Central Banking
http://lists.repec.orgmailman/listinfo/nep-cba
Central Banking
2016-02-04
Optimal Monetary and Macroprudential Policy in a Currency Union
http://d.repec.org/n?u=RePEc:mar:magkse:201522&r=cba
The financial crisis proved strikingly that stabilizing the price level is a necessary but not a sufficient condition to ensure macroeconomic stability. The obvious candidate for addressing systemic risk is macroprudential policy. In this paper we study the optimal monetary and macroprudential policy mix in a currency union in the case of different kinds of aggregate and idiosyncratic shocks. The monetary and macroprudential instruments are modelled as independent tools. With a union-wide macroprudential tool, full absorption on the aggregate level is possible, but welfare losses due to fluctuations in relative variables prevail. With country-specific macroprudential tools, full absorption of shocks is always possible. But it is only optimal as long as there is no inefficient labor allocation. Comparing different policy regimes, we get the following ranking in terms of welfare: discretion outperforms strict inflation targeting which outperforms a (euro-area based) Taylor Rule.
Jakob Palek
Benjamin Schwanebeck
financial frictions, credit spreads, borrowing constraint, monetary policy, macroprudential policy, optimal policy mix, currency union
2015
Policy and Macro Signals as Inputs to Inflation Expectation Formation
http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/79hle3i1b69dqrocqsjarh6lb1&r=cba
How do private agents interpret central bank actions and communication? To what extent do the effects of monetary shocks depend on the information disclosed by the central bank? This paper investigates the effect of monetary shocks and shocks to the Bank of England’s inflation and output projections on the term structure of UK private inflation expectations, to shed light on private agents’ interpretation of central bank signals about policy and the macroeconomic outlook. We proceed in three steps. First, we correct our dependent variables – market-based inflation expectation measures – for potential risk, liquidity and inflation risk premia. Second, we extract exogenous shocks following Romer and Romer (2004)’s identification approach. Third, we estimate the linear and interacted effects of these shocks in an empirical framework derived from the information frictions literature. We find that private inflation expectations respond negatively to contractionary monetary policy shocks, consistent with the usual transmission mechanism. In contrast, we find that inflation expectations respond positively to positive central bank inflation or output projection shocks, suggesting private agents put more weight on the signal that they convey about future economic developments than about the policy outlook. However, when shocks to central bank inflation projections are interacted with shocks to output projections of the same sign, they have no effect on inflation expectations, suggesting that private agents understand the functioning of the central bank reaction function and put more weight on the policy signal when there is no trade-off. We also find that the effects of contractionary monetary shocks are amplified when they are accompanied by positive shocks to central bank inflation projections. The coordination of policy decisions and macroeconomic projections thus appears important for managing inflation expectations.
Paul Hubert
Becky Maule
Monetary policy; Information processing; Signal extraction; Market-based inflation expectations; Central bank projections
2016-01
Country Portfolios, Collateral Constraints and Optimal Monetary Policy
http://d.repec.org/n?u=RePEc:san:wpecon:1604&r=cba
Recent literature shows that, when international financial trade is absent, optimal policy deviates significantly from strict inflation targeting, but when there is trade in equities and bonds, optimal policy is close to strict inflation targeting. A separate line of literature shows that collateral constraints can imply that cross-border portfolio holdings act as a shock transmission mechanism which significantly undermines risk sharing. This raises an important question: does asset trade in the presence of collateral constraints imply a greater role for monetary policy as a risk sharing device? This paper finds that the combination of asset trade with collateral constraints does imply a potentially large welfare gain from optimal policy (relative to inflation targeting). However, the welfare gain of optimal policy is even larger when there is no international asset trade (but collateral constraints bind within each country). In other words, the risk sharing role of asset trade tends to reduce the welfare gains from policy optimisation even when collateral constraints act as a shock transmission mechanism. This is true even when there are large and persistent collateral constraint shocks.
Ozge Senay
Alan Sutherland
Optimal monetary policy, Financial market structure, Country Portfolios, Collateral constraints
2016-01-29
Taming macroeconomic instability: Monetary and macro prudential policy interactions in an agent-based model
http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/5bnglqth5987gaq6dhju3psjn3&r=cba
We develop an agent-based model to study the macroeconomic impact of alternative macro prudential regulations and their possible interactions with different monetary policy rules.The aim is to shed light on the most appropriate policy mix to achieve the resilience of the banking sector and foster macroeconomic stability. Simulation results show that a triple-mandate Taylor rule, focused on output gap, inflation and credit growth, and a Basel III prudential regulation is the best policy mix to improve the stability of the banking sector and smooth output fluctuations. Moreover, we consider the dfferent levers of Basel III andtheir combinations. We find that minimum capital requirements and counter-cyclical capital buffers allow to achieve results close to the Basel III first-best with a much more simplifiedregulatory framework. Finally, the components of Basel III are non-additive: the inclusionof an additional lever does not always improve the performance of the macro prudentialregulation
Lilit Popoyan
Mauro Napoletano
Andrea Roventini
Macro prudential policy; Basel III regulation; Financial stability; Monetary policy; Agent-based computational economics
2015-12
Monetary policy and exchange rate dynamics
http://d.repec.org/n?u=RePEc:fip:fedbwp:15-16&r=cba
Financial markets regard exchange rate movements as conveying information about future expected policy rates. This paper explores the empirical link between conventional and unconventional monetary policy surprises and exchange rate fluctuations at a quarterly frequency. It examines these links using the currencies of ten developed economies calculated against four base currencies: the U.S. dollar, the British pound, the Deutschmark/euro, and the Japanese yen. Two periods are studied: 1990:Q1–2008:Q4, when the U.S. dollar hit the zero lower bound (ZLB) in December 2008, and the ZLB period between 2009:Q1 and 2015:Q1. The authors decompose exchange rate movements using a standard no-arbitrage asset pricing equation and two alternate interest rate forecasting models—a standard Taylor rule and a yield factor model. This decomposition reveals how contemporaneous unanticipated monetary policy surprises and changes in the expected future paths of policy are linked to exchange rate changes directly through relative interest rates as well as indirectly through expected excess returns and expected long-run exchange rate levels. The authors also use this decomposition to measure the fractions of the estimated effects of conventional and unconventional monetary policy surprises on exchange rate changes that are due to each component of the exchange rate change.
Stavrakeva, Vania
Tang, Jenny
2015-10-29
Optimal Monetary Policy, Exchange Rate Misalignments and Incomplete Financial Markets
http://d.repec.org/n?u=RePEc:san:cdmawp:1602&r=cba
Recent literature on monetary policy in open economies shows that, when international financial trade is restricted to a single non-contingent bond, there are significant internal and external trade-offs that prevent optimal policy from simultaneously closing all welfare gaps. This implies an optimal policy which deviates from inflation targeting in order to offset real exchange rate misalignments. These simple models are, however, not good representations of modern financial markets. This paper therefore develops a more general and realistic two-country model of incomplete markets, where, in the presence of a wide range of stochastic shocks, there is international trade in nominal bonds denominated in the currencies of the two countries and equity claims on profit streams in the two countries. The analysis shows that, as in the recent literature, optimal policy deviates from inflation targeting in order to offset exchange rate misalignments, but the welfare benefits of optimal policy relative to inflation targeting are quantitatively smaller than found in simpler models of financial incompleteness. It is nevertheless found that optimal policy implies quantitatively significant stabilisation of the real exchange rate gap and trade balance gap compared to inflation targeting.
Ozge Senay
Alan Sutherland
Optimal monetary policy, Financial market structure, Country Portfolios
2016-01-27
Optimal monetary and fiscal policy at the zero lower bound in a small open economy
http://d.repec.org/n?u=RePEc:fip:feddgw:260&r=cba
We investigate open economy dimensions of optimal monetary and fiscal policy at the zero lower bound (ZLB) in a small open economy model. At positive interest rates, the trade elasticity has negligible effects on optimal policy. In contrast, at the ZLB, the trade elasticity plays a key role in optimal policy prescriptions. The way in which the trade elasticity shapes policy depends on the government's ability to commit. Under discretion, the increase in government spending at the ZLB depends critically on the trade elasticity. Under commitment, the difference between future and current policies, both for domestic inflation and government spending, is smaller when the trade elasticity is higher.
Bhattarai, Saroj
Egorov, Konstantin
2016-01-01
THE WELFARE COST OF INFLATION AND THE REGULATIONS OF MONEY SUBSTITUTES
http://d.repec.org/n?u=RePEc:van:wpaper:vuecon-sub-16-00001&r=cba
This paper studies the possibility of using financial regulation that prohibits the use of money substitutes as a tool for mitigating the adverse effects of deviations from the Friedman rule. We establish that when inflation is not too high regulation aimed at eliminating money substitutes improves welfare by economizing on transaction costs. The gains from regulation depend on the distribution of income and on the level of direct taxation. The area under the demand for money curve is equal to the welfare cost of inflation only when there are no direct taxes and no proportional intermediation costs: otherwise, the area under the demand curve overstates the welfare cost of inflation when money substitutes are not important and understates the welfare cost when money substitutes are important.
Benjamin Eden
Maya Eden
Welfare cost of inflation, Liquidity, Regulations of money substitutes
2016-01-11
Comparing the Transmission of Monetary Policy Shocks in Latin America: A Hierarchical Panel VAR
http://d.repec.org/n?u=RePEc:rbp:wpaper:2015-015&r=cba
This paper assesses and compares the effects of monetary policy shocks across Latin American countries that put in practice the Inflation Targeting scheme (Brazil, Chile, Colombia, Mexico and Peru). An estimated Hierarchical Panel VAR allows us to use the data efficiently and, at the same time, exploit the heterogeneity across countries. Monetary shocks are identified through an agnostic procedure that imposes zero and sign restrictions. We find a real short run effect of monetary policy on output (with a peak around 12-15 months); a significant medium run response of prices with the absence of the so-called price puzzle and a hump-shaped response of the exchange rate, i.e. weak evidence of the so-called delayed overshooting puzzle phenomenon. Nevertheless, we find some degree of heterogeneity on the impact and propagation of monetary shocks across countries. In particular, we find stronger effects on output and prices in Brazil and Peru relative to Chile, Colombia and Mexico and a stronger reaction of the exchange rate in Brazil, Chile and Colombia relative to Mexico and Peru. Finally, we present a weighted-averaged impulse response after a monetary shock, which is representative for the region. *Note: Winning article in the 2015 Rodrigo Gómez Central Bank Award, organized by the Center for Latin American Monetary Studies (CEMLA). The article will be published by this institution.
Pérez, Fernando
Panel Vector Autoregressions, Sign Restrictions, Bayesian Hierarchical models
2015-12
Effects of US quantitative easing on emerging market economies
http://d.repec.org/n?u=RePEc:fip:feddgw:255&r=cba
We estimate international spillover effects of US Quantitative Easing (QE) on emerging market economies. Using a Bayesian VAR on monthly US macroeconomic and financial data, we first identify the US QE shock with non-recursive identifying restrictions. We estimate strong and robust macroeconomic and financial impacts of the US QE shock on US output, consumer prices, long-term yields, and asset prices. The identified US QE shock is then used in a monthly Bayesian panel VAR for emerging market economies to infer the spillover effects on these countries. We find that an expansionary US QE shock has significant effects on financial variables in emerging market economies. It leads to an exchange rate appreciation, a reduction in long-term bond yields, a stock market boom, and an increase in capital inflows to these countries. These effects on financial variables are stronger for the “Fragile Five” countries compared to other emerging market economies. We however do not find significant effects of the US QE shock on output and consumer prices of emerging markets.
Bhattarai, Saroj
Chatterjee, Arpita
Park, Woong Yong
2015-11-01
Bank capital regulation: are local or central regulators better?
http://d.repec.org/n?u=RePEc:tac:wpaper:2015-2016_6&r=cba
Using a simple two-region model where local or central regulators set capital requirements as risk sensitive capital or leverage ratios, we demonstrate the importance of capital requirements being set centrally when cross-region spillovers are large and local regulators suffer from substantial regulatory capture. We show that local regulators may want to surrender regulatory power only when spillover effects are large but the degree of supervisory capture is relatively small, and that capital regulation at central rather than local levels is more beneficial the larger the impact of systemic risk and the more asymmetric is regulatory capture at the local level.
Carole HARITCHABALET
Laetitia LEPETIT
Kévin SPINASSOU
Franck STROBEL
bank regulation; capital requirement; spillover; regulatory capture; financial architecture
2016-01
Choosing Expected Shortfall over VaR in Basel III Using Stochastic Dominance
http://d.repec.org/n?u=RePEc:ems:eureir:79539&r=cba
Bank risk managers follow the Basel Committee on Banking Supervision (BCBS) recommendations that recently proposed shifting the quantitative risk metrics system from Value-at-Risk (VaR) to Expected Shortfall (ES). The Basel Committee on Banking Supervision (2013, p. 3) noted that: “a number of weaknesses have been identified with using VaR for determining regulatory capital requirements, including its inability to capture tail risk”. The proposed reform costs and impact on bank balances may be substantial, such that the size and distribution of daily capital charges under the new rules could be affected significantly. Regulators and bank risk managers agree that all else being equal, a “better” distribution of daily capital charges is to be preferred. The distribution of daily capital charges depends generally on two sets of factors: (1) the risk function that is adopted (ES versus VaR); and (2) their estimated counterparts. The latter is dependent on what models are used by bank risk managers to provide for forecasts of daily capital charges. That is to say, while ES is known to be a preferable “risk function” based on its fundamental properties and greater accounting for the tails of alternative distributions, that same sensitivity to tails can lead to greater daily capital charges, which is the relevant (that is, controlling) practical reference for risk management decisions and observations. In view of the generally agreed focus in this field on the tails of non-standard distributions and low probability outcomes, an assessment of relative merits of estimated ES and estimated VaR is ideally not limited to mean variance considerations. For this reason, robust comparisons between ES and VaR will be achieved in the paper by using a Stochastic Dominance (SD) approach to rank ES and VaR.
Chang, C-L.
Jiménez-Martín, J.A.
Maasoumi, E.
McAleer, M.J.
Stochastic dominance, Value-at-Risk, Expected Shortfall, Optimizing strategy, Basel III Accord
2015-12-01
Quantitative assessment of the role of incomplete asset markets on the dynamics of the real exchange rate
http://d.repec.org/n?u=RePEc:fip:feddgw:262&r=cba
I develop a two-country New Keynesian model with capital accumulation and incomplete international asset markets that provides novel insights on the effect that imperfect international risk-sharing has on international business cycles and RER dynamics. I find that business cycles appear similar whether international asset markets are complete or not when driven by a combination of non-persistent monetary shocks and persistent productivity (TFP) shocks. In turn, international asset market incompleteness has sizeable effects if (persistent) investment-specific technology (IST) shocks are a main driver of business cycles. I also show that the model with incomplete international asset markets can approximate the RER volatility and persistence observed in the data, for instance, if IST shocks are near-unit-root. Hence, I conclude that the nature of shocks, the extent of financial integration across countries and the existing limitations on asset trading are central to understand the dynamics of the real exchange rate and the endogenous international transmission over the business cycles.
Martinez-Garcia, Enrique
2016-01-01
Monetary policy, financial dollarization and agency costs
http://d.repec.org/n?u=RePEc:rbp:wpaper:2015-019&r=cba
This paper models an emerging economy with financial dollarization features within an optimizing, stochastic general equilibrium setup. One key result in this framework is that unexpected nominal exchange rate depreciations are positively correlated with the probability of default by borrower firms and turn out to be a powerful mechanism to affect aggregate consumption. Throughout the monetary policy evaluation exercises performed, the sign of the unexpected depreciation is positively correlated to the real value of assets and negatively correlated to aggregate consumption. This result supports the idea that unexpected exchange rate depreciations are contractionary and not expansionary if dollarization and agency costs in the financial sector are considered.
Vega, Marco
Phillips Curve, Monetary Policy, Financial Dollarization, Financial Intermediation, Agency Costs, Small Open Economy
2015-12
Interest Rates Rules
http://d.repec.org/n?u=RePEc:msl:workng:1009&r=cba
The paper uses a monetary economy to derive a ‘Taylor rule’ along the dynamic path and within the business cycle frequency of simulated data, a Fisher equation within the low frequency of simulated data, and predictions of Lucas-like policy changes that shift balanced growth path equilibria and expectations. The inflation coefficient is always greater than one when the velocity of money exceeds one, thus exhibiting robust Taylor principle behavior in a monetary economy. Successful estimates of the magnitude of the coefficient on inflation and the rest of the interest rate equation are presented using Monte Carlo simulated data for both business cycle and medium term frequencies. Policy analysis shows the biases in interest rate predictions as depending on whether changes in structural parameters and expectations about variables are correctly included.
Ceri Davies
Max Gillman
Michal Kejak
Taylor rule, Fisher equation, velocity, expectations, misspecification bias, policy evaluation.
2016-01
Early observations on gradual monetary policy normalization
http://d.repec.org/n?u=RePEc:fip:fedbsp:101&r=cba
Remarks by Eric S. Rosengren, President and Chief Executive Officer, Federal Reserve Bank of Boston, at the Greater Boston Chamber of Commerce Government Affairs Forum, Boston, Massachusetts, January 13, 2016.
Rosengren, Eric S.
2016-01-13
The countercyclical capital buffer in spain: an analysis of key guiding indicators
http://d.repec.org/n?u=RePEc:bde:wpaper:1601&r=cba
This paper analyses a group of quantitative indicators to guide the Basel III countercyclical capital buffer (CCB) in Spain. Using data covering three stress events in the Spanish banking system since the early 1960s, we describe a number of conceptual and practical issues that may arise with the Basel benchmark buffer guide (i.e. the credit-to-GDP gap) and study alternative specifications plus a number of complementary indicators. In this connection, we explore ways to deal with structural changes that may lead to some shortcomings in the indicators. Overall, we find that indicators of credit ‘intensity’ (where we propose the ratio of changes in credit to GDP), private sector debt sustainability, real estate prices and external imbalances can usefully complement the credit-to-GDP gap when taking CCB decisions in Spain.
Christian Castro
Ángel Estrada
Jorge Martínez
countercyclical capital buffer, credit-to-GDP gap, guiding indicators, build-up phase, credit intensity, real estate prices, external imbalances, private sector debt sustainability, macroprudential policy
2016-01
Global or domestic? Which shocks drive inflation in European small open economies?
http://d.repec.org/n?u=RePEc:nbp:nbpmis:232&r=cba
In the paper we investigate, which shocks drive inflation in small open economies. We proceed in two steps. First, we use the SVAR approach to identify the global shocks. In the second step we regress the disaggregated price indices for selected European economies - the Czech Republic, Poland and Sweden- on the global shocks controlling for the domestic variables. Our results show that in two out of three analyzed countries the fluctuations of inflation are to the largest extent determined by the cyclical movements of the domestic output gap with the commodity shock being also the important source of inflation variability while for the third country the contribution of the commodity shock dominates over the output gap in explaining inflation fluctuations. We find that the direct impact of the global demand shock on the price dynamics is negligible, while it affects the country’s inflation mainly through the domestic output gap. The role of the non-commodity global supply shock is less prominent, however, this shock, interpreted to some extent as a globalization shock, for most of the analyzed period lowers the prices of semi-durable and durable goods and therefore the inflation. Nonetheless, in the aftermath of the global financial crisis, this shock reversed what may be interpreted as a weakening of the globalization process.
Aleksandra Hałka
Jacek Kotłowski
Inflation, monetary policy, globalization, disaggregated price indices, output gap, exchange rate pass-through, SVAR models.
2016
Secular Drivers of the Global Real Interest Rate
http://d.repec.org/n?u=RePEc:cfm:wpaper:1605&r=cba
Long-term real interest rates across the world have fallen by about 450 basis points over the past 30 years. The co-movement in rates across both advanced and emerging economies suggests a common driver: the global neutral real rate may have fallen. In this paper we attempt to identify which secular trends could have driven such a fall. Although there is huge uncertainty, under plausible assumptions we think we can account for around 400 basis points of the 450 basis points fall. Our quantitative analysis highlights slowing global growth as one force that may have pushed down on real rates recently, but shifts in saving and investment preferences appear more important in explaining the long-term decline. We think the global saving schedule has shifted out in recent decades due to demographic forces, higher inequality and to a lesser extent the glut of precautionary saving by emerging markets. Meanwhile, desired levels of investment have fallen as a result of the falling relative price of capital, lower public investment, and due to an increase in the spread between risk-free and actual interest rates. Moreover, most of these forces look set to persist and some may even build further. This suggests that the global neutral rate may remain low and perhaps settle at (or slightly below) 1% in the medium to long run. If true, this will have widespread implications for policymakers — not least in how to manage the business cycle if monetary policy is frequently constrained by the zero lower bound.
Lukasz Rachel
Thomas Smith
Equilibrium interest rate, long-term yields, globalsaving and investment, global trend
2015-12
The evasive predictive ability of core inflation
http://d.repec.org/n?u=RePEc:bbv:wpaper:1534&r=cba
We explore the ability of traditional core inflation â€“consumer prices excluding food and energyâ€“to predict headline CPI annual inflation. We analyze a sample of OECD and non-OECD economies using monthly data from January 1994 to March 2015. Our results indicate that sizable predictability emerges for a small subset of countries.
Jose Luis Nolazco
Pablo Pincheira
Jorge Selaive
Chile , Economic Analysis , Working Paper
2016-01
The Determinants of Country´s Risk Premium Volatility: Evidence from Panel VAR Model
http://d.repec.org/n?u=RePEc:iez:wpaper:1505&r=cba
We use data for 24 European countries, spanning from 1994 to 2015, in order to examine how changes in macroeconomic conditions influence the country’s risk premium volatility proxied by sovereign spreads variance. In the first part of the empirical analysis we estimate the univariate generalised autoregressive conditional heteroskedasticity (GARCH) model in order to obtain the conditional variance of sovereign bond spreads. We show that the increase of this variance coincides with economic and financial crisis occurring either in the country or globally. In the second part of the empirical analysis we estimate panel vector autoregression (panel VAR) model in order to model the interplay among macroeconomic fundamentals (inflation, output gap, public debt and interest rates) and the country´s risk premium volatility. We show that overheating of the economy, along with the unexpected increase in public debt, inflation and interest rates increase the country´s risk premium volatility. We also show that sudden increase in country´s risk premium volatility depresses the economy, exerts deflationary pressures on consumer prices, and is followed by strong and permanent increase in public debt.
Petra Palic
Petra Posedel Simovic
Maruska Vizek
sovereign bond markets, panel VAR, European Union
2015-12
An argument for positive nominal interest
http://d.repec.org/n?u=RePEc:wrk:warwec:1104&r=cba
In a dynamic economy, money provides liquidity as a medium of exchange.A central bank that sets the nominal rate of interest and distributes its profit to shareholders as dividends is traded in the asset market. A nominal rates of interest that tend to zero, but do not vanish, eliminate equilibrium allocations that do not converge to a Pareto optimal allocation.
Bloise, Gaetano
Polemarchakis, Herakles
nominal rate of interest ; dynamic efficiency
2015