nep-cba New Economics Papers
on Central Banking
Issue of 2011‒08‒02
thirty-two papers chosen by
Alexander Mihailov
University of Reading

  1. Over-optimism in Forecasts by Official Budget Agencies and Its Implications By Jeffrey A. Frankel
  2. A Comparison of Product Price Targeting and Other Monetary Anchor Options, for Commodity Exporters in Latin America By Frankel, Jeffrey A.
  3. Redistribution and the Multiplier By Tommaso Monacelli; Roberto Perotti
  4. On Measuring the Effects of Fiscal Policy in Recessions By Jonathan A. Parker
  5. A View on Global Imbalances and their Contribution to the Financial Crisis By Georg Dettmann
  6. Europe on the Brink By Peter Boone; Simon Johnson
  7. Interactions in DSGE models: The Boltzmann-Gibbs machine and social networks approach By Chang, Chia-ling; Chen, Shu-heng
  8. Money is an experience good: competition and trust in the private provision of money By Ramon Marimon; Juan Pablo Nicolini; Pedro Teles
  9. Forecasting inflation with gradual regime shifts and exogenous information By Andrés González; Kirstin Hubrich; Timo Teräsvirta
  10. A Linear Quadratic Approach to Optimal Monetary Policy with Unemployment and Sticky Prices: The Case of a Distorted Steady State By Raissi, M.
  11. Moment conditions model averaging with an application to a forward-looking monetary policy reaction function By Luis F. Martins
  12. Exogenous expectations on endogenous uncertainty: recursive equilibrium and survival By Raad, Rodrigo Jardim
  13. Country Heterogeneity and the International Evidence on the Effects of Fiscal Policy By Carlo Favero; Francesco Giavazzi; Jacopo Perego
  14. International organisations’ vs. private analysts’ forecasts: an evaluation By Ildeberta Abreu
  15. Capital flows, push versus pull factors and the global financial crisis By Marcel Fratzscher
  16. The n-Dimensional Bailey-Divisia Measure as a General-Equilibrium Measure of the Welfare Costs of Inflation By Cysne, Rubens Penha
  17. Spillovers from the Euro Area Sovereign Debt Crisis: A Macroeconometric Model Based Analysis By Bayoumi, Tamim; Vitek, Francis
  18. Fiscal Policy and Lending Relationships By Giovanni Melina; Stefania Villa
  19. Endogenous Persistence with Recursive Inattentiveness By Lena Dräger
  20. Transpacific Imbalances and Macroeconomic Codependency By Thorbecke, Willem
  21. Risk Management of Risk Under the Basel Accord: A Bayesian Approach to Forecasting Value-at-Risk of VIX Futures By Roberto Casarin; Chia-Lin Chang; Juan-Ángel Jiménez-Martín; Michael McAleer; Teodosio Pérez Amaral
  22. Securitization and lending standards - evidence from the wholesale loan market By Alper Kara; David Marqués-Ibáñez; Steven Ongena
  23. Land-price dynamics and macroeconomic fluctuations By Zheng Liu; Pengfei Wang; Tao Zha
  24. "Leaning Against the Wind" and the Timing of Monetary Pollicy By Itai Agur; Maria Demertzis
  25. Macroeconomic effects of fiscal consolidations in a DSGE model for the Euro Area: does composition matter? By Vitor M. Carvalho; Manuel M. F. Martins
  26. Euro area cross-border financial flows and the global financial crisis By Katrin Forster; Melina Vasardani; Michele Ca’ Zorzi
  27. Forecasting the price of oil By Ron Alquist; Lutz Kilian; Robert J. Vigfusson
  28. Time-Varying Monetary-Policy Rules and Financial Stress: Does Financial Instability Matter for Monetary Policy? By Jaromir Baxa; Roman Horvath; Borek Vasicek
  29. The impact of external shocks on the eurozone: a structural VAR model By Jean-Baptiste Gossé; Cyriac Guillaumin
  30. Threshold effects in the monetary policy reaction function of the Deutsche Bundesbank By Mandler, Martin
  31. Impact of the monetary policy instruments on Islamic stock market index return By Albaity, Mohamed Shikh
  32. The Transmission of Monetary Policy through Conventional and Islamic Banks By Zaheer, S.; Ongena, S.; Wijnbergen, S.J.G. van

  1. By: Jeffrey A. Frankel
    Abstract: The paper studies forecasts of real growth rates and budget balances made by official government agencies among 33 countries. In general, the forecasts are found: (i) to have a positive average bias, (ii) to be more biased in booms, (iii) to be even more biased at the 3-year horizon than at shorter horizons. This over-optimism in official forecasts can help explain excessive budget deficits, especially the failure to run surpluses during periods of high output: if a boom is forecasted to last indefinitely, retrenchment is treated as unnecessary. Many believe that better fiscal policy can be obtained by means of rules such as ceilings for the deficit or, better yet, the structural deficit. But we also find: (iv) countries subject to a budget rule, in the form of euroland’s Stability and Growth Path, make official forecasts of growth and budget deficits that are even more biased and more correlated with booms than do other countries. This effect may help explain frequent violations of the SGP. One country, Chile, has managed to overcome governments’ tendency to satisfy fiscal targets by wishful thinking rather than by action. As a result of budget institutions created in 2000, Chile’s official forecasts of growth and the budget have not been overly optimistic, even in booms. Unlike many countries in the North, Chile took advantage of the 2002-07 expansion to run budget surpluses, and so was able to ease in the 2008-09 recession.
    JEL: E62 H50
    Date: 2011–07
  2. By: Frankel, Jeffrey A. (Harvard University)
    Abstract: Seven possible nominal variables are considered as candidates to be the anchor or target for monetary policy. The context is countries in Latin America and the Caribbean (LAC), which tend to be price takers on world markets, to produce commodity exports subject to volatile terms of trade, and to experience procyclical international finance. Three anchor candidates are exchange rate pegs: to the dollar, euro and SDR. One candidate is orthodox Inflation Targeting. Three candidates represent proposals for a new sort of inflation targeting that differs from the usual focus on the CPI, in that prices of export commodities are given substantial weight and prices of imports are not: PEP (Peg the Export Price), PEPI (Peg an Export Price Index), and PPT (Product Price Targeting). The selling point of these production-based price indices is that each could serve as a nominal anchor while yet accommodating terms of trade shocks, in comparison to a CPI target. CPI-targeters such as Brazil, Chile, and Peru are observed to respond to increases in world prices of imported oil with monetary policy that is sufficiently tight to appreciate their currencies, an undesirable property, which is the opposite of accommodating the terms of trade. As hypothesized, a product price target generally does a better job of stabilizing the real domestic prices of tradable goods than does a CPI target. Bottom line: A Product Price Targeter would appreciate in response to an increase in world prices of its commodity exports, not in response to an increase in world prices of its imports. CPI targeting gets this backwards.
    JEL: E50 F40
    Date: 2011–07
  3. By: Tommaso Monacelli; Roberto Perotti
    Abstract: During a fiscal stimulus, does it matter, for the size of the government spending multiplier, which category of agents bears the brunt of the current and/or future adjustment in taxes? In an economy with heterogeneous agents and imperfect financial markets, the answer depends on whether or not New Keynesian features, such are price rigidity, are present. If prices are flexible, the tax-financing rule is either neutral or quasi-neutral. If prices are sticky, who bears the brunt of the adjustment, whether financially constrained borrowers as opposed to unconstrained savers, does matter. The differential effect on the multiplier, however, depends crucially on (i) the degree of persistence of the fiscal expansion, and (ii) on whether the expansion is balanced-budget as opposed to debt-financed.
    Date: 2011
  4. By: Jonathan A. Parker
    Abstract: We do not have a good measure of the effects of fiscal policy in a recession because the methods that we use to estimate the effects of fiscal policy — both those using the observed outcomes following different policies in aggregate data and those studying counterfactuals in fitted model economies -- almost entirely ignore the state of the economy and estimate 'the' government multiplier, which is presumably a weighted average of the one we care about — the multiplier in a recession — and one we care less about — the multiplier in an expansion. Notable exceptions to this general claim suggest this difference is potentially large. Our lack of knowledge stems significantly from the focus on linear dynamics: VARs and linearized (or close-to-linear) DSGEs. Our lack of knowledge also reflects a lack of data: deep recessions are few and nonlinearities hard to measure. The lack of statistical power in the estimation of nonlinear models using aggregate data can be addressed by exploiting estimates of partial-equilibrium responses in dissaggregated data. Microeconomic estimates of the partial-equilibrium causal effects of a policy can discipline the causal channels inherent in any DSGE model of the general equilibrium effects of policy. Microeconomic studies can also provide measures of the dependence of the effects of a policy on the states of different agents which is a key component of the dependence of the general-equilibrium effects of fiscal policy on the state of the economy.
    JEL: E17 E5 E62
    Date: 2011–07
  5. By: Georg Dettmann (Department of Economics, Mathematics & Statistics, Birkbeck; Department of Economic Science, University of Verona)
    Abstract: The Global Imbalances that contributed to the financial crisis (2007-2010) are still present, and the world still hasn’t fully recovered from recession. There is no consistent explanation of the Global Imbalances and their interaction with simultaneous events yet. The current state of the literature is that papers contradict each other and the main questions remain unsolved. This paper aims to provide a coherent story of the economic environment that laid the ground for the financial crisis, focusing on the evolution of Global Imbalances. It will reconcile the discrepancies of the different strands of existing literature and hypotheses. Hypotheses which can be rejected will be discarded. The paper will try to explain what mechanisms (inside and outside of the US) worked within these Imbalances, how they were motivated and if these mechanisms are sustainable. The single most important result will be that there is no obvious reason why China and the other emerging Asian economies finance the US. Further, the US finance themselves by means that are not fully understood yet and can only partially be explained. One important factor appears to be the use of the Exorbitant Privilege via Seigniorage. Other factors remain unknown.
    Date: 2011–07
  6. By: Peter Boone (Peterson Institute for International Economics); Simon Johnson (Peterson Institute for International Economics)
    Abstract: Europe’s efforts to stabilize its finances are failing, and the region needs to prepare for widespread restructuring of sovereign and bank debt. Peter Boone and Simon Johnson argue that Europe’s financial system has relied on a policy of protecting creditors from default and has thus spread pervasive moral hazard—a presumption by creditors that they will not take losses on their loans to Greece and other ailing countries. The authors argue that this situation is no longer tenable and examine three possible scenarios for the coming months as the sovereign debt crisis evolves. Under the first scenario, the euro area would try to reassert its commitment to avoid defaults and inflation. This continuation of the moral hazard regime would require severe austerity for Greece and other countries on the periphery of the euro area. The second scenario involves elimination of the moral hazard regime. The euro area would admit that some sovereigns have too much debt. A series of debt restructurings would follow. The final scenario would be for policymakers to continue to contradict themselves by promising selective defaults or restructurings of some countries’ debts while maintaining that they can ensure the stability of the rest of the euro area. But the authors argue that it is an illusion to believe that selective restructuring would not introduce contagion. Such an approach would result in panic, massive capital flight, and disorderly defaults. The ensuing chaos would in turn lead to a negatively charged political atmosphere that would make consensus nearly impossible.
    Date: 2011–07
  7. By: Chang, Chia-ling; Chen, Shu-heng
    Abstract: While DSGE models have been widely used by central banks for policy analysis, they seem to have been ineffective in calibrating the models for anticipating financial crises. To bring DSGE models closer to real situations, some of researchers have revised the traditional DSGE models. One of the modified DSGE models is the adaptive belief system model. In this framework, changes in sentiment can be expounded by a Boltzmann-Gibbs distribution, and in addition to externally caused fluctuations endogenous interactions are also considered. Methodologically, heuristic switching models are mesoscopic. For this reason, the social network structure is not described in the adaptive belief system models, even though the network structure is an important factor of interaction. The interaction behavior should ideally be based on some kind of social network structures. Today, the Boltzmann-Gibbs distribution is widely used in economic modeling. However, the question is whether the Boltzmann-Gibbs distribution can be directly applied, without considering the underlying social network structure more seriously. To this day, it seems that few scholars have discussed the relationship between social networks and the Boltzmann-Gibbs distribution. Therefore, this paper proposes a network based ant model and tries to compare the population dynamics in the Boltzmann-Gibbs model with different network structure models applied to stylized DSGE models. We find that both the Boltzmann-Gibbs model and the network-based ant model could generate herding behavior. However, it is difficult to envisage the population dynamics generated by the Boltzmann-Gibbs model and the network-based ant model having the same distribution, particularly in popular empirical network structures such as small world networks and scale-free networks. In addition, our simulation results further suggest that the population dynamics of the Boltzmann-Gibbs model and the circle network ant model can be considered with the same distribution under specific parameters settings. This finding is consistent with the study of thermodynamics, on which the Boltzmann-Gibbs distribution is based, namely, the local interaction. --
    Keywords: DSGE model,network-based ant model,networks,Boltzmann-Gibbs distribution
    JEL: C63 D85 E12 E32 E37
    Date: 2011
  8. By: Ramon Marimon; Juan Pablo Nicolini; Pedro Teles
    Abstract: We study the interplay between competition and trust as efficiency enhancing mechanisms in the private provision of money. With commitment, trust is automatically achieved and competition ensures efficiency. Without commitment, competition plays no role. Trust does play a role but requires a bound on efficiency. Stationary inflation must be non-negative and, therefore, the Friedman rule cannot be achieved.<br>The quality of money can only be observed after its purchasing capacity is realized. In that sense money is an experience good.
    JEL: E40 E50 E58 E60
    Date: 2011
  9. By: Andrés González (Banco de la República, Bogotá, Colombia.); Kirstin Hubrich (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Timo Teräsvirta (CREATES, Aarhus University, Denmark.)
    Abstract: We propose a new method for medium-term forecasting using exogenous information. We first show how a shifting-mean autoregressive model can be used to describe characteristic features in inflation series. This implies that we decompose the inflation process into a slowly moving nonstationary component and dynamic short-run fluctuations around it. An important feature of our model is that it provides a way of combining the information in the sample and exogenous information about the quantity to be forecast. This makes it possible to form a single model-based inflation forecast that also incorporates the exogenous information. We demonstrate, both theoretically and by simulations, how this is done by using the penalised likelihood for estimating the model parameters. In forecasting inflation, the central bank inflation target, if it exists, is a natural example of such exogenous information. We illustrate the application of our method by an out-of-sample forecasting experiment for euro area and UK inflation. We find that for euro area inflation taking the exogenous information into account improves the forecasting accuracy compared to that of a number of relevant benchmark models but this is not so for the UK. Explanations to these outcomes are discussed. JEL Classification: C22, C52, C53, E31, E47.
    Keywords: Nonlinear forecast, nonlinear model, nonlinear trend, penalised likelihood, structural shift, time-varying parameter.
    Date: 2011–07
  10. By: Raissi, M.
    Abstract: Ravenna and Walsh (2010) develop a linear quadratic framework for optimal monetary policy analysis in a New Keynesian model featuring search and matching frictions and show that maximization of expected utility of the representative household is equivalent to minimizing a quadratic loss function that consists of inflation, and two appropriately defined gaps involving unemployment and labor market tightness. This paper generalizes their analysis, most importantly by relaxing the Hosios (1990) condition which eliminates the distortions resulting from labor market inefficiencies, such that the equilibrium level of unemployment under flexible prices would not necessarily be optimal. I take account of steady-state distortions using the methodology of Benigno and Woodford (2005) and derive a quadratic loss function that involves the same three terms, albeit with different relative weights and definitions for unemployment- and labor market tightness gaps. I evaluate the resulting loss function subject to a simple set of log-linearized equilibrium relationships and perform policy analysis. The key result of the paper is that search externalities give rise to an endogenous cost push term in the new Keynesian Phillips curve, suggesting a case against complete price stability as the only goal of monetary policy, because there is now a trade-off between stabilizing inflation and reducing inefficient unemployment fluctuations. Transitory movements of inflation in this environment helps job creation and hence prevents excessive volatility of unemployment.
    JEL: E52 E61 J64
    Date: 2011–07–21
  11. By: Luis F. Martins
    Abstract: In this paper, we examine the empirical validity of the baseline version of the forward-looking monetary policy reaction function proposed by Clarida, Gali, and Gertler (2000). For that purpose, we propose a moment conditions model averaging estimator in the Generalized Method of Moments and Generalized Empirical Likelihood setups. We derive some of their asymptotic properties under correctly specified and misspecified models. Although the model averaging estimates and the standard procedures point to a stabilizing policy rule during the Paul Volcker and Alan Greenspan tenures but not so during the pre-Volker period, our results cast serious doubts on the significance of the cyclical output variable as a forcing variable in the FED funds dynamics during the Volcker-Greenspan period.
    JEL: C22 C52 E43 E52
    Date: 2011
  12. By: Raad, Rodrigo Jardim
    Abstract: This paper analyses general equilibrium models with finite heterogeneous agents having exogenous expectations on endogenous uncertainty. It is shown that there exists a recursive equilibrium with the state space consisting of the past aggregate portfolio distribution and the current state of the nature and that it implements the sequential equilibrium. We establish conditions under which the recursive equilibrium is continuous. Moreover, we use the continuous recursive relation of the aggregate variables to prove that if the economy has two types of agents, the one who commits persistent mistakes on the expectation rules of the future endogenous variables is driven out of the market by the others with correct anticipations of the variables, that is, the rational expectations agents.
    Date: 2011–04–18
  13. By: Carlo Favero; Francesco Giavazzi; Jacopo Perego
    Abstract: The aim of this paper is to show how the richer frequency and variety of fiscal policy shocks available in an international sample can be analyzed recognizing the heterogeneity that exists across different countries. The main conclusion of our empirical analysis is that the question “what is the fiscal policy multiplier” is an ill-posed one. There is no unconditional fiscal policy multiplier. The effect of fiscal policy on output is different depending on the different debt dynamics, the different degree of openness and the different fiscal reaction functions in different countries. There are many fiscal multipliers and an average fiscal multiplier is of very little use to describe the effect of exogenous shifts in fiscal policy on output.
    Date: 2011
  14. By: Ildeberta Abreu
    Abstract: This paper evaluates the performance of the macroeconomic forecasts disclosed by three leading international organisations - the IMF, the European Commission and the OECD - and compares it with that of the mean forecasts of two surveys of private analysts - the Consensus Economics and The Economist. The publication of forecasts twice a year by international organisations always receives a great deal of public attention but the timely forecasts disclosed monthly by private institutions have been gaining increased visibility. The aim of this work is to help forecast users in answering the question of how much (little) confidence they should place in the alternative forecasts that are available at each moment. The evaluation covers real GDP growth and inflation projections for nine main advanced economies, over the period 1991-2009. Several evaluation criteria are used. The quantitative accuracy of forecasts is assessed and their unbiasedness and efficiency is tested. The directional accuracy of forecasts and the ability to predict economic recessions are also examined. The results suggest that the forecasting performance of the international organisations is broadly similar to that of the surveys of private analysts. By and large, current-year forecasts present desirable features and clearly outperform year-ahead forecasts for which evidence is more mixed both in terms of quantitative and qualitative accuracy.
    JEL: E37
    Date: 2011
  15. By: Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: The causes of the 2008 collapse and subsequent surge in global capital flows remain an open and highly controversial issue. Employing a factor model coupled with a dataset of high-frequency portfolio capital flows to 50 economies, the paper finds that common shocks – key crisis events as well as changes to global liquidity and risk – have exerted a large effect on capital flows both in the crisis and in the recovery. However, these effects have been highly heterogeneous across countries, with a large part of this heterogeneity being explained by differences in the quality of domestic institutions, country risk and the strength of domestic macroeconomic fundamentals. Comparing and quantifying these effects shows that common factors (“push” factors) were overall the main drivers of capital flows during the crisis, while country-specific determinants (“pull” factors) have been dominant in accounting for the dynamics of global capital flows in 2009 and 2010, in particular for emerging markets. JEL Classification: F3, F21, G11.
    Keywords: capital flows, factor model, common shocks, liquidity, risk, push factors, pull factors, emerging markets, advanced economies.
    Date: 2011–07
  16. By: Cysne, Rubens Penha
    Abstract: This paper shows that in economies with several monies the Bailey-Divisia multidimensional consumers surplus formula may emerge asan exact general-equilibrium measure of the welfare costs of in ation,provided that preferences are quasilinear.
    Date: 2011–07–26
  17. By: Bayoumi, Tamim; Vitek, Francis
    Abstract: This paper analyzes past and possible future spillovers from the Euro Area Sovereign Debt Crisis, both within the Euro Area and to the rest of the world. This analysis is based on a structural macroeconometric model of the world economy, disaggregated into fifteen national economies. We find that macroeconomic and financial market spillovers have been small outside of countries with high trade or financial exposures, but that they could become large if severe financial stress were to spread beyond Greece, Ireland and Portugal.
    Keywords: Contagion; Euro Area Sovereign Debt Crisis; Panel unobserved components model; Spillovers
    JEL: E44 F41
    Date: 2011–07
  18. By: Giovanni Melina (Department of Economics, Mathematics & Statistics, Birkbeck; University of Surrey); Stefania Villa (Department of Economics, Mathematics & Statistics, Birkbeck; University of Foggia)
    Abstract: This paper studies how fiscal policy affects credit market conditions. First, it conducts a FAVAR analysis showing that the credit spread responds negatively to an expansionary government spending shock, while consumption, investment, and lending increase. Second, it illustrates that these results are not mimicked by a DSGE model where the credit spread is endogenized via the inclusion of a banking sector exploiting lending relationships. Third, it demonstrates that introducing deep habits in private and government consumption makes the model able to replicate empirics. Sensitivity checks and extensions show that core results hold for a number of model calibrations and specifications. The presence of banks exploiting lending relationships generates a financial accelerator effect in the transmission of fiscal shocks.
    Date: 2011–07
  19. By: Lena Dräger (University of Hamburg and ETH Zurich)
    Abstract: The DSGE model with endogenous and time-varying sticky information in Dräger (2010) is extended by allowing agents’ recursive choice between forecasts under rational or sticky information to affect the model solution. Dynamic equilibrium paths generate highly persistent series for output, inflation and the nominal interest rate. Agents choose predictors in a near-rational manner and we find that the share of agents with rational expectations reacts to the overall variability of aggregate variables. The model can generate hump-shaped responses of inflation and output to a monetary policy shock if the degree of inattentiveness is sufficiently high. Finally, feedback from agents’ degree of inattentiveness to the model solution affects the determinacy region of the model. The Taylor principle is then only a necessary condition for determinacy, and monetary policy should target the output gap as well in order to ensure a unique and stable solution.
    Keywords: Endogenous sticky information, heterogeneous expectations, DSGE models, persistence.
    JEL: E31 E37 E52
    Date: 2011–07
  20. By: Thorbecke, Willem (Asian Development Bank Institute)
    Abstract: Current account deficits in the United States (US) and current account surpluses in East Asia are an enduring part of the global economic landscape. They are supported by low saving in the US and by reserve accumulation in Asia. This paper argues that this strategy is causing macroeconomic problems for the People’s Republic of China (PRC). Inflation is rising, and interest rates are set too low because the yuan is closely linked to the US dollar. Low interest rates have fueled overinvestment in physical capital and rising real estate prices. They also cause savers to earn negative returns on their bank deposits.
    Keywords: reserve accumulation; sterilization policy; transpacific imbalances; macroeconomic codependency
    JEL: F30 F32
    Date: 2011–07–28
  21. By: Roberto Casarin; Chia-Lin Chang; Juan-Ángel Jiménez-Martín; Michael McAleer (University of Canterbury); Teodosio Pérez Amaral
    Abstract: It is well known that the Basel II Accord requires banks and other Authorized Deposit-taking Institutions (ADIs) to communicate their daily risk forecasts to the appropriate monetary authorities at the beginning of each trading day, using one or more risk models, whether individually or as combinations, to measure Value-at-Risk (VaR). The risk estimates of these models are used to determine capital requirements and associated capital costs of ADIs, depending in part on the number of previous violations, whereby realised losses exceed the estimated VaR. McAleer et al. (2009) proposed a new approach to model selection for predicting VaR, consisting of combining alternative risk models, and comparing conservative and aggressive strategies for choosing between VaR models. This paper addresses the question of risk management of risk, namely VaR of VIX futures prices, and extends the approaches given in McAleer et al. (2009) and Chang et al. (2011) to examine how different risk management strategies performed during the 2008-09 global financial crisis (GFC). The empirical results suggest that an aggressive strategy of choosing the Supremum of single model forecasts, as compared with Bayesian and non-Bayesian combinations of models, is preferred to other alternatives, and is robust during the GFC. However, this strategy implies relatively high numbers of violations and accumulated losses, which are admissible under the Basel II Accord.
    Keywords: Median strategy; Value-at-Risk; daily capital charges; violation penalties; aggressive risk management; conservative risk management; Basel Accord; VIX futures; Bayesian strategy; quantiles; forecast densities
    JEL: G32 C53 C22 C11
    Date: 2011–07–01
  22. By: Alper Kara (Hull University Business School, United Kingdom.); David Marqués-Ibáñez (European Central Bank, Financial Research Division, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Steven Ongena (Tilburg University, Department of Finance, Faculty of Economics and Business Administration, Netherlands.)
    Abstract: We investigate the effect of securitization activity on banks’ lending standards using evidence from pricing behavior on the syndicated loan market. We find that banks more active at originating asset-backed securities are also more aggressive on their loan pricing practices. This suggests that securitization activity lead to laxer credit standards. Macroeconomic factors also play a large role explaining the impact of securitization activity on bank lending standards: banks more active in the securitization markets loosened more aggressively their lending standards in the run up to the recent financial crisis but also tightened more strongly during the crisis period. As a continuum of this paper we are examining whether individual loans that are eventually securitized are priced more aggressively by using unique European data on individual loans from all major trustees. JEL Classification: G21, G28.
    Keywords: securitization, bank risk taking, syndicated loans, financial crisis.
    Date: 2011–07
  23. By: Zheng Liu; Pengfei Wang; Tao Zha
    Abstract: We argue that positive comovements between land prices and business investment are a driving force behind the broad impact of land-price dynamics on the macroeconomy. We develop an economic mechanism that captures the comovements by incorporating two key features into a DSGE model: we introduce land as a collateral asset in firms' credit constraints, and we identify a shock that drives most of the observed fluctuations in land prices. Our estimates imply that these two features combine to generate an empirically important mechanism that amplifies and propagates macroeconomic fluctuations through the joint dynamics of land prices and business investment.
    Date: 2011
  24. By: Itai Agur; Maria Demertzis
    Abstract: If monetary policy is to aim also at financial stability, how would it change? To analyze this question, this paper develops a general-form, axiomatic framework. Financial stability objectives are shown to make a monetary authority more aggressive. By that we mean that in reaction to negative shocks, cuts are deeper but shorter-lived than otherwise. Keeping cuts brief is crucial as bank risk responds primarily to rates that are kept "too low for too long". Within this shorter time span, cuts must then be deeper than otherwise to also achieve standard objectives.
    Keywords: Monetary policy; Financial stability
    JEL: E52 G21
    Date: 2011–07
  25. By: Vitor M. Carvalho (CEF.UP, Faculdade de Economia do Porto, Universidade do Porto); Manuel M. F. Martins (CEF.UP, Faculdade de Economia do Porto, Universidade do Porto)
    Abstract: We develop a new-Keynesian DSGE model with an extended fiscal policy block to assess the conditions for expansionary fiscal consolidations. In addition to several taxes, we consider public employment expenditures and government spending, which may have different degrees of productivity. We calibrate the model for the Euro Area and use it to simulate alternative fiscal consolidations with changes in the budget composition. Among the main conclusions we find that: (i) if conducted with a cut in weaklyproductive spending and a symmetric increase in highly-productive spending, fiscal consolidations have expansionary effects on investment and output; (ii) if consolidation is pursued through a pure reduction in weaklyproductive public employment, the effects on output decrease with the degree of labor market competition and turn out to be positive under perfect competition.
    Keywords: fiscal policy, fiscal consolidation, new-Keynesian DSGE model
    JEL: E12 E62 H63
    Date: 2011–07
  26. By: Katrin Forster (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Melina Vasardani (Bank of Greece, 21 E. Venizelos Ave., Athens 10250, Greece.); Michele Ca’ Zorzi (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main)
    Abstract: This paper analyses the impact of the global financial crisis on euro area cross-border financial flows by comparing recent developments with the main pre-crisis trends. Two prominent features of the period of turmoil were (i) the sizeable deleveraging of external financial exposures by the private sector and, in particular, the banking sector from 2008 and (ii) the significant changes in the composition of euro area cross-border portfolio flows, as investors shifted from equity to debt instruments, from long-term to short-term debt instruments and from private to public sector securities. Since 2009 such trends have started reversing. However, as balance sheet restructuring by financial and non-financial corporations continues, cross-border financial flows have remained well below pre-crisis levels. The degree of resumption and volatility of cross-border financial activity may have a major bearing on growth prospects for the euro area and may also matter from a financial stability perspective. We argue that the recent experience, first of extraordinary growth and then of scaling down of international financial activity, calls for enhanced monitoring of developments in cross-border financial flows so that the underlying risks to the domestic economy stemming from the financial sector can be better assessed. Looking forward, successful implementation of policy actions to promote macroeconomic discipline and enhance financial regulation and supervision could influence, inter alia, the composition and volume of cross-border capital flows, contributing to a more efficient and sustainable allocation of resources. JEL Classification: E44, E58, F33, F42
    Keywords: Global financial crisis, euro area, capital flows.
    Date: 2011–07
  27. By: Ron Alquist; Lutz Kilian; Robert J. Vigfusson
    Abstract: We address some of the key questions that arise in forecasting the price of crude oil. What do applied forecasters need to know about the choice of sample period and about the tradeoffs between alternative oil price series and model specifications? Are real or nominal oil prices predictable based on macroeconomic aggregates? Does this predictability translate into gains in out-of-sample forecast accuracy compared with conventional no-change forecasts? How useful are oil futures markets in forecasting the price of oil? How useful are survey forecasts? How does one evaluate the sensitivity of a baseline oil price forecast to alternative assumptions about future demand and supply conditions? How does one quantify risks associated with oil price forecasts? Can joint forecasts of the price of oil and of U.S. real GDP growth be improved upon by allowing for asymmetries?
    Date: 2011
  28. By: Jaromir Baxa; Roman Horvath; Borek Vasicek
    Abstract: We examine whether and how selected central banks responded to episodes of financial stress over the last three decades. We employ a new monetary-policy rule estimation methodology which allows for time-varying response coefficients and corrects for endogeneity. This flexible framework applied to the USA, the UK, Australia, Canada, and Sweden, together with a new financial stress dataset developed by the International Monetary Fund, not only allows testing of whether central banks responded to financial stress, but also detects the periods and types of stress that were the most worrying for monetary authorities and quantifies the intensity of the policy response. Our findings suggest that central banks often change policy rates, mainly decreasing them in the face of high financial stress. However, the size of the policy response varies substantially over time as well as across countries, with the 2008–2009 financial crisis being the period of the most severe and generalized response. With regard to the specific components of financial stress, most central banks seemed to respond to stock-market stress and bank stress, while exchange-rate stress is found to drive the reaction of central banks only in more open economies.
    Keywords: Endogenous regressors, financial stress, monetary policy, Taylor rule, time-varying parameter model.
    JEL: E43 E52 E58
    Date: 2011–07
  29. By: Jean-Baptiste Gossé (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris-Nord - Paris XIII - CNRS : UMR7234); Cyriac Guillaumin (LEPII - Laboratoire d'Économie de la Production et de l'Intégration Internationale - CNRS : FRE3389 - Université Pierre Mendès-France - Grenoble II)
    Abstract: This paper studies the impact of the main external shocks which the eurozone and member states have undergone since the start of the 2000s. Such shocks have been monetary (drop in global interest rates), financial (two stock market crises) and real (rising oil prices and an accumulation of global current account imbalances). We have used a structural VAR (SVAR) methodology, on the basis of which we have defined four structural shocks: external, supply, demand and monetary. The estimates obtained using SVAR models enabled us to determine the impact of these shocks on the eurozone and its member countries. The study highlights the diversity of reactions inside the eurozone. The repercussions of the oil and monetary shocks were fairly similar in all eurozone countries - excepting the Netherlands and the United Kingdom - but financial crises and global imbalances have had very different effects. External shocks explain one-fifth of the growth differential and current account balance variance and about one-third of fluctuations in the real effective exchange rate in Europe. The impact of the oil crisis was particularly large, but it pushed the euro down. Global imbalances explain a large proportion of exchange rate fluctuations but drove the euro up. Furthermore the response functions to financial and monetary crises are similar, except for current account functions. A financial crisis seems to result in the withdrawal of larger volumes of assets than a monetary crisis. The study thus highlights the diversity of the reactions in the eurozone and shows that external shocks do more to explain variations in the real effective exchange rate than in the growth differential or current account, while underlining the particularly important part played by global imbalances in European exchange rate fluctuations.
    Keywords: global imbalances, current account, eurozone, structural VAR model, contemporary and long-term restrictions, external shock, exogeneity hypothesis.
    Date: 2011–06–25
  30. By: Mandler, Martin
    Abstract: We estimate monetary policy reaction functions with threshold effects for the Deutsche Bundesbank using a real-time data set. Estimates based on the deviation of inflation from the Bundesbank's inflation target as threshold variable suggest a switch to a stronger output gap response in the reaction function if past inflation was high. The reaction function in the regime with higher inflation implies an overall less contractionary monetary policy than that for the low inflation regime. A modified model with three regimes shows this result to be related to periods of substantial excess inflation. We explore a threshold reaction function with a moving inflation target that captures a gradual adjustment of an intermediate to a long-term inflation target and find the Bundesbank to follow a more restrictive monetary policy stance if inflation is above the intermediate-term inflation target.
    Keywords: Deutsche Bundesbank; monetary policy reaction function; threshold regression; instrumental variables; real-time data
    JEL: E58 E52 C22
    Date: 2011–07
  31. By: Albaity, Mohamed Shikh
    Abstract: Previous studies found that Islamic stock market index in Malaysia (KLSI), does not react, or react negatively to interest rate, although one of the main criteria of Islamic finance is to avoid business and activities that yield interest because of its prohibition in Islamic laws. On the other hand, studies of Islamic stock market index in the US (DJIMI) found that there is no impact of interest rate on DJIMI. These two stock market indices have different screening criteria and different composite of securities. This study aims at investigating the monetary policy variables impact, the effect of interest rate, and the use of stock market indices as a hedge against inflation. It also examines the volatilities of monetary variables, interest rates, and inflation rate on two Islamic stock market indices. Using time series analysis such as GARCH the results are as follows. It is found that in the variance univariate models of the conventional indices that M1, M3, inflation rate, and real growth in GDP are significant in influencing KLCI volatility, while M2, M3, inflation rate and interest rate affected DJINA volatility. On the other hand, in the Islamic indices, KLSI and DJIMI variance is influenced by M2, M3, and inflation rate. In addition, in the multivariate model, DJIMI is influenced by the interest rate and the inflation rate in the mean and variance equations. In contrast, KLSI is influenced commonly in the mean and variance equations by M3, and the inflation rate. --
    Keywords: Macroeconomic volatility,GARCH,Islamic index
    JEL: E4 E6 F4
    Date: 2011
  32. By: Zaheer, S.; Ongena, S.; Wijnbergen, S.J.G. van (Tilburg University, Center for Economic Research)
    Abstract: We investigate the differences in banks’ responses to monetary policy shocks across bank size, liquidity, and type, i.e., conventional versus Islamic, in Pakistan between 2002:II to 2010:I. We find that following a monetary contraction, small banks with liquid balance sheets cut their lending less than other small banks. In contrast large banks maintain their lending irrespective of their liquidity positions. Islamic banks, though similar in size to small banks, respond to monetary policy shocks as large banks. Hence ceteris paribus the credit channel of monetary policy may weaken when Islamic banking grows in relative importance.
    Keywords: Monetary policy;Islamic Banking;Pakistan.
    JEL: E5 G2
    Date: 2011

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