Central Bank Actions Research Articles

A model of fiscal dominance under the “Reinhart Conjecture”

This paper proposes some simple models where the central bank trades off between stabilizing the business cycle and targeting inflation to a level that stabilizes the public debt ratio. We show that in a closed economy fiscal dominance does not necessarily imply hyperinflation. Moreover, in an open economy it is successful in lowering debt ratios when output is reactive enough to unconventional monetary policy and when the expectations of future inflation are well anchored to the debt-stabilization inflation target. We show that the dynamics of both inflation and public debt ratio are described by first-difference equations with time varying coefficients. We provide some conditions for the asymptotic solutions of the long-run steady states. In particular, we define two regimes of respectively strong and weak fiscal dominance, depending upon whether or not the central bank's action ensures both the sustainability and the speed of convergence of debt to its long-term level.

The optimal degree of monetary discretion in a new Keynesian model with private information

This paper considers the optimal degree of monetary discretion when the central bank conducts policy based on its private information about the state of the economy and is unable to commit. Society seeks to maximize social welfare by imposing restrictions on the central bank's actions over time, and the central bank takes these restrictions and the new Keynesian Phillips curve as constraints. By solving a dynamic mechanism design problem, we find that it is optimal to grant “constrained discretion” to the central bank by imposing both upper and lower bounds on permissible inflation, and that these bounds should be set in a history-dependent way. The optimal degree of discretion varies over time with the severity of the time-inconsistency problem, and although no discretion is optimal when the time-inconsistency problem is very severe, it is a transient phenomenon and some discretion is granted eventually.

Measurmenet of inflation forecast targeting. A proposal of methodological solution

The paper offers a methodological solution to measuring infl ation forecast targeting (IFT). IFT is a central bank’s procedure which consists in: producing its own infl ation forecast, revealing its results and making interest rates decisions on the basis of the forecast. Infl ation forecast targeting is implemented, to some extent, by any central bank implementing infl ation targeting framework. It facilitates the forward-looking attitude of the central banker. This forward-lookingness facilitates the expectations shaping and goals achievement. The literature on IFT is broad but it does not cover a concise framework for IFT analysis and measurement. The following contribution fi lls in this gap. It presents the IFT index. The idea of its elaboration is in line with any monetary policy qualitative aspects measurement: 5 aspects of IFT are distinguished, each of which having a system of points attribution described. These aspects are: forecasting methodology, declaration on the forecast role in the monetary policy, forecast publication, actual central bank’s practice and ex post forecast evaluation. Actual central bank’s practice covers the assessment of the central bank’s decision compatibility with the message of the forecast. The multivariate scheme of assessment which considers central bank’s fl exibility in the decision making process – guaranteed by the framework of the infl ation targeting – is elaborated. The other IFT aspects’ evaluations consist in the analysis of the information revealed. The IFT can be divided into two sub indices: one covering only the forecasting system transparency and the other one – for decisions compatibility check. The IFT index and sub-indices are universal in the sense of considering the IFT broadly on the basis of various central bank’s practice. The index can be used to cross-country and over time comparison – such an example is also presented in the paper. It also makes it possible to verify the hypotheses on the central banks’ consistency in implementing IFT – measured by IFT index – and the central banks’ performance.

Central Bank Actions and Words: The Intraday Effects of FOMC Policy Communications on Individual Equity Volatility and Returns

AbstractWe compare intraday impacts of the release of Federal Reserve decision announcements and of Federal Open Market Committee minutes between 2004 and 2015 on 1,997 equity return and volatility series. We find that returns are unresponsive to either news release, but conditional volatility increases for both, manifesting immediately after each information release, and persisting for 30 minutes post‐announcement. These effects are larger for decisions than for minutes. On stratifying firms by trading intensity, we find most “high trading intensity” firms respond to these announcements, while “low trading intensity” firms are less affected. Our results show that traders respond, albeit differently, to both sets of information releases.

Populism and Central Bank Independence

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.

Światowy kryzys finansowy i działania naprawcze wobec gospodarki polskiej

Przedmiotem pracy jest przedstawienie zarysu światowego kryzysu finansowego z lat 2007-2011, jego przebiegu i skutków w Polsce oraz działań naprawczych i zapobiegawczych podejmowanych przez rząd i instytucje finansowe w Polsce. Praca oparta na literaturze problemu i przedmiotu badań oraz informacjach różnych krajowych i międzynarodowych instytucji finansowych i organizacji międzynarodowych. Kryzys finansowy w Polsce ujawnił się z opóźnieniem w stosunku do innych krajów wysokorozwiniętych i przebiegał z mniejszą intensywnością. W działaniach antykryzysowych Polska dostosowała się do zaleceń Unii Europejskiej. Międzynarodowego Funduszu Walutowego. Działania rządu i banku centralnego w Polsce dotyczyły sfery instytucjonalnej, sposobu funkcjonowania i prowadzenia polityki finansowej oraz sfery realnej gospodarki, w tym zwłaszcza przedsiębiorstw, gospodarstw domowych i instytucji publicznych.

Central Banking and Macroeconomic Ideas: Economics, Politics and History

The lecture notes describe different views in analysing the relationships between the central banking activities – i.e. monetary and banking policies – and the business cycle, using a modified workhorse AS AD model, in order to include in the simplest way uncertainty, expectations and the role of banking and finance, as well as the incentives of the policymakers. The bottom line is to show pedagogically that one size - i.e. a unique economic mainstream – doesn’t fit all – i.e. cannot explain different national and historical business cycles. Therefore it is necessary to know more than one macroeconomic views, and history, politics and empirics matters in disentangling the pros and cons of each of them.

Nominal GDP stabilization: Chasing a mirage

Abstract This paper argues that NGDP targeting is unlikely to produce macroeconomic stability. Contrary to the policy objective, NGDP targeting may increase macroeconomic turbulence. DSGE models that prove the effectiveness of NGDP stabilization policy rest on two assumptions. The first assumption is that macroeconomic volatility is a consequence of exogenous shocks to an otherwise stable system. The second assumption is that central banks can act upon aggregate variables. Neither of these assumptions is accurate. An economy is an ecology of interacting agents, some of whom have rivalrous plans. Macroeconomic volatility is an endogenous and intrinsic feature of such an economic system. Furthermore, central banks act upon some agents in the economic system, not on aggregate variables. The percolation of central bank actions through production networks can impede coordination efforts of economic agents during recessions, thereby increasing macroeconomic volatility.

Translating central bank independence into Norwegian: central bankers and the diffusion of central bank independence to Norway in the 1990s

ABSTRACTThe sweeping diffusion of central bank independence (CBI) as an institutional norm in many countries over the course of the 1990s has attracted a lot of interest within the discipline of international political economy. Important strands within the literature have emphasised the role of ideas and of central bank institutions in the diffusion process, although not placing ultimate explanatory weight on central bankers’ actions and activities in order to explain differences in patterns of diffusion between countries. Norway represents an outlier in the diffusion process, not reforming its central bank legislation until 2003 – six years later than the United Kingdom. The article explores this late shift to CBI by building on an ideational approach, investigating whether Norwegian central bankers’ translation strategies and actions adds more explanatory value than the mainly structural arguments dominating the existing diffusion literature. The article finds that central bank action and changing strategies actually helps us a great deal explaining why Norwegian authorities chose to alter central bank legislation when they did.

Do the central bank actions reduce interest rate volatility?

This paper investigates how Central Bank of Brazil (CBB) actions influence market uncertainty. We consider two kinds of actions: the monetary policy decision about the interest rate target and the pure communication event of this decision published one week later. Unlike related papers, we measure the market uncertainty by the implied volatility extracted from interest rate options. Implied volatility is more suitable than physical volatility to assess economic effects since it encompass market beliefs adjusted by risk. We use an event study approach to evaluate the impact of CBB actions. The results show that both the decisions about the target rate and the communication event reduce the interest rate volatility.

Monetary versus fiscal policy in India: an SVAR analysis

ABSTRACTConventionally, the policymakers relied on three policy alternatives to manage business cycles – debt-financed government spending, debt-financed tax rebate and interest rate. While the first two are fiscal policy instruments, the latter is a monetary policy instrument. This paper aims to capture interactions among Indian monetary and fiscal policy actions, and the impact of such policy actions on select macroeconomic variables for the period 1990Q1–2011Q4. The policy actions are identified using the sign restrictions approach combined with magnitude restrictions in a Structural Vector Autoregression framework, and interpreted using impulse responses and variance decomposition. The results show that Indian monetary policy responds to tax rebate shocks and spending shocks differently. In the case of a tax rebate shock, Indian monetary policy responds by reducing interest rates thereby accommodating fiscal expansion. On the opposite, monetary policy seems not to accommodate expenditure shocks. Interestingly, the monetary policy shock is accompanied by a fiscal expansion that threatens the credibility of the central bank actions, thus indicating fiscal policy dominance. A comparison of the efficacy of the policies suggests that the interest rate is more effective in stimulating output. Out of the two fiscal policy instruments analysed, the tax rebate seems to be the better option for stimulating output considering the output-debt trade-off.

Circumventing the zero lower bound with monetary policy rules based on money

Discussions of monetary policy rules after the 2007–2009 recession highlight the potential ineffectiveness of a central bank's actions when the short-term interest rate under its control is limited by the zero lower bound. This perspective assumes, in a manner consistent with the canonical New Keynesian model, that the quantity of money has no role to play in transmitting a central bank's actions to economic activity. This paper examines the validity of this claim and investigates the properties of alternative monetary policy rules based on control of the monetary base or a monetary aggregate in lieu of the capacity to manipulate a short-term interest rate. The results indicate that rules of this type have the potential to guide monetary policy decisions toward the achievement of a long-run nominal goal without being constrained by the zero lower bound on a nominal interest rate. They suggest, in particular, that by exerting its influence over the monetary base or a broader aggregate, the Federal Reserve could more effectively stabilize nominal income around a long-run target path, even in a low or zero interest-rate environment.

CENTRAL BANKING IN THE NEW ERA

This paper analyzes the evolution of central banking, and in particular the American experience of central banking. It provides projections for the future of central banking in the new era of post 2008. The paper initially demonstrates recent improvements in the financial and banking sectors, regulations and different measures of monetary and financial rules both in the USA and the rest of the advanced economies. Then, it claims institutions, such as central banks, will gain new objectives and more significance in this new era and thus will be given new roles, over time and along with the improvements and deepening in the financial system. The paper argues centuries long central bank evolution is not complete yet and that more objectives should be expected to come forward. In that line, there is need for a shift in the conventional policy measures. New trends in central banking such as the helicopter money, popular nominal GDP targeting regime and the retro developmental central banking are all critically analyzed. The paper provides a breakdown of financial development and central banking activities in a historical context and provides a rationale and a new basis for possible future innovations.

What keeps long-term U.S. interest rates so low?

U.S. government indebtedness and fiscal deficits increased notably following the Global Financial Crisis. Yet long-term interest rates and U.S. Treasury yields have remained remarkably low. What keeps long-term interest rates so low? This paper relies on a simple model, based on John Maynard Keynes’ view that the central bank's actions are the key drivers of long-term interest rates, to explain the behavior of long-term interest rates in the U.S. The empirical findings confirm that short-term interest rates are the most important determinants of long-term interest rates in the U.S. Contrary to conventional wisdom, higher government indebtedness has a negative effect on long-term interest rates, particularly on a long run basis. However, in the short run, higher government indebtedness has a positive effect on long-term interest rates. These are relevant for contemporary policy debates and macroeconomic theory.

Mikro- i makroostrożnościowa polityka nadzorcza względem sektora bankowego – potencjalne obszary konfliktów i sposoby ich minimalizacji

The consequences of last crisis on financial market is the promotion of the macroprudential policy as new approach in regulatory policy on the financial sector. The main ideas of goal, tasks and instruments of macroprudential policy were presented in the article. They were confronted with the goal, tasks and instruments of microprudential supervisory policy. This comparison indicates the existence of general goal of macroprudential policy but there are also some problems concerning the detailed tasks of this policy. This result causes the further problem with identification of many instruments which should be belong to the marcoprudential policy only. Lack of detailed tasks of macroprudential policy and similar instruments used by micro- and macroprudential policy may generate some tension in supervisory policy and diminish the safety of financial sector and the trust its clients. We recommend to implement the new supervisory policy on step by step basis, collecting all the time the necessary experience and to take the decision later if the institutional separation of macroprudential policy is really reasonable or it is better to divide the tasks of this policy between microprudential policy and central bank activity.

COMMUNICATION ABOUT FUTURE POLICY RATES IN THEORY AND PRACTICE: A SURVEY

AbstractWe discuss the theoretical rationale for central bank communication about future policy rates, either as part of inflation targeting or in the form of forward guidance. We also summarize both actual central bank communication about future policy rates and empirical evidence on the effectiveness of these types of communication. We argue that there is a disconnect between the theory and practice of forward guidance, as theory assumes commitment on the part of the central bank, while in practice central banks generally do not commit. Future theoretical research on forward guidance should therefore take the absence of commitment by central banks into account.

The channels of monetary policy triggered by central bank actions and statements in the Australian equity market

Owing to the discrete disclosure practices of the Reserve Bank of Australia, this paper provides new evidence on the channels of monetary policy triggered by central bank actions (monetary policy announcements) and statements (explanatory minutes releases), in the Australian equity market. Both monetary policy announcements and explanatory minutes releases are shown to have a significant and comparable impact on the returns and volatility of the Australian equity market. Further, distinct from US and European studies that find strong evidence of the interest rate, bank loan and balance sheet channels and no evidence of the exchange rate channel following central bank actions, this paper finds that monetary policy impacts the Australian equity market via the exchange rate, interest rate and bank loan channels of monetary policy, with only weak evidence of the balance sheet channel of monetary policy. These channels are found to be operating irrespective of the trigger (monetary policy announcements or explanatory minutes releases), though results are somewhat weaker when examining the explanatory minutes releases. These results have important implications for central bank officials and financial market participants alike: by confirming a comparable avenue to affect monetary policy; and providing an explication of its impact on the Australian equity market.

Policy and Macro Signals as Inputs to Inflation Expectation Formation

How do private agents interpret central bank actions and communication? To what extent do the effects of monetary shocks depend on the information disclosed by the central bank? This paper investigates the effect of monetary shocks and shocks to the Bank of England’s inflation and output projections on the term structure of UK private inflation expectations, to shed light on private agents’ interpretation of central bank signals about policy and the macroeconomic outlook. We proceed in three steps. First, we correct our dependent variables - market-based inflation expectation measures - for potential risk, liquidity and inflation risk premia. Second, we extract exogenous shocks following Romer and Romer (2004)’s identification approach. Third, we estimate the linear and interacted effects of these shocks in an empirical framework derived from the information frictions literature. We find that private inflation expectations respond negatively to contractionary monetary policy shocks, consistent with the usual transmission mechanism. In contrast, we find that inflation expectations respond positively to positive central bank inflation or output projection shocks, suggesting private agents put more weight on the signal that they convey about future economic developments than about the policy outlook. However, when shocks to central bank inflation projections are interacted with shocks to output projections of the same sign, they have no effect on inflation expectations, suggesting that private agents understand the functioning of the central bank reaction function and put more weight on the policy signal when there is no trade-off. We also find that the effects of contractionary monetary shocks are amplified when they are accompanied by positive shocks to central bank inflation projections. The co-ordination of policy decisions and macroeconomic projections thus appears important for managing inflation expectations.

Euro crash risk

Abstract We identify crucial events during the European sovereign debt crisis and investigate their impact on the euro currency. In particular, we analyze how specific announcements related to vulnerable eurozone member states, European Central Bank (ECB) actions, and credit rating downgrades affect the value and the crash risk of the euro. We proxy the appreciation and depreciation of the euro by its abnormal foreign exchange (FX) rate returns with respect to 35 currencies. The crash risk of the euro is proxied by the conditional skewness of the FX rate return distribution with respect to the same currencies. We find that the market reacts positively to news related to countries under EU/IMF rescue umbrella. We discover that ECB actions on average result in a euro depreciation on the day of the announcement reflecting obvious concerns of market participants, but the effect is partly reversed the day after. Our analysis also shows that sovereign and corporate credit rating downgrades tend to lead to a depreciation of the euro and, more importantly, to an increase of the euro crash risk. Interestingly, we find that specific announcements about Greece on average do not substantially affect the euro exchange rate directly; however, it does have an overall significant effect on the euro crash risk, imposing a substantial risk for the stability of the common currency in the eurozone.

Anomaly in Stock-Bond Correlations: The Role of Monetary Policy

The paper estimates constant conditional correlation (CCC) GARCH models to test whether the dramatic changes in stock-bond market correlations can be explained by monetary policy variables such as OIS interest rate shocks or volatility regimes. We find that both specifications are empirically relevant: Correlations decrease after positive monetary shocks (decreasing rates) as well as in times with large central bank activity (high rate volatility regimes).