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on Central Banking |
| By: | Harald Uhlig (University of Chicago - Department of Economics) |
| Abstract: | This paper is a non-technical and somewhat philosophical essay, that seeks to investigate the relationship between economics and reality. More precisely, it asks how reality in the form of empirical evidence does or does not influence economic thinking and theory. In particular, which role do calibration, statistical inference, and structural change play? What is the current state of affairs, what are the successes and failures, what are the challenges? I shall tackle these questions moving from general to specific. For the general perspective, I examine the following four points of view. First, economics is a science. Second, economics is an art. Third, economics is a competition. Forth, economics is politics. I then examine four specific cases for illustration and debate. First, is there a Phillips curve? Second, are prices sticky? Third, does contractionary monetary policy lead to a contraction in output? Forth, what causes business cycles? The general points as well as the specific cases each have their own implication for the central question at hand. Armed with this list of implications, I shall then attempt to draw a summary conclusion and provide an overall answer. |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:bfi:wpaper:2011-006&r=cba |
| By: | Eric van Wincoop |
| Abstract: | The 2008-2009 financial crises, while originating in the United States, witnessed a drop in asset prices and output that was at least as large in the rest of the world as in the United States. A widely held view is that this was the result of global transmission through leveraged financial institutions. We investigate this in the context of a simple two-country model. The paper highlights what the various transmission mechanisms associated with balance sheet losses are, how they operate, what their magnitudes are and what the role is of different types of borrowing constraints faced by leveraged institutions. For realistic parameters we find that the model cannot account for the global nature of the crisis, both in terms of the size of the impact and the extent of transmission. |
| JEL: | E32 F3 F4 G12 G2 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17686&r=cba |
| By: | Alan J Auerbach |
| Abstract: | As the world economy slowly recovers from the very deep and widespread recession of recent years, many countries confront very serious fiscal imbalances. How much time they have to deal with these imbalances is a central question, the salience of which can only have been increased by the ongoing fiscal crisis and bailout in Greece and the immediate fiscal adjustments being discussed or already undertaken in several other countries. There is little doubt that much of the current attention to fiscal imbalances is attributable to the rapid increases in debt to GDP ratios arising from the recession, either directly through the automatic tax and spending responses to slow growth, or indirectly through the countercyclical discretionary fiscal measures undertaken. Table 1 shows the evolution of net general government debt to GDP ratios for several leading economies in recent years, starting in 2007, just as the worldwide recession began. |
| Keywords: | deficit, fiscal gap, fiscal rule, fiscal policy, fiscal sustainability |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:361&r=cba |
| By: | Francesco Giavazzi; Alberto Giovannini |
| Abstract: | Financial systems are inherently fragile because of the very function which makes them valuable: liquidity transformation. Thus regulatory reforms, as urgent and desirable as they are, will definitely strengthen the financial system and decrease the risk of liquidity crises, but they will never eliminate it. This leaves monetary policy with a very important task. In a framework that recognizes the interactions between monetary policy and liquidity transformation 'optimal' monetary policy would consist of a modified Taylor rule in which the real rate reflects the possibility of liquidity crises and recognizes the possibility that liquidity transformation gets ubsidized. Failure to recognize this point risks leading the economy into a low interest rate trap: low interest rates induce too much risk taking and increase the probability of crises. These crises, in turn, require low interest rates to maintain the ?nancial system alive. Raising rates becomes extremely difficult in a severely weakened financial system, so monetary authorities remain stuck in a low interest rates trap. This seems a reasonable description of the situation we have experienced throughout the past decade. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:igi:igierp:425&r=cba |
| By: | Han Chen; Vasco Cúrdia; Andrea Ferrero |
| Abstract: | The effects of asset purchase programs on macroeconomic variables are likely to be moderate. We reach this conclusion after simulating the impact of the Federal Reserve’s second large-scale asset purchase program (LSAP II) in a DSGE model enriched with a preferred habitat framework and estimated on U.S. data. Our simulations suggest that such a program increases GDP growth by less than half a percentage point, although the effect on the level of GDP is very persistent. The program’s marginal contribution to inflation is very small. One key reason for our findings is that we estimate a small degree of financial market segmentation. If we enrich the set of observables with a measure of long-term debt, the semi-elasticity of the risk premium to the amount of debt in private-sector hands is substantially smaller than that reported in the recent empirical literature. In this case, our baseline estimates of the effects of LSAP II on the macroeconomy decrease by at least a factor of two. Throughout the analysis, a commitment to an extended period at the zero lower bound for nominal interest rates increases the effects of asset purchase programs on GDP growth and inflation. |
| Keywords: | Macroeconomics ; Gross domestic product ; Federal Reserve System ; Inflation (Finance) ; Debt ; Stochastic analysis |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:527&r=cba |
| By: | Jaroslav Borovicka; Lars Hansen |
| Abstract: | Dynamic stochastic equilibrium models of the macro economy are designed to match the macro time series including impulse response functions. Since these models aim to be structural, they also have implications for asset pricing. To assess these implications, we explore asset pricing counterparts to impulse response functions. We use the resulting dynamic value decomposition (DVD) methods to quantify the exposures of macroeconomic cash flows to shocks over alternative investment horizons and the corresponding prices or compensations that investors must receive because of the exposure to such shocks. We build on the continuous-time methods developed in Hansen and Scheinkman (2010), Borovicka et al. (2011) and Hansen (2011) by constructing discrete-time shock elasticities that measure the sensitivity of cash flows and their prices to economic shocks including economic shocks featured in the empirical macroeconomics literature. By design, our methods are applicable to economic models that are nonlinear, including models with stochastic volatility. We illustrate our methods by analyzing the asset pricing model of Ai et al. (2010) with tangible and intangible capital. |
| Keywords: | Asset pricing ; Macroeconomics ; Markov processes |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-2012-01&r=cba |
| By: | Jaroslav Borovicka (University of Chicago - Federal Reserve Bank of Chicago); Lars Peter Hansen (University of Chicago - Department of Economics) |
| Abstract: | Dynamic stochastic equilibrium models of the macro economy are designed to match the macro time series including impulse response functions. Since these models aim to be structural, they also have implications for asset pricing. To assess these implications, we explore asset pricing counterparts to impulse response functions. We use the resulting dynamic value decomposition (DVD) methods to quantify the exposures of macroeconomic cash flows to shocks over alternative investment horizons and the corresponding prices or compensations that investors must receive because of the exposure to such shocks. We build on the continuous-time methods developed in Hansen and Scheinkman (2010), Borovicka et al. (2011) and Hansen (2011) by constructing discrete-time shock elasticities that measure the sensitivity of cash flows and their prices to economic shocks including economic shocks featured in the empirical macroeconomics literature. By design, our methods are applicable to economic models that are nonlinear, including models with stochastic volatility. We illustrate our methods by analyzing the asset pricing model of Ai et al. (2010) with tangible and intangible capital. |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:bfi:wpaper:2011-012&r=cba |
| By: | Peter Sinclair |
| Abstract: | This paper poses, and then attempts to answer, eleven questions about the principles and practice of inflation targeting under contemporary conditions |
| Keywords: | inflation targeting |
| JEL: | E52 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:bir:birmec:11-23&r=cba |
| By: | Farhi, Emmanuel; Gopinath, Gita; Itskhoki, Oleg |
| Abstract: | We show that even when the exchange rate cannot be devalued, a small set of conventional fiscal instruments can robustly replicate the real allocations attained under a nominal exchange rate devaluation in a standard New Keynesian open economy environment. We perform the analysis under alternative pricing assumptions -- producer or local currency pricing, along with nominal wage stickiness; under alternative asset market structures, and for anticipated and unanticipated devaluations. There are two types of fiscal policies equivalent to an exchange rate devaluation -- one, a uniform increase in import tariff and export subsidy, and two, a value-added tax increase and a uniform payroll tax reduction. When the devaluations are anticipated, these policies need to be supplemented with a consumption tax reduction and an income tax increase. These policies have zero impact on fiscal revenues. In certain cases equivalence requires, in addition, a partial default on foreign bond holders. We discuss the issues of implementation of these policies, in particular, under the circumstances of a currency union. |
| Keywords: | competitive devaluation; currency union; fiscal policy |
| JEL: | E32 E6 F3 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8721&r=cba |
| By: | Emmanuel Farhi; Gita Gopinath; Oleg Itskhoki |
| Abstract: | We show that even when the exchange rate cannot be devalued, a <i>small</i> set of <i>conventional</i> fiscal instruments can robustly replicate the real allocations attained under a nominal exchange rate devaluation in a standard New Keynesian open economy environment. We perform the analysis under alternative pricing assumptions— producer or local currency pricing, along with nominal wage stickiness; under alternative asset market structures, and for anticipated and unanticipated devaluations. There are two types of fiscal policies equivalent to an exchange rate devaluation—one, a uniform increase in import tariff and export subsidy, and two, a value-added tax increase and a uniform payroll tax reduction. When the devaluations are anticipated, these policies need to be supplemented with a consumption tax reduction and an income tax increase. These policies have zero impact on fiscal revenues. In certain cases equivalence requires, in addition, a partial default on foreign bond holders. We discuss the issues of implementation of these policies, in particular, under the circumstances of a currency union. |
| JEL: | E32 E60 F30 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17662&r=cba |
| By: | Lukasz Rawdanowicz; Eckhard Wurzel; Patrice Ollivaud |
| Abstract: | The management of government debt and assets has important implications for fiscal positions. Debt managers aim to secure non-interrupted funding at lowest medium-term costs subject to risks. Massive crisis-related increases in government debt in most OECD countries and increased risks on the asset side of government balance sheets may imply attaching a larger weight to avoiding risk than prior to the crisis, suggesting to extend debt maturities, possibly above pre-crisis levels. There are a number of trade-offs. Choices on the debt maturity structure interact with unconventional monetary policies. By driving down longer-term yields, the latter increase incentives to extend debt maturities which could counteract the initial monetary policy goal. High debt raises the temptation for eroding it via inflation, but the effectiveness of such policy seems to be limited and might be costly in the long run. Moreover, debt management needs to contribute to ensuring appropriate liquidity and functioning of government bond markets. Building financial assets can be appropriate for some purposes, such as prefunding future temporary spending or transferring wealth to future generations, but the risks are that accumulated funds might be used for current spending or tax reductions. In addition, assets might do little to hedge risks associated with debt servicing costs. Non-financial asset sales can help improve the fiscal situation, but purely revenue-driven privatisations without appropriate regulatory provisions addressing potential market failures should be avoided. Successful balance sheet management requires transparent, accurate and comprehensive measures of not only current but also future assets and liabilities.<P>Problèmes actuels dans la gestion de la dette et des actifs gouvernementaux<BR>La gestion de la dette et des actifs gouvernementaux a des implications importantes sur les situations budgétaires. Les gestionnaires de la dette ont pour but de sécuriser un financement ininterrompu au plus bas coût à moyen terme et en contrôlant les risques. Les augmentations massives de la dette publique liées à la crise dans la plupart des pays de l’OCDE ainsi que l’augmentation des risques sur les actifs du compte du patrimoine public peuvent se traduire par un poids plus élevé donné au contrôle des risques par rapport à la période antérieure à la crise, suggérant d’étendre le délai de remboursement des dettes, peut-être au dessus des niveaux prévalant avant la crise. Il y a un certain nombre d’arbitrages. Les choix sur la structure par échéance de la dette interagissent avec les politiques monétaires non conventionnelles. En réduisant les rendements à long terme, ces dernières accroissent les incitations à étendre le délai de remboursement des dettes ce qui peut neutraliser le but initial de la politique monétaire. Des niveaux élevés de dette accentuent la tentation de les éroder par de l’inflation, cependant l’efficacité de telle politique semble limitée et peut même être coûteuse sur le long terme. En outre, la gestion de la dette doit contribuer à assurer une liquidité appropriée et un bon fonctionnement des marchés d’obligations d’État. Développer des actifs financiers peut être adéquat dans certains cas, par exemple pour provisionner des dépenses temporaires futures, ou pour transférer de la richesse aux générations futures, mais le risque est que ces fonds accumulés soient utilisés pour des dépenses courantes ou pour baisser les impôts. De plus ces actifs ne vont sans doute pas permettre de se couvrir des risques associés au service de la dette. La vente des actifs non financiers peut améliorer la situation budgétaire, mais des privatisations uniquement orientées par la recherche de recettes sans dispositions réglementaires adaptées aux éventuelles défaillances des marchés doivent être évitées. Une gestion réussie du patrimoine public exige de la transparence ainsi que des mesures précises et complètes non seulement des actifs et passifs actuels mais aussi de leurs valeurs futures. |
| Keywords: | public debt, public debt management, contingent liability, monetary policy, public assets, dette publique, gestion de la dette publique, politique monétaire, actifs publics, engagements éventuels |
| JEL: | E6 H63 H81 H82 |
| Date: | 2011–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:923-en&r=cba |
| By: | Friederike Niepmann |
| Abstract: | This paper develops and tests a theoretical model that allows for the endogenous decision of banks to engage in international and global banking. International banking, where banks raise capital in the home market and lend it abroad, is driven by differences in factor endowments across countries. In contrast, global banking, where banks intermediate capital locally in the foreign market, arises from differences in country-level bank efficiency. Together, these two driving forces determine the foreign assets and liabilities of a banking sector. The model provides a rationale for the observed rise in global banking relative to international banking. Its key predictions regarding the cross-country pattern of foreign bank asset and liability holdings are strongly supported by the data |
| Keywords: | international banking; cross-border lending; capital flows; trade in banking services |
| JEL: | F21 F23 F34 G21 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:325&r=cba |
| By: | Fiorella De Fiore (European Central Bank (ECB) - Directorate General Research); Harald Uhlig (University of Chicago - Department of Economics) |
| Abstract: | We present a dynamic general equilibrium model with agency costs, where heterogeneous firms choose among two alternative instruments of external finance - corporate bonds and bank loans. We characterize the financing choice of firms and the endogenous financial structure of the economy. The calibrated model is used to address questions such as: What explains differences in the financial structure of the US and the euro area? What are the implications of these differences for allocations? We find that a higher share of bank finance in the euro area relative to the US is due to lower availability of public information about firms' credit worthiness and to higher efficiency of banks in acquiring this information. We also quantify the effect of differences in the financial structure on per-capita GDP. |
| Keywords: | Financial structure; agency costs; heterogeneity |
| JEL: | E20 E44 C68 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:bfi:wpaper:2011-004&r=cba |
| By: | Charles Goodhart |
| Abstract: | The overriding practical problem now is the tension between the global financial and market system and the national political and power structures. The main analytical short-coming lies in the failure to incorporate financial frictions, especially default, into our macro-economic models. Neither a move to a global sovereign authority, nor a reversion towards narrower economic nationalism, seems likely to take place in the near future. Meanwhile, the adjustment to economic imbalances remains asymmetric, with almost all the pressure on deficit countries. Almost by definition surplus countries are “virtuous”. But current account surpluses have to be matched by net capital outflows. Such capital flows to weaker deficit countries have often had unattractive returns. A program to give earlier and greater warnings of the risks of investing in deficit countries could lead to earlier policy reaction, and reduce the risk of crisis. |
| JEL: | E32 E42 E44 F02 F21 F33 F34 F4 F42 F51 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17682&r=cba |
| By: | Olivier Blanchard (International Monetary Fund, MIT, NBER); Marianna Riggi (Bank of Italy) |
| Abstract: | In the 1970s, large increases in the price of oil were associated with sharp decreases in output and large increases in inflation. In the 2000s, even larger increases in the price of oil were associated with much milder movements in output and inflation. Using a structural VAR approach, Blanchard and Gali (2009) argued that this reflected a change in the causal relation from the price of oil to output and inflation. They then argued that this change could be due to a combination of three factors, namely, a smaller share of oil in production and consumption, lower real wage rigidity and better monetary policy. Their argument, based on simulations of a simple new-Keynesian model, was informal. Our purpose in this paper is to take the next step, and to estimate the explanatory power and contribution of each of these factors. To do so, we use a minimum distance estimator that minimizes, over the set of structural parameters and for each of two samples (pre- and post-1984), the distance between the empirical SVAR-based impulse response functions and those implied by a new-Keynesian model. Our empirical results point to an important role for all three factors. |
| Keywords: | oil prices, wage rigidities, monetary policy credibility. |
| JEL: | E20 E32 E52 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_835_11&r=cba |
| By: | Daniel Sámano |
| Abstract: | The global financial crisis of late 2008 could not have provided more convincing evidence that price stability is not a sufficient condition for financial stability. In order to attain both, central banks must develop macroprudential instruments in order to prevent the occurrence of systemic risk episodes. For this reason testing the effectiveness of different macroprudential tools and their interaction with monetary policy is crucial. In this paper we explore whether two policy instruments, namely, a capital adequacy ratio rule in combination with a Taylor rule may provide a better macroeconomic outcome than a Taylor rule alone. We conduct our analysis by appending a macroeconometric financial block to an otherwise standard semistructural small open economy neokeynesian model for policy analysis estimated for the Mexican economy. Our results show that with the inclusion of the second instrument, the central bank may obtain substantial gains. Specifically, the central authority can isolate financial shocks and dampen their effects over macroeconomic variables. |
| Keywords: | Macroprudential policy, monetary policy, capital requirements. |
| JEL: | E44 E52 E61 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:bdm:wpaper:2011-17&r=cba |
| By: | Francesco Giavazzi; Luigi Spaventa |
| Abstract: | The current account has always been a neglected variable in the management of the Euro area and in the assessment of its members' performance; so has, as a consequence, the savings-investment balance. This paper first reviews the arguments that explain this attitude and justify, under some conditions and in some cases, the persistence of current account deficits. It then examines some peculiar features of the growth experience under monetary union in four Euro area countries which do not conform to the conventional convergence pattern. Models establishing the optimality of a succession of current account deficits in a catching-up process implicitly assume that the intertemporal budget constraint is satisfied, so that the accumulation of foreign liabilities is matched by future surpluses. In section 3 we first introduce explicitly this constraint in a simple two-period, two-good model and show that its fulfilment requires that growth be driven by an adequate increase of the country's production capacity of traded goods and services. By examining the composition of output and demand we show that this has not been the case in the four countries considered and argue that monetary union has helped relax the necessary discipline. The common monetary policy moreover did nothing to prevent an extraordinary growth of credit that fed the imbalances in the four countries. The paper closes addressing some policy issues related to the future sustainability o the monetray union. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:igi:igierp:426&r=cba |
| By: | Nicolas Coeurdacier; Hélène Rey |
| Abstract: | Home bias is a perennial feature of international capital markets. We review various explanations of this puzzling phenomenon highlighting recent developments in macroeconomic modelling that incorporate international portfolio choices in standard two-country general equilibrium models. We refer to this new literature as Open Economy Financial Macroeconomics. We focus on three broad classes of explanations: (i) hedging motives in frictionless financial markets (real exchange rate and non-tradable income risk), (ii) asset trade costs in international financial markets (such as transaction costs or differences in tax treatments between national and foreign assets), (iii) informational frictions and behavioural biases. Recent theories call for new portfolio facts beyond equity home bias. We present new evidence on crossborder asset holdings across different types of assets: equities, bonds and bank lending and new micro data on institutional holdings of equity at the fund level. These data should inform macroeconomic modelling of the open economy and a growing literature of models of delegated investment. |
| JEL: | F21 F3 F32 F4 F41 G11 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17691&r=cba |
| By: | Junsang Lee; Keisuke Otsu |
| Abstract: | In this paper, we construct a dynamic stochastic general equilibrium model in order to investigate the impact of credit spread shocks on the U.S. business cycle. We find that the shocks to the investment specific technology and the preference weights on consumption and leisure are the main sources of output fluctuation. Shocks to the credit spread and productivity are the main source of the fluctuation in the investment to output ratio. Credit spread shocks also had a significant impact on the output during the recent financial crisis. |
| Keywords: | Credit Spread; Business Cycles; Investment Specific Technology |
| JEL: | E13 E32 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:1123&r=cba |
| By: | Luis Felipe Céspedes; Andrés Velasco |
| Abstract: | According to standard economic theory, fiscal policy should be countercyclical. In the neoclassical smoothing model of Barro (1979), a government should optimally run surpluses in good times and deficits in bad times. That is the same a government should do, though for different reasons, in the standard Keynesian or neo-Keynesian framework. Yet in practice governments often seem to follow a pro-cyclical fiscal policy. Cuddington (1989), Talvi and Vegh (2005) and Sinnott (2009), among others, document that governments save little or even disave in booms. Procyclicality is most evident in Latin America (Gavin et al (1996), Gavin and Perotti (1997), Stein et al (1999)) but is also present in OECD countries (Talvi and Vegh (2005), Arreaza et al (1999), Lane (2003)). |
| Keywords: | commodity prices, optimal fiscal policy, fiscal behavior, institutions |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:365&r=cba |
| By: | Reuven Glick; Sylvain Leduc |
| Abstract: | We present evidence on the effects of large-scale asset purchases by the Federal Reserve and the Bank of England since 2008. We show that announcements about these purchases led to lower long-term interest rates and depreciations of the U.S. dollar and the British pound on announcement days, while commodity prices generally declined despite this more stimulative financial environment. We suggest that LSAP announcements likely involved signaling effects about future growth that led investors to downgrade their U.S. growth forecasts lowering longterm US yields, depreciating the value of the U.S. dollar, and triggering a decline in commodity prices. Moreover, our analysis illustrates the importance of controlling for market expectations when assessing these effects. We find that positive U.S. monetary surprises led to declines in commodity prices, even as long-term interest rates fell and the U.S. dollar depreciated. In contrast, on days of negative U.S. monetary surprises, i.e. when markets evidently believed that monetary policy was less stimulatory than expected, long-term yields, the value of the dollar, and commodity prices all tended to increase. |
| Keywords: | Open market operations ; Monetary policy ; Prices |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2011-30&r=cba |
| By: | Kai Christoffel (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Ivan Jaccard (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Juha Kilponen (Bank of Finland, Rauhankatu 19, FI-00101 Helsinki, Finland and European Financial Stability Facility.) |
| Abstract: | We introduce a specification of habit formation featuring non-separability between consumption and leisure into an otherwise standard New Keynesian model. The model can be estimated with standard Bayesian techniques and the bond pricing implications are evaluated using higher-order approximations. The model is able to reproduce a sizeable risk premium on long-term bonds and the cyclicality of fiscal policy has an impact on the bond premium that is quantitatively important. Technology, government spending, and mark-up shocks are the main drivers of the time-variation in bond premia. JEL Classification: E5, E6, G1. |
| Keywords: | DSGE models, fiscal policy, bond risk premium, monetary policy. |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111411&r=cba |
| By: | Körner, Finn Marten |
| Abstract: | Global imbalances are almost universally regarded as a disequilibrium phenomenon. Caballero, Farhi, and Gourinchas (2008) challenge this notion with their dynamic general equilibrium model of global imbalances. The authors conclude that current account deficit nations need not worry about long-lasting deficits as long as the model is in equilibrium. The joint model in this paper combines the two model extensions for exchange rates and FDI which are disjunct in the original model. An analytical solution to the new joint model is neither as straightforward as for the separate models nor can previous results from calibrated simulation be confirmed without restriction. The model is highly dependent on parameter assumptions: A variation of calibrated parameters highlights the prime impact of investment costs previously assumed away. Sustainable equilibrium paths for global imbalances are much narrower in updated simulations than previously predicted. Policy recommendations on the sustainability of international debt holdings therefore need to be a lot more cautious. -- |
| Keywords: | international debt,financial market development,foreign direct investment,real exchange rate,international macro-finance |
| JEL: | F31 F34 G15 O41 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:hohpro:332011&r=cba |
| By: | Eric M. Leeper; Todd B. Walker |
| Abstract: | The Great Recession and worldwide financial crisis have exploded fiscal imbalances and brought fiscal policy and inflation to the forefront of policy concerns. Those concerns will only grow as aging populations increase demands on government expenditures in coming decades. It is widely perceived that fiscal policy is inflationary if and only if it leads the central bank to print new currency to monetize deficits. Monetization can be inflationary. But it is a misperception that this is the only channel for fiscal inflations. Nominal bonds, the predominant form of government debt in advanced economies, derive their value from expected future nominal primary surpluses and money creation; changes in the price level can align the market value of debt to its expected real backing. This introduces a fresh channel, not requiring monetization, through which fiscal deficits directly affect inflation. The paper begins by pointing out similarities and differences between the Weimar Republic after World War I and the United States today. It describes various ways in which fiscal policy can directly affect inflation and explains why these fiscal effects are difficult to detect in time series data. |
| Keywords: | monetary-fiscal interactions; fiscal theory; monetization |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:364&r=cba |
| By: | Joshua Aizenman; Sebastian Edwards; Daniel Riera-Crichton |
| Abstract: | We analyze the way in which Latin American countries have adjusted to commodity terms of trade (CTOT) shocks in the 1970-2007 period. Specifically, we investigate the degree to which the active management of international reserves and exchange rates impacted the transmission of international price shocks to real exchange rates. We find that active reserve management not only lowers the short-run impact of CTOT shocks significantly, but also affects the long-run adjustment of REER, effectively lowering its volatility. We also show that relatively small increases in the average holdings of reserves by Latin American economies (to levels still well below other emerging regions current averages) would provide a policy tool as effective as a fixed exchange rate regime in insulating the economy from CTOT shocks. Reserve management could be an effective alternative to fiscal or currency policies for relatively trade closed countries and economies with relatively poor institutions or high government debt. Finally, we analyze the effects of active use of reserve accumulation aimed at smoothing REERs. The result support the view that “leaning against the wind” is potent, but more effective when intervening to support weak currencies rather than intervening to slow down the pace of real appreciation. The active reserve management reduces substantially REER volatility. |
| JEL: | F1 F15 F31 F32 F36 O13 O54 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17692&r=cba |
| By: | Thorsten Drautzburg (University of Chicago - Department of Economics); Harald Uhlig (University of Chicago - Department of Economics) |
| Abstract: | We quantify the fiscal multipliers in response to the American Recovery and Reinvestment Act (ARRA) of 2009. We extend the benchmark Smets-Wouters (2007) New Keynesian model, allowing for credit-constrained households, the zero lower bound, government capital and distortionary taxation. The posterior yields modestly positive short-run multipliers around 0.52 and modestly negative long-run multipliers around -0.42. The multiplier is sensitive to the fraction of transfers given to credit-constrained households, the duration of the zero lower bound and the capital. The stimulus results in negative welfare effects for unconstrained agents. The constrained agents gain, if they discount the future substantially. |
| Keywords: | Fiscal Stimulus; New Keynesian model; liquidity trap; zero lower bound; fiscal multiplier |
| JEL: | E62 E63 E65 H20 H62 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:bfi:wpaper:2011-005&r=cba |
| By: | Chakraborty, Ratula (Norwich Business School, University of East Anglia); Dobson, Paul (School of Business and Economics, Loughborough University); Seaton, Jonathan S. (Corresponding Author, Department of Economics, University of Warwick,); Waterson, Michael (Department of Economics, University of Warwick, JEL classification: L16 ; L81 ; E31 Key words: Pricing behaviour ; supermarket prices ; inflationary behaviour ; price indexes) |
| Abstract: | We investigate micro pricing behaviour in groceries (the UK’s most important consumer market) over eight years including the inflationary period of early 2008. We find behaviour sharply distinguished from most previous work, namely that overall basket prices rise but more individual prices fall than rise! This is consistent with retailers obscuring the fact of rising basket prices. We employ a significant new source of data that captures cross-competitor interplay in prices at a very detailed level. Unusually but importantly, our work takes into account that consumers buy baskets of goods, rather than individual products, when shopping at supermarkets. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:975&r=cba |
| By: | Simona E. Cociuba; Malik Shukayev; Alexander Ueberfeldt |
| Abstract: | A view advanced in the aftermath of the late-2000s financial crisis is that lower than optimal interest rates lead to excessive risk taking by financial intermediaries. We evaluate this view in a quantitative dynamic model in which interest rate policy affects risk taking by changing the amount of safe bonds that intermediaries use as collateral in the repo market. In this model with properly-priced collateral, lower than optimal interest rates reduce risk taking. We also consider the possibility that intermediaries can augment their collateral by issuing assets whose risk is underestimated by credit rating agencies, as was observed prior to the crisis. In the presence of such mispriced collateral, lower than optimal interest rates contribute to excessive risk taking and amplify the severity of recessions. |
| Keywords: | Transmission of monetary policy; Financial system regulation and policies |
| JEL: | E44 E52 G28 D53 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:11-31&r=cba |
| By: | Michal Franta; Jozef Barunik; Roman Horvath; Katerina Smidkova |
| Abstract: | This paper shows how fan charts generated from Bayesian vector autoregression (BVAR) models can be useful for assessing 1) the forecasting accuracy of central banks’ prediction models and 2) the credibility of stress tests carried out to evaluate financial stability. Using unique data from the Czech National Bank (CNB), we compare our BVAR fan charts for inflation, GDP growth, interest rate and the exchange rate to those of the CNB, which are based on past forecasting errors. Our results suggest that in terms of the Kullback-Leibler Information Criterion, BVAR fan charts typically do not outperform those of the CNB, providing a useful cross-check of their accuracy. However, we show how BVAR fan charts can rigorously deal with the non-negativity constraint on the nominal interest rate and usefully complement the official fan charts. Finally, we put forward how BVAR fan charts can be useful for assessing financial stability and propose a simple method for evaluating whether the assumptions of banks’ stress tests about the macroeconomic outlook are sufficiently adverse. |
| Keywords: | Bayesian vector autoregression, fan chart, inflation targeting, stress tests, uncertainty. |
| JEL: | E52 E58 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2011/10&r=cba |
| By: | Olesya V. Grishchenko; Joel M. Vanden; Jianing Zhang |
| Abstract: | In this paper we estimate the value of the embedded option in U.S. Treasury Inflation Protected Securities (TIPS). The option value exhibits significant time variation that is correlated with periods of deflationary expectations. We use our estimated option values to construct an embedded option price index and an embedded option return index. We then use our embedded option indices as independent variables and examine their statistical and economic significance for explaining the future inflation rate. In most of our regressions, our embedded option return index is significant even in the presence of traditional inflation variables, such as the yield spread between nominal Treasuries and TIPS, the return on gold bullion, the VIX index return, and the lagged inflation rate. We conduct several robustness tests, including alternative weighting schemes, alternative variable specifications, and alternative data samples. We conclude that the embedded option in TIPS contains useful information for future inflation, both in-sample and out-of-sample. Our results should be valuable to practitioners, monetary authorities, and policymakers alike. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2011-58&r=cba |
| By: | Adrian Pagan (University of Sydney); Tim Robinson (Reserve Bank of Australia) |
| Abstract: | In the wake of the global financial crisis a considerable amount of research has focused on integrating financial factors into macroeconomic models. Two common approaches for doing so include the financial accelerator and collateralised lending, examples of which are Gilchrist, Ortiz and Zakrajšek (2009) and Iacoviello (2005). This paper proposes that two useful ways to evaluate such models are by focusing on their implications for business cycle characteristics and whether the models can match several stylised facts about the impact of financial conditions. One of these facts is that credit crises produce long-duration recessions. We find that while in the Gilchrist <em>et al</em> (2009) model financial factors can impact on particular cycles, they do little change to the average cycle characteristics. Some, but not all, of the stylised facts are captured by the model. |
| Keywords: | financial crises; business cycles |
| JEL: | E13 E32 E44 E51 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbardp:rdp2011-04&r=cba |
| By: | Roman Horváth (IES, Charles University Prague); Kateøina Šmídková (IES, Charles University Prague); Jan Zápal (London School of Economics) |
| Abstract: | We assess whether the voting records of central bank boards are informative about future monetary policy. First, we specify a theoretical model of central bank board decision-making and simulate the voting outcomes. Three different versions of model are estimated with simulated data: 1) democratic, 2) consensual and 3) opportunistic. These versions differ in the degree of informational influence between the chairman and other board members influence prior to the voting. The model shows that the voting pattern is informative about future monetary policy provided that the signals about the optimal policy rate are noisy and that there is sufficient independence in voting across the board members, which is in line with the democratic version. Next, the model predictions are tested on real data on five inflation targeting countries (the Czech Republic, Hungary, Poland, Sweden and the United Kingdom). Subject to various sensitivity tests, it is found that the democratic version of the model corresponds best to the real data and that in all countries the voting records are informative about future monetary policy, making a case for publishing the records. |
| Keywords: | monetary policy, voting record, transparency, collective decision-making. |
| JEL: | C78 D78 E52 E58 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2011_37&r=cba |
| By: | Corrado Macchiarelli (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | Since the end of the fixed rates in 1973 and after the EMS sterling dismissal in 1992, the value of the pound has undergone large cyclical fluctuations on average. Of particular interest to policy makers is the understanding of whether such movements are consistent with the lack or not of a correction mechanism to some long-run equilibrium. The purpose of the present study is to understand those dynamics, how the external value of the British sterling relative to the USD evolved during the recent floating experiences, and what have been the driving forces. In this paper we assume the real exchange rate to be determined by forces relating to the goods and capital market in a general equilibrium framework. This entails testing the purchasing power parity and the uncovered interest parity together. Our findings have two important implications, both for monetary policy. First, we show that some of the observed changes in the real exchange rates can not be solely attributed to changes in inflation rates, but, possibly, also to investors’ behavior. Secondly, we show that the special US dollar status of World reserve currency results into a weaker behavior of the US bond rate on international markets. JEL Classification: E31, E43, E44, F31, C58. |
| Keywords: | PPP, UIP, RIP, international parity conditions. |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111405&r=cba |
| By: | Ian Christensen; Césaire Meh; Kevin Moran |
| Abstract: | This paper assesses the merits of countercyclical bank balance sheet regulation for the stabilization of financial and economic cycles and examines its interaction with monetary policy. The framework used is a dynamic stochastic general equilibrium model with banks and bank capital, in which bank capital solves an asymmetric information problem between banks and their creditors. In this economy, the lending decisions of individual banks affect the riskiness of the whole banking sector, though banks do not internalize this impact. Regulation, in the form of a constraint on bank leverage, can mitigate the impact of this externality by inducing banks to alter the intensity of their monitoring efforts. We find that countercyclical bank leverage regulation can have desirable stabilization properties, particularly when financial shocks are an important source of economic fluctuations. However, the appropriate contribution of countercyclical capital requirements to stabilization after a technology shock depends on the size of the externality and on the conduct of the monetary authority. |
| Keywords: | Monetary policy framework; Transmission of monetary policy; Financial institutions; Financial system regulation and policies; Economic models |
| JEL: | E44 E52 G21 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:11-32&r=cba |
| By: | Ian Christensen; Césaire Meh; Kevin Moran |
| Abstract: | This paper assesses the merits of countercyclical bank balance sheet regulation for the stabilization of financial and economic cycles and examines its interaction with monetary policy. The framework used is a dynamic stochastic general equilibrium modelwith banks and bank capital, in which bank capital solves an asymmetric information problem between banks and their creditors. In this economy, the lending decisions of individual banks affect the riskiness of the whole banking sector, though banks do not internalize this impact. Regulation, in the form of a constraint on bank leverage, can mitigate the impact of this externality by inducing banks to alter the intensity of their monitoring efforts. We find that countercyclical bank leverage regulation can have desirable stabilization properties, particularly when financial shocks are an important source of economic fluctuations. However, the appropriate contribution of countercyclical capital requirements to stabilization after a technology shock depends on the size of the externality and on the conduct of the monetary authority. <P> |
| Keywords: | Moral hazard, bank capital, countercyclical capital requirements, leverage, monetary policy, |
| JEL: | E44 E52 G21 |
| Date: | 2011–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2011s-76&r=cba |
| By: | Philip Turner |
| Abstract: | Few financial variables are more fundamental than the "risk free" real long-term interest rate because it prices the terms of exchange over time. During the past 15 years, it has dropped from a range of 4 to 5% to a range of 0 to 2%. By late 2011, cyclical factors had driven it close to zero. This paper explores why. Possible persistent factors are: the investment of the large savings generated by developing Asia in highly-rated bonds; accounting and valuation rules for institutional investment; and financial sector regulation. The consequences could be far-reaching: cheaper leverage; less pressure to correct fiscal deficits; larger interest rate exposures in the financial industry; and a more cyclical bond market. During the financial crisis, central banks in the advanced countries have made the long-term interest rate a policy variable as Keynes had always advocated. This policy focus will draw more attention to the macroeconomic and financial consequences of government debt management policies. Coordination between central bank balance sheet policies and government debt management is essential. With government debt very high for years to come, bond market volatility could confront central banks with unenviable choices. |
| Keywords: | Long-term interest rate, bond market, government debt management, financial regulation, central banks |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:367&r=cba |
| By: | Valeriya Dinger |
| Abstract: | In this paper I revisit the debate on the impact of bank and market characteristics on the rigidity of retail bank interest rates. Whereas existing research in this area has been exclusively concerned with static measures of bank and market structure, I adopt a dynamic approach which explores the rigidity effects of the changes of bank and market structure generated by bank mergers. I find that bank mergers significantly affect the frequency of changes to deposit rates. In particular, the probability of adjusting deposit rates in response to shocks in money market rates significantly drops after mergers that involve large target banks and after mergers that generate a substantial geographical expansion of bank operations. These effects, however, materialize only after a "transition" period characterized by very frequent changes of the deposit rates. |
| Keywords: | Bank mergers ; Bank deposits ; Interest rates |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1131&r=cba |
| By: | Acharya, Viral V.; Mora, Nada |
| Abstract: | Can banks maintain their advantage as liquidity providers when they are heavily exposed to a financial crisis? The standard argument - that banks can - hinges on deposit inflows that are seeking a safe haven and provide banks with a natural hedge to fund drawn credit lines and other commitments. We shed new light on this issue by studying the behavior of bank deposit rates and inflows during the 2007-09 crisis. Our results indicate that the role of the banking system as a stabilizing liquidity insurer is not one of the passive recipient, but of an active seeker, of deposits. We find that banks facing a funding squeeze sought to attract deposits by offering higher rates. Banks offering higher rates were also those most exposed to liquidity demand shocks (as measured by their unused commitments, wholesale funding dependence, and limited liquid assets), as well as with fundamentally weak balance-sheets (as measured by their non-performing loans or by subsequent failure). Such rate increases have a competitive effect in that they lead other banks to offer higher rates as well. Overall, the results present a nuanced view of deposit rates and flows to banks in a crisis, one that reflects banks not just as safety havens but also as stressed entities scrambling for deposits. |
| Keywords: | financial crisis; flight to safety; liquidity; liquidity risk; solvency risk |
| JEL: | E4 G01 G11 G21 G28 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8706&r=cba |
| By: | M Hashem Pesaran; Andreas Pick; Mikhail Pranovich |
| Abstract: | This paper considers the problem of forecasting under continuous and discrete structural breaks and proposes weighting observations to obtain optimal forecasts in the MSFE sense. We derive optimal weights for continuous and discrete break processes. Under continuous breaks, our approach recovers exponential smoothing weights. Under discrete breaks, we provide analytical expressions for the weights in models with a single regressor and asymptotically for larger models. It is shown that in these cases the value of the optimal weight is the same across observations within a given regime and differs only across regimes. In practice, where information on structural breaks is uncertain a forecasting procedure based on robust weights is proposed. Monte Carlo experiments and an empirical application to the predictive power of the yield curve analyze the performance of our approach relative to other forecasting methods. |
| Keywords: | Forecasting; structural breaks; optimal weights; robust weights; exponential smoothing |
| JEL: | C22 C53 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:327&r=cba |
| By: | Evren Caglar; Jagjit S. Chadha; Katsuyuki Shibayama |
| Abstract: | Koop, Pesaran and Smith (2011) suggest a simple diagnostic indicator for the Bayesian estimation of the parameters of a DSGE model. They show that, if a parameter is well identified, the precision of the posterior should improve as the (artificial) data size T increases, and the indicator checks the speed at which precision improves. It does not require any additional programming; a researcher just needs to generate artificial data and estimate the model with different T. Applying this to Smets and Wouters'(2007) medium size US model, we find that while exogenous shock processes are well identified, most of the parameters in the structural equations are not. |
| Keywords: | Bayesian Estimation; Dynamic stochastic general equilibrium models; Identification |
| JEL: | C51 C52 E32 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:1125&r=cba |
| By: | Scheffknecht, Lukas; Geiger, Felix |
| Abstract: | We merge a financial market model with leverage-constrained, heterogeneous agents with a reduced-form version of the New-Keynesian standard model. Agents in both submodels are assumed to be boundedly rational. The fi nancial market model produces endogenously arising boom-bust cycles. It is also capable to generate highly non-linear deleveraging processes, fi re sales and ultimately a default scenario. Asset price booms are triggered via self-fulfilling prophecies. Asset price busts are induced by agents' choice of an increasingly fragile balance sheet structure during good times. Their vulnerability is inevitably revealed by small, randomly occurring shocks. Our transmission channel of financial market activity to the real sector embraces a recent strand of literature shedding light on the link between the active balance sheet management of financial market participants, the induced procyclical fluctuations of desired risk compensations and their final impact on the real economy. We show that a systematic central bank reaction on financial market developments dampens macroeconomic volatility considerably. Furthermore, restricting leverage in a countercyclical fashion limits the magnitude of financial cycles and hence their impact on the real economy. -- |
| Keywords: | behavioral economics,New-Keynesian macroeconomics,monetary policy,agent-based financial market model,leverage,macroprudential regulation,financial stability,asset price bubbles,systemic risk |
| JEL: | E31 E41 E47 E52 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fziddp:372011&r=cba |
| By: | Mohamed Tahar Benkhodja (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France) |
| Abstract: | In this paper, we compare, first, the impact of a windfall and a boom sectors on the economy of an oil exporting country and their welfare implications ; in a second step, we analyze how monetary policy should be conducted to insulate the economy from the main impact of these shocks, namely the Dutch Disease. To do so, we built a Multisector DSGE model with nominal and real rigidities. The main finding is that Dutch disease effect arise after spending and resource movement effects in the following cases : i) flexible prices and wages both in the case of a windfall and in the case of a boom ; ii) flexible wage and sticky price only in the case of a …fixed exchange rate. In other cases, Dutch disease effect can be avoided if : prices are sticky and wages are flexible when the exchange rate is flexible ; iii) prices and wages are sticky whatever the objective of the central bank is in both cases : windfall and boom. We also compare the source of fluctuation that leads to Dutch disease effect and we conclude that the windfall leads to a strong e¤ect in terms of de-industrialization compared to a boom. The choice of flexible exchange rate regime also helps to improve welfare. |
| Keywords: | Monetary Policy, Dutch Disease, Oil Prices, Small Open Economy |
| JEL: | E52 F41 Q40 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:1134&r=cba |
| By: | Corrado Macchiarelli (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This study revisits the relation between the uncovered interest parity (UIP), the ex ante purchasing power parity (EXPPP) and the real interest parity (RIP) using a VAR approach for the US dollar, the British sterling and the Japanese yen interest rates, exchange rates and changes in prices. The original contribution is on developing some joint coefficient-based tests for the three parities conditions at a long horizon. Particularly, test results are derived by rewriting the UIP, the EXPPP and the RIP as a set of cross-equation restrictions in the VAR (see also Campbell and Shiller, 1987; Bekaert and Hodrick, 2001; and Bekaert et al., 2007; King and Kurmann, 2002). Consistent with the idea of some form of proportionality among the above three parities, we find a ”forward premium” bias in both the UIP - as it is normally found in empirical analysis (e.g. Fama, 1987) - and the ex ante PPP. The latter result is new in the literature and stems from testing the PPP in expectational terms, thus assuming agents to bear on the uncertainty of future exchange rate changes and inflation dynamics. The overall results confirm the UIP to be currency-based (see also Bekaert et al., 2007) and the EXPPP to be horizon-dependent (see also Lothian and Taylor, 1996; Taylor, 2002). Moreover, we find (weak) evidence that conditioning the VAR on variables having a strong forward-looking component (i.e. share prices) helps recover a unitary coefficient in the UIP equation. JEL Classification: E31, E43, E44, F31, C58. |
| Keywords: | PPP, UIP, RIP, international parity conditions. |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111404&r=cba |
| By: | Cristian Badarinza (Goethe University Frankfurt, Department of Money and Macroeconomics, House of Finance, Grueneburgplatz 1,D-60323 Frankfurt am Main, Germany.); Marco Buchmann (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | In this paper we discuss the role of the cross-sectional heterogeneity of beliefs in the context of understanding and assessing macroeconomic vulnerability. Emphasis lies on the potential of changing levels of disagreement in expectations to influence the propensity of the economy to switch between different regimes, a hypothesis that finds robust empirical support from a regime-switching model with endogenous transition probabilities for output growth and realized stock market volatility in the US. JEL Classification: C53, D8, E32. |
| Keywords: | Heterogeneous beliefs, business cycles, regime-switching, forecasting, endogenous transition probabilities. |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111407&r=cba |
| By: | Fungacova, Zuzana (BOFIT); Herrala, Risto (BOFIT); Weill, Laurent (BOFIT) |
| Abstract: | This study examines how bank ownership influenced the credit supply during the recent financial crisis in Russia, where the banking sector consists of a mix of state-controlled banks, foreign-owned banks, and domestic private banks. To estimate credit supply changes, we employ an exhaustive dataset for Russian banks that covers the crisis period and apply an original approach based on stochastic frontier analysis. Our findings suggest bank ownership affected credit supply during the financial crisis and that the crisis led to an overall decrease in the credit supply. Relative to domestic private banks foreign-owned banks reduced their credit supply more and state-controlled banks less. This supports the hypothesis that foreign banks have a “lack of loyalty” to domestic actors during a crisis, as well as the view that an objective function of state-controlled banks leads them to support the economy during economic downturns. |
| Keywords: | bank; credit policy; foreign ownership; state ownership; stochastic frontier analysis |
| JEL: | D14 G21 |
| Date: | 2011–12–16 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2011_034&r=cba |
| By: | Alan K. Detmeister |
| Abstract: | This paper examines a number of alternative PCE price inflation measures including overall PCE inflation, PCE inflation excluding food and energy, trimmed mean PCE inflation, component-smoothed inflation, variance-weighted inflation, inflation with weights based on disaggregated regressions, and survey measures of inflation expectations. When averaging across a handful of specifications based on the primary uses of a core inflation measure three conclusions arise: 1. Inflation rates for nearly all the measures best track ex-post trend inflation or predict future overall inflation when they are averaged over a considerable number of months. Overall PCE price inflation should be averaged over 18 months or longer. A shorter averaging period is appropriate for core measures, often on the order of 12 months. 2. Even after appropriately averaging each index, core inflation indexes generally perform better than overall inflation. 3. Exclusion indexes, such as PCE excluding food and energy, perform slightly worse than many other possible core inflation measures; trimmed mean PCE, or a variance-weighted index, may be better choice for a summary inflation measure. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2011-56&r=cba |
| By: | Ben R. Craig; Falko Fecht |
| Abstract: | While net settlement systems make more efficient use of liquidity than gross settlement systems, they are known to generate systemic risk. What does that tendency imply for the stability of the payments (or financial) system when the two settlement systems coexist? Do liquidity shortages induce banks to settle more transactions in the net settlement system, thereby increasing systemic risk? Or do banks require their counterparties to send payments through the gross settlement system when default risks are high, increasing the need for liquidity and the money market rate but reducing overall systemic risk? This paper studies the factors that drive the relative importance of net and gross settlement systems over the short run, using daily data on transaction volumes from the large- volume payment systems of all euro area countries that have had both a net and a gross settlement system at the same time. Applying a large portfolio of different econometric techniques, we find that it is actually the transaction volumes in gross settlement systems that affect the daily price of liquidity and the credit risk spread in money markets. |
| Keywords: | Payment systems ; Systemic risk |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1132&r=cba |
| By: | Jacopo Cimadomo (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper surveys the empirical research on fiscal policy analysis based on real-time data. This literature can be broadly divided in three groups that focus on: (1) the statistical properties of revisions in fiscal data; (2) the political and institutional determinants of projection errors by governments and (3) the reaction of fiscal policies to the business cycle. It emerges that, first, fiscal data revisions are large and initial releases are biased estimates of final values. Second, the presence of strong fiscal rules and institutions leads to relatively more accurate releases of fiscal data and small deviations of fiscal outcomes from government plans. Third, the cyclical stance of fiscal policies is estimated to be more ‘counter-cyclical’ when real-time data are used instead of ex-post data. Finally, more work is needed for the development of real-time datasets for fiscal policy analysis. In particular, a comprehensive real-time dataset including fiscal variables for industrialized (and possibly developing) countries, published and maintained by central banks or other institutions, is still missing. JEL Classification: E62, H60, H68. |
| Keywords: | Fiscal policy, real-time data, data revisions, cyclical sensitivity. |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111408&r=cba |
| By: | Stéphanie Guichard; Elena Rusticelli |
| Abstract: | The financial crisis has resulted in a substantial increase in unemployment in the OECD. This paper shows that this increase has reversed the reduction in structural unemployment which has been estimated to have occurred in most OECD countries since the late 1990s. Structural unemployment is defined as a time-varying NAIRU derived from the information contained in a reduced Phillips curve equation (linking inflation to the unemployment gap) by means of a Kalman filter. The overall limited revisions in historical NAIRU estimated in 2008 after such a large labour market shock support the robustness of the OECD approach. This approach is therefore extended to almost all OECD countries. Alternative specifications of the Phillips curve are proposed for some specific groups of countries.<P>Un réexamen des NAIRUs après la crise<BR>La crise de la crise financière a entraîné une augmentation importante du chômage dans l'OCDE. Ce document montre que cette augmentation a inversé la tendance á la réduction du chômage structurel que l’on avait été estimé avoir eu lieu dans la plupart des pays de l'OCDE depuis la fin des années 1990. Le chômage structurel est défini comme à un NAIRU variant dans le temps et dérivé de l'information contenue dans une équation de courbe de Phillips réduite (reliant l'inflation à l'écart du chômage au chômage structurel) au moyen d'un filtre de Kalman. Les révisions dans l’ensemble limitées du NAIRU historique estimés en 2008 après un tel choc sur le marché du travail supportent la robustesse de l'approche de l'OCDE. Cette approche est donc étendue à presque tous les pays de l'OCDE. Des spécifications alternatives de la courbe de Phillips sont proposées pour certains groupes spécifiques du pays. |
| Keywords: | unemployment, NAIRU, structural unemployment, Phillips curves, chômage, courbe de Phillips, NAIRU, chômage structurel |
| JEL: | C32 E24 E31 J3 J6 |
| Date: | 2011–12–19 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:918-en&r=cba |
| By: | Gbaguidi, David Sedo |
| Abstract: | The main topic of this paper is to challenge the rational nature of the agents' expectations and the structural effectiveness of the behaviorally micro-based New Keynesian Phillips Curve (NKPC). Building on previous results, we model this trade-off between the U.S inflation rate and a Unit Labor Cost-based measure of the real activity through a Markov Switching Intercept and Heteroscedastic - Vectorial AutoRegressive (MSIH-VAR) specification. This specification allows the adequate capture of the rationality in the agents' expectations process. It underlies a finite number of expected inflation rate regimes, which highlight the agents' adaptive beliefs on the achievements of these regimes. Moreover, the results confirm the structural stability of the NKPC over the inflation rate regimes as its deep parameters seem to be unaffected by the regimes switching. |
| Keywords: | Inflation; New Keynesian Phillips Curve; Regime Switching |
| JEL: | E0 C32 E31 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:35481&r=cba |
| By: | Alexandra Flayols (USTV UFR SEG - Université Sud-Toulon-Var - UFR Sciences économiques et de gestion - Ministère de l'Enseignement Supérieur et de la Recherche Scientifique) |
| Abstract: | Le passage à l'Union économique et monétaire dans la mesure où chaque pays demeure souverain n'a pas d'équivalent dans l'histoire. La banque centrale européenne a donc dû mettre en place une coopération efficace avec les banques centrales nationales dans un contexte institutionnel et économique nouveau. La convergence des pays membres ne doit ainsi pas être le seul fait d'un instant donné, mais doit être durable pour garantir la pérennité de la zone euro. Nous nous sommes interrogés sur l'hétérogénéité à laquelle doit faire face la banque centrale européenne et si celle-ci remet en cause l'efficacité de la politique monétaire unique. Suite à ce questionnement, nous avons tenté de déterminer si certains pays membres tirent un plus grand avantage de la politique telle qu'elle est menée par la banque centrale européenne. |
| Keywords: | politique monétaire, hétérogénéité, zone euro, BCE, inflation, croissance, chômage, NAIRU, Phillips, finances publiques |
| Date: | 2011–11–29 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:dumas-00647031&r=cba |
| By: | Stijn Claessens; Neeltje van Horen |
| Abstract: | Using a new, comprehensive database on bank ownership, identifying also the home country of foreign banks, for 137 countries over the period 1995-2009, this paper provides an overview of foreign bank activity and its impact of financial development and stability. We document substantial increases in foreign bank presence, especially in emerging markets and developing countries, but which slowed down dramatically with the onset of the global crisis. Over time, banks from many more home countries have become active as investors, with several emerging countries becoming important exporters. Investment, however, remains mostly regional. In terms of loans, deposits and profits, current market shares of foreign banks average 20 percent in OECD countries and close to 50 percent in developing countries and emerging markets. Foreign banks differ from domestic banks in key balance sheet variables, notably having higher capital and more liquidity, but lower profitability. Cross-country analysis shows that only in developing countries is foreign bank presence negatively correlated with domestic credit creation. Finally, using panel regressions, we show that during the global crisis foreign banks reduced credit more compared to domestic banks, but not when dominant in the host country. |
| Keywords: | foreign banks; foreign direct investment; cross-border banking; bilateral investment; financial globalization; financial sector development; financial stability; spillovers; financial crisis |
| JEL: | F21 F23 G21 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:330&r=cba |
| By: | Martin Menner (Universidad de Alicante) |
| Abstract: | A periodic "Gesell Tax" on money holdings as a way to overcome the zero-lower-bound on nominal interest rates is studied in a framework where money is essential. For this purpose, I characterize the efficiency properties of taxing money in a full-fledged macroeconomic business cycle model of the third-generation of monetary search models. Both, inflation and "Gesell taxes" maximize steady state capital stock, output, consumption, investment and welfare at moderate levels. The Friedman rule is sub-optimal, unless accompanied by a moderate “Gesell tax”. In a recession scenario a Gesell tax speeds up the recovery in a similar way as a large fiscal stimulus but avoids "crowding out" of private consumption and investment. |
| Keywords: | monetary search-theory, negative interest rates, Gesell tax, capital formation, DSGE model |
| JEL: | D83 E19 E32 E49 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2011-26&r=cba |
| By: | Reinhold Heinlein; Hans-Martin Krolzig |
| Abstract: | The determination of the $/£ exchange rate is studied in a small symmetric macroeconometric model including UK-US differentials in inflation, output gap, short and long-term interest rates for the four decades since the breakdown of Bretton Woods. The key question addressed is the possible presence of a ‘delayed overshooting puzzle’ in the dynamic reaction of the exchange rate to monetary policy shocks. In contrast to the existing literature, we follow a data-driven modelling approach combining (i) a VAR based cointegration analysis with (ii) a graph-theoretic search for instantaneous causal relations and (iii) an automatic general-to-specific approach for the selection of a congruent parsimonious structural vector equilibrium correction model. We find that the long-run properties of the system are characterized by four cointegration relations and one stochastic trend, which is identified as the long-term interest rate differential and that appears to be driven by long-term inflation expectations as in the Fisher hypothesis. It cointegrates with the inflation differential to a stationary ‘real’ long-term rate differential and also drives the exchange rate. The short-run dynamics are characterized by a direct link from the short-term to the long-term interest rate differential. Jumps in the exchange rate after short-term interest rate variations are only significant at 10%. Overall, we find strong evidence for delayed overshooting and violations of UIP in response to monetary policy shocks. |
| Keywords: | Exchange Rates; Monetary Policy; Cointegration; Structural VAR; Model Selection |
| JEL: | C22 C32 C50 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:1124&r=cba |
| By: | Ansgar Belke (Department of Economics, University of Duisburg-Essen, Germany); Niklas Potrafke (Department of Economics, University of Konstanz, Germany) |
| Abstract: | This paper examines whether government ideology has influenced monetary policy in OECD countries. We use quarterly data in the 1980.1-2005.4 period and exclude EMU countries. Our Taylor-rule specification focuses on the interactions of a new time-variant index of central bank independence with government ideology. The results show that leftist governments have somewhat lower short-term nominal interest rates than rightwing governments when central bank independence is low. In contrast, short-term nominal interest rates are higher under leftist governments when central bank independence is high. The effect is more pronounced when exchange rates are flexible. Our findings are compatible with the view that leftist governments, in an attempt to deflect blame of their traditional constituencies, have pushed market-oriented policies by delegating monetary policy to conservative central bankers. |
| Keywords: | monetary policy, Taylor rule, government ideology, partisan politics, central bank independence, panel data |
| JEL: | E52 E58 D72 C23 |
| Date: | 2011–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:knz:dpteco:1148&r=cba |
| By: | Ansgar Belke; Niklas Potrafke |
| Abstract: | This paper examines whether government ideology has influenced monetary policy in OECD countries. We use quarterly data in the 1980.1-2005.4 period and exclude EMU countries. Our Taylor-rule specification focuses on the interactions of a new time-variant index of central bank independence with government ideology. The results show that leftist governments have somewhat lower short-term nominal interest rates than rightwing governments when central bank independence is low. In contrast, short-term nominal interest rates are higher under leftist governments when central bank independence is high. The effect is more pronounced when exchange rates are flexible. Our findings are compatible with the view that leftist governments, in an attempt to deflect blame of their traditional constituencies, have pushed market-oriented policies by delegating monetary policy to conservative central bankers. |
| Keywords: | Monetary policy, Taylor rule, government ideology, partisan politics, central bank independence, panel data |
| JEL: | E52 E58 D72 C23 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1180&r=cba |
| By: | Knut Are Aastveit (Norges Bank (Central Bank of Norway)); Hilde C. Bjørnland (BI Norwegian Business School, University of California and Norges Bank (Central Bank of Norway)); Leif Anders Thorsrud (BI Norwegian Business School and Norges Bank (Central Bank of Norway)) |
| Abstract: | This paper bridges the new open economy factor augmented VAR (FAVAR) studies with the recent findings in the business cycle synchronization literature emphasizing the importance of regional factors. That is, we estimate and identify a three block FAVAR model with separate world, regional and domestic blocks and study the transmission of both global and regional shocks to four small open economies (Canada, New Zealand, Norway and UK). The results show that foreign shocks explain a major share of the variance in all countries, most so shocks that are common to the world. However, regional shocks also play an important role, explaining more than 20 percent of the variance in the variables. Hence in small open economies, the world is not enough. The regional factors impact the four countries differently, though, some through trade and some through consumer sentiment. Our findings of a strong transmission of both global and regional shocks to open economies are in sharp contrast to the evidence from recently developed open economy DSGE models. |
| Keywords: | International transmission, World and region, Small open economy, FAVAR, Business cycles |
| JEL: | C32 E32 F41 |
| Date: | 2011–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2011_16&r=cba |
| By: | Riccardo Fiorentini (Department of Economics (University of Verona)) |
| Abstract: | The paper investigates the links between international global imbalances and the recent international financial crisis. It also focuses on the asymmetries of the dollar standard exchange rate regime. Global imbalances preceded the crisis but were one of the ingredients that led to the financial crash of 2007-2008. The paper rejects the ‘saving glut' explanation of the US trade deficit and shows that the key role of the dollar in the international monetary system allows the USA to exert seignorage in the international economy and created a circuit where Asian and oil-producing countries financed the US deficit. The inflow of foreign capitals increased the US domestic credit supply contributing to the development of the sub-prime bubble. The paper concludes that only the creation of a supranational monetary authority can eliminate the dangers of the asymmetric dollar standard regime. |
| Keywords: | Imbalances, crisis, dollaer |
| JEL: | F33 E21 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:ver:wpaper:18/2011&r=cba |
| By: | Stanova N. |
| Abstract: | This paper introduces a small-scale experimental model intended as a first stage to developing a fully-fledged system dynamics macroeconomic model of a new generation.The model economy incorporates important real-world features that are missing in the mainstream macroeconomic literature. The agents representing the demand and supply side dispose over a limited information set. Their interactions are not constrained by a priori imposition of equilibrium conditions. The exercise shows that, unlike in general equilibrium models, booms and busts in output and price endogenously arise due to the stock variable representation of demand and supply and modelling the agents’decisions as autonomous. It is also demonstrated that bad times and good times are driven by the same causal mechanisms. The insights are paramount for an appropriate understanding of the true possibilities of macroeconomic policies and provide fruitful material for further exploration. |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:ant:wpaper:2011022&r=cba |
| By: | Antonia Lòpez-Villavicencio (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris XIII - Paris Nord); Jacques Mazier (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris XIII - Paris Nord); Jamel Saadaoui (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris XIII - Paris Nord) |
| Abstract: | We analyze, in a unified theoretical framework, the two main models for equilibrium exchange rate, namely, the BEER and the FEER approaches. In order to understand the interactions between them, we study in detail the temporal links between these two measures. Our results show that, in average, the BEER and the FEER are closely related. Yet, important differences can be observed for some countries and/or some periods of time. Therefore, we analyze some of the factors that may explain this disconnection, identifying several aspects which are able to alter the relation between the current account and the real effective exchange rate, and so, between the FEER and the BEER. Our analysis puts forward the structural changes in matter of competitiveness, the dynamics of foreign asset positions and valuation effects as explanations for the divergence. |
| Keywords: | Equilibrium Exchange Rate, BEER, FEER, Cointegration, Global Imbalances |
| Date: | 2012–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00535907&r=cba |
| By: | Christopher Ragan (McGill University) |
| Abstract: | Sticking with the status quo was only one option under debate among monetary experts in the lead-up to renewal of the Bank of Canada’s inflation-targeting mandate, which was announced this week. Several other routes were available. Two of them – namely, targeting nominal GDP or targeting full employment – were arguably non-starters. Two other approaches, however, held more promise: (i) moving to a price-level targeting regime, or (ii) sticking with inflation targeting but with a lower, say 1 percent, target. Nevertheless, the renewal of the status quo keeps in place a coherent monetary policy regime that has served Canadians well. |
| Keywords: | Monetary Policy, Canada, Bank of Canada, inflation targeting |
| JEL: | E4 E52 E58 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:cdh:ebrief:125&r=cba |
| By: | Eickmeier, Sandra; Ng, Tim |
| Abstract: | We study how credit supply shocks in the US, the euro area and Japan are transmitted to other economies. We use the recently-developed GVAR approach to model financial variables jointly with macroeconomic variables in 33 countries for the period 1983-2009. We experiment with inter-country links that distinguish bilateral trade, portfolio investment, foreign direct investment and banking exposures, as well as asset-side vs. liability-side financial channels. Capturing both bilateral trade and inward foreign direct investment or outward banking claim exposures in a GVAR fits the data better than using trade weights only. We use sign restrictions on the short-run impulse responses to financial shocks that have the effect of reducing credit supply to the private sector. We find that negative US credit supply shocks have stronger negative effects on domestic and foreign GDP, compared to credit supply shocks from the euro area and Japan. Domestic and foreign credit and equity markets respond clearly to the credit supply shocks. Exchange rate responses are consistent with a "flight to quality" to the US dollar. The UK, another international financial centre, is also responsive to the shocks. These results are robust to the exclusion of the 2007-09 crisis episode from the sample. |
| Keywords: | credit supply shocks; global VAR; international business cycles; sign restrictions; trade and financial integration |
| JEL: | C3 F15 F36 F41 F44 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8720&r=cba |
| By: | Carolina Arteaga cabrales; Joan Camilo Granados Castro; Jair Ojeda Joya |
| Abstract: | In this paper we study the effect of monetary policy shocks on commodity prices. While most of the literature has found that expansionary shocks have a positive effect on aggregate price indices, we study the effect on individual prices of a sample of four commodities. This set of commodity prices is essential to understand the dynamics of the balance of payments in Colombia. The analysis is based on structural VAR models, we identify monetary policy shocks following [Kim, 1999, 2003] upon quarterly data for commodity prices and their fundamentals for the period 1980q1 to 2010q3. Our results show that commodity prices overshoot their long run equilibrium in response to a contractionary shock in the US monetary policy and, in contrast with literature, the response of the individual prices considered is stronger than what has been found in aggregate indices. Additionally, it is found that the monetary policy explains a substantial share of the fluctuations in prices. |
| Date: | 2011–12–22 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:009199&r=cba |
| By: | Riccardo Bonci (Banca d’Italia, Regional Economic Research, Perugia branch, Via Nazionale 91, 00184 Roma, Italy.) |
| Abstract: | This paper provides new evidence on the transmission of monetary policy in the euro area, assessing the impact of an unexpected increase of the short-term interest on the lending and borrowing activity of the different economic sectors. We exploit the information content of the flow-of-funds statistics, that provide the most appropriate framework to analyse the flowing of funds from one sector (the lender) to the other (the borrower). We proceed in two steps. First, we estimate a small VAR model for the euro area over the period 1991Q1 to 2009Q2. Then, we extend the benchmark VAR model in order to include the flow-of-funds series and analyse the response of the latter variables to a contractionary monetary policy shock. We find that the policy tightening is followed by a worsening of the budget deficit; firms cut on their demand for bank loans, partially replacing them with inter-company loans, and draw on their liquidity to try to offset the fall of revenues associated with the slowdown of economic activity; households reduce net borrowing and increase precautionary saving in the short run. Consistent with the bank lending channel of monetary policy at work, the interest rate hike is followed by a short-run deceleration of credit growth, mainly driven by the response of banks. JEL Classification: E32, E4, E52, G11. |
| Keywords: | Monetary policy; flow of funds; credit growth. |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111402&r=cba |
| By: | Christian Calmès (Chaire d'information financière et organisationnelle ESG-UQAM, Laboratory for Research in Statistics and Probability, Université du Québec (Outaouais)); Raymond Théoret (Chaire d'information financière et organisationnelle ESG-UQAM, Université du Québec (Montréal), Université du Québec (Outaouais)) |
| Abstract: | Since financial institutions are subjected to increasingly tighter requirements regarding the way they conduct their loan business, we could assume that built-in regulatory pressures induce them to adopt collective business strategies, with the unintended consequence of persistently weakening the banking system ability to cope with external shocks. Surprisingly, we find rather the opposite. This paper documents how banks, as a group, react to macroeconomic risk and uncertainty, and more specifically the way banks systemic behaviour evolves over the business cycle. Adopting the methodology of Beaudry et al. (2001), our results clearly indicate that the dispersion across banks traditional portfolios has actually increased through time. We introduce an estimation procedure based on EGARCH and re-fine Baum et al. (2002, 2004, 2009) and Quagliariello (2007, 2009) framework to analyze the question in the new industry context, i.e. shadow banking. Consistent with finance theory, we first confirm that banks tend to behave homogeneously vis-à-vis macroeconomic uncertainty. Additionally, we find that the cross-sectional dispersions of loans to assets and non-traditional activities shrink essentially during downturns, when the resilience of the banking system is at its lowest. Our results also indicate that banks herd-like behaviour remains predominantly a cyclical phenomenon, almost unaffected by the new banking environment. Most importantly however, the cross-sectional dispersion of market-oriented ac-tivities appears to be both more volatile and sensitive to the business cycle than the dispersion of the traditional banking business lines. |
| Keywords: | Basel III; Banking stability; Macroprudential policy; Herding; Macroeconomic uncertainty. |
| JEL: | C32 G20 G21 |
| Date: | 2011–12–19 |
| URL: | http://d.repec.org/n?u=RePEc:pqs:wpaper:322011&r=cba |
| By: | Mehrotra, Aaron (BOFIT); Funke, Michael (BOFIT); Yu, Hao (BOFIT) |
| Abstract: | With recovery from the global financial crisis in 2009 and 2010, inflation emerged as a major concern for many central banks in emerging Asia. We use data observed at mixed frequencies to estimate the movement of Chinese headline inflation within the framework of a state-space model, and then take the estimated indicator to nowcast Chinese CPI inflation. The importance of forward-looking and high-frequency variables in tracking inflation dynamics is highlighted and the policy implications discussed. |
| Keywords: | nowcasting; CPI inflation cycle; mixed-frequency modelling; dynamic factor model; China |
| JEL: | C53 E31 E37 |
| Date: | 2011–12–22 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2011_035&r=cba |
| By: | Ma, Guonan (BOFIT); Xiandong, Yan (BOFIT); Xi, Liu (BOFIT) |
| Abstract: | This paper examines the evolving role of reserve requirements as a policy tool in China. Since 2007, the Chinese central bank (PBC) has relied more on this tool to withdraw domestic liquidity surpluses, as a cheaper substitute for open-market operation instruments in this period of rapid FX accumulation. China’s reserve requirement system has also become more complex and been used to address a range of other policy objectives, not least being macroeconomic management, financial stability and credit policy. The preference for using reserve requirements reflects the size of China’s FX sterilisation task and the associated cost considerations, a quantity-oriented monetary policy framework challenged to reconcile policy dilemmas and tactical considerations. The PBC often finds it easier to reach consensus over reserve requirement decisions than interest rate decisions and enjoys greater discretion in applying this tool. The monetary effects of reserve requirements need to be explored in conjunction with other policy actions and not in isolation. Depending on the policy mix, higher reserve requirements tend to signal a tightening bias, to squeeze excess reserves of banks, to push market interest rates higher, and to help widen net interest spreads, thus tightening domestic monetary conditions. There are, however, costs to using this policy tool, as it imposes a tax burden on Chinese banks that in turn appear to have passed a significant portion of this cost onto their customers, mostly depositors and SMEs. However, the pass-through onto bank customers appears to be partial. |
| Keywords: | reserve requirements; sterilisation tools; monetary policy; net interest margin and spread; tax incidence; Chinese economy |
| JEL: | E40 E50 E52 E58 E60 H22 |
| Date: | 2011–12–14 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2011_030&r=cba |
| By: | Lahura, Erick (Central Bank of Peru; Universidad Catolica del Peru); Vega, Marco (Central Bank of Peru; Universidad Catolica del Peru) |
| Abstract: | Under inflation targeting and other related monetary policy regimes, the identification of non-transitory in ation and forecasts about future inflation constitute key ingredients for monetary policy decisions. In practice, central banks perform these tasks using so-called "core inflation measures". In this paper we construct alternative core inflation measures using wavelet functions and multiresolution analysis (MRA), and then evaluate their relevance for monetary policy. The construction of wavelet-based core inflation measures (WIMs) is relatively new in the literature and their assessment has not been addressed formally, this paper being the first attempt to perform both tasks for the case of Peru. Another main contribution of this paper is that it proposes a VAR-based long-run criterion as an alternative criteria for evaluating core inflation measures. Evidence from Peru shows that WIMs are superior to official core inflation in terms of both the proposed criterion and forecast-based criteria. |
| Keywords: | Core infl ation, wavelets, forecast, structural VAR |
| JEL: | C45 E31 E37 E52 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2011-019&r=cba |