US post-COVID Economic Recovery and the Fed's Monetary Policy Mistakes

This paper argues that the persistent inflation in the U.S. during the post-COVID economic recovery was mainly the result of the Fed's policy mistake caused by an overestimation of the negative output gap. The paper shows that after a two-quarter contraction, the U.S. economy quickly rebounded and outpaced its potential output, thus remaining in overheating territory. However, policymakers prolonged the monetary expansion beyond the necessary, which contributed to fuel inflation for a more prolonged time. The policy mistake was the result of an inaccurate estimation of potential output. Based on an alternative estimation that uses full employment as a condition, this paper shows that the U.S. economy has been running with a positive output gap since mid-2021. The results illustrate that the Federal Reserve was well-behind the curve in an economy in overexpansion and with a galloping inflation escalating well-above the target.

The politicisation of the European Central Bank and its emergency credit lines outside the Euro Area

Is the European Central Bank (ECB) increasingly acting on political – rather than technocratic – considerations? This question is of a central concern to students of European Union (EU) political economy. This article contributes to this debate by studying the ECB's credit lines to the central banks of EU member states outside the Euro Area during the Global Financial Crisis and the COVID-19 crisis. Both times the ECB accorded selectively better borrowing conditions to some central banks. The article finds that its selection of who gets favourable borrowing terms has indeed become more political. In 2008, the ECB decided the credit terms based on technocratic criteria, but twelve years later, it granted better lending conditions to countries that were close to adopting the euro. How the ECB balances its mandate for price stability in the Euro Area and its role as a supranational EU institution decides whether it will become more politicised. [ABSTRACT FROM AUTHOR] Copyright of Journal of European Public Policy is the property of Routledge and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

Post-Pandemic Greenness? How Central Banks Use Narratives to Become Green

Suggested only a few years ago, green central banking has received a new impetus with the central bank interventions implemented in the wake of the COVID-19 pandemic. Several central banks, with the European Central Bank (ECB) and the Bank of England (BoE) being prominent examples, have stepped up their public communication on this issue in an effort to explain and justify their planned or ongoing policy actions. Carefully recorded and easy to find, these public communication messages are a rich source of insight into the process of monetary policy formation. In this article, we analyze the messages from two central banks, with the primary objective of identifying the narratives they use (if any) and describing the key features of these narratives, thus shedding new light on an ongoing process of policy change. A secondary objective of the article is to contribute to the growing literature related to the use of narratives in public policy by studying narratives in monetary policy through qualitative means, an approach that, to date, has received relatively little attention from scholars. To this end, we discuss two expectations related to the use of policy narratives derived from the literature. Thus, we hope to show how the two central banks devise and deploy narratives to help implement an unprecedented turnaround in monetary policy. © 2023 by the authors.

The impact of Bank of Japan's exchange-traded fund purchases

The Bank of Japan (BOJ) enhanced its large-scale asset purchases in October 2010 by purchasing equity exchange-traded funds (ETFs). This study is the first to demonstrate that the BOJ provides downside protection for stock prices through the countercyclical purchase of ETFs. The BOJ responds to a large negative stock return during the overnight and morning periods, and submits purchase orders during lunchtime. Using the BOJ's March 2020 announcement of doubling the annual purchase amount during the COVID-19 pandemic, this study also finds that the announcement effect is small and temporary. In contrast, the flow effect of the actual purchases is significant and increases. The BOJ's countercyclical ETF purchase prevents equity risk premia from rising during an economic downturn. © 2023 Elsevier B.V.

The Impact of Bank of Japan's Exchange-Traded Fund Purchases

The Bank of Japan (BOJ) enhanced its large-scale asset purchases in October 2010 by purchasing equity exchange-traded funds (ETFs). This study is the first to demonstrate that the BOJ provides downside protection for stock prices through the countercyclical purchase of ETFs. The BOJ responds to a large negative stock return during the overnight and morning periods, and submits purchase orders during lunchtime. Using the BOJ's March 2020 announcement of doubling the annual purchase amount during the COVID-19 pandemic, this study also finds that the announcement effect is small and temporary. In contrast, the flow effect of the actual purchases is significant and increases. The BOJ's countercyclical ETF purchase prevents equity risk premia from rising during an economic downturn.

Fighting Fires from Crisis to Crisis: The Evolution of Central Banking in Europe

The year 2019 ushered in the end of an era for the European Central Bank when Mario Draghi stepped down as ECB President. The financial crisis left a legacy of central banks as “the only game in town”. The COVID-19 pandemic reinforced the role of central banks as critical firefighters during crises, in contrast to earlier periods. This contribution examines the evolution of central banking in Europe. First, it evaluates the ideational shifts that allowed for a more expansive interpretation of the role of a central bank. Second, it looks at the ECB’s response to the Covid-19 crisis and assesses the underlying reasons why the use of the bank’s balance sheet is here to stay. Third, it looks at these issues in a comparative perspective, contrasting the issues and policy responses faced by the ECB to those of the Bank of England and the US Federal Reserve. The final section concludes. © 2023, The Author(s), under exclusive license to Springer Nature Switzerland AG.

How bank capital structure decision-making change in recessions: Covid-19 evidence from Pakistan

Purpose>This study contributes to existing literature by investigating bank capital structure dynamics during the Covid-19 pandemic. The role of contemporary bank-specific determinants of capital structure during this period is analyzed.Design/methodology/approach>An independent t-test is carried out to check the response of bank leverage to the crisis. Using fixed effect estimation and difference general method of moments (GMM), the impact of the shock is examined. An unbalanced quarterly data set from 2016q1 to 2020q3 of all commercial banks in Pakistan is used.Findings>The study finds that due to procyclicality of capital, during the Covid-19 crisis, the banks preempted a fall in capital and improved their capital positions. The role of bank specific variables in determining capital structure like profitability, size and competition weakened during this period. Evidence suggests that policy rate intervention by the central bank was a significant factor in capital structure decisions during the Covid-19 period. The study finds that macroeconomic shocks have significant impact on capital structure decision-making of banks which goes beyond the bank-specific factors.Originality/value>It finds evidence of a moderating role of monetary policy in capital structure decision-making which has not been previously highlighted in literature. Monetary policy is found to become an important factor deciding the capital structure of banks during the Covid-19 first 3 quarters. This study also explores the impact of Covid-19 on the bank-specific determinants of capital structure of banks.

MONETARY POLICY IN THE TIME OF COVID-19, OR HOW UNCERTAINTY IS HERE TO STAY

The COVID-19 crisis has compounded the uncertainty that has come to characterise the European economy. We explore how this uncertainty manifests itself in terms of European Central Bank decision-making and the long-run challenges the ECB faces. Confidence in ECB actions will come from the contingency scenarios it considers and communicates on, and from the adoption of potential policies for a wide range of such scenarios. Greater clarity around the ECB's inflation target and surrounding tolerance bands would also be beneficial.

Initial Monetary Policy Response to the COVID-19 Pandemic in Inflation Targeting Economies

The monetary policy response to COVID-19 in various economies around the world was in many ways exceptional. This paper investigates several aspects of this response among 28 inflation targeters by looking at actions undertaken by selected monetary authorities at the outset of the pandemic-induced crisis. Evidently, the reviewed central banks assessed the pandemic to be a clear-cut case for loosening monetary policy. They promptly announced expansionary decisions, often at extraordinary meetings, using a possibly broad set of measures, with not much hesitation before reaching for unconventional ones. One of the key aspects of the response was how quickly the authorities reacted to the shock. It turned out that, on average, advanced economies announced their initial policy actions within a month, whereas emerging market economies were twice as fast. As shown by a simple econometric exercise, this difference can to a great extent be explained by the time when the first COVID-19 cases were recorded in a country, the stringency of the adopted pandemic restrictions, and the need for liquidity provisions in economies with less deep financial systems. Of relevance were also variables related to having room for manoeuvre with respect to nonstandard measures and the deviation of inflation from the target.

The Law of Monetary Finance under Unconventional Monetary Policy

Monetary finance (money creation by central banks to fund public expenditure) is a high-profile part of economic, political and policy debates concerning the legitimacy of central banks in liberal economies and democracies. This article makes a distinctively legal contribution to those debates by analysing the legal frameworks governing monetary finance in three prominent central banking systems between 2008 and 2020: the Federal Reserve System, the Eurosystem and the Bank of England. It begins by explaining the law governing central bank and national treasury relations in the United States, the EU and the UK. It then examines how that law operated under the unconventional monetary policies adopted by central banks in response to the financial crisis and the COVID-19 pandemic. The article concludes by reflecting on the challenges monetary finance presents to the sui generis position of central banks in the liberal constitutional order.

The pandemic and economic policy: monetary policy under discussion

This paper explores the credibility of monetary policy in Colombia and its evolution after the adoption of the inflation targeting system. To do so, a non-linear Phillips curve is estimated based on unemployment for an open economy, which incorporates the direct effect of past inflation rate on price formation and a prospective component. It shows a deeper trade-off between inflation and unemployment and lower inflationary persistence. Consequently, the country could emphasize the greater responsibility of the central bank in economic growth and employment. (English) [ FROM AUTHOR] Este artículo explora la credibilidad de la política monetaria en Colombia y su evolución después de adoptar el sistema de inflación objetivo. A partir de la estimación de relaciones lineales y no lineales de la curva de Phillips con base en el mercado laboral de una economía abierta y la incorporación de los efectos de la inflación pasada y el componente prospectivo de las expectativas de los analistas, se obtiene una menor persistencia y un trade-off entre inflación y desempleo más estrecho. En consecuencia, el país podría dar mayor responsabilidad al banco central en el crecimiento económico y el empleo. (Spanish) [ FROM AUTHOR] Este artigo explora a credibilidade da política monetária na Colômbia e sua evolução após a adoção do sistema de metas para a inflação. A partir da estimação das relações lineares e não lineares da curva de Phillips com base no mercado de trabalho de uma economia aberta e da incorporação dos efeitos da inflação passada e do componente prospectivo das expectativas dos analistas, menor persistência e trade-off mais apertado entre a inflação e o desemprego. Conseqüentemente, o país poderia atribuir maior responsabilidade ao banco central pelo crescimento econômico e pelo emprego. (Portuguese) [ FROM AUTHOR] Copyright of Revista de Economía Institucional is the property of Universidad Externado de Colombia and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full . (Copyright applies to all s.)

In the Name of COVID-19: Is the ECB Fuelling the Climate Crisis?

We offer preliminary evidence drawing on a novel dataset of corporate bonds issued in the European energy sector since January 2020 in combination with the European Central Bank's (ECB) purchases under the Pandemic Emergency Purchase Programme (PEPP) in response to COVID-19. We show that the likelihood of a European energy company bond to be bought as part of the ECB's programme increases with the greenhouse gas (GHG) intensity of the bond issuing firm. We also find weaker evidence that the ECB's PEPP portfolio during the pandemic is likely to become tilted towards companies with anti-climate lobbying activities and companies with less transparent GHG emissions disclosure. Our findings imply that, at later stages of the COVID-19 recovery, an in-depth analysis may be necessary to understand if, and if yes why, the ECB fuelled the climate crisis.