Concerted Efforts? Monetary Policy and Macro-Prudential Tools

Transcription

1 Concerted Efforts? Monetary Policy and Macro-Prudential Tools Andrea Ferrero Richard Harrison Benjamin Nelson University of Oxford Bank of England Rokos Capital 20 th Central Bank Macroeconomic Modeling Workshop on Policy Coordination Banque de France Paris, 17 November 2017 The views expressed in this paper do not necessarily reflect the position of either the Bank of England or Rokos Capital.

2 Boom-Bust Cycle in Debt and House Prices 140 US FHFA Real House Prices (left) US Mortgage Debt (right) Index = 100 in 2000:Q % of GDP Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

3 A New Normal? Several macro-prudential tools introduced in response to crisis, e.g. Capital requirements LTV limits Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

4 A New Normal? Several macro-prudential tools introduced in response to crisis, e.g. Capital requirements LTV limits New resulting policy framework Monetary policy: Interest rate setting Financial stability: Macro-prudential tools Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

5 A New Normal? Several macro-prudential tools introduced in response to crisis, e.g. Capital requirements LTV limits New resulting policy framework Monetary policy: Interest rate setting Financial stability: Macro-prudential tools How should monetary and macro-prudential policies conducted? With the recovery in the UK economy broadening and gaining momentum in recent months, the Bank of England is now focussed on turning that recovery into a durable expansion. To do so, our policy tools must be used in concert. Mark Carney Financial Stability Report Press Conference 26 June 2014 Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

6 What We Do Simple framework to study interaction of monetary and macro-pru policies Nominal rigidities (Woodford, 2003) Borrowers and savers (Kiyotaki and Moore, 1997) Explicit role of financial intermediation (Curdia and Woordford, 2017) Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

7 What We Do Simple framework to study interaction of monetary and macro-pru policies Nominal rigidities (Woodford, 2003) Borrowers and savers (Kiyotaki and Moore, 1997) Explicit role of financial intermediation (Curdia and Woordford, 2017) Normative analysis Joint optimal policy plan in normal times (analytics) Boom-bust scenario with occasionally-binding constraints (numerical analysis) Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

8 What We Do Simple framework to study interaction of monetary and macro-pru policies Nominal rigidities (Woodford, 2003) Borrowers and savers (Kiyotaki and Moore, 1997) Explicit role of financial intermediation (Curdia and Woordford, 2017) Normative analysis Joint optimal policy plan in normal times (analytics) Boom-bust scenario with occasionally-binding constraints (numerical analysis) Focus on implications of macro-pru for monetary policy Pervasive spillovers between monetary policy and macro-prudential regulation Tightening of macro-pru at ZLB endogenously prolong duration of recession Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

9 Outline 1 Model sketch and credit market equilibrium 2 Optimal policy: Analytical results 3 Quantitative experiments: Boom-bust scenario Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

10 Overview Introduce nominal rigidities in Justiniano, Primiceri and Tambalotti (2016) Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

11 Overview Introduce nominal rigidities in Justiniano, Primiceri and Tambalotti (2016) Patient and impatient households, differ in their individual discount factor Impatient households would like to borrow to purchase housing services Patient household save via deposits and equity of financial intermediaries Equity adjustment costs Equity pays a premium over deposits Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

12 Overview Introduce nominal rigidities in Justiniano, Primiceri and Tambalotti (2016) Patient and impatient households, differ in their individual discount factor Impatient households would like to borrow to purchase housing services Patient household save via deposits and equity of financial intermediaries Equity adjustment costs Equity pays a premium over deposits Financial intermediaries channel funds from savers to borrowers Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

13 Overview Introduce nominal rigidities in Justiniano, Primiceri and Tambalotti (2016) Patient and impatient households, differ in their individual discount factor Impatient households would like to borrow to purchase housing services Patient household save via deposits and equity of financial intermediaries Equity adjustment costs Equity pays a premium over deposits Financial intermediaries channel funds from savers to borrowers Financial frictions Collateral constraint on impatient households (Kiyotaki and Moore, 1997) Capital requirement on financial intermediaries (He and Krishnamurty, 2013) Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

14 Overview Introduce nominal rigidities in Justiniano, Primiceri and Tambalotti (2016) Patient and impatient households, differ in their individual discount factor Impatient households would like to borrow to purchase housing services Patient household save via deposits and equity of financial intermediaries Equity adjustment costs Equity pays a premium over deposits Financial intermediaries channel funds from savers to borrowers Financial frictions Collateral constraint on impatient households (Kiyotaki and Moore, 1997) Capital requirement on financial intermediaries (He and Krishnamurty, 2013) Standard NK supply side with sticky prices Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

15 Credit Market Equilibrium Underlying credit market equilibrium (real economy) corresponds to JPT Sequence of static equilibria that can be represented in (d b, R b ) space Location of equilibrium depends on parameter values (not multiple equilibria) R b Credit Supply A 1/β b B Credit Demand 1/β s Non-Binding Borrowing Constraint Binding Borrowing Constraint d b Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

16 Macro-Pru Tools and Credit Market Equilibrium Tightening of LTV ratios: Θ t R b Credit Supply 1/β b B Credit Demand B 1/β s Θê Non-Binding Borrowing Constraint Binding Borrowing Constraint d b Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

17 Macro-Pru Tools and Credit Market Equilibrium Tightening of capital requirements: κ t R b Credit Supply κé 1/β b B B Credit Demand 1/β s Non-Binding Borrowing Constraint Binding Borrowing Constraint d b Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

18 Outline 1 Model sketch and credit market equilibrium 2 Optimal policy: Analytical results 3 Quantitative experiments: Boom-bust scenario Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

19 LQ Approximation Loss function L E 0 t=0 β t ( x 2 t + λ π π 2 t + λ c c 2 t + λ h h2 t + λ κ κ 2 t ) Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

20 LQ Approximation Loss function L E 0 t=0 β t ( x 2 t + λ π π 2 t + λ c c 2 t + λ h h2 t + λ κ κ 2 t ) Output gap and inflation due to nominal rigidities Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

21 LQ Approximation Loss function L E 0 t=0 β t ( x 2 t + λ π π 2 t + λ c c 2 t + λ h h2 t + λ κ κ 2 t ) Output gap and inflation due to nominal rigidities Consumption and housing gaps due to lack of risk sharing Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

22 LQ Approximation Loss function L E 0 t=0 β t ( x 2 t + λ π π 2 t + λ c c 2 t + λ h h2 t + λ κ κ 2 t ) Output gap and inflation due to nominal rigidities Consumption and housing gaps due to lack of risk sharing Inverse of leverage due to equity adjustment costs Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

23 LQ Approximation Loss function L E 0 t=0 β t ( x 2 t + λ π π 2 t + λ c c 2 t + λ h h2 t + λ κ κ 2 t ) Output gap and inflation due to nominal rigidities Consumption and housing gaps due to lack of risk sharing Inverse of leverage due to equity adjustment costs Special cases: Flexible prices: λπ = 0 and x t = 0 Exogenous leverage constraints: λκ κ 2 t t.i.p. Segmented housing markets: ht = 0 t Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

24 LQ Approximation Phillips curve π t = γx t + βe t π t+1 + u m t Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

25 LQ Approximation Phillips curve π t = γx t + βe t π t+1 + u m t IS curve (Savers Euler equation) x t ξ c t = σ 1 (i t E t π t+1 ) + E t (x t+1 ξ c t+1 ) + ν cgap t Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

26 LQ Approximation Phillips curve π t = γx t + βe t π t+1 + u m t IS curve (Savers Euler equation) x t ξ c t = σ 1 (i t E t π t+1 ) + E t (x t+1 ξ c t+1 ) + ν cgap t Binding borrowing constraint d b t = θ t + q t + (1 ξ) h t Evolution of debt d b t = 1 (i β t 1 + ψκ t 1 + d b t 1 π t) + (1 ξ)( h t h t 1 ) + 1 ξ s η c t Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

27 LQ Approximation House prices q t = (i t E t π t+1 ) + σω ω + β E tx t+1 + ξ µ ω + β θ ξ(1 µ) t ω + β ψκ t + β ω + β E tq t+1 + ν h t Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

28 LQ Approximation House prices q t = (i t E t π t+1 ) + σω ω + β E tx t+1 + ξ µ ω + β θ ξ(1 µ) t ω + β ψκ t + β ω + β E tq t+1 + ν h t Housing gap h t = ω ξ(β s β b ) (i t E t π σ h ξω t+1 ) + β s β b σ h ω (q t E t q t+1 ) σ σ h ξ (x t E t x t+1 ) + σ c t + µ σ h σ h ω θ t 1 µ σ h ω ψκ t + ν hgap t Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

29 Optimal Monetary Policy Abstract from ZLB and assume borrowing constraint always binds Optimal targeting rule for monetary policy with Ω c > 0 x t + γλ π π t + Ω c c t = 0 Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

30 Optimal Monetary Policy Abstract from ZLB and assume borrowing constraint always binds Optimal targeting rule for monetary policy with Ω c > 0 x t + γλ π π t + Ω c c t = 0 If ct = 0, same targeting rule as in baseline NK model If ct = 0, risk-sharing-adjusted monetary policy tradeoff Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

31 Optimal Monetary Policy Abstract from ZLB and assume borrowing constraint always binds Optimal targeting rule for monetary policy with Ω c > 0 x t + γλ π π t + Ω c c t = 0 If ct = 0, same targeting rule as in baseline NK model If ct = 0, risk-sharing-adjusted monetary policy tradeoff Monetary policy concerned with distributional considerations Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

32 Optimal Macro-Prudential Policy Two rules (two instruments: LTV ratios and capital requirements) 1. Optimal capital requirements κ t = Φ h ht + Φ c c t, with Φ h, Φ c > 0 Positive housing and/or consumption gap Tighter capital requirements Static, no aggregate considerations Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

33 Optimal Macro-Prudential Policy Two rules (two instruments: LTV ratios and capital requirements) Define single state variable for policy problem S t d b t + i t + ψκ t β s h b t Can then rewrite law of motion of debt and borrowing constraint as S t = 1 (S t π t ) + i t + ψκ t + (1 ξ)(1 β s ) h t + 1 ξ c t β s η S t = θ t + q t + i t + ψκ t + (1 ξ)(1 β s ) h t Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

34 Optimal Macro-Prudential Policy Two rules (two instruments: LTV ratios and capital requirements) 2. Optimal LTV ratio (implicit) V t + F x x t + F π π t + F c c t + F h ht = 0 where V t measures marginal effect of current decisions on future losses V t = B x E t x t+1 + B π E t π t+1 + B c E t c t+1 + B h E t ht+1 + βb S E t V t+1 Dynamic tradeoff between current stimulus and its effects on future losses V t E tl t+1 S t Accounts for effect of macro-pru on aggregate and distributional variables Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

35 Optimal Monetary and Macro-Prudential Policies Pervasive spillovers between monetary and macro-prudential policies Optimal monetary policy affected by lack of full risk-sharing Optimal macro-prudential policy features Static rule for capital requirements function of distributional gaps Dynamic rule that trades off current stimulus and effects on future losses Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

36 Outline 1 Model sketch and credit market equilibrium 2 Optimal policy: Analytical results 3 Quantitative experiments: Boom-bust scenario Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

37 Calibration Introduce slow-moving debt to capture corr(hp, d b ) D b t (i) γ d D b t 1 (i) + (1 γ d) Θ t Q t H b t (i) Parameter Description Value β s Savers discount factor β b Borrowers discount factor σ IES (consumption) 1 ϕ Inverse Frisch elasticity 1 γ d Debt limit inertia 0.7 γ Slope of Phillips curve ξ Fraction of borrowers in economy 0.57 η Debt/GDP ratio 1.8 Θ LTV ratio 0.7 ψ Elasticity of funding cost to capital ratio σ h IES (housing) 5 ρ h Housing demand shock persistence 0.95 Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

38 Experiment and Solution Method Generate boom-bust scenario for house prices (similar to US experience) Sequence of positive news shock on house prices followed by collapse Negative shock large enough so that nominal interest rate hits ZLB E t u h K > E t 1 u h K t = 1,... K 1 u h K < E 1 u h K 2.5 (a) Expected house price shock 50 (b) Real house price expectations Solve model using occasionally-binding constraints (Holden and Paetz, 2012) Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

39 Pre-Crisis Status Quo Suppose policymaker seeks to minimize L FIT ( ) t E t β i x 2 t+i + λ ππt+i 2 i=0 No macro-prudential objective Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

40 Pre-Crisis Status Quo Suppose policymaker seeks to minimize L FIT ( ) t E t β i x 2 t+i + λ ππt+i 2 i=0 No macro-prudential objective Assume policymaker operates under discretion Hard to hit ZLB under commitment Without ZLB, optimal targeting rule is x t + λ π γπ t = 0 Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

41 Pre-Crisis Status Quo Real house price Debt Multiplier on borrowing constraint Output gap, per cent Quarterly inflation, per cent 4 2 Nominal policy rate Consumption gap, per cent Housing gap, per cent No bounds applied Bounds applied Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

42 Introducing Macro-Prudential Policy Macro-prudential authority also operates under discretion, minimizes L MP ( ) 0 = E 0 β t λ c c 2 t + λ h h2 t + λ κ κt 2 t=0 Focus on use of LTV instrument Monetary policy continues to operate under flexible inflation targeting Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

43 Introducing Macro-Prudential Policy Real house price Output gap, per cent Debt Quarterly inflation, per cent Multiplier on borrowing constraint Nominal policy rate Consumption gap, per cent Housing gap, per cent Loan to value ratio, per cent Lending rate Monetary policy Monetary policy plus LTV & bank capital Monetary policy plus LTV Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

44 Macro-Pru Tightening after the Crash Many macro-pru authorities currently considering tightening Increase LTV and/or capital requirements to ensure financial stability What are implications for monetary policy during crisis (ZLB period)? Monetary policy continues to operate under flexible inflation targeting Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

45 Macro-Pru Tightening after the Crash Real house price Output gap, per cent Debt Quarterly inflation, per cent Multiplier on borrowing constraint Nominal policy rate Consumption gap, per cent Housing gap, per cent Loan to value ratio, per cent Lending rate No LTV tightening LTV tightening Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

46 Conclusions Financial crisis extended objectives and toolkit of central banks Macro-Prudential policy: LTV limits and capital requirements Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

47 Conclusions Financial crisis extended objectives and toolkit of central banks Macro-Prudential policy: LTV limits and capital requirements This paper has focused on implications of macro-pru for monetary policy Illustrated how inflation targeting affected by macro-prudential policy targets Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

48 Conclusions Financial crisis extended objectives and toolkit of central banks Macro-Prudential policy: LTV limits and capital requirements This paper has focused on implications of macro-pru for monetary policy Illustrated how inflation targeting affected by macro-prudential policy targets Macro-prudential policy especially useful to escape ZLB situations But must be used very aggressively In directions that may encourage economy to undertake even more debt May conflict with financial stability objectives outside scope of this paper Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

49 Impatient Households (Borrowers) Continuum of measure ξ (0, 1), maximize { [ ]} ( ) E 0 β t b 1 e zcb t + χb H (Ht b ) 1 σ h χb L 1 σ t=0 h 1 + ϕ (Lb t ) 1+ϕ Budget constraint P t C b t D b t + Q t H b t = W b t L b t R b t 1 Db t 1 + Q th b t 1 + Ωb t T b t, Collateral constraint (Kiyotaki and Moore, 1997) with Θ t (0, 1) D b t Θ t Q t H b t Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

50 Patient Households (Savers) Continuum of measure 1 ξ, maximize E 0 { t=0 β t s with β s (β b, 1) Budget constraint [ ( ) ] } 1 e zcs t + χs H (H s 1 σ t) 1 σ h χs L h 1 + ϕ (Ls t) 1+ϕ P t C s t + D s t + E s t + Γ(E s t) + (1 + τ h )Q t H s t = W s t L s t + R d t 1 Ds t 1 + Re t 1 Es t 1 + Q th s t 1 + Ωs t T s t, where Γ(E s t ) is cost of changing equity position (Jermann and Quadrini, 2012) [ ] 2 Γ(E s t) Ψ E s t κξd b 2 κξd b 1 t t /(1 ξ) 1 ξ Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

51 Financial Intermediaries Balance sheet at time t (after borrowers and lenders decisions) Assets Liabilities Loans D b t Deposits D s t Equity E s t Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

52 Financial Intermediaries Balance sheet at time t (after borrowers and lenders decisions) Assets Liabilities Loans D b t Deposits D s t Equity E s t Leverage constraint/capital requirement (He and Krishnamurthy, 2013) E s t κ t D b t Always binding in equilibrium for banks to be relevant Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

53 Financial Intermediaries Balance sheet at time t (after borrowers and lenders decisions) Assets Liabilities Loans D b t Deposits D s t Equity E s t Leverage constraint/capital requirement (He and Krishnamurthy, 2013) E s t κ t D b t Always binding in equilibrium for banks to be relevant Zero profit condition R b t = κ t R e t + (1 κ t )R d t Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

54 Supply Standard New Keynesian supply side Retailers package differentiated intermediate goods with CES technology Intermediate goods produced with technology linear in labor Y t (f ) = A t L t (f ) Labor aggregate L t (f ) [L b t (f )] ξ [L s t(f )] 1 ξ Corresponding wage index W t (W b t ) ξ (W s t ) 1 ξ Staggered price setting (Calvo, 1983) Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

55 Equilibrium Goods market Y t = ξc b t + (1 ξ)c s t + Γ t Housing market H = ξh b t + (1 ξ)h s t Aggregate balance sheet of financial sector ξd b t = (1 ξ)(d s t + E s t) Evolution of per-capita real private debt D b t P t = Rb t 1 Π t D b t 1 P t 1 + C b t Y t + Q t P t (H b t H b t 1 ) + T b, Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

56 Robustness: Endogenous Spreads Credit spreads exogenous in our model May affect macro-pru policy that encourages more borrowing in a slump When spreads are likely to rise, hence deterring additional borrowing Replace banking system with framework in Gertler and Kiyotaki (2010) Moral hazard = Endogenous spreads Nelson and Pinter (2013) show steady state is unchanged Compare using same loss function Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

57 Comparison with Nelson and Pinter (2017) Demand shock Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

58 Comparison with Nelson and Pinter (2017) Housing demand shock Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

59 Comparison with Nelson and Pinter (2017) LTV shock Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32

60 Comparison with Nelson and Pinter (2017) TFP shock Ferrero, Harrison & Nelson (Oxford, BoE, Rokos) Concerted Efforts? 17 November / 32