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Central Banking

Paper Session

Friday, Jan. 3, 2020 8:00 AM - 10:00 AM (PST)

Marriott Marquis, Point Loma
Hosted By: American Economic Association
  • Chair: Julie K. Smith, Lafayette College

Announcement-Specific Decompositions of Unconventional Monetary Policy Shocks and Their Macroeconomic Effects

Daniel Lewis
,
Federal Reserve Bank of New York

Abstract

I propose to identify announcement-specific decompositions of asset price changes
into monetary policy shocks using intraday time-varying volatility. This approach is the
first to accommodate both changes in the nature of shocks and the state of the economy
across announcements, allowing me to explicitly compare shocks across announcements.
I compute decompositions with respect to Fed Funds, forward guidance, and asset purchase
shocks for 2007-2018. Only a handful of announcements spark significant shocks.
Asset purchase shocks lower corporate borrowing costs; both asset purchases and forward
guidance increase spreads. Asset purchase shocks have significant expansionary
effects on inflation and GDP growth.

Central Bank Policies and Financial Markets: Lessons from the Euro Crisis

Ashoka Mody
,
Princeton University
Milan Nedeljkovic
,
FEFA and CESifo

Abstract

The European Central Bank (ECB) took many measures to combat the eurozone's rolling financial crisis. For providing desperately scarce dollars to eurozone banks, the ECB relied on the U.S. Federal Reserve. Using a novel econometric framework, we identify financial markets' causal response to the ECB's liquidity injections and its more pro-active monetary stimulus between October 2009 and September 2012, the most intense phase of the eurozone crisis. Dollar liquidity reduced stress in bond markets and improved economic sentiment, as reflected in higher equity prices. In contrast, euro liquidity provision and even active measures (policy rate reductions and bond market interventions) delivered modest results. Although government bond spreads did typically decline, markets remained worried that spreads could rise quickly; moreover, broad economic sentiment remained unchanged. Only the Outright Monetary Transactions (OMT) intervention had a substantial beneficial effect. Overall, the results imply that central bank interventions are effective if they clearly signal commitment to reinvigorate the economy and if they address the source rather than the symptom of financial stress. The ECB did not follow these principles, limiting its ability to improve financial market sentiment.

Communication and Transparency Through Central Bank Texts

Jonathan Benchimol
,
Bank of Israel
Sophia Kazinnik
,
Federal Reserve Bank of Richmond
Yossi Saadon
,
Bank of Israel

Abstract

The policymaker financial stability toolkit recognizes central bank communication as an important tool. Communication efforts make market expectations of monetary policy decisions more accurate and stable. This paper studies the effect of central bank communication on monetary policy transparency. Using state-of-the-art text mining methodologies, the informational content from the interest rate decision statements, minutes, and governor's speeches published by the Fed, the ECB, the RBA, and the BoI from 1998 to 2018 is extracted. We construct a set of indicators to examine whether they can provide a clear signal about the future direction of monetary policy. We use basic text mining indicators to create a new transparency index measuring the central bank communication quality. We find that some sentiment measures improve the short-run predictability of the policy interest rate, the VIX, and upcoming monetary policy surprises.

Designing Central Bank Digital Currencies

Itai Agur
,
International Monetary Fund
Anil Ari
,
International Monetary Fund
Giovanni Dell'Ariccia
,
International Monetary Fund

Abstract

We study the optimal design of a central bank digital currency (CBDC) in an environment where agents sort into cash, CBDC and bank deposits according to their preferences over anonymity and security; and where network effects make the convenience of payment instruments dependent on the number of their users. CBDC can be designed with attributes similar to cash or deposits, and can be interest-bearing: a CBDC that closely competes with deposits depresses bank credit and output, while a cash-like CBDC may lead to the disappearance of cash. Then, the optimal CBDC design trades off bank intermediation against the social value of maintaining diverse payment instruments. When network effects matter, an interest-bearing CBDC alleviates the central bank's tradeoff.

Evaluating Central Banks' Tool Kit: Past, Present, and Future

Eric Sims
,
University of Notre Dame
Jing Cynthia Wu
,
University of Notre Dame

Abstract

We develop a structural DSGE model to systematically compare the principal tools of unconventional monetary policy -- quantitative easing (QE), forward guidance, and negative interest rate policy (NIRP). To generate the same output response, the requisite NIRP and forward guidance interventions are twice as large as a conventional policy shock, which seems implausible in practice. In contrast, QE via an endogenous feedback rule can alleviate the constraints on conventional policy posed by the zero lower bound. In spite of its usefulness, QE does not come without cost. A central bank accumulating a large balance sheet must confront the disruptions associated with the unwinding after a ZLB period is over, which can be minimized by committing to a smooth path a priori. A large balance sheet also has consequences for the efficacy of NIRP and the effective lower bound on policy rates.
JEL Classifications
  • E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit