I study central bank asset purchase effects in an estimated general equilibrium macroeconomic model with required borrowing for particular expenditures and a constrained credit market. Counterfactual simulations show Federal Reserve asset purchase programs from 2009 through 2014 reduce the yield curve's slope by 2.9% at peak with a limited output effect. The yield curve does not invert in late 2019 absent these asset purchases, highlighting the policy dependence of any recession indicator properties of the yield curve. The estimation exercise provides new term premium estimates. Furthermore, I address modeling debt in macroeconomic models, comparing loan-in-advance and relatively impatient borrower specifications.
{"title":"Bond Pricing and Business Cycles with Central Bank Asset Purchases","authors":"Ronald R. Mau","doi":"10.2139/ssrn.3742968","DOIUrl":"https://doi.org/10.2139/ssrn.3742968","url":null,"abstract":"I study central bank asset purchase effects in an estimated general equilibrium macroeconomic model with required borrowing for particular expenditures and a constrained credit market. Counterfactual simulations show Federal Reserve asset purchase programs from 2009 through 2014 reduce the yield curve's slope by 2.9% at peak with a limited output effect. The yield curve does not invert in late 2019 absent these asset purchases, highlighting the policy dependence of any recession indicator properties of the yield curve. The estimation exercise provides new term premium estimates. Furthermore, I address modeling debt in macroeconomic models, comparing loan-in-advance and relatively impatient borrower specifications.","PeriodicalId":145273,"journal":{"name":"Monetary Economics: Central Banks - Policies & Impacts eJournal","volume":"70 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-10-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129773628","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Nigeria is the first African country to issue a central bank digital currency (CBDC) or fiat digital currency. The eNaira CBDC was issued as a money equivalent to be used alongside with paper Naira. This paper identifies the features, opportunities and risks of the central bank digital currency (CBDC) in Nigeria, also known as the eNaira. The opportunities which CBDC present to Nigeria include improved monetary policy transmission, convenience, efficient payments and increased financial inclusion. Some identified risks include digital illiteracy, increased propensity for cyber-attacks, data theft, and the changing role of banks in a full-fledged CBDC economy. This article contributes to the literature by evaluating the pros and cons of fiat digital currency such as a central bank digital currency.
{"title":"Central Bank Digital Currency in Nigeria: Opportunities and Risks","authors":"Peterson K. Ozili","doi":"10.2139/ssrn.3917936","DOIUrl":"https://doi.org/10.2139/ssrn.3917936","url":null,"abstract":"Nigeria is the first African country to issue a central bank digital currency (CBDC) or fiat digital currency. The eNaira CBDC was issued as a money equivalent to be used alongside with paper Naira. This paper identifies the features, opportunities and risks of the central bank digital currency (CBDC) in Nigeria, also known as the eNaira. The opportunities which CBDC present to Nigeria include improved monetary policy transmission, convenience, efficient payments and increased financial inclusion. Some identified risks include digital illiteracy, increased propensity for cyber-attacks, data theft, and the changing role of banks in a full-fledged CBDC economy. This article contributes to the literature by evaluating the pros and cons of fiat digital currency such as a central bank digital currency.","PeriodicalId":145273,"journal":{"name":"Monetary Economics: Central Banks - Policies & Impacts eJournal","volume":"8 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-09-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123645917","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We study the two-way interaction between central banks and financial markets using a beauty contest framework. The analysis identifies when asset prices reveal useful information about fundamentals and when they reflect back the central bank’s pronouncements. In equilibrium, the central bank is overly dependent on financial market signals and the information value of asset prices is diminished. Our results highlight the need to guard against giving undue prominence to market signals during monetary policy deliberations, but they can be specific to the mathematical model employed in the paper.
{"title":"Market-Friendly Central Bankers and the Signal Value of Prices","authors":"Prasanna Gai, Edmund Y. Lou, Sherry X. Wu","doi":"10.2139/ssrn.3923335","DOIUrl":"https://doi.org/10.2139/ssrn.3923335","url":null,"abstract":"We study the two-way interaction between central banks and financial markets using a beauty contest framework. The analysis identifies when asset prices reveal useful information about fundamentals and when they reflect back the central bank’s pronouncements. In equilibrium, the central bank is overly dependent on financial market signals and the information value of asset prices is diminished. Our results highlight the need to guard against giving undue prominence to market signals during monetary policy deliberations, but they can be specific to the mathematical model employed in the paper.","PeriodicalId":145273,"journal":{"name":"Monetary Economics: Central Banks - Policies & Impacts eJournal","volume":"34 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121422390","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Are transaction costs and half-lives between two cities the same in both directions in traditional city-based monetary systems? Market conditions and political circumstances may not justify this assumption; and we provide evidence that it does not hold in the 1825-1885 period in Spain. Moreover, we show empirical evidence that market integration in Spain from 1875 to 1885 was a slow process of monetary unification with decreasing transaction costs, and a very inefficient convergence. Therefore, full integration did not happen in the period 1875-1885 and had to wait until mid-1880s, when the Spanish money-market was unified due to financial innovations.
{"title":"Money Market Integration in Spain in the Ninetheen Century: The Role of the 1875-1885 Decade","authors":"E. Iglesias, J. C. Maixé-Altés","doi":"10.2139/ssrn.3906764","DOIUrl":"https://doi.org/10.2139/ssrn.3906764","url":null,"abstract":"Are transaction costs and half-lives between two cities the same in both directions in traditional city-based monetary systems? Market conditions and political circumstances may not justify this assumption; and we provide evidence that it does not hold in the 1825-1885 period in Spain. Moreover, we show empirical evidence that market integration in Spain from 1875 to 1885 was a slow process of monetary unification with decreasing transaction costs, and a very inefficient convergence. Therefore, full integration did not happen in the period 1875-1885 and had to wait until mid-1880s, when the Spanish money-market was unified due to financial innovations.","PeriodicalId":145273,"journal":{"name":"Monetary Economics: Central Banks - Policies & Impacts eJournal","volume":"115 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-08-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"117149666","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper provides direct evidence of the importance of firm attention to macroeconomic dynamics. We construct a text-based measure of firm attention to macroeconomic news and document firm attention that is polarized and countercyclical. Differences in attention lead to asymmetric responses to monetary policy: expansionary monetary shocks raise stock returns of attentive firms more than those of inattentive firms, and contractionary shocks lower returns of attentive firms by less. We interpret the findings using a quantitative model of rationally inattentive firms and calibrate parameters for information frictions using our text-based measure. In the model, firms invest in attention endogenously and face heterogeneous information costs. Less attentive firms adjust prices slowly in response to monetary innovations, which yields non-neutrality. As average attention varies over the business cycle, so does the efficacy of monetary policy.
{"title":"Firm Inattention and the Transmission of Monetary Policy: A Text-Based Approach","authors":"Wenting Song, Samuel Stern","doi":"10.2139/ssrn.3900641","DOIUrl":"https://doi.org/10.2139/ssrn.3900641","url":null,"abstract":"This paper provides direct evidence of the importance of firm attention to macroeconomic dynamics. We construct a text-based measure of firm attention to macroeconomic news and document firm attention that is polarized and countercyclical. Differences in attention lead to asymmetric responses to monetary policy: expansionary monetary shocks raise stock returns of attentive firms more than those of inattentive firms, and contractionary shocks lower returns of attentive firms by less. We interpret the findings using a quantitative model of rationally inattentive firms and calibrate parameters for information frictions using our text-based measure. In the model, firms invest in attention endogenously and face heterogeneous information costs. Less attentive firms adjust prices slowly in response to monetary innovations, which yields non-neutrality. As average attention varies over the business cycle, so does the efficacy of monetary policy.","PeriodicalId":145273,"journal":{"name":"Monetary Economics: Central Banks - Policies & Impacts eJournal","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-08-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115984608","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Jeremy I. Bulow, P. Klemperer, Stanford GSB Submitter
Banks' reluctance to repair their balance sheets, combined with deposit insurance and regulatory forbearance in recognizing greater risks and losses, can lead to solvency problems that look like liquidity (bank-run) crises. Regulatory forbearance incentivizes banks to both retain risky loans and reject new good opportunities. With sufficient regulatory forbearance, partially-insured banks act exactly as if they are fully insured. Stress tests certify that uninsured creditors will be paid, not solvency, and have ambiguous effects on the efficiency of investment.
{"title":"Misdiagnosing Bank Capital Problems","authors":"Jeremy I. Bulow, P. Klemperer, Stanford GSB Submitter","doi":"10.2139/ssrn.3915917","DOIUrl":"https://doi.org/10.2139/ssrn.3915917","url":null,"abstract":"Banks' reluctance to repair their balance sheets, combined with deposit insurance and regulatory forbearance in recognizing greater risks and losses, can lead to solvency problems that look like liquidity (bank-run) crises. Regulatory forbearance incentivizes banks to both retain risky loans and reject new good opportunities. With sufficient regulatory forbearance, partially-insured banks act exactly as if they are fully insured. Stress tests certify that uninsured creditors will be paid, not solvency, and have ambiguous effects on the efficiency of investment.","PeriodicalId":145273,"journal":{"name":"Monetary Economics: Central Banks - Policies & Impacts eJournal","volume":"219 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127657021","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Traders closely watch the Bank of Korea (BOK) base rate decisions since the short rate is the primary factor in bond and currency valuations. The survey of professional forecasters (SPF) has been widely used as the most reliable BOK base rate decision forecaster. In this paper, we investigate whether the SPF's prediction ability can be improved further. To this end, we use a dynamic multinomial ordered probit prediction model of the BOK base rate with a large number of predictors, and apply a Bayesian variable selection algorithm. Through an empirical exercise, we show that our approach substantially outperforms the SPF in terms of out-of-sample prediction. The key predictors are found to be the SPF, short-term bond yields, lagged base rate, federal funds rate, and inflation expectation survey data. Further, allowing for the prediction abilities to change over time is essential for improving predictive accuracy.
{"title":"The Bank of Korea Watch","authors":"Hyerim Kim, K. Kang","doi":"10.2139/ssrn.3890555","DOIUrl":"https://doi.org/10.2139/ssrn.3890555","url":null,"abstract":"Traders closely watch the Bank of Korea (BOK) base rate decisions since the short rate is the primary factor in bond and currency valuations. The survey of professional forecasters (SPF) has been widely used as the most reliable BOK base rate decision forecaster. In this paper, we investigate whether the SPF's prediction ability can be improved further. To this end, we use a dynamic multinomial ordered probit prediction model of the BOK base rate with a large number of predictors, and apply a Bayesian variable selection algorithm. Through an empirical exercise, we show that our approach substantially outperforms the SPF in terms of out-of-sample prediction. The key predictors are found to be the SPF, short-term bond yields, lagged base rate, federal funds rate, and inflation expectation survey data. Further, allowing for the prediction abilities to change over time is essential for improving predictive accuracy.","PeriodicalId":145273,"journal":{"name":"Monetary Economics: Central Banks - Policies & Impacts eJournal","volume":"11 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-07-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128017127","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Banks can take costly actions (such as higher capitalization, liquidity holding, and advanced risk management) to fend off runs. While such actions directly affect bank risks, they can also serve as signals of the banks’ fundamentals. A separating equilibrium due to such signaling, however, would involve two types of inefficiency: strong banks choose excessively costly signals, whereas weak banks are particularly vulnerable to runs. We show that minimum regulatory requirements can maintain a pooling equilibrium and eliminate the inefficiencies associated with the separation. We support this novel rationale for prudential regulations with evidence from the US liquidity requirement.
{"title":"Bank Signaling, Risk of Runs, and the Informational Impact of Prudential Regulations","authors":"K. Ma, Tamas Vadasz","doi":"10.2139/ssrn.3889451","DOIUrl":"https://doi.org/10.2139/ssrn.3889451","url":null,"abstract":"Banks can take costly actions (such as higher capitalization, liquidity holding, and advanced risk management) to fend off runs. While such actions directly affect bank risks, they can also serve as signals of the banks’ fundamentals. A separating equilibrium due to such signaling, however, would involve two types of inefficiency: strong banks choose excessively costly signals, whereas weak banks are particularly vulnerable to runs. We show that minimum regulatory requirements can maintain a pooling equilibrium and eliminate the inefficiencies associated with the separation. We support this novel rationale for prudential regulations with evidence from the US liquidity requirement.","PeriodicalId":145273,"journal":{"name":"Monetary Economics: Central Banks - Policies & Impacts eJournal","volume":"79 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-07-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116927540","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
When the Federal Reserve first paid interest on excess reserves (IOER) in October 2008, it presented a choice that banks had not previously faced. Banks could invest capital in precautionary excess reserves and earn a risk-free rate "better than" the treasury rate, or lend and earn a higher, but riskier interest rate. One-stage and two-stage panel estimations show "reserve premiums" are associated with a 6% ($601.5B) reduction in bank lending after accounting for increased lending due to QE. Results support the growing importance of policy discretion as IOER inverted interest rate incentives for counter-cyclical lending to that of cyclical lending.
{"title":"Better Than Risk-Free: Do Reserve Premiums Crowd out Bank Lending?","authors":"R. Kim","doi":"10.2139/ssrn.3318432","DOIUrl":"https://doi.org/10.2139/ssrn.3318432","url":null,"abstract":"When the Federal Reserve first paid interest on excess reserves (IOER) in October 2008, it presented a choice that banks had not previously faced. Banks could invest capital in precautionary excess reserves and earn a risk-free rate \"better than\" the treasury rate, or lend and earn a higher, but riskier interest rate. One-stage and two-stage panel estimations show \"reserve premiums\" are associated with a 6% ($601.5B) reduction in bank lending after accounting for increased lending due to QE. Results support the growing importance of policy discretion as IOER inverted interest rate incentives for counter-cyclical lending to that of cyclical lending.","PeriodicalId":145273,"journal":{"name":"Monetary Economics: Central Banks - Policies & Impacts eJournal","volume":"46 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-06-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129956943","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper investigates the role of executive compensation in the transmission of monetary shocks to corporate investments. We find that a managerial compensation structure that facilitates risk-taking (high Vega) is a positive and significant contributor to the translation of monetary shocks into subsequent corporate investments. The investments of high Vega firms are three times as sensitive to monetary shocks as the investments of low Vega firms. This mediating effect is robust across size, age, and leverage. We also show that the executive compensation Vega is highly responsive to monetary shocks, especially for firms with apriori preference for risk-taking. The design of executive compensation packages not only addresses agency problems within the firm but also has relevant macroeconomic consequences.
{"title":"The Investment Channel of Monetary Policy: Executive Compensation Matters","authors":"Samer Adra, Elie Menassa","doi":"10.2139/ssrn.3830457","DOIUrl":"https://doi.org/10.2139/ssrn.3830457","url":null,"abstract":"This paper investigates the role of executive compensation in the transmission of monetary shocks to corporate investments. We find that a managerial compensation structure that facilitates risk-taking (high Vega) is a positive and significant contributor to the translation of monetary shocks into subsequent corporate investments. The investments of high Vega firms are three times as sensitive to monetary shocks as the investments of low Vega firms. This mediating effect is robust across size, age, and leverage. We also show that the executive compensation Vega is highly responsive to monetary shocks, especially for firms with apriori preference for risk-taking. The design of executive compensation packages not only addresses agency problems within the firm but also has relevant macroeconomic consequences.","PeriodicalId":145273,"journal":{"name":"Monetary Economics: Central Banks - Policies & Impacts eJournal","volume":"47 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-04-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114796744","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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