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on Central Banking |
| By: | Rhys R. Mendes; Stephen Murchison; Carolyn A. Wilkins |
| Abstract: | For central banks, conducting policy in an environment of uncertainty is a daily fact of life. This uncertainty can take many forms, ranging from incomplete knowledge of the correct economic model and data to future economic and geopolitical events whose precise magnitudes and effects cannot be known with certainty. The objective of this paper is to summarize and compare the main results that have emerged in the literature on optimal monetary policy under uncertainty with actual central bank behaviour. To this end, three examples are studied in which uncertainty played a significant role in the Bank of Canada’s policy decision, to see how closely they align with the predictions from the literature. Three principles emerge from this analysis. First, some circumstances—such as when the policy rate is at risk of being constrained by the effective lower bound—should lead the central bank to be more pre-emptive in moving interest rates, whereas others can rationalize more of a wait-and-see approach. In the latter case, the key challenge is finding the right balance between waiting for additional information and not falling behind the curve. Second, the starting-point level of inflation can matter for how accommodative or restrictive policy is relative to the same situation without uncertainty, if there are thresholds in the central bank’s preferences associated with specific ranges for the target variable, such as the risk of inflation falling outside of the inflation control range. Third, policy decisions should be disciplined, where possible, by formal modelling and simulation exercises in order to support robustness and consistency in decision making over time. The paper concludes with a set of suggested areas for future research. |
| Keywords: | Monetary Policy, Uncertainty and monetary policy |
| JEL: | E52 E58 E61 E65 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:17-13&r=cba |
| By: | Lars E.O. Svensson |
| Abstract: | How would the policy rule of forecast targeting work for the Federal Reserve? To what extent is the Federal Reserve already practicing forecast targeting? Forecast targeting means selecting a policy rate and policy-rate path so that the forecasts of inflation and employment “look good,” in the sense of best fulfilling the dual mandate of price stability and maximum employment, that is, best stabilize inflation around the inflation target and employment around its maximum level. It also means publishing the policy-rate path and the forecasts of inflation and employment forecasts and, importantly, explaining and justifying them. This justification may involve demonstrations that other policy-rate paths would lead to worse mandate fulfillment. Publication and justification will contribute to making the policy-rate path and the forecasts credible with the financial market and other economic agents and thereby more effectively implement the Federal Reserve's policy. With such information made public, external observers can review Federal Reserve policy, both in real time and after the outcomes for inflation and employment have been observed, and the Federal Reserve can be held accountable for fulfilling its mandate. In contrast to simple policy rules that rely on very partial information in a rigid way, such as Taylor-type rules, forecast targeting allows all relevant information to be taken into account and has the flexibility and robustness to adapt to new circumstances. Forecast targeting can also handle issues of time consistency and determinacy. The Federal Reserve is arguably to a considerable extent already practicing forecast targeting. |
| JEL: | E52 E58 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23993&r=cba |
| By: | Christophe Blot (OFCE, Sciences Po Paris, France); Jérôme Creel (OFCE, Sciences Po Paris, France); Paul Hubert (OFCE, Sciences Po Paris, France); Fabien Labondance (OFCE, Sciences Po Paris, France) |
| Abstract: | We investigate the role of both ECB’s asset purchases and market sentiment in the Eurozone sovereign debt crisiscontext. We explain the evolution of long-term interest rates in the Eurozone and in some Member States since the ECB started to purchase various securities for monetary policy purposes. We control for four categories offundamentals: macroeconomic, international, financial and expectations. We show that unconventional monetary policies and country-specific market sentiment have significant negative and positive effects respectively. Our results suggest that ECB’s unconventional policies have been effective in mitigating the disruption in the channels of transmission across the different Eurozone countries |
| Keywords: | Asset purchase programmes, ECB, sovereign yields, unconventional monetary policies, CISS |
| JEL: | E52 E58 |
| Date: | 2017–09 |
| URL: | http://d.repec.org/n?u=RePEc:fce:doctra:1718&r=cba |
| By: | Michael Bordo; Eric Monnet; Alain Naef |
| Abstract: | The Gold Pool (1961-1968) was one of the most ambitious cases of central bank cooperation in history. Major central banks pooled interventions – sharing profits and losses – to stabilize the dollar price of gold. Why did it collapse? From at least 1964, the fate of the Pool was in fact tied to sterling, the first line of defense for the dollar. Sterling’s unsuccessful devaluation in November 1967 spurred speculation and massive losses for the Pool. Contagion occurred because US policies were inflationary and insufficiently credible as well. The demise of the Pool provides a striking example of contagion between reserve currencies. |
| JEL: | E42 F31 F33 N14 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24016&r=cba |
| By: | Anindya Banerjee (University of Canterbury); Victor Bystrov; Paul Mizen |
| Abstract: | In this paper we examine the influence of unconventional monetary policy at the ECB on mortgage and business lending rates offered by banks in the major euro area countries (Germany, France, Italy and Spain). Since there are many different policy measures that have been undertaken, we utilise a dynamic factor model based on the Bernanke Boivin and Eliasz (2005) approach, which allows examination of impulse responses to a policy rate conditioned by structurally identified latent factors. The distinct feature of this paper is that it explores the effects of all three phases of monetary policy to emphasize the transmission channels - through short-term rates, long-term yields and and perceived risk - ultimately directed towards bank lending rates. Further analysis of unconventional monetary policy is provided through rolling window impulse responses and variance decompositions of the identified financial factors on lending rates to demonstrate the changing influence of different policy measures on lending rates. |
| Keywords: | monetary policy, dynamic factor models, interest rates, pass through |
| JEL: | C32 C53 E43 E4 |
| Date: | 2017–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:cbt:econwp:17/07&r=cba |
| By: | Sharon Kozicki; Jill Vardy |
| Abstract: | While central banks cannot provide complete foresight with respect to their future policy actions, it is in the interests of both central banks and market participants that central banks be transparent about their reaction functions and how they may evolve in response to economic developments, shocks, and risks to their outlooks. This paper outlines the various ways in which the Bank of Canada seeks to explain its economic outlook and monetary policy decisions, with an emphasis on how different sources of uncertainty factor into monetary policy communications. To help markets and others understand its reaction function, the central bank must explain what uncertainties are weighing on policy and how (or if) these uncertainties are being considered in policy formulation. Discussion of uncertainty becomes particularly important when a large shock has hit the economy or when a central bank’s view or its policy stance is changing. Market views and the views of the central bank will not always be aligned. The aim of monetary policy communications should not be alignment but understanding—helping markets comprehend the central bank’s policy objectives and providing a coherent rationale for policy decisions. In doing so, the bank must be transparent about the uncertainties influencing the outlook, their possible impacts and how these uncertainties will be factored into policy decisions. This paper outlines some recent and upcoming initiatives to achieve those objectives and improve Bank of Canada communications. |
| Keywords: | Credibility, Monetary Policy, Uncertainty and monetary policy |
| JEL: | E E5 E52 E58 E61 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:17-14&r=cba |
| By: | Gräb, Johannes; Żochowski, Dawid |
| Abstract: | We use a confidential euro area bank-level data set of close to 250 banks to assess outward and inward spillovers of unconventional monetary policies on bank lending. We find that euro area banks increase lending to the rest of the world in response to non-standard ECB monetary policy accommodation. We also find strong evidence that euro area banks increase lending to the domestic non-financial private sector in response to accommodative unconventional monetary policy measures in the US. Inward and outward spillovers are substantially stronger for euro area banks which are liquidity constrained and which rely more on internal capital markets. This suggests that bank-specific supply effects, stemming from banks’ increased ability to lend following a central bank balance sheet expansion, are a major driver of monetary policy spillovers, providing strong support to the existence of an international bank lending channel that prevails at the effective lower bound. JEL Classification: E44, E52, G01 |
| Keywords: | cross-border spillovers, international bank lending channel, monetary policy, quantitative easing |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20172109&r=cba |
| By: | Davis, Scott (Federal Reserve Bank of Dallas); Zlate, Andrei (Federal Reserve Bank of Boston) |
| Abstract: | This paper measures the effect of monetary tightening in key advanced economies on net capital flows and exchange rates around the world. Measuring this effect is complicated by the fact that the domestic monetary policies of affected economies respond endogenously to the foreign tightening shock. Using a structural VAR framework with quarterly panel data we estimate the impulse responses of domestic policy variables and net capital flows to a foreign monetary tightening shock. We find that the endogenous responses of domestic monetary policy depends on each economy’s capital account openness and exchange rate regime. We develop a method to plot counter-factual impulse responses for net capital outflows under the assumption that domestic interest rates are held constant despite foreign monetary tightening. Our results suggests that failing to account for the endogenous response of domestic monetary policy biases down the estimated elasticity of net capital flows to foreign interest rates by as much as ¼ for floaters and ½ for peggers with open capital accounts. |
| JEL: | E5 F3 F4 |
| Date: | 2017–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:328&r=cba |
| By: | Mueller, Philippe; Tahbaz-Salehi, Alireza; Vedolin, Andrea |
| Abstract: | We document that a trading strategy that is short the U.S. dollar and long other currencies exhibits significantly larger excess returns on days with scheduled Federal Open Market Committee (FOMC) announcements. We show that these excess returns (i) are higher for currencies with higher interest rate differentials vis-à-vis the United States, (ii) increase with uncertainty about monetary policy, and (iii) increase further when the Federal Reserve adopts a policy of monetary easing. We interpret these excess returns as compensation for monetary policy uncertainty within a parsimonious model of constrained financiers who intermediate global demand for currencies. |
| JEL: | F3 G3 |
| Date: | 2017–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:77256&r=cba |
| By: | Christopher Waller (Federal Reserve Bank of St. Lousi); Paola Boel (Sveriges Riksbank) |
| Abstract: | We construct a monetary economy in which agents face aggregate demand shocks and heterogeneous idiosyncratic preference shocks. We show that, in this environment, not all agents are satiated at the zero lower bound even when the Friedman rule is the best interest rate policy the central bank can implement. Therefore, there is scope for central bank policies of liquidity provision even at the zero lower bound. This is because such policies temporarily relax the liquidity constraint of impatient agents without harming the patient ones, thus improving welfare. Due to a pricing externality, this may also have beneficial general equilibrium effects for the patient agents even if they are unconstrained in their holdings of real balances. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1030&r=cba |
| By: | Goodhart, Charles |
| Abstract: | Unlike other facets of monetary policy renormalisation, there has been little discussion yet of what principles should determine the optimum size of a Central Bank's balance sheet, the end-point to which on-going portfolio reductions should approach. In this note I start by addressing the arguments of those who would leave this balance sheet very large, much as now; and then continue with the counter-arguments, also stressing the nature of the relationships between monetary and fiscal policies, and between the Central Bank and the Treasury's Debt Management Office. |
| Keywords: | Central Bank balance sheet; monetary policy renormalisation; debt management; interest rate risk; auction risk |
| JEL: | F3 G3 |
| Date: | 2017–09 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:84205&r=cba |
| By: | Benchimol, Jonathan (Bank of Israel); Fourçans, André (ESSEC Business School) |
| Abstract: | Which monetary policy rule best fits the historical data? Which rule is most effective to reach the central bank’s objectives? Is minimizing a central bank loss equivalent to maximizing households’ welfare? Are NGDP growth or level targeting good options, and if so, when? Do they perform better than Taylor-type rules? In order to answer these questions, we use Bayesian estimations to evaluate the Smets and Wouters (2007) model under nine monetary policy rules with US data ranging from 1955 to 2017 and over three different sub-periods (among them the zero lower bound period where a shadow rate is introduced). We find that when considering the minimization of the central bank’s loss function, the estimates generally indicate the superiority of NGDP level targeting rules. If the behavior of the Fed is expressed in terms of households-welfare, the implications are not necessarily the same. |
| JEL: | E32 E52 E58 |
| Date: | 2017–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:329&r=cba |
| By: | Goodhart, Charles; Lastra, Rosa |
| Abstract: | The consensus that surrounded the granting of central bank independence in the pursuit of a price stability oriented monetary policy has been challenged in the aftermath of the global financial crisis, in the light of the rise of populism on the one hand and the expanded mandates of central banks on the other hand. After considering the economic case for independence and the three Ds (distributional, directional and duration effects), the paper examines three different dimensions in the debate of how the rise in populism - or simply general discontent with the status quo - affects central bank independence. Finally, the paper examines how to interpret the legality of central bank mandates, and whether or not central banks have exceeded their powers. This analysis leads us in turn to consider accountability and, in particular, the judicial review of central bank actions and decisions. It is important to have in place adequate mechanisms to ‘guard the guardians’ of monetary and financial stability. |
| Keywords: | central bank independence; populism; mandates; accountability; legitimacy; Judicial Review |
| JEL: | F3 G3 |
| Date: | 2017–09–26 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:85159&r=cba |
| By: | Snezana Eminidou (University of Cyprus); Marios Zachariadis (University of Cyprus); Elena Andreou (University of Cyprus) |
| Abstract: | We use monthly data across fifteen euro-area economies for the period 1985:1-2015:3 to obtain monetary policy changes that can be regarded as surprises for different types of consumers. A novel feature of our empirical approach is the estimation of monetary policy surprises based on changes in monetary policy that were unanticipated according to the consumers stated beliefs about the economy. We go on to investigate how these monetary policy surprises affect consumers' inflation expectations. We find that such monetary policy surprises can have the opposite impact on inflation expectations to those obtained under the assumption that consumers are well informed about a set of macroeconomic variables describing the state of the economy. More specifically, when we relax the assumption of well informed consumers by focusing instead on their stated beliefs about the economy, unanticipated increases in the interest rate raise inflation expectations. This is consistent with imperfect information theoretical settings where unanticipated increases in interest rates are interpreted as positive news about the state of the economy by consumers that know policymakers have relatively more information. This impact changes sign since the Crisis. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:919&r=cba |
| By: | Silvia Miranda-Agrippino; Giovanni Ricco (University of Warwick, OFCE-SciencesPo Paris) |
| Abstract: | Despite years of research, there is still uncertainty around the effects of monetary policy shocks. We reassess the empirical evidence by combining a new identification that accounts for informational rigidities, with a flexible econometric method robust to misspecifications that bridges between VARs and Local Projections. We show that most of the lack of robustness of the results in the extant literature is due to compounding unrealistic assumptions of full information with the use of severely misspecified models. Using our novel methodology, we find that a monetary tightening is unequivocally contractionary, with no evidence of either price or output puzzles. |
| Keywords: | Monetary policy, local projections, VARs, expectations, information rigidity, survey forecasts, external instruments |
| JEL: | C11 C14 E52 G14 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:fce:doctra:1715&r=cba |
| By: | Tahiri, Noor Rahman |
| Abstract: | This paper provides a broad overview of monetary policy cooperation of Afghanistan and Pakistan central banks through the differences framework of policy analysis. The framework proves useful for interpreting past policy decisions and mistakes of Policy during the 2005 but when closely examined within the context of the information available and policymaker perceptions in real time of those country , this change is indirect than usually appears at first glance with reviewing analysis in this research we also find the real GDP, Inflation, GDP per capita, PPP, GDP per capita, current dollars, GDP per capita, constant dollars, GDP, current U.S. dollars, External debt and Economic growth measure through the world banks internet measuring of Afghanistan and Pakistan compression . |
| Keywords: | Host Country Growth, GDP, Policy |
| JEL: | C54 D12 E52 |
| Date: | 2017–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:82653&r=cba |
| By: | Yuto Iwasaki (Bank of Japan); Nao Sudo (Bank of Japan) |
| Abstract: | Reservations are sometimes raised regarding the effectiveness of unconventional monetary policy (UMP) due to the concerns about influences of impaired financial systems and low policy rates. To see if this is the case, we combine the local projection method of Jorda (2005) with shadow rates to estimate macroeconomic effects of monetary policy shocks during the implementation period of UMP, and test if effects of these shocks with the same magnitude differ across periods or states of the economy, using Japan's data from the 1980s to 2016. We find that monetary policy shocks during the implementation period of the UMP had statistically significant expansionary effects on the economy. We also find that an unexpected 100 basis point cut in shadow rates during the UMP yielded larger expansionary effects on key economic variables than it did during the conventional monetary policy (CMP), because of the following three reasons: (i) A cut in the shadow rates resulted in a larger reduction in the real interest rate, and affected a wider range of borrowing rates during the UMP; (ii) The effectiveness of monetary policy shocks was dampened when the financial system was significantly impaired, particularly during the CMP; (iii) Other things being equal, the effectiveness has been so far little affected by the level of policy rate. Our results show that UMP has been effective, but that the nature of monetary transmission is subject to change depending on financial conditions or other economic circumstances, and therefore monetary policy needs to be carefully implemented. Note also that our study only explores the effects of a one-unit shock to the monetary policy rule, and does not address the entire effects of monetary easing that are affected by the size of shocks as well. |
| Keywords: | Conventional and unconventional monetary policy; Shadow rates |
| JEL: | F39 G15 G18 |
| Date: | 2017–11–09 |
| URL: | http://d.repec.org/n?u=RePEc:boj:bojwps:wp17e11&r=cba |
| By: | Marie Hoerova (European Central Bank); Harald Uhlig (University of Chicago); Fiorella De Fiore (European Central Bank) |
| Abstract: | We build a general equilibrium model featuring unsecured and secured interbank markets, and collateralized central bank funding. The model accounts for some key facts about the European money markets since 2008: i) the decline in the ratio of interbank liabilities in total bank assets since the onset of the global financial crisis; ii) the reduced ability of banks to access the unsecured market during the sovereign crisis, and their shift to secured market funding; iii) the increased reliance on central bank funding, particularly for banks in countries with a vulnerable sovereign. Using the calibrated model, we find that a decline in the share of unsecured to secured interbank market transactions, as observed during the crisis, generates a sizeable macroeconomic impact. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1092&r=cba |
| By: | Correia, Ricardo; Dubiel-Teleszynski, Tomasz Piotr; Población García, Francisco Javier |
| Abstract: | In this paper, we construct a structural model to determine the costs of a bank rescue considering bail-outs and bail-ins. In our model, a government assumes the equity stake under unlimited liability upon abandonment of the original equity holders. The model determines an abandonment trigger such that if total income drops below this trigger, private shareholders abandon the bank. Given this trigger, the model also determines the bank rescue costs, the expected time to the bank rescue and the bank rescue probabilities. A static analysis of our model produces several empirically testable hypotheses. The model was explored in a sample of southern European countries considering alternative assumptions regarding parameter estimates and the behavior of operational costs. The model results regarding the rescue costs are reasonable, but the model also predicts bank rescues, estimates equity values, performs welfare analyses and estimates the impact of different macro- and micro-prudential policies. The empirical exercise we present, highlights the importance of the assumptions made regarding the behavior of the operational costs by showing dramatic differences in results in a sample of countries that otherwise appear to share important cultural and geographical proximities. JEL Classification: G21, G28, H81 |
| Keywords: | abandonment trigger, bank bail-out, macro-prudential policies, structural model |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20172110&r=cba |
| By: | Paul Hubert (OFCE Sciences Po) |
| Abstract: | Does the effect of monetary policy depend on the macroeconomic information released by the central bank? Because differences between central bank’s and private agents’ information sets affect private agents’interpretation of policy decisions, this paper aims to investigate whether the publication of macroeconomic information by the central bank modifies private responses to monetary policy. We assess the non-linear effects of monetary shocks conditional on the Bank of England’s macroeconomic projections on UK private inflation expectations. We find that inflation projections modify the impact of monetary shocks. When contractionary monetary shocks are interacted with positive (negative) projections, the negative effect of policy on inflation expectations is amplified (reduced). This suggests that providing guidance about central bank future expected inflation helps private agents’ information processing, and therefore changes their response to policy decisions.. |
| Keywords: | Monetary policy, information processing, signal extraction, market-based inflation expectations, central bank projections, real-time forecasts. |
| JEL: | E62 E58 |
| Date: | 2017–09 |
| URL: | http://d.repec.org/n?u=RePEc:fce:doctra:1719&r=cba |