nep-cba New Economics Papers
on Central Banking
Issue of 2012‒03‒14
eleven papers chosen by
Maria Semenova
Higher School of Economics

  1. Markov Switching Monetary Policy in a two-country DSGE Model By Mavromatis, Konstantinos
  2. Bayesian Estimation of DSGE Models By Pablo A Guerron-Quintana; James M Nason
  3. Forecasting Value-at-Risk Using Block Structure Multivariate Stochastic Volatility Models By Manabu Asai; Massimiliano Caporin; Michael McAleer
  4. Government debt, inflation dynamics and the transmission of fiscal policy shocks By Mayer, Eric; Rüth, Sebastian; Scharler, Johann
  5. Monetary policy under alternative exchange rate regimes in Central and Eastern Europe By Ziegler, Christina
  6. Net Foreign Asset (Com)position: Does Financial Development Matter? By Robert Vermeulen; Jakob de Haan
  7. Credit Crunches, Asset Prices and Technological Change By Luis Araujo; Raoul Minetti
  8. International Financial Integration and Economic Growth: New Evidence on Threshold Effects By Jinzhao Chen; Thérèse Quang
  9. Credit at Times of Stress: Latin American Lessons from the Global Financial Crisis - Working Paper 289 By Liliana Rojas-Suarez and Carlos Montoro
  10. Macro-Prudential Approaches to Banking Regulation : Perspectives of Selected Asian Central Banks By Reza Siregar
  11. Two Transitions: A Brief on Analyses and Policies for MENA and CESEE By Vladimir Gligorov

  1. By: Mavromatis, Konstantinos (Department of Economics, University of Warwick and Warwick Business School, Finance Group,)
    Abstract: In this paper I show, using both empirical and theoretical analysis, that changes in monetary policy in one country can have important e.ects on other economies. My ew empirical evidence shows that changes in the monetary policy behaviour of the Fed since the start of the Euro, well captured by a Markov-switching Taylor rule, have had significant e.ects on the behaviour of inflation and output in the Eurozone even though ECB’s monetary policy is found to be fairly stable. Using a two-country DSGE model, I examine this case theoretically; monetary policy in one of the countries (labelled foreign) switches regimes according to a Markov-switching process and this has nonnegligible e.ects in the other (home) country. Switching by the foreign central bank renders commitment to a time invariant interest rate rule suboptimal for the home central bank. This is because home agents expectations change as foreign monetary policy changes which a.ects the dynamics of home inflation and output. Optimal policy in the home country instead reacts to the regime of the foreign monetary policy and so implies a time-varying reaction of the home Central Bank. Following this time-varying optimal policy at home eliminates the e.ects in the home country of foreign regime shifts, and also reduces dramatically the e.ects in the foreign country. Therefore, changes in foreignmonetary regimes should not be neglected in considering monetary policy at home. Key words: Markov-switching DSGE ; Optimal monetary policy ; Dynamic programming ;SVAR ; real-time data. JEL Classification: E52 ; F41 ; F42.
    Date: 2012
  2. By: Pablo A Guerron-Quintana; James M Nason
    Abstract: We survey Bayesian methods for estimating dynamic stochastic general equilibrium (DSGE) models in this article. We focus on New Keynesian (NK)DSGE models because of the interest shown in this class of models by economists in academic and policy-making institutions. This interest stems from the ability of this class of DSGE model to transmit real, nominal, and fiscal and monetary policy shocks into endogenous fluctuations at business cycle frequencies. Intuition about these propagation mechanisms is developed by reviewing the structure of a canonical NKDSGE model. Estimation and evaluation of the NKDSGE model rests on being able to detrend its optimality and equilibrium conditions, to construct a linear approximation of the model, to solve for its linear approximate decision rules, and to map from this solution into a state space model to generate Kalman filter projections. The likelihood of the linear approximate NKDSGE model is based on these projections. The projections and likelihood are useful inputs into the Metropolis-Hastings Markov chain Monte Carlo simulator that we employ to produce Bayesian estimates of the NKDSGE model. We discuss an algorithm that implements this simulator. This algorithm involves choosing priors of the NKDSGE model parameters and fixing initial conditions to start the simulator. The output of the simulator is posterior estimates of two NKDSGE models, which are summarized and compared to results in the existing literature. Given the posterior distributions, the NKDSGE models are evaluated with tools that determine which is most favored by the data. We also give a short history of DSGE model estimation as well as pointing to issues that are at the frontier of this research.
    JEL: C32 E10 E32
    Date: 2012–02
  3. By: Manabu Asai (Soka University / Faculty of Economics); Massimiliano Caporin (Department of Economics and Management “Marco Fanno” University of Padova, Italy.); Michael McAleer (Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam and Tinbergen Institute, The Netherlands, Department of Quantitative Economics, Complutense University of Madrid, and Institute of Economic Research, Kyoto University)
    Abstract: Most multivariate variance or volatility models suffer from a common problem, the “curse of dimensionality”. For this reason, most are fitted under strong parametric restrictions that reduce the interpretation and flexibility of the models. Recently, the literature has focused on multivariate models with milder restrictions, whose purpose was to combine the need for interpretability and efficiency faced by model users with the computational problems that may emerge when the number of assets is quite large. We contribute to this strand of the literature proposing a block-type parameterization for multivariate stochastic volatility models. The empirical analysis on stock returns on US market shows that 1% and 5 % Value-at-Risk thresholds based on one-step-ahead forecasts of covariances by the new specification are satisfactory for the period includes the global financial crisis.
    Keywords: block structures; multivariate stochastic volatility; curse of dimensionality; leverage effects; multi-factors; heavy-tailed distribution.
    JEL: C32 C51 C10
    Date: 2012
  4. By: Mayer, Eric; Rüth, Sebastian; Scharler, Johann
    Abstract: We analyze the influence of the fiscal position on the transmission of government spending shocks in a New Keynesian model. We find that once we allow for positive levels of government debt in the steady state, the sign and the size of the fiscal multiplier depend strongly on the horizon at which the multiplier is evaluated. While the long-run effect of a fiscal policy innovation is typically of a similar order of magnitude as in Gali et al. (2007), short-run multipliers differ substantially. The reason for this non-monotonic behavior is the interaction between the dynamics of the inflation rate and the debt level in real terms, which is absent in standard models in which government debt is restricted to be equal to zero in the steady state. --
    Keywords: fiscal multiplier,New Keynesian model,government debt,inflation
    JEL: E31 E62 H63
    Date: 2012
  5. By: Ziegler, Christina
    Abstract: Monetary policy in CEE is an important determinant in the wage bargaining process, because trade unions have to predict inflation as one component of future real wages. This paper scrutinizes whether countries in CEE that officially announce an inflation target are tempted to act time-inconsistently and switch from the announced inflation target to an exchange rate target in order to sustain higher output via surprise inflation. If market participants discover the time-inconsistency, they will adjust their inflation expectations, which result in higher average rates of price increases. The time-inconsistent behavior in central bank interest rate setting is modeled by several Taylor rules. An empirical application provides evidence that some monetary authorities in CEE such as the Czech Republic and Slovakia have acted timeinconsistent and have focused on the exchange rate in periods of official inflation targeting, which might have contributed to higher average rates of inflation and welfare losses. Furthermore, uncertainty in wage determination process has risen due to a harder predictability of productivity and inflation as components of future nominal wages. --
    Keywords: monetary policy,Taylor rules,exchange rate regime,Central and Eastern Europe,inflation targeting
    JEL: E52 E58 F31 O52 P20
    Date: 2012
  6. By: Robert Vermeulen; Jakob de Haan
    Abstract: We investigate the relationship between a country’s domestic financial development and the (composition of its) net foreign asset position using a pooled mean group estimator and data for 51 countries during the period 1970-2007. The results show that financial development reduces a country’s long-run net foreign asset position. In addition, financial development leads to higher net equity and lower net debt positions. These findings confirm the theoretical predictions of Mendoza et al. (2009). The results are robust to using different indicators of financial development and inclusion of the level of development of a country in the cointegrating relationship.
    Keywords: net foreign assets; financial development; financial integration; pooled mean group estimator
    JEL: F30 F41 G15
    Date: 2012–03
  7. By: Luis Araujo (Michigan State University and SÆo Paulo School of EconomicsV); Raoul Minetti (Michigan State University)
    Abstract: We investigate the effects of a credit crunch in an economy where firms can operate a mature technology or restructure their activity and adopt a new technology. We show that firms' collateral and credit relationships ease firms' access to credit and investment but can also inhibit firms' restructuring. When this occurs, negative collateral or productivity shocks and the resulting drop in the price of collateral assets squeeze collateral-poor firms out of the credit market but foster the restructuring of collateral-rich firms. We characterize conditions under which such an increase in firms' restructuring occurs within existing credit relationships or through their breakdown. The analysis reveals that the credit and asset market policies adopted during the recent credit crunch can promote investment but might also slow down a process of Shumpeterian restructuring in the credit market.
    Keywords: Aggregate Restructuring, Collateral, Credit Crunch, Credit Relationships
    JEL: E44
    Date: 2012–03
  8. By: Jinzhao Chen; Thérèse Quang
    Abstract: Recent research highlights that countries differ with respect to their experience with capital flows and do not systematically gain from capital account liberalization. This paper is related to the empirical literature that investigates the particular conditions under which international financial integration (IFI) is growth-enhancing. Relying on non-linear panel techniques, we find that countries that are able to reap the benefits of IFI satisfy certain threshold conditions regarding the level of economic, institutional and financial development, and the inflation rate. Our results also reveal a differentiated behaviour of foreign direct investment and portfolio liabilities compared to debt liabilities.
    Keywords: international financial integration, economic growth, panel threshold regression model
    JEL: F3 F4 O4
    Date: 2012
  9. By: Liliana Rojas-Suarez and Carlos Montoro
    Abstract: The financial systems in emerging market economies during the 2008–09 global financial crisis performed much better than in previous crisis episodes, albeit with significant differences across regions. For example, real credit growth in Asia and Latin America was less affected than in Central and Eastern Europe. This paper identifies the factors at both the country and the bank levels that contributed to the behavior of real credit growth in Latin America during the global financial crisis. The resilience of real credit during the crisis was highly related to policies, measures and reforms implemented in the pre-crisis period. In particular, we find that the best explanatory variables were those that gauged the economy’s capacity to withstand an external financial shock. Key were balance sheet measures such as the economy’s overall currency mismatches and external debt ratios (measuring either total debt or short-term debt). The quality of pre-crisis credit growth mattered as much as its rate of expansion. Credit expansions that preserved healthy balance sheet measures (the “quality” dimension) proved to be more sustainable. Variables signalling the capacity to set countercyclical monetary and fiscal policies during the crisis were also important determinants. Moreover, financial soundness characteristics of Latin American banks, such as capitalization, liquidity and bank efficiency, also played a role in explaining the dynamics of real credit during the crisis. We also found that foreign banks and banks which had expanded credit growth more before the crisis were also those that cut credit most. The methodology used in this paper includes the construction of indicators of resilience of real credit growth to adverse external shocks in a large number of emerging markets, not just in Latin America. As additional data become available, these indicators could be part of a set of analytical tools to assess how emerging market economies are preparing themselves to cope with the adverse effects of global financial turbulence on real credit growth.
    Keywords: Latin America, credit growth, global financial crisis, emerging markets, financial resilience, vulnerability indicators
    JEL: E65 G2
    Date: 2012–02
  10. By: Reza Siregar (Asian Development Bank Institute (ADBI))
    Abstract: New lessons, challenges, and debates have emerged from the subprime crisis in the United States. While the macroeconomic orientation is not new and has always been among the classic toolkits of central banks for ensuring financial stability, the current explicit articulation and specification of such a tool as a global standard is new. The objective of this study is to review and analyze the steps taken by the central banks and monetary authorities of select Asian countries to strengthen their prudential regulations, mainly the macro-prudential component of such regulations.
    Keywords: Banking Regulation, Macro-prudential approache, prudential regulations, Financial Stability, central banks, Asia
    JEL: E52 E58 G28
    Date: 2011–11
  11. By: Vladimir Gligorov (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: One year after the onset of the Arab Spring, the transition is clearly at its very beginning. In that, it does not compare with the onset of transition in Central, East and Southeast Europe (CESEE) in 1989 or 1990, which was a kind of breakthrough and provided a clear discontinuity with the past in almost all respects. In the majority of cases this has been one more step in the process of systemic change in the CESEE that will take some time to unfold. This Policy Note compares changes in the Middle East and North Africa (MENA) with the processes of reforms and change that took place in the socialist world from, arguably, 1956 to 1989. It is hard to time the current turmoil in the MENA region in comparison with the long process of reforms and transition in CESEE, but it could be argued that in most cases the 1989 moment is yet to come to the former region. ...
    Date: 2012–01

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