Abstract: This paper analyses the implications of central bank balance sheet policies on financial stability in a framework with banks facing occasionally-binding leverage constraints and endogenous disruptions in financial intermediation. Whilst central bank balance sheet expansions are effective in stabilising the economy in a financial stress episode, they increase the frequency of such episodes and their duration. Balance sheet expansions induce financial intermediaries to take on more risk in normal times and slow their recapitalisation during a stress episode. In a tightening cycle, stabilisation properties of balance sheet policies are maintained but come at a significant cost to price stability.
with David Murakami.
Abstract: The presence of an occasionally binding constraint due to the effective lower bound (ELB) in New Keynesian models generally gives rise to multiple equilibria under active monetary policy. To restore uniqueness in the model with an active Taylor rule, we consider appropriate simple fiscal policy instruments. Without relaxing the assumptions of Ricardian equivalence, full information, and rational expectations, we show that appropriate fiscal targeting rules ensure that New Keynesian models subject to the ELB possess a unique solution.
with David Murakami and Ganesh Viswanath-Natraj.
Abstract: In this paper we study the interaction between monetary policy and financial inclusion in an economy that introduces a central bank digital currency (CBDC). Using a New Keynesian two-agent framework with banked and unbanked households, we show that CBDCs provide a more efficient savings device for the unbanked to smooth consumption, increasing welfare. A Ramsey optimal policy exercise reveals that the CBDC rate is set at a constant spread to the policy rate. We observe a policy trade-off: a higher CBDC rate benefits the unbanked, but disintermediates banks and reduces welfare of banked households. Taken together, our findings highlight the role of tailoring CBDC design based on the level of financial inclusion in an economy.
with Momo Komatsu and David Murakami.
Abstract: Japan has faced rapid ageing, persistently low interest rates and deflation for decades. Concurrently, during this period, there has been a gradual convergence in productivity between young and elderly workers. This paper aims to explore the relationship between productivity, demographic shifts, and interest rates in Japan during the post-bubble era, using an overlapping generations two-agent New Keynesian (OTANK) life-cycle DSGE model. The narrowing productivity gap between younger and older cohorts puts upward pressure on interest rates. Meanwhile, factors such as longer life expectancy and negative population growth rates exert downward pressure on interest rates. The latter effect dominates. An important policy implication emerges: Enhancing worker productivity across the entire lifespan and bridging the productivity gap between younger and older workers can help offset the decline in interest rates.
with Guido Ascari, David Murakami, and Francesco Zanetti.
with David Murakami and Yifan Zhang.
with Martina Bianchi and David Bounie.
with Xuanheng Huang, David Murakami, Ganesh Viswanath-Natraj, and Yifan Zhang.
with David Bounie, Abel François, and Davi Marim
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