A Large Central Bank Balance Sheet? The Role of Interbank Market Frictions

Transcription

1 A Large Cenral Bank Balance Shee? The Role of Inerbank Marke Fricions Óscar Arce, Galo Nuño, Dominik Thaler and Carlos Thomas Banco de España Ocober / 45

2 Moivaion Wha should be he new normal in he conduc of moneary policy? Before he crisis ( old normal ): Lean cenral bank balance shee Moneary policy conduced mainly hrough ineres raes (corridor sysem) During he crisis: Ineres raes close o he effecive lower bound (ELB) Large expansions in cenral bank balance shees quaniaive easing Compression of spreads beween inerbank and cenral bank deposi raes (floor sysem) Afer he crisis: a new normal Lean vs large balance shees Corridor vs floor sysems 2 / 45

3 Wha we do Quesions: Wha is beer: A lean or a large balance shee? How are hey differen: How do balance shee policies affec he economy? 3 / 45

4 Wha we do Quesions: Wha is beer: A lean or a large balance shee? How are hey differen: How do balance shee policies affec he economy? Propose a DSGE model: Sandard New Keynesian model wih price sickiness Banks: inermediae savings from households o firms have heerogenous invesmen opporuniies rade amongs each oher on a decenralized over-he-couner (OTC) inerbank marke 3 / 45

5 Main findings Balance shee policies affec he economy hrough he inerbank marke by affecing he inerbank-dfr spread, which riggers ineremporal subsiuion 4 / 45

6 Main findings Balance shee policies affec he economy hrough he inerbank marke by affecing he inerbank-dfr spread, which riggers ineremporal subsiuion The marginal effec of balance shee policies diminishes in he size of he balance shee 4 / 45

7 Main findings Balance shee policies affec he economy hrough he inerbank marke by affecing he inerbank-dfr spread, which riggers ineremporal subsiuion The marginal effec of balance shee policies diminishes in he size of he balance shee LTROs and Asse purchases are close subsiues 4 / 45

8 The marginal effec of balance shee policies diminishes in he size of he balance shee LTROs and Asse purchases are close subsiues A large BS (floor sysem) buys addiional policy space wr. he ELB Temporary QE, if appropriaely implemened, can buy he same policy space 4 / 45 Main findings Balance shee policies affec he economy hrough he inerbank marke by affecing he inerbank-dfr spread, which riggers ineremporal subsiuion

9 Ouline of he alk 1 Inroducion 2 Model 3 Mechanism 4 Lean or large balance shee? 5 / 45

10 Model overview Cenral bank HH Specialized Firms Capial Monopolisic Compeiion Price sickiness 6 / 45

11 Model overview Cenral bank Bankers Specialized Firms Monopolisic Compeiion HH Price sickiness 7 / 45

12 Model overview Cenral bank Bankers Equiy Invesmen Banks Specialized Firms Monopolisic Compeiion HH Price sickiness 8 / 45

13 Model overview Cenral bank Bankers Equiy Invesmen Banks Equiy Inermediae Firms Specialized Firms Risk Idiosyncraic reurn radeoff produciviy In. Prod. Monopolisic Compeiion HH Price sickiness 9 / 45

14 Model overview Cenral bank Bankers Equiy Invesmen Banks Equiy Inermediae Firms Specialized Firms Risk Idiosyncraic reurn radeoff produciviy In. Prod. Monopolisic Compeiion HH Deposis Reail bank Price sickiness 10 / 45

15 Model overview Cenral bank Bankers Equiy Invesmen Banks Equiy Inermediae Firms Specialized Firms Deposis Risk Idiosyncraic reurn radeoff produciviy In. Prod. Monopolisic Compeiion HH Deposis Reail bank Price sickiness 11 / 45

16 Model overview Cenral bank Reserves LF Lending Bankers Equiy Invesmen Banks Equiy Inermediae Firms Specialized Firms Deposis Risk Idiosyncraic reurn radeoff produciviy In. Prod. Monopolisic Compeiion HH Deposis Reail bank Price sickiness 12 / 45

17 Srucure of he economy Coninuum of islands j [0, 1] On each island here is 1 compeiive inermediae firm wih Cobb Douglas producion funcion using capial and labor wih island specific produciviy Y j = ωj 1K α }{{} L1 α idios. Labor and capial are mobile Capial is only provided by he local invesmen bank Reurn on capial: MPK j = RA }{{} ω j 1 }{{} aggr. idios. No aggregae uncerainy (for simpliciy) 13 / 45

18 Invesmen Banks problem Bankers maximize heir log uiliy over consumpion E 0 =0 β log (Π j ) 14 / 45

19 Invesmen Banks problem Bankers maximize heir log uiliy over consumpion E 0 =0 β log (Π j ) Budge consrain A j }{{} Real asses + b j,g }{{} Gov. bonds + Π j }{{} Consumpion = E j }{{} Pre div. equiy + B j }{{} IB borrowing 14 / 45

20 Invesmen Banks problem Bankers maximize heir log uiliy over consumpion E 0 =0 β log (Π j ) Budge consrain A j }{{} Real asses + b j,g }{{} Gov. bonds Maximum leverage raio + Π j }{{} Consumpion = E j A j φ N j }{{} Pos div. equiy }{{} Pre div. equiy + B j }{{} IB borrowing 14 / 45

21 Invesmen Banks problem Bankers maximize heir log uiliy over consumpion E 0 =0 β log (Π j ) Budge consrain A j }{{} Real asses + b j,g }{{} Gov. bonds Maximum leverage raio + Π j }{{} Consumpion = E j A j φ N j }{{} Pos div. equiy }{{} Pre div. equiy + B j }{{} IB borrowing LOM of equiy (noe: inerbank borrowing and lending raes may differ R B 1 RL 1 ) RG E j =R A ω j 1 Aj 1 + b j,g 1 + π 1 Bj π ( 1 B j 1 >0RB B j 1 <0RL 1 ) 14 / 45

22 Soluion o he invesmen bank s problem Dividend policy Π j = ( ) 1 β E j, 15 / 45

23 Soluion o he invesmen bank s problem Dividend policy Π j = ( ) 1 β E j, Banks endogenously segmened in hree groups depending on heir idiosyncraic produciviy ω j Non leveraged Inves in bonds and inerbank make Non leveraged Inves in firms Borrow in IB marke up o leverage consrain Inves in firms R L R 1 + π π +1 B R A ω j 15 / 45

24 Reail banks Collec deposis from he households and lend hese funds ou hrough he inerbank marke. Perfec compeiion R D }{{} = R L }{{} HH deposi rae Effecive lending rae 16 / 45

25 Inerbank marke How does he inerbank marke work? In a fricionless marke we would have R B = R L 17 / 45

26 Inerbank marke How does he inerbank marke work? In a fricionless marke we would have R B = R L Insead we model he IB marke as an OTC marke wih maching fricions similar o Bianchi and Bigio (2014) or Afonso and Lagos (2012). 17 / 45

27 Inerbank marke How does he inerbank marke work? In a fricionless marke we would have R B = R L Insead we model he IB marke as an OTC marke wih maching fricions similar o Bianchi and Bigio (2014) or Afonso and Lagos (2012). Banks (boh invesmen and reail) place per uni lending or borrowing orders 17 / 45

28 Inerbank marke How does he inerbank marke work? In a fricionless marke we would have R B = R L Insead we model he IB marke as an OTC marke wih maching fricions similar o Bianchi and Bigio (2014) or Afonso and Lagos (2012). Banks (boh invesmen and reail) place per uni lending or borrowing orders Orders find maches according o some maching funcion Υ( ) 17 / 45

29 Inerbank marke How does he inerbank marke work? In a fricionless marke we would have R B = R L Insead we model he IB marke as an OTC marke wih maching fricions similar o Bianchi and Bigio (2014) or Afonso and Lagos (2012). Banks (boh invesmen and reail) place per uni lending or borrowing orders Orders find maches according o some maching funcion Υ( ) The higher he marke ighness x, he lower (higher) he probabiliy Γ B (Γ L ) ha borrowing (lending) orders find a mach 17 / 45

30 Inerbank marke How does he inerbank marke work? In a fricionless marke we would have R B = R L Insead we model he IB marke as an OTC marke wih maching fricions similar o Bianchi and Bigio (2014) or Afonso and Lagos (2012). Banks (boh invesmen and reail) place per uni lending or borrowing orders Orders find maches according o some maching funcion Υ( ) The higher he marke ighness x, he lower (higher) he probabiliy Γ B (Γ L ) ha borrowing (lending) orders find a mach Each ime 2 orders mach, he banks engage in Nash bargaining wih weigh ξ regarding he ineres rae 17 / 45

31 Inerbank marke How does he inerbank marke work? In a fricionless marke we would have R B = R L Insead we model he IB marke as an OTC marke wih maching fricions similar o Bianchi and Bigio (2014) or Afonso and Lagos (2012). Banks (boh invesmen and reail) place per uni lending or borrowing orders Orders find maches according o some maching funcion Υ( ) The higher he marke ighness x, he lower (higher) he probabiliy Γ B (Γ L ) ha borrowing (lending) orders find a mach Each ime 2 orders mach, he banks engage in Nash bargaining wih weigh ξ regarding he ineres rae If a mached pair of banks fail o agree a a given round, hen wih probabiliy ϑ boh banks can search for a new rading parner 17 / 45

32 Inerbank marke How does he inerbank marke work? In a fricionless marke we would have R B = R L Insead we model he IB marke as an OTC marke wih maching fricions similar o Bianchi and Bigio (2014) or Afonso and Lagos (2012). Banks (boh invesmen and reail) place per uni lending or borrowing orders Orders find maches according o some maching funcion Υ( ) The higher he marke ighness x, he lower (higher) he probabiliy Γ B (Γ L ) ha borrowing (lending) orders find a mach Each ime 2 orders mach, he banks engage in Nash bargaining wih weigh ξ regarding he ineres rae If a mached pair of banks fail o agree a a given round, hen wih probabiliy ϑ boh banks can search for a new rading parner Else hey need o execue heir order a he CB s lending and deposi faciliy (R DF and R LF ) 17 / 45

33 Inerbank marke How does he inerbank marke work? In a fricionless marke we would have R B = R L Insead we model he IB marke as an OTC marke wih maching fricions similar o Bianchi and Bigio (2014) or Afonso and Lagos (2012). Banks (boh invesmen and reail) place per uni lending or borrowing orders Orders find maches according o some maching funcion Υ( ) The higher he marke ighness x, he lower (higher) he probabiliy Γ B (Γ L ) ha borrowing (lending) orders find a mach Each ime 2 orders mach, he banks engage in Nash bargaining wih weigh ξ regarding he ineres rae If a mached pair of banks fail o agree a a given round, hen wih probabiliy ϑ boh banks can search for a new rading parner Else hey need o execue heir order a he CB s lending and deposi faciliy (R DF and R LF ) 17 / 45

34 Soluion o he bargaining problem Given he srucure of he bank s problem and some addiional simplifying assumpion, each negoiaion is concluded wih an agreemen a he same inerbank rae where R IB = ϕ R DF + (1 ϕ ) R LF ξ ( 1 ϑγ L ) ϕ = 1 ξϑγ L (1 ξ) ϑγ B 18 / 45

35 Soluion o he bargaining problem Given he srucure of he bank s problem and some addiional simplifying assumpion, each negoiaion is concluded wih an agreemen a he same inerbank rae where R IB = ϕ R DF + (1 ϕ ) R LF ξ ( 1 ϑγ L ) ϕ = 1 ξϑγ L (1 ξ) ϑγ B The effecive borrowing rae for a borrowing bank is ( ) R B = Γ B }{{} mach prob R IB + 1 Γ B R LF The effecive lending rae for a lending bank is ( ) R L = Γ L R IB + 1 Γ L R DF 18 / 45

36 Public secor The CB ses he sance of MP by conrolling R DF he value of public deb i holds, b G,CB. and R LF, as well as The CB ses he corridor raes such ha he nominal IB rae (he operaional arge) follows a Taylor rule in equilibrium: R IB and keeps he corridor consan = ρ(r IB 1) + (1 ρ) [ R + υ (π π)] R LF R DF = χ 19 / 45

37 Public secor The CB ses he sance of MP by conrolling R DF he value of public deb i holds, b G,CB. and R LF, as well as The CB ses he corridor raes such ha he nominal IB rae (he operaional arge) follows a Taylor rule in equilibrium: R IB and keeps he corridor consan = ρ(r IB 1) + (1 ρ) [ R + υ (π π)] R LF R DF = χ CB balance shee ( ) ( ) b G,CB + Φ B 1 Γ B = Φ L 1 Γ L }{{}}{{}}{{} Public. deb Lending faciliy Deposi faciliy Profis/Losses are paid o he HH lump sum 19 / 45

38 Public secor The CB ses he sance of MP by conrolling R DF he value of public deb i holds, b G,CB. and R LF, as well as The CB ses he corridor raes such ha he nominal IB rae (he operaional arge) follows a Taylor rule in equilibrium: R IB and keeps he corridor consan = ρ(r IB 1) + (1 ρ) [ R + υ (π π)] R LF R DF = χ CB balance shee ( ) ( ) b G,CB + Φ B 1 Γ B = Φ L 1 Γ L }{{}}{{}}{{} Public. deb Lending faciliy Deposi faciliy Profis/Losses are paid o he HH lump sum The reasury is passive and keeps deb sock consan, using lump sum axes 19 / 45

39 Res of he model The res of he model is a sandard new Keynesian model wih Calvo pricing and invesmen adjusmen coss, in which household deposi heir savings a reail banks a rae R D. Boh households and banks have access o a sorage echnology wih gross reurn 1 κ which provides he effecive lower bound (ELB): R D R DF 1 κ 20 / 45

40 Mechanism: How does convenional and unconvenional MP affec ineres raes? 21 / 45

41 Mechanism: How does convenional and unconvenional MP affec ineres raes? Be x = ΦB Φ L he IB marke ighness, hen he IB rae is: R IB = ϕ(x ( )R DF + 1 ϕ(x ) ) R LF Effecive lending rae: ( ) R L = Γ L (x ) R IB + 1 Γ L (x ) R DF 21 / 45

42 Mechanism: How does convenional and unconvenional MP affec ineres raes? Be x = ΦB Φ L he IB marke ighness, hen he IB rae is: R IB = ϕ(x ( )R DF + 1 ϕ(x ) ) R LF Effecive lending rae: ( ) R L = 1 (1 ϕ (x ))Γ L (x ) R DF + (1 ϕ (x )) Γ L (x ) R LF 21 / 45

43 Mechanism: How does convenional and unconvenional MP affec ineres raes? Be x = ΦB Φ L he IB marke ighness, hen he IB rae is: R IB Effecive lending rae: R L = ϕ(x ( )R DF + 1 ϕ(x ) ) R LF = ψ (x )R DF + ( 1 ψ(x ) ) R LF 21 / 45

44 Mechanism: How does convenional and unconvenional MP affec ineres raes? Be x = ΦB Φ L he IB marke ighness, hen he IB rae is: R IB Effecive lending rae: R L = ϕ(x ( )R DF + 1 ϕ(x ) ) R LF = ψ (x )R DF + ( 1 ψ(x ) ) R LF Analogous for he expeced borrowing rae: R B 21 / 45

45 Mechanism: How does convenional and unconvenional MP affec ineres raes? Be x = ΦB Φ L he IB marke ighness, hen he IB rae is: R IB Effecive lending rae: R L = ϕ(x ( )R DF + 1 ϕ(x ) ) R LF = ψ (x )R DF + ( 1 ψ(x ) ) R LF Analogous for he expeced borrowing rae: R B Convenional policy: parallel movemen of R LF consan and R DF, wih x 21 / 45

46 Mechanism: How does convenional and unconvenional MP affec ineres raes? Be x = ΦB Φ L he IB marke ighness, hen he IB rae is: R IB Effecive lending rae: R L = ϕ(x ( )R DF + 1 ϕ(x ) ) R LF = ψ (x )R DF + ( 1 ψ(x ) ) R LF Analogous for he expeced borrowing rae: R B Convenional policy: parallel movemen of R LF consan and R DF, wih x QE: wihdrawal of bonds increases supply of liquidiy by unproducive invesmen banks o he IB marke, which reduces x. Since ψ, ϕ < 0, his in urn moves R L, R B and R IB owards he DFR R DF. 21 / 45

47 Convenional policy R LF R IB = R L = R D R DF 22 / 45

48 Quaniaive easing R LF R IB = R L = R D R DF 23 / 45

49 The EONIA - DFR spread and excess reserves 24 / 45

50 Addiional insighs on he effecs of balance shee policies QE is increasingly ineffecive (Reis 2016) ( ) 2 ( ) 2 We show ha 2 R IB / b G,CB < 0 = 2 Y / b G,CB < 0 Inerbank marke breakdowns lead o CB balance shee exensions We show ha a reducion in he effi ciency of he maching echnology, (i.e. Υ( ) ), leads o a bigger balance shee even absen QE measures CB asse purchases and CB lending o banks a favorable raes (LTROs) are subsiues We exend he model o allow for direc lending o borrowing banks (LTROs) as an addiional QE measure. We show analyically ha for each pah of bond purchases here is a pah of LTRO, such ha he real variables in he implied equilibria coincide. 25 / 45

51 Lean or large balance shee: Comparaive saics Assuming ha he IB marke is mach effi cien (i.e. Υ(x, x) = x), excess reserves=bond holdings and here is no lending faciliy lending Higher CB bond holdings imply slighly higher seniorage, which is disorionary The magniude of his effec is negligible for a reasonable calibraion 26 / 45

52 Policy space: Lean balance shee R LF 1 β R IB = R L = R D R DF ELB 27 / 45

53 Policy space: Large balance shee R LF 1 β R DF = R IB = R L = R D ELB 28 / 45

54 Policy space: Lean balance shee wih emporary QE R LF 1 β R IB = R L = R D R DF ELB 29 / 45

55 Dynamic analysis 30 / 45

56 Dynamic analysis 31 / 45

57 Dynamic analysis 32 / 45

58 Conclusions Unconvenional moneary policy has real effecs due o fricions in he inerbank marke These effecs decrease in he size of he balance shee They are equal for APP and LTROs A lean balance shee wih a corridor sysem looks like a good alernaive in normal imes if he CB is willing o immediaely engage in a QE program when he ELB is binding and he IB marke is working properly However, a large balance shee is a beer alernaive if he ELB is ofen binding and swif and flexible emporary QE programs are no implemenable or he IB marke is no working properly 33 / 45

59 Inerbank marke OTC marke similar o Bianchi and Bigio (2014) or Afonso and Lagos (2012). Banks (boh invesmen and reail) place lending orders Orders are placed on a per-uni basis as in Akenson e al. (2012). 34 / 45

60 Masses of borrowing and lending orders Φ B = (φ 1)N [1 F ( Φ L = F ω L ( )] ω B, ) N b G + B L. 35 / 45

61 Maching funcion, ( ) Υ Φ L, Φ B. Probabiliy ha a borrowing order finds a lending order Γ B Υ ( Φ L, Φ B ) ( ) Φ L Φ B = Υ Φ B, 1, Probabiliy ha a lending order finds a borrowing order Γ L Υ ( Φ L, Φ B ) ( ) Φ L = Υ 1, ΦB Φ L. 36 / 45

62 Bargaining Banks use a muli-round Nash bargaining o spli he surplus of he dollar ransfer Ouside opions are he CB lending R LF and deposi R DF faciliy raes. Banks bargain abou he (gross) inerbank rae, R IB ξ (0, 1) is he bargaining power of he borrowers If a mached pair of banks fail o agree a a given round, hen wih probabiliy ϑ (0, 1) boh banks search for a new rading parner 37 / 45

63 Mach effi cien IB marke Definiion (mach effi cien IB marke) The inerbank marke is mach-effi cien if Υ (1, 1) = 1. Oherwise (Υ (1, 1) < 1) he inerbank marke is mach-ineffi cien. Definiion (asympoically mach effi cien IB marke) A mach-ineffi cien marke is asympoically mach-effi cien if Υ (x, 1) = lim Υ (1, x) = 1. lim x x 38 / 45

64 Lean balance shee Proposiion If he inerbank marke is mach-effi cien and b G,CB = 0 hen R L = R B = R IB = ξr DF + (1 ξ) R LF, he amoun of reserves a he cenral bank is zero ( ) M /P = Φ L 1 Γ L = / 45

65 Irrelevance of he corridor widh in normal imes Lean balance shee Proposiion If he inerbank marke is mach-effi cien and b G,CB = 0, given an arbirary corridor widh χ and an inerbank rae R IB such ha he ELB is no binding he equilibrium allocaion is independen of he corridor widh. The policy raes in his case are R DF = R IB (1 ξ) χ, R LF = R IB + ξχ. 40 / 45

66 Policy space Lean balance shee Proposiion If he inerbank marke is mach-effi cien and b G,CB = 0, he disance from he deposi faciliy rae in seady sae o he ELB is R DF (1 κ) = 1/β (1 ξ) χ (1 κ). 41 / 45

67 Large balance shee Proposiion If he inerbank marke is mach-effi cien and b G,CB Γ L = 0 hen 0 such ha R L = R DF, R B = R IB = ϕ R DF + (1 ϕ ) R LF > R L, and he amoun of reserves a he cenral bank is ( ) M /P = Φ L 1 Γ L = Φ L = b G,CB + Φ B. 42 / 45

68 Floor sysem Large balance shee Proposiion If he inerbank marke is mach-effi cien, b G,CB 0 (such ha Γ L = 0) and ϑ 1 hen he cenral bank operaes a floor sysem wih R B = R IB R L = R DF, and he marginal lending faciliy R LF rae does no affec he economy. 43 / 45

69 Policy space Large balance shee Proposiion If he inerbank marke is mach-effi cien, b G,VCB 0 (such ha Γ L = 0) and ϑ 1, hen he disance from he deposi faciliy rae in seady sae o he ELB is R DF (1 κ) = 1/β (1 κ). (Remember: wih lean balance shee, disance from he ELB is: ) R DF (1 κ) = 1/β (1 ξ) χ 1 < 1/β (1 κ) 44 / 45

70 The case of a mach-ineffi cien inerbank marke Lean balance shee Proposiion If he inerbank marke is ineffi cien and b G,CB = 0 hen R L < R IB < R B. 45 / 45