Jonathan Benchimol and Caroline Bozou. Submitted. “
Desirable Banking Competition and Stability”.
AbstractEvery financial crisis raises questions about how the banking market structure affects the real economy. Although low bank concentration may lower markups and foster bank risk-taking, controlled banking concentration systems appear more resilient to financial shocks. We use a nonlinear dynamic stochastic general equilibrium model with financial frictions to compare the transmissions of shocks under different competition and concentration configurations. Oligopolistic competition and concentration amplify the effects of the shocks relative to monopolistic competition. The transmission mechanism works through the markups, which are amplified when banking concentration is increased. According to financial stability and social welfare objectives, the desirable banking market structure is determined. Depending on policymakers' preferences, the banking concentration of five to seven banks balances social welfare and bank stability objectives.
Paper Jonathan Benchimol, Sophia Kazinnik, and Yossi Saadon. Submitted. “
Federal Reserve Communication and the COVID-19 Pandemic”.
Abstract
Our study examines how the Federal Reserve (Fed) communicated during the COVID-19 pandemic and compares it with other periods of stress. This comparison uses a set of dictionaries related to COVID-19, unconventional monetary policy (UMP), and financial stability, as well as sentiment analysis and topic modeling. We show that Fed communication during the COVID-19 pandemic focused on financial stability, market volatility, social welfare, and UMP, and was mostly characterized by contextual uncertainty. We also compare Fed communication during the COVID-19 pandemic with the dot-com and global financial crises regarding content, sentiment, and timing. We find that Fed communication and actions were more reactive to the COVID-19 crisis than to other crises. We also find that declining financial stability sentiment in interest rate announcements and minutes precedes accommodative monetary policy decisions.
Paper Jonathan Benchimol and Samuel Dahan. Submitted. “
The Legal Case for a Central Bank Labour Mandate”.
AbstractA consensus has emerged among economists that central banks cannot ignore employment and how monetary policies affect workers and employers. However, there is no agreement on the extent to which labour issues should be incorporated into operational frameworks or whether central banks should support structural reforms. In fact, more than 80% of the world’s central banks have no explicit employment objective. That said, given that labour issues can directly cause macroeconomic imbalances, many central banks, even those without explicit dual objectives, have incorporated labour indicators into their core policy frameworks. We assess the implicit mandate of the Bank of Canada and the European Central Bank, which, unlike the Federal Reserve, do not have an express labour mandate. To scrutinize modern central banking practices, we investigate the historical, legal, and extra-statutory data with regard to the primary objectives of central banks and how they interact with secondary objectives in practice. Our analysis shows that both the Global Financial Crisis and the recession triggered by COVID-19 have had tremendous impacts on the workforce, requiring immediate action and eventually changing the policy environment in which central banks operate. However, while neither the Bank of Canada nor the European Central Bank have an explicit dual mandate, the latter has been much more aggressive in pursuing labour objectives. We discuss the legality of this mandate transformation in light of the Bank of Canada Act and the European Union Treaty. Finally, we make a legal case for a more human-developmental approach to central banking, one that involves greater social and labour dimensions.
Paper Jonathan Benchimol and Lahcen Bounader. Submitted. “
Optimal Monetary Policy Under Bounded Rationality”.
Abstract
We develop a behavioral New Keynesian model to analyze optimal monetary policy with heterogeneously myopic households and firms. Five key results are derived. First, our model reflects coherent microeconomic and aggregate myopia due to the consistent transition from subjective to objective expectations. Second, the optimal monetary policy entails implementing inflation targeting in a framework where myopia distorts agents' inflation expectations. Third, price level targeting emerges as the optimal policy under output gap, revenue, or interest rate myopia. Given that bygones are not bygones under price level targeting, rational inflation expectations are a minimal condition for optimality under bounded rationality. Fourth, we show that there are no feasible instrument rules for implementing the optimal monetary policy, casting doubt on the ability of simple Taylor rules to assist in the setting of monetary policy when agents are myopic. Finally, bounded rationality is not necessarily welfare decreasing, and is even associated with welfare gains for extreme cognitive discounting.
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