Central Bank Actions Research Articles

The Impact of Inflation on Institutional Investors' Behaviour in the Indian Stock Market

Inflation has a significant impact on equity markets as it can lead to a reduction in purchasing power and a reduction in real income, which in turn affects the cost of equity. While inflation generally has a negative impact on equity markets, it can have a positive effect in some cases. Investors in the Indian stock market can react to inflation by adapting their investment strategies, including changes in asset allocation, sector rotation, risk management, monitoring central banks ‘activities and adjusting their investment horizon. Institutional Investors (IIs), such as pension funds, insurance companies and mutual funds, may adjust their investment strategies in order to include more inflation-linked assets, such as Treasury Inflation-Protected Securities (TIPS) or inflation-indexed bonds, in order to preserve their purchasing power. In addition, their portfolios can be reallocated to assets less susceptible to the negative effects of inflation, such as equities, gold and real estate. Institutional Investors can also move their investments to sectors that tend to perform well during inflationary periods, such as consumer staples, utilities and natural resources. In addition, risk management strategies, such as diversification, hedging, or investment in inflation-protected securities, may be used to protect portfolios from inflation-induced volatility. Finally, Institutional Investors closely monitor the central bank's activities, such as interest rates of the Reserve Bank of India (RBI) and monetary policy adjustments, which may affect inflationary expectations and market sentiment. This study aims to analyse the impact of inflation on Institutional Investors’(IIs) investment behaviour in the Indian stock market.

The sovereign function test out of thin air? The status of the central bank determined behind the scenes in Certain Iranian Assets

Abstract On 30 March 2023, the International Court of Justice rendered its judgment on the merits of the case concerning Certain Iranian Assets, in which the Iranian central bank was not characterized as a company within the meaning of the Treaty of Amity. In so concluding, the Court relied upon the test focusing on the central bank’s sovereign functions and the purposes of the transaction at stake. Debate surrounds the origin and sources of inspiration of the sovereign function test, insofar as the majority’s minimum reasoning leaves an impression that it arose from thin air. This article explores the origin and the sources of inspiration of the test, concluding that the Court’s judgment affords the reading that the test was inspired, albeit clandestinely, by rules and practice specifically dedicated to the characterization of central bank activities, located in areas such as the laws of State immunity or responsibility, by judicial cross-referencing.

Discretely Distributed Scheduled Jumps and Interest Rate Derivatives: Pricing in the Context of Central Bank Actions

Interest rate dynamics are influenced by various economic factors, and central bank meetings play a crucial role concerning this subject matter. This study introduces a novel approach to modeling interest rates, focusing on the impact of central banks’ scheduled interventions and their implications for pricing bonds and path-dependent derivatives. We utilize a modified Skellam probability distribution to address the discrete nature of scheduled interest rate jumps and combine them with affine jump-diffusions (AJDs) in order to realistically represent interest rates. We name this class the AJD–Skellam models. Within this class, we provide closed-form formulas for the characteristic functions of a still broad class of interest rate models. The AJD–Skellam models are well-suited for using the interest rate version of the Fourier-cosine series (COS) method for fast and efficient interest rate derivative pricing. Our methodology incorporates this method. The results obtained in the paper demonstrate enhanced accuracy in capturing market behaviors and in pricing interest rate products compared to traditional diffusion models with random jumps. Furthermore, we highlight the applicability of the model to risk management and its potential for broader financial analysis.

Synthetic Central Bank Digital Currencies and Systemic Liquidity Risks

The failure of major banks in 2023, such as Silicon Valley Bank (SVB), Signature Bank, First Republic Bank, and Credit Suisse, points to the continuing need for financial institutions to price liquidity risk properly and for financial systems to find alternative sources of liquidity in times of dire need. Central bank digital currencies (CBDCs), fiat-backed stablecoins (fsCOINs), and synthetic central bank digital currencies (sCBDCs) could offer improvements, but each comes with its own set of problems and conditions. Prior research reaches conflicting conclusions about the effect that each of these three financial assets has on systemic bank liquidity and fails to adequately address their net benefits relative to each other. This paper addresses these issues, including those connected to financial disintermediation, bank runs, outsourcing central bank activities, financial interoperability, cash equivalents, maturity transformation, required reserves, and changes in nations’ monetary bases. After addressing the strengths and weaknesses of fsCOINs and CBDCs, we conclude that sCBDCs provide the most significant net liquidity benefits when risks and returns are considered.

The Impact of Federal Reserve Interest Hike: Currency, Stock and Bond Market

The paper investigates the consequences of interest rate hikes initiated by the Federal Reserve on various financial markets. This comprehensive analysis examines the relationships between interest rate changes and their effects on currency, stock, and bond markets, which also discuss the potential scenario or solutions in respond to the rate hike. By analyzing data from different regions of the world, the paper discusses how these monetary policy decisions influence market dynamics, investor sentiment, and overall economy. Federal Reserve raising interest rate has impacted the world from various aspects, which each’s country government needs to plan strategically to respond to the impact toward currency, stock, and bond market. The findings presented in this paper contribute valuable insights for policymakers, investors, and economists seeking a deeper understanding of the intricate interplay between central bank actions and financial market reactions, which it is important to understand the impacts and apply monetary policy in order to ensure economic stability.

The Role of Central Banks in Managing Monetary Policy and its Effects on the Economy

This paper examines the crucial role of central banks in managing monetary policy and its profound effects on the economy. It provides an in-depth analysis of the objectives, tools, and strategies employed by central banks to regulate monetary conditions, control inflation, and promote economic stability. Additionally, it explores the transmission mechanisms through which monetary policy decisions impact various sectors of the economy, including interest rates, exchange rates, investment, consumption, and employment. The paper also highlights the challenges and limitations faced by central banks in conducting effective monetary policy, particularly in an era of economic globalization and financial interconnectedness. Overall, this research contributes to a comprehensive understanding of the intricate relationship between central bank actions, monetary policy, and macroeconomic outcomes.

CRITICAL REVIEW OF CHAPTER II - TRENDS IN INTERNATIONAL MARKETS: TRADE AND DEVELOPMENT REPORT 2022, (P41-67)

This critical review concentrates on Chapter II of The Trade and Development Report (TDR), which is prepared annually by the United Nations Conference on Trade and Development (UNCTAD) and presented to the General Assembly via the Secretary-General of the United Nations. TDR 2022 provides analysis of global trade trends and policy issues that affect trade and financial flows, and offers recommendations how to make the world economy fairer for all nations. Published in April 2023, the Report relays a warning of economic stagnation which will especially adversely affect developing nations. It cites supply-side disruptions and the war in Ukraine as major factors behind inflation, food and energy price increases and cost-of-living crises. It singles out monetary tightening in advanced economies and appreciating US dollar as main contributing factors in capital retreat from developing nations and increases in cost of their dollar denominated debt. TDR 2022 estimates that after having spent $379 billion of national reserves for the purpose of currency protection in 2022 alone, many developing nations are now left with dwindling central bank reserves. This begs the question, does the supremacy of some economies in relation to the global economy and their outsized influence on the global economy, warrant an attempt at new and improved central bank mission statements that should be looked at by various governments? Perhaps that effort could concentrate at articulating statements that take into account central bank actions that are intended to stabilize, protect, and expand the global economy as a whole, thus evolve today’s selfish approach by competing central banks that are single-mindedly focused on domestic circumstances. By concentrating locally, their actions are often seen as simply displacing economic pains rather than attempting to fix them. Therefore, the Report offers some recommendations how to avert negative spillovers from monetary tightening policies in advanced economies and austerity measures that accompany them. Other recommendations pertain to leveling the global economic playing field and include reforming the international legal framework governing debt, windfall taxes on excessive profits, and reigning in speculative activities in commodity markets.

Chinese yuan interest rate swap yields.

This paper models the dynamics of Chinese yuan-denominated long-term interest rate swap yields. It shows that the short-term interest rate exerts a decisive influence on the long-term swap yield after controlling for various macrofinancial variables, such as core inflation, the growth of industrial production, the percent change in the equity price index, and the percentage change in the Chinese yuan exchange rate. The autoregressive distributed lag approach is applied to model the dynamics of the long-term swap yield. The findings reinforce and extend John Maynard Keynes's conjecture that in advanced countries, as well as emerging market economies such as China, the central bank's actions have a decisive role in setting the long-term interest rate on government bonds and over-the-counter financial instruments, such as swaps.

Unconventional monetary policy and local fiscal policy

Following the onset of the pandemic, the Federal Reserve employed an unconventional monetary policy that directly intervened in municipal bond markets. We characterize the fiscal and macroeconomic implications of such central bank actions in a New Keynesian model of a monetary union. We assume that state and local governments are subject to a loan-in-advance constraint, reflecting that with lumpy cash flows, they often finance a fraction of expenditures by issuing short-term bonds. The municipal debt is held by financial intermediaries, who also supply credit to the private sector. Direct central bank purchases can transmit to the economy through two main channels: (1) by alleviating cash flow problems of the regional governments and (2) by accelerating lending to the private sector if credit constraints ease more broadly. By quantifying the relative importance of these channels, we highlight that the central bank’s actions lead to sizable increases in private investment but have more muted effects on state and local government expenditures. In addition, we also show the transmission of direct federal government aid through intergovernmental transfers is markedly different from unconventional policy.

Daily monetary policy reactions to the pandemic: The Australian case

In contrast to the more typical monthly series, Reserve Bank of Australia data offer a high frequency window into central bank actions following the onset of the pandemic. Daily observations demonstrate not only the absolute size of the Reserve Bank’s open market purchases but also a dramatic increase in the conditional variance identified under GARCH estimation. Regression analysis and impulse response functions reveal significant monetary policy responses to government support measures and exchange rate movements against the US dollar. Notwithstanding its overall highly expansionary monetary policy, the Reserve Bank appears to have tempered the pace of its open market purchases when either the government policy response intensified or currency depreciation increased.

Do central bank actions curb exchange rate volatility

Do central bank actions curb exchange rate volatility

Do central bank actions curb exchange rate volatility

Do central bank actions curb exchange rate volatility

Judicial review of central banks: an Indian perspective

ABSTRACT Central banks are unique institutions of profound economic significance. Judicial review of central bank actions raises concerns regarding the appropriate zone of judicial deference. Over the last decade, the frequency of judicial review challenges before the Supreme Court of India involving the Reserve Bank of India (“RBI”) appears to have substantially increased. I attempt to contextualize this trend against the evolving nature of judicial deference towards the RBI. From 1960s to late 1990s, the Court was extremely deferential towards the RBI. With the turn of the century, several exogenous factors compelled the RBI to act beyond its uncontested traditional functions, affecting stakeholders beyond its immediate jurisdiction. This explains the increase in judicial review challenges involving the RBI since 2015. This trend also provides evidence of the eroding judicial deference towards the Central Bank at least on the regulatory (process) aspects, if not as much on the substantive economic policies themselves.

Monetary Policy Under Uncertainty: The Case of COVID-19 Health Crisis in Morocco

The COVID-19 health crisis marked the beginning of a series of shocks that are a source of uncertainty that impacts the decision-making process of central banks around the world. The aim of this paper is to analyze the conduct of Morocco's monetary policy in a context of uncertainty, that of the COVID-19 health crisis. The results of our analysis have shown that in a context of uncertainty, the central bank is called upon to increase its communication to better guide the expectations of economic agents and ensure better transmission of the various monetary policy measures to the real economy. In addition, it must show itself to be credible by transmitting clear signals to restore the confidence of economic agents. However, central bank action alone is not enough. Conditions must be met, on the credit supply and credit demand sides, to remedy the structural imbalances that are holding back the competitiveness of our economy and to counter uncertainty.

Central Bank Communication about Climate Change

This paper applies natural language processing to a large corpus of central bank speeches to identify those related to climate change. We analyze these speeches to better understand how central banks communicate about climate change. By all accounts, communication about climate change has accelerated sharply in recent years. The breadth of topics covered is wide, ranging from the impact of climate change on the economy to financial innovation, sustainable finance, monetary policy, and the central bank mandate. Financial stability concerns are touched upon, but macroprudential policy is rarely mentioned. Direct central bank action largely revolves around identifying and monitoring potential risks to the financial system. Finally, we find that central banks tend to use speculative language more frequently when talking about climate change relative to other topics.

Have crisis-induced banking supports influenced European bank performance, resilience and price discovery?

The ownership structures of European banks are today quite different relative to those before the Global Financial Crisis (GFC), particularly due to new takeovers, government guarantees, bailouts, and other defencive market responses post-GFC. These new ownership structures raise questions as to how these banks have performed, particularly during the implementation of non-standard central bank monetary policies in response to crises that have occurred since the GFC. This paper develops a time-varying series of changing government, private and public bank ownership structures, and compares the performance of several major European banking institutions during periods of crises and mitigating central bank actions. We specifically evaluate as to whether crisis-driven changes of ownership structure have influenced the corporate performance, resilience and signals of price discovery generated by these institutions? The COVID-19 pandemic is identified and used as an example of an idiosyncratic shock on which testing procedures are implemented. Significant differentials within the European banking system based on government supports are identified. The data examined show that the information share of price discovery among government-supported European banks is significantly higher in non-crisis periods than non-government supported banks. We present several companion tests consistent with this evidence and discuss a variety of implications for future research and policy.

The interactions between Hong Kong’s housing market and global markets upon unprecedented monetary policy changes

This paper explores whether the introduction of unconventional monetary policy measures re-shapes the interactions between Hong Kong’s housing market and global stock market and economic factors. It is found that, the interactions between Hong Kong’s housing prices and global stock markets attenuated during the conventional monetary policy period (CMPP), especially after the Asian Financial Crisis. The level of interactions with global factors reached the lowest during the transitional period between CMPP and the unconventional monetary policy period (UMPP). By contrast, the co-movements with global stock market factors had played a bigger role in explaining Hong Kong’s housing price variations during UMPP, especially at the time when the US, UK, EU, and Japan deployed QEs and/or negative interest rate policy. Nevertheless, such high level of integrations did not sustain as QE3 ended in the US. The findings yield important implications in view of recent central bank actions responding to the dim economic prospects due to the COVID-19 pandemic.

Feeling the Heat: Mortgage Lending and Central Bank Options

Extreme heat periods due to the changing climate are having a negative impact on many areas of the economy. In our study, we look at how much US mortgage lending is originated in the areas that are most vulnerable to future heat waves, and what central bank and supervisory authority actions could mitigate the resulting risk. From our results, we see that proportionally more lending flows into the areas that are likely to be most exposed to heat in the future. Population and economic output are relatively higher in these areas, and thus climate risk is less of a factor in lending decisions. However, lenders reject proportionately slightly more mortgage applications in the counties that are expected to be the hottest. Central bank and supervisory authority measures to support climate objectives are therefore of key importance. These could include, for example, central bank asset purchase programmes to support sustainable construction, especially in areas vulnerable to climate change, or the development of collateral management along similar lines. Coordination between the different authorities is also important because of the limitations of central bank actions.

Becoming a central bank: The development of the Bank of England's private sector lending policies during the Restriction

AbstractThis article studies the changes that took place in the Bank of England's Restriction‐era policies governing private sector lending. The findings show that the Bank was adapting to novel monetary circumstances, created both by the evolution of the English financial system and by the Restriction itself, and that, although the process was far from smooth, the Bank was learning to act as a central bank: during this period the Bank transformed its internal operating procedures to put regulation‐based constraints on its private sector lending, established regular reviews of its policies and their effects on the money market, and adopted a distinct crisis‐orientated lending policy. In addition to establishing that these core central bank activities developed over this period, the article also shows that for 18 months starting in 1809 the Bank's policies were destabilizing, and that the Bullion Committee probably played a role in a shift in Bank lending policies that took place in mid‐1810. Overall, this study finds that the 1810 crisis was a turning point in the Bank's understanding of its role in the economy: the Bank directors both acknowledged privately the Bank's duty to the public, and restructured its discount policies with a view to promoting financial and monetary stability.

Determinants of Management of Central Bank to Provide the Economic Growth: an Application of Structural Equation Modeling

The country's domestic economic expansion is becoming increasingly important, especially in the context of the epidemic and financial crises, both within individual countries and the world. To provide this growth, it is relevant to the strategy of the central bank's activities for overcoming extern in the context of epidemical and internal threats with specific regulatory approaches and monetary instruments. The paper summarizes the arguments and counterarguments within the discussion of the question regarding the central bank's influence on the country's economic growth. The study's primary purpose is to determine the relationship between the indicators that characterize the central bank's activities and the country's economic development. The systematization of literary sources and approaches related to this issue confirms the mediated relationship between the activities of the central bank and the economic growth on a long-term basis. The relevance of this topic is closely connected with the changing role of the central bank and the expansion of its powers, tasks, responsibilities, and its place in the country's economy. This research's objective is the economies of the countries predominantly of the European Union, which has different levels of economic development. The structural modeling method is used in STATA 12.0 (based on data on 11 variables for the period of 1998-2016 for 24 countries). The results of the study confirm the correlation between the role of central banks and domestic economic expansion.