E58 - Central Banks and Their Policies
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COVID-19 and Financial Stability: Practice Ahead of Theory
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. -
Risk and State-Dependent Financial Frictions
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. -
A Horse Race of Monetary Policy Regimes: An Experimental Investigation
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. -
Unregulated Lending, Mortgage Regulations and Monetary Policy
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. -
Settlement Balances Deconstructed
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. -
More Than Words: Fed Chairs’ Communication During Congressional Testimonies
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. -
Household Heterogeneity and the Performance of Monetary Policy Frameworks
Consumption inequality and a low interest rate environment are two important trends in today’s economy. But the implications they may have—and how those implications interact—within different monetary policy frameworks are not well understood. We study the ranking of alternative frameworks that take these trends into account. -
The Central Bank Strikes Back! Credibility of Monetary Policy under Fiscal Influence
Central banks in many advanced economies enjoy a high degree of independence, which protects monetary policy decisions from political influence. But how should independent central banks react if pressured by fiscal policy-makers? We examine whether a central bank should design a monetary policy framework that prescribes acting conditionally on how fiscal policy behaves. -
A Horse Race of Alternative Monetary Policy Regimes Under Bounded Rationality
We introduce bounded rationality in a canonical New Keynesian model calibrated to match Canadian macroeconomic data since Canada’s adoption of inflation targeting. We use the model to quantitatively assess the macroeconomic impact of alternative monetary policy regimes.