient, economically viable and contribute to making payments – and ultimately the European economy – more competitive. The effectiveness of holding limits should be better justified and explained. If a decision is made to proceed with the digital euro project, our study proposes approaching it as follows: Start with a digital euro that is as simple as possible and includes only the most basic functionalities. Rely on and build upon existing mechanisms in the payment infrastructure as much as possible and take full advantage of current service processes. Establish a regulatory framework that ensures a level playing field for the payment ecosystem, between providers and between currencies (public and private money). Finally, so as not to impact the euro’s attractiveness as a means of payment relative to other major currencies, decisions on the digital euro (either a retail or wholesale one) cannot be taken in isolation from central bank digital currency developments in other major jurisdictions. |
| Date: | 2023–10 |
| URL: | https://d.repec.org/n?u=RePEc:eps:cepswp:41185 |
| By: | Olivier Armantier; Marco Cipriani; Asani Sarkar |
| Abstract: | We study Discount Window (DW) stigma, the reluctance to access the Federal Reserve’s lender-of-last resort facility, between 2014 and 2024. Despite increased usage since 2020, we find conclusive evidence that the DW is stigmatized, especially among smaller banks and when financial markets experience disruptions. In particular, evidence of DW stigma emerged months before the 2023 banking turmoil and had not subsided a year later. We also identify new determinants and consequences of DW stigma. The implications of these results for the provision of emergency liquidity are discussed. |
| Keywords: | discount window; lender of last resort; stigma |
| JEL: | E52 G21 G28 |
| Date: | 2024–11–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:99159 |
| By: | Hunter Ng |
| Abstract: | This article investigates whether the Federal Reserve Chair strategically controls facial expressions during FOMC press conferences and how these nonverbal cues affect financial markets. I use facial recognition technology on videos of press conferences from April 2011 to December 2020 to quantify changes in the Chair's nonverbal signals. Results show that facial expressions serve as a separate public signal, distinct from verbal content. Using deepfakes, I find that the same facial expressions expressed by different Fed Chairs are interpreted differentially. As their tenure increases, negative expressions become more frequent, eliciting adverse market reactions. Furthermore, the markets interpretation of these expressions evolves over time, suggesting that investors process facial cues with dual-processing finite-state Markov memory. In line with the Fed's goals of transparency and non-volatility, I find that Fed Chairs do not strategically control their expressions. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.20214 |