Central banking

Technicalities

 * TARGET2 mirror/represent asymmetrical flows of payment in private capital flows
 * Market neutrality: meaning to disincentivize irresponsible borrowing
 * For what do banks actually need central bank reserves? These days mainly as a collateral (because it's a high-quality liquid asset) that is cheaper than other HQLAs such as govies
 * Inflation-targeting vs. price level targeting: if a shock makes inflation rise above target, inflation-targeting aim for the target (i.e. on-target) regardless of the level of current inflation while price-level targeting now overcompensates by aiming for (a while of) below-target

New Keynesian/Consensus view

 * LR nominal interest rate determined by: LR real interest rate + inflation expectations

Marxist view

 * Because the central bank has the power to set the conditions under which other moneys are convertible into its own money, it can, within certain limits, regulate the market rate of interest (Capital, vol. 3, p. 542). It cannot behave arbitrarily. It is constrained by its foreign exchange position, gold reserves and other links with some kind of supra-national money on the world stage
 * When convertibility into gold is permanently (as opposed to temporarily) suspended, the quantity of central bank money and the rate of interest on that money can become policy instruments
 * If credit is extended continuously in the boom and the CB/state accommodates this by printing money (or issuing bonds + the CB buying them), then the devaluation of commodities (in the crisis) can be converted into the devaluation of money through inflation. The transformation of devaluation into inflation simultaneously entails the centralization and socialization of the devaluation process that accompanies overaccumulation. Devaluation, we should note, begins as a private affair (individual firms go bankrupt; particular commodities remain unsold) and ends up having social ramifications (unemployment, diminished circulation of revenues, etc.).

Interest rate policy

 * Corridor of interest rates
 * Marginal lending facility (Spitzenrefinanzierungssatz): the ceiling is the (punitive) interest rate for over-night liquidity
 * Main refinancing operations (Hauptrefinanzierungssatz): banks exchange their securities for CB-money; in normal times it accounts for ca. 3/4 of monetary base
 * Deposit facility (Einlagesatz): possibility of storing excess liquidity at the CB for a small remuneration - historically it was 1% but now it's in fact negative
 * Escape clause: a simple modification to the Taylor rule → follow that rule as long as the economy remains in a neighborhood of the desired equilibrium and implement an escape clause in the event that a non-desired equilibrium appears to form. The escape clause could specify that if inflation moves outside a particular monitoring range, then the government deviates from the Taylor rule in favor of some other policy that directly moves inflation back into the monitoring range. The policy to which the government deviates under the escape clause might not be optimal in normal times, but the mere existence of the escape clause prevents undesired equilibria from forming in the first place

Price stability

 * Nominal and real interest rates are the same
 * Price stability is also defined as (investors) having the option to invest in a risk-free asset (i.e. no loss of purchasing power with at least a return of 0). When prices are stable, zero is the lower bound for the risk-free real interest rate
 * Central banks manipulate the money market interest rate and through this (indirectly) the capital market interest rates

Pre-GFC vs. post-GFC central banking

 * See Valimaki & Papadia (2018) chapter 3: The most serious hit to the pre-crisis model of CB came from the experience during the Great Recession that, contrary to what was hoped, advanced economies had not graduated from financial, and especially banking, instability and that price stability did not, by itself, assure financial stability.
 * At the start of the Eurocrisis, banks' refinancing operations surged (they borrowed liquidity as a safeguard) and put them into the deposit facility at the CB, i.e. the money never left the CB

Transmission channels

 * Interest rate channel: intertemporal substitution/C-S decisions governed by short & long-term rates (faced by HH and NFCs) - transmission of CB's risk-free short rates to risky long private rates is crucial
 * X-rate channel: how relative price movements change expenditure switching from or to domestic production to/from imported goods - depends on openness, export-dependence, REER-elasticity of exports, cost structure of export goods and market/competition structure; short-term impact of MP on X-rate is less predictable (because deviations from CIP/UIP) but long-term MP should be able to influence X-rate via its impact on inflation
 * Asset price channel: wealth effects arising from monetary policy stance - more financial integration (i.e. cross-border holdings) led to higher risk diversification and broader exposure, which weakened domestic MP effect but foreign MP can have valuation effects through X-rate movements
 * Bank-lending channel: frictions in financial intermediation

Portfolio rebalancing effect (QE)

 * The Fed's securities purchases work primarily through the so-called portfolio balance channel: once short- term interest rates have reached zero, the Feds purchases of longer-term securities affect financial conditions by changing the quantity and mix of financial assets held by the public
 * Relies on the presumption that different financial as-sets are not perfect substitutes in investors' portfolios, so that changes in the net supply of an asset available to investors affect its yield and those of broadly similar assets
 * Thus, the purchases of Treasury, agency debt, and agency MBS likely both reduced the yields on those securities and also pushed investors into holding other assets with similar characteristics (e.g. credit risk & duration). For example, some investors who sold MBS to the Fed may have replaced them in their portfolios with longer-term, high-quality corporate bonds, depressing the yields on those assets as well.
 * QE worked by substituting bonds, and particularly sovereign bonds, in the portfolios of investors, with a much shorter duration asset, namely liabilities of the central bank in the form of bank reserves. It was also argued that if treasury bills instead of bonds had been bought under QE, very little effect would have been generated because their characteristics are very similar to those of bank reserves.