E58 - Central Banks and Their Policies

• Regulatory Requirements of Banks and Arbitrage in the Post-Crisis Federal Funds Market

  Staff Working Paper 2022-48 Rodney J. Garratt, Sofia Priazhkina

  This paper explains the nature of interest rates in the U.S. federal funds market after the 2007-09 financial crisis. We build a model of the over-the-counter lending market that incorporates new aspects of the financial system: abundance of liquidity, different regulatory standards for banks, and arbitrage opportunities created by limited access to the facility granting interest on excess reserves.

  Content Type(s): Staff research, Staff working papers Topic(s): Central bank research, Economic models, Financial institutions, Financial markets, Financial stability, Financial system regulation and policies, Wholesale funding JEL Code(s): E, E4, E42, E5, E58, G, G2, G28

• Stablecoins and Their Risks to Financial Stability

  Staff Discussion Paper 2022-20 Cameron MacDonald, Laura Zhao

  What risks could stablecoins pose to the financial system? We argue that the stabilization mechanisms of stablecoins give rise to the risk of confidence runs, which can propagate to broader cryptoasset markets and the traditional financial sector. We also argue that stablecoins can contribute to financial stability risks by facilitating the buildup of leverage and liquidity mismatch in decentralized finance. Such risks cannot be addressed by ensuring the price stability of stablecoins alone. Finally, we explore the potential implications of stablecoins for the current system of bank-intermediated credit and for monetary policy.

  Content Type(s): Staff research, Staff discussion papers Topic(s): Digital currencies and fintech, Financial institutions, Financial markets, Financial stability, Financial system regulation and policies JEL Code(s): E, E4, E42, E44, E5, E58, G, G2, G23

• Harnessing the benefit of state-contingent forward guidance

  Staff Analytical Note 2022-13 Vivian Chu, Yang Zhang

  A low level of the neutral rate of interest increases the likelihood that a central bank’s policy rate will reach its effective lower bound (ELB) in future economic downturns. In a low neutral rate environment, using an extended monetary policy toolkit including forward guidance helps address the ELB challenge. Using the Bank’s Terms-of-Trade Economic Model, we assess the benefits and limitations of a state-contingent forward guidance implemented within a flexible inflation targeting framework.

  Content Type(s): Staff research, Staff analytical notes Topic(s): Central bank research, Economic models, Monetary policy framework, Monetary policy transmission JEL Code(s): E, E2, E27, E3, E37, E4, E5, E52, E58

• Looking Through Supply Shocks versus Controlling Inflation Expectations: Understanding the Central Bank Dilemma

  Staff Working Paper 2022-41 Paul Beaudry, Thomas J. Carter, Amartya Lahiri

  Why might central banks want to look through supply-driven inflation sometimes and pivot away at other times? When does a change in monetary policy stance help anchor expectations? In this paper we present a simple environment that helps clarify these issues by offering an optimal policy perspective on recent central bank behaviour.

  Content Type(s): Staff research, Staff working papers Topic(s): Central bank research, Economic models, Inflation and prices, Monetary policy, Monetary policy and uncertainty, Monetary policy communications JEL Code(s): E, E1, E12, E2, E24, E3, E31, E5, E52, E58, E6, E65

• COVID and Financial Stability: Practice Ahead of Theory

  Staff Discussion Paper 2022-18 Jing Yang, Hélène Desgagnés, Grzegorz Halaj, Yaz Terajima

  The Covid-19 pandemic uncovered policy challenges related to the economic measures that were taken to support the economy. Two years later, we attempt to identify the broader impact of these measures and research that needs to follow.

  Content Type(s): Staff research, Staff discussion papers Topic(s): Coronavirus disease (COVID-19), Financial stability, Financial system regulation and policies JEL Code(s): E, E5, E58, E6, E61, G, G2, G21, H, H3, H8, H84

• Risk and State-Dependent Financial Frictions

  Staff Working Paper 2022-37 Martin Harding, Rafael Wouters

  Using a nonlinear New Keynesian model with a financial accelerator, we show that financial frictions generate large state-dependent amplification effects. Shocks propagate more strongly in periods of financial stress. We propose an endogenous regime-switching DSGE framework for efficient estimation and improved model fit.

  Content Type(s): Staff research, Staff working papers Topic(s): Central bank research, Credit and credit aggregates, Financial stability, Monetary policy JEL Code(s): E, E5, E52, E58

• A Horse Race of Monetary Policy Regimes: An Experimental Investigation

  Staff Working Paper 2022-33 Olena Kostyshyna, Luba Petersen, Jing Yang

  How should central banks design monetary policy in stable times and during recessions? We run a horse race between five monetary policy frameworks in an experimental laboratory to assess how well the different approaches can manage the public’s expectations and stabilize the economy.

  Content Type(s): Staff research, Staff working papers Topic(s): Inflation targets, Monetary policy, Monetary policy communications, Monetary policy framework JEL Code(s): C, C9, D, D8, D84, E, E5, E52, E58

• Unregulated Lending, Mortgage Regulations and Monetary Policy

  Staff Working Paper 2022-28 Ugochi Emenogu, Brian Peterson

  This paper evaluates the effectiveness of macroprudential policies when regulations are uneven across mortgage lender types. We look at credit tightening that results from macroprudential regulations and examine how much of it is counteracted by credit shifting to unregulated lenders. We also study the impact of monetary policy tightening when some lenders are unregulated.

  Content Type(s): Staff research, Staff working papers Topic(s): Financial institutions, Financial system regulation and policies, Monetary policy transmission JEL Code(s): E, E4, E44, E5, E50, E52, E58, G, G2, G21, G23, G28

• Settlement Balances Deconstructed

  Staff Discussion Paper 2022-13 Parnell Chu, Grahame Johnson, Scott Kinnear, Karen McGuinness, Matthew McNeely

  Because of the COVID-19 pandemic, public interest in the Bank’s balance sheet and, more specifically, the size of settlement balances, has grown. This paper deconstructs the concept of settlement balances and provides some context on their history, current state and possible future evolution.

  Content Type(s): Staff research, Staff discussion papers Topic(s): Central bank research, Coronavirus disease (COVID-19), Financial markets, Monetary policy implementation JEL Code(s): E, E5, E58, E59, E6, G, G0, G01

• More Than Words: Fed Chairs’ Communication During Congressional Testimonies

  Staff Working Paper 2022-20 Michelle Alexopoulos, Xinfen Han, Oleksiy Kryvtsov, Xu Zhang

  We measure soft information contained in the congressional testimonies of U.S. Federal Reserve Chairs and analyze its effect on financial markets. Increases in the Chair’s text-, voice-, or face-emotion indices during these testimonies generally raise stock prices and lower their volatility.

  Content Type(s): Staff research, Staff working papers Topic(s): Central bank research, Financial markets, Monetary policy communications JEL Code(s): E, E5, E52, E58, E7, E71