nep-cba New Economics Papers
on Central Banking
Issue of 2012‒03‒08
twenty-six papers chosen by
Alexander Mihailov
University of Reading

  1. The role of money and monetary policy in crisis periods: the Euro area case By Benchimol, Jonathan; Fourçans, André
  2. Determinants of Banking System Fragility: A Regional Perspective By Degryse, H.A.; Elahi, M.A.; Penas, M.F.
  3. Optimal Design of Bank Bailouts: Prompt Corrective Action By J-P. Niinimaki
  4. Money as Indicator for the Natural Rate of Interest By Helge Berger; Henning Weber
  5. Do Regulators Overestimate the Costs of Regulation? By David Simpson
  6. Macroprudential Rules and Monetary Policy when Financial Frictions Matter By Jeannine Bailliu; Césaire Meh; Yahong Zhang
  7. Financial integration, specialization and systemic risk By Falko Fecht; Hans Peter Grüner; Philipp Hartmann
  8. Explaining Inflation-Gap Persistence by a Time-Varying Taylor Rule By Conrad, Christian; Eife, Thomas A.
  9. Inflation convergence in Central and Eastern Europe with a view to adopting the euro By Juan Carlos Cuestas; Luis A. Gil-Alana; Karl Taylor
  10. Optimal bank transparency By Moreno, Diego; Takalo , Tuomas
  11. Reserve Requirements for Price and Financial Stability - When Are They Effective? By Glocker, C.; Towbin, P.
  12. Treasury Bills and/or Central Bank Bills for Absorbing Surplus Liquidity: The Main Considerations By Obert Nyawata
  13. Does Basel II Pillar 3 Risk Exposure Data help to Identify Risky Banks? By Ralf Sabiwalsky
  14. Transmission Lags and Optimal Monetary Policy By Alessandro Flamini
  15. Fiscal policy coordination in the EMU: A problem with asymmetry and aggregation By Matti Viren
  16. A Critical Analysis of the Technical Assumptions of the Standard Micro Portfolio Approach to Sovereign Debt Management By Hans J. Blommestein; Anja Hubig
  17. Managing Non-core Liabilities and Leverage of the Banking System: A Building Block for Macroprudential Policy Making in Korea By Ali Alichi; Sang Chul Ryoo; Cheol Hong
  18. Sudden Floods, Macroprudention Regulation and Stability in an Open Economy By Pierre-Richard Agénor; K. Alper; L. Pereira da Silva
  19. Crisis Prevention and Management - What Worked in the 2008/2009 Crisis? By Becker, Torbjörn
  20. Expansionary Effect of an Anticipated Fiscal Policy on Consumption in Japan By Hiroshi Morita
  21. Supply Shocks and the Cyclical Behaviour of Bank Lending Rates under the Basel Accords By Roy Zilberman
  22. Capital Inflows, Exchange Rate Flexibility, and Credit Booms By Esteban Vesperoni; Nicolas E. Magud; Carmen Reinhart
  23. Institutional structures of financial sector supervision, their drivers and emerging benchmark models By Melecky, Martin; Podpiera , Anca Maria
  24. Fiscal Rules and the Sovereign Default Premium By Leonardo Martinez; Juan Carlos Hatchondo; Francisco Roch
  25. Pricing Full Deposit Insurance in Germany amidst the Financial Crisis 2008-2010 By Markus R. Kosters; Stefan T.M. Streatmans; Mario Maggi
  26. The role of investment banking for the German economy: Final report for Deutsche Bank AG, Frankfurt/Main By Schröder, Michael; Borell, Mariela; Gropp, Reint; Iliewa, Zwetelina; Jaroszek, Lena; Lang, Gunnar; Schmidt, Sandra; Trela, Karl

  1. By: Benchimol, Jonathan (ESSEC Business School); Fourçans, André (ESSEC Business School)
    Abstract: In this paper, we test two models of the Eurozone, with a special emphasis on the role of money and monetary policy during crises. The role of separability between money and consumption is investigated further and we analyse the Euro area economy during three different crises: 1992, 2001 and 2007. We find that money has a rather significant role to play in explaining output variations during crises whereas, at the same time, the role of monetary policy on output decreases significantly. Moreover, we find that a model with non-separability between consumption and money has better forecasting performance than a baseline separable model over crisis periods.
    Keywords: Euro area; Money; DSGE forecasting
    JEL: E31 E51 E58
    Date: 2012–02–01
  2. By: Degryse, H.A.; Elahi, M.A.; Penas, M.F. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: Banking systems are fragile not only within one country but also within and across regions. We study the role of regional banking system characteristics for regional banking system fragility. We find that regional banking system fragility reduces when banks in the region jointly hold more liquid assets, are better capitalized, and when regional banking systems are more competitive. For Asia and Latin-America, a greater presence of foreign banks also reduces regional banking fragility. We further investigate the possibility of contagion within and across regions. Within region banking contagion is important in all regions but it is substantially lower in the developed regions compared to emerging market regions. For cross-regional contagion, we find that the contagion effects of Europe and the US on Asia and Latin America are significantly higher compared to the effect of Asia and Latin America among themselves. Finally, the impact of cross-regional contagion is attenuated when the host region has a more liquid and more capitalized banking sector.
    Keywords: Banking system stability;cross-regional contagion;financial integration.
    JEL: G15 G20 G29
    Date: 2012
  3. By: J-P. Niinimaki
    Abstract: The paper investigates the optimal design of bank bailouts. Under three types of ex post moral hazard that tempt banks to hide loan losses, the paper analyzes banking regulation via three Prompt Corrective Action instruments: prohibition of dividends, limits on compensation to managers and early closure policy. The first two have a mitigating effort on moral hazard but the last instrument has a damaging impact. As to bad debts and the cleaning of banks' balance sheets, asset insurance and equity capital motivate banks to disclose loan losses. In some cases, prohibition of dividends or limits on compensation to managers has the same effect.
    Keywords: Financial intermediation, Mechanism design, Bank bailouts, Banking regulation, Prompt Corrective Action
    JEL: G21 G28
    Date: 2011–11
  4. By: Helge Berger; Henning Weber
    Abstract: The natural interest rate is of great relevance to central banks, but it is difficult to measure. We show that in a standard microfounded monetary model, the natural interest rate co-moves with a transformation of the money demand that can be computed from actual data. The co-movement is of a considerable magnitude and independent of monetary policy. An optimizing central bank that does not observe the natural interest rate can take advantage of this co-movement by incorporating the transformed money demand, in addition to the observed output gap and inflation, into a simple but optimal interest rate rule. Combining the transformed money demand and the observed output gap provides the best information about the natural interest rate.
    Keywords: Central banks , Demand for money , Economic models , Interest rates , Monetary policy , Money ,
    Date: 2012–01–10
  5. By: David Simpson
    Abstract: It has occasionally been asserted that regulators typically overestimate the costs of the regulations they impose. A number of arguments have been proposed for why this might be the case, with the most widely credited one being that regulators fail sufficiently to appreciate the effects of innovation in reducing regulatory compliance costs. Most existing studies have found that regulators are more likely to over- than to underestimate costs. Moreover, the ratio of ex ante estimates of compliance costs to ex post estimates of the same costs is generally greater than one. In this paper I argue that neither piece of evidence necessarily demonstrates that ex ante estimates are biased. There are several reasons to suppose that the distribution of compliance costs would be skewed, so that the median of the distribution would lie below the mean. It is not surprising, then, that most estimates would prove to be too high. Moreover, we would expect from a simple application of Jensen’s inequality that the expected ratio of ex ante to ex post compliance costs would be greater than one. In this paper I propose a regression-based test of the bias of ex ante compliance cost estimates, and cannot reject the hypothesis that estimates are unbiased. Despite the existence of a number of papers reporting ex ante and ex post compliance cost estimates, it is surprisingly difficult to get a large sample of such comparisons. My most salient finding does not concern the bias of ex ante cost estimates so much as their inaccuracy and the continuing paucity of careful studies.
    Keywords: benefit-cost analysis, cost estimation, ex ante, ex post, innovation, iterated expectations
    JEL: L51 Q52
    Date: 2011–12
  6. By: Jeannine Bailliu; Césaire Meh; Yahong Zhang
    Abstract: This paper examines the interaction between monetary policy and macroprudential policy and whether policy makers should respond to financial imbalances. To address this issue, we build a dynamic general equilibrium model that features financial market frictions and financial shocks as well as standard macroeconomic shocks. We estimate the model using Canadian data. Based on these estimates, we show that it is beneficial to react to financial imbalances. The size of these benefits depends on the nature of the shock where the benefits are larger in the presence of financial shocks that have broader effects on the macroeconomy.
    Keywords: Economic models; Financial markets; Financial stability; Monetary policy framework
    JEL: E42 E50 E60
    Date: 2012
  7. By: Falko Fecht (EBS Business School, Gustav-Stresemann-Ring 3, 65189 Wiesbaden, Germany.); Hans Peter Grüner (Universität Mannheim, Schloss, 68131 Mannheim, Germany and CEPR, London, UK.); Philipp Hartmann (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: This paper studies the implications of cross-border financial integration for financial stability when banks' loan portfolios adjust endogenously. Banks can be subject to sectoral and aggregate domestic shocks. After integration they can share these risks in a complete interbank market. When banks have a comparative advantage in providing credit to certain industries, financial integration may induce banks to specialize in lending. An enhanced concentration in lending does not necessarily increase risk, because a well-functioning interbank market allows to achieve the necessary diversification. This greater need for risk sharing, though, increases the risk of cross-border contagion and the likelihood of widespread banking crises. However, even though integration increases the risk of contagion it improves welfare if it permits banks to realize specialization benefits. JEL Classification: D61, E44, G21.
    Keywords: Financial integration, specialization, interbank market, financial contagion.
    Date: 2012–02
  8. By: Conrad, Christian; Eife, Thomas A.
    Abstract: In a simple New Keynesian model, we derive a closed form solution for the inflation-gap persistence parameter as a function of the policy weights in the central bank’s Taylor rule. By estimating the time-varying weights that the FED attaches to inflation and the output gap, we show that the empirically observed changes in U.S. inflation-gap persistence during the period 1975 to 2010 can be well explained by changes in the conduct of monetary policy. Our findings are in line with Benati’s (2008) view that inflation persistence should not be considered a structural parameter in the sense of Lucas.
    Keywords: inflation-gap persistence; Great Moderation; monetary policy; New Keynesian model; Taylor rule
    JEL: C22 E31 E52 E58
    Date: 2012–02–17
  9. By: Juan Carlos Cuestas (University of Sheffield); Luis A. Gil-Alana (University of Navarra); Karl Taylor (University of Sheffield)
    Abstract: In this paper we consider inflation rate differentials between seven Central and Eastern Countries (CEECs) and the Eurozone. We focus explicitly upon a group of CEECs given that although they are already member states, they are currently not part of the Economic and Monetary Union (EMU) and must fulfil the Maastricht convergence criteria before being able to adopt the euro. However, this group of countries does not have an opt-out clause and so must eventually adopt the single currency. Hence, considering divergence in inflation rates between each country and the Eurozone is important in that evidence of persistent differences may increase the chance of asymmetric inflationary shocks. Furthermore, once a country joins the Eurozone the operation of a country specific monetary policy is no longer an option. We explicitly test for convergence in the inflation rate differentials, incorporating non-linearities in the autoregressive parameters, fractional integration with endogenous structural changes, and also consider club convergence analysis for the CEECs over the period 1997 to 2011 based on monthly data. Our empirical findings suggest that the majority of countries experience non-linearities in the inflation rate differential, however there is only evidence of a persistent difference in three out of the seven countries. Complementary to this analysis we apply the Phillips and Sul (2007) test for club convergence and find that there is evidence that most of the CEECs converge to a common steady state.
    Keywords: Central and Eastern Europe , euro adoption, inflation convergence, non-linearities
    JEL: E31 E32 C22
    Date: 2012–01
  10. By: Moreno, Diego (Departamento de Economía, Universidad Carlos III de Madrid); Takalo , Tuomas (Bank of Finland Research)
    Abstract: Consider a competitive bank whose illiquid asset portfolio is funded by short-term debt that has to be refinanced before the asset matures. We show that in this setting maximal transparency is not socially optimal, and that the existence of social externalities of bank failures further lowers the optimal level of transparency. Moreover, asset risk taking recedes as the level of transparency declines towards the socially optimal level. As for the sign of the transparency impact on refinancing risk, it is negative given the risk associated with the asset, but ambiguous if one accounts for its indirect effect via risk taking.
    Keywords: financial stability; information disclosure; market discipline; Basel III; global games
    JEL: D43 D82 G14 G21 G28
    Date: 2012–02–24
  11. By: Glocker, C.; Towbin, P.
    Abstract: Reserve requirements are a prominent policy instrument in many emerging countries. The present study investigates the circumstances under which reserve requirements are an appropriate policy tool for price or financial stability. We consider a small open economy model with sticky prices, financial frictions and a banking sector that is subject to legal reserve requirements and compute optimal interest rate and reserve requirement rules. Overall, our results indicate that reserve requirements can support the price stability objective only if financial frictions are important and lead to substantial improvements if there is a financial stability objective. Contrary to a conventional interest rate policy, reserve requirements become more effective when there is foreign currency debt.
    Keywords: Reserve Requirements, Monetary Policy, Financial Stability, Capital Flows, Business Cycle.
    JEL: E58 E52 F41 G18
    Date: 2012
  12. By: Obert Nyawata
    Abstract: This paper discusses the challenging question of whether central banks should use treasury bills or central bank bills for draining excess liquidity in the banking system. While recognizing that there are practical reasons for using central bank bills, the paper argues that treasury bills are the first best option especially because positive externalities for the financial sector and the rest of the economy. However, the main considerations in the choice should be: (i) operational independence for the central bank; (ii) market development; and (iii) the strengthening of the transmission of monetary policy impulses.
    Date: 2012–01–31
  13. By: Ralf Sabiwalsky
    Abstract: Basel II Pillar 3 reports provide information about banks' exposure towards a number of risk factors, such as corporate credit risk and interest rate risk. Previous studies nd that the quality of such information is likely to be weak. We analyze the marginal contribution of pillar 3 exposure data to the quality of equity volatility forecasts for individual banks. Our method uses (local in time) measures of risk factor risk using a multivariate stochastic volatility model for ve risk factors, and uses measures of bank sensitivity with respect to these risk factors. We use two sets of sensitivity measures. One takes into account pillar 3 information, and the other one does not. Generally, we generate volatility forecasts as if no market prices of equity were available for the bank the forecast is made for. We do this for banks for which such data is, in fact, available so that we can conduct ex post - tests of the quality of volatility forecasts. We nd that (1) pillar 3 information allows for a better-than-random ranking of banks according to their risk, but (2) pillar 3 exposure data does not help reduce volatility forecast error magnitude.
    Keywords: Risk Reporting, Stochastic Volatility, Risk Factors
    JEL: G17 G21
    Date: 2012–02
  14. By: Alessandro Flamini (Department of Economics, University of Pavia)
    Abstract: Real world monetary policy is complicated by long and variable lags in the transmission of the policy to the economy. Most of the policy models, however, abstracts from policy lags. This paper presents a model where transmission lags depend on the behaviour of a two-sector supply side of the economy and focuses on how lag length and variability affect optimal monetary policy. The paper shows that optimal monetary policy should respond more to the sector with the shortest transmission lag and that the presence of production links among sectors amplifies this response. Furthermore, the shorter or more variable the aggregate transmission lag, the more active the overall policy and the larger the response to the sector with the shortest transmission lag. Finally, the relative strength of the response to inflation and output gap depends on the intensity of the sectoral production links, and on the length of the transmission lags. Only with reasonable production links should the optimal policy respond more to in?ation than to the output gap in line with the empirical evidence.
    Keywords: Inflation targeting; monetary policy transmission mechanism; policy transmission lags; multiplicative uncertainty; Markov jump linear quadratic systems; optimal monetary policy.
    JEL: E52 E58 F41
    Date: 2012–02
  15. By: Matti Viren
    Abstract: This paper deals with fiscal policy coordination within the European Monetary Union. In the first place, it investigates the potential problems which are caused by cross-country differences in key fiscal parameters and the asymmetric nature of these parameters. In the second section, the pros and cons of policy coordination evaluated using some multi-country estimates as point of reference. The empirical results clearly show that policy coordination within the EMU context is very difficult because of these country differences and asymmetries. Even so, it is shown that policy coordination pays off at least in cases where the countries share the same shocks. Some practical problems of policy coordination and future prospects are also considered in the paper.
    Keywords: Fiscal policy, policy coordination, government deficit, EMU
    JEL: H62 E61 E63
    Date: 2011–12
  16. By: Hans J. Blommestein; Anja Hubig
    Abstract: This paper examines the analytical underpinnings of the standard micro portfolio approach to public debt management (PDM) that aims at minimising longer-term cash-flow based borrowing costs at an acceptable level of risk. The study concludes that two technical key assumptions need to hold for the standard micro portfolio approach to yield optimal (i.e. cost-minimising) results. We argue that these assumptions do not hold in the current borrowing environment characterized by fiscal dominance with complex links between PDM and monetary policy (MP). By using the principles of portfolio theory we demonstrate that in this borrowing environment, cost-risk optimality requires the use of a broader cost concept than employed in the standard micro portfolio approach. This new concept (referred to as effective borrowing costs) incorporates not only the cash flows of the debt portfolio itself, but also those related to primary borrowing requirements. The resulting broader cost measure includes therefore the interactions with the budget. Finally, the paper demonstrates that the standard cost-risk framework of the micro portfolio approach is nested within this new, broader cost concept.
    Keywords: public debt management, fiscal policy, monetary policy, sovereign risk, central banks, sovereign debt, government borrowing
    JEL: E52 E58 E62 H63
    Date: 2012–02–20
  17. By: Ali Alichi; Sang Chul Ryoo; Cheol Hong
    Abstract: Korea has been active in implementing targeted macroprudential policies to address specific financial stability concerns. In this paper, we develop a conceptual model that could serve as a building block for the broader framework of macroprudential policy making in Korea. It is assumed that the policy maker imposes taxes on key aggregate financial ratios in the banking system to mitigate excessive leverage over the economic cycle. The model is calibrated for Korea. The results illustrate how countercyclical tools, such as simple taxes on key financial ratios, could be incorporated to enrich the broader macroprudential policy framework in the Korean context.
    Keywords: Banking systems , Debt , Economic models , Monetary policy ,
    Date: 2012–01–24
  18. By: Pierre-Richard Agénor; K. Alper; L. Pereira da Silva
    Abstract: We develop a dynamic stochastic model of a middle-income, small open economy with a two-level banking intermediation structure, a risk-sensitive regulatory capital regime, and imperfect capital mobility. Firms borrow from a domestic bank and the bank borrows on world capital markets, in both cases subject to an endogenous premium. A sudden flood in capital flows generates an expansion in credit and activity, and asset price pressures. Countercyclical regulation, in the form of a Basel III-type rule based on real credit gaps, is effective at promoting macroeconomic stability (defined in terms of the volatility of a weighted average of inflation and the output gap) and financial stability (defined in terms of the volatility of a composite index of the nominal exchange rate and house prices). However, because the gain in terms of reduced volatility may exhibit diminishing returns, a countercyclical regulatory rule may need to be supplemented by other, more targeted, macroprudential instruments.
    Date: 2012–02
  19. By: Becker, Torbjörn (Stockholm Institute of Transition Economics)
    Abstract: This paper takes a systematic look at the economic impact of the crisis that started in earnest in the fall of 2008 across countries and regions. Despite warnings of growing domestic and external imbalances in many countries years ahead of the crisis, the massive impact of the crisis came as a surprise to most. By correlating economic performance in the crisis with an extensive set of early warning, country insurance, and policy indicators, this paper provides some lessons on crisis prevention and management for the future. Although significant efforts have been made to develop robust early warnings systems, the paper shows the mixed success of some commonly analyzed indicators in predicting economic outcomes in this crisis. The only robust early warning indicator was increases in real estate prices while international reserves seem to have insured against the worst crisis outcomes on average. However, much work on building a robust early warning system remains and the analytical and empirical challenges in this area are substantial. The issues confronting early warning systems are also relevant to the more recent field of macro prudential supervision and regulation. Nevertheless, the cost of crises is massive and preventing future ones with better regulation, policies and supervision based on solid research must be a top priority among policy makers and academics alike.
    Keywords: Economic crisis; crisis prevention; early warning indicators
    JEL: E66
    Date: 2012–02–15
  20. By: Hiroshi Morita
    Abstract: This paper investigates the effect of an anticipated fiscal policy on consumption in Japan. I identify an anticipated increment in public investment by using the excess stock returns on the construction industry and by applying the sign restriction VAR. The result shows that GDP and consumption respond to a public investment shock positively. Further, I demonstrate that the empirical facts are consistent with the New Keynesian model that has a high elasticity of labor supply and a large share of Non-Ricardians.
    Keywords: Fiscal Policy, Fiscal Foresight, Sign Restriction VAR
    JEL: E62 H30
    Date: 2012–01
  21. By: Roy Zilberman
    Abstract: This paper examines the procyclical e¤ects of bank capital requirements in a simple static general equilibrium model with credit market imperfections. A "bank capital channel" is introduced by assuming that bank capital buffers increase banks' incentives to screen and monitor borrowers more carefully, thus reducing the borrowers' probability of default and allowing banks to charge a lower interest rate on loans provided for investment purposes. We also identify a "collateral channel" by assuming that higher levels of effective collateral mitigate moral hazard behaviour by firms, which raises the repayment probability and lowers the loan rate. Basel I and Basel II regulatory regimes are then de…ned in terms of the calculation of the risk weights on loans with a distinction made between the Standardized and Foundation Internal Ratings Based (IRB) approaches of Basel II. We analyze the role of the bank capital channel in the transmission of a supply shock (and associated changes in prices) when the bank capital channel dominates the collateral channel and when the collateral channel dominates the bank capital channel. Our results suggest that in the former case, the lending rate is always procyclical with respect to supply shocks while in the latter, the loan rate can be either procyclical or countercyclical. Finally, in order to compare between the different regulatory regimes, it is crucial to understand which of the abovementioned channels dominates the other.
    Date: 2012
  22. By: Esteban Vesperoni; Nicolas E. Magud; Carmen Reinhart
    Abstract: The prospects of expansionary monetary policies in the advanced countries for the foreseeable future have renewed the debate over policy options to cope with large capital inflows that are, at least partly, driven by low interest rates in the financial centers. Historically, capital flow bonanzas have often fueled sharp credit expansions in advanced and emerging market economies alike. Focusing primarily on emerging markets, we analyze the impact of exchange rate flexibility on credit markets during periods of large capital inflows. We show that bank credit grows more rapidly and its composition tilts to foreign currency in economies with less flexible exchange rate regimes, and that these results are not explained entirely by the fact that the latter attract more capital inflows than economies with more flexible regimes. Our findings thus suggest countries with less flexible exchange rate regimes may stand to benefit the most from regulatory policies that reduce banks’ incentives to tap external markets and to lend/borrow in foreign currency; these policies include marginal reserve requirements on foreign lending, currency-dependent liquidity requirements, and higher capital requirement and/or dynamic provisioning on foreign exchange loans.
    Date: 2012–02–03
  23. By: Melecky, Martin; Podpiera , Anca Maria
    Abstract: This paper studies the development of institutional structures for prudential and business conduct supervision of financial services over the past decade for 98 high and middle income countries. It identifies possible drivers of changes in these supervisory structures using a panel ordered probit analysis. The results show that (i) countries advancing to a higher stage of economic development tend to integrate their financial sector supervisory structure. Similarly, improvements in overall public governance drive countries to adopting more integrated supervisory arrangements. (ii) Greater independence of the central bank could entail less integration of prudential supervision, but not necessarily of business conduct. (iii) Small open economies opt for more integrated structures of financial sector supervision, especially on the prudential side. (iv) Financial deepening makes countries integrate supervision progressively more, however, greater development of the non-bank financial system including capital markets and the insurance industry makes countries opt for less integrated prudential supervision but not business conduct supervision structures. (v) The lobbying power of concentrated and highly profitable banking sectors acts as a significant negative force against business conduct integration. (vi) Countries with banking sectors that have been more exposed to aggregate liquidity risk, due to their high share of external funding, tend to integrate more their prudential supervision. Finally, (vii) a country that has experienced past financial crises is more likely to integrate its supervisory structure for financial services.
    Keywords: Integrated Supervision; Prudential and Business Conduct Supervision; Financial Services; International Experience; Panel Data Analysis; Ordered Probit
    JEL: G18 E50 G20
    Date: 2012–03–01
  24. By: Leonardo Martinez; Juan Carlos Hatchondo; Francisco Roch
    Abstract: This paper finds optimal fiscal rule parameter values and measures the effects of imposing fiscal rules using a default model calibrated to an economy that in the absence of a fiscal rule pays a significant sovereign default premium. The paper also studies the case in which the government conducts a voluntary debt restructuring to capture the capital gains from the increase in its debt market value implied by a rule announcement. In addition, the paper shows how debt ceilings may reduce the procyclicality of fiscal policy and thus consumption volatility.
    Keywords: Debt restructuring , Economic models , Fiscal policy , Risk premium , Sovereign debt ,
    Date: 2012–01–25
  25. By: Markus R. Kosters (School of Business and Economics, Maastricht University); Stefan T.M. Streatmans (Maastricht research school of Economics of Technology and Organizations); Mario Maggi (Department of Economics and Quantitative Methods, University of Pavia)
    Abstract: This paper investigates the pricing of full deposit insurance in Germany in the context of its political promise by the German government. We implement the characteristics of the mutual guarantee framework of German banks and the specifics of the German deposit insurance system into a Monte Carlo model. The analysis suggests that banks have an incentive to increase their riskiness if they do not have to bear the fair value of the insurance costs of their deposits. On the other hand, the government should incentivise banks to reduce their size and become more specialized to achieve better diversification in the German banking landscape.
    Keywords: Asset pricing, financial crisis, deposit insurance, mutual guarantee framework
    Date: 2011–05
  26. By: Schröder, Michael; Borell, Mariela; Gropp, Reint; Iliewa, Zwetelina; Jaroszek, Lena; Lang, Gunnar; Schmidt, Sandra; Trela, Karl
    Abstract: The aim of this study is to assess the contributions of investment banking to the economy with a particular focus on the German economy. To this end we analyse both the economic benefits and the costs stemming from investment banking. The study focuses on investment banks as this part of banking is particularly relevant for financing companies as well as the development and use of specific products to support the needs of private and professional clients. The assessment of benefits and costs of investment banking has been conducted from a European perspective. Nevertheless there is a focus on the German economy to allow a more detailed analysis of certain aspects as for example the use of derivatives by German companies, the success of M&As in Germany or the effect of securitization on loan supply and GDP in Germany. For comparison purposes other European countries and also the U.S. have been taken into account. The last financial crisis has shown the negative impacts of banks on the financial system and the whole economy. In a study on the contribution of investment banks to systemic risk we quantify the negative side of the investment banking business. In the last part of the study we assess how the effects of regulatory changes on investment banking. All important changes in banking and capital market regulation are taken into account such as Basel III, additional capital requirements for systemically important financial institutions, regulation of OTC derivatives and specific taxes. --
    Date: 2012

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