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on Central Banking |
| By: | Oya Celasun; Lev Ratnovski; Roxana Mihet |
| Abstract: | U.S. monetary policy can remain extraordinarily accommodative only if longer-term inflation expectations stay well-anchored, including in response to commodity price shocks. We find that oil price shocks have a statistically significant, but economically small impact on longer-term inflation compensation embedded in U.S. Treasury bonds. The estimated effect is larger for the post-crisis period, and robust to controlling for measures of liquidity risk premia. Oil price shocks are also correlated with the variance of longer-term inflation expectations in the University of Michigan Survey of Consumers in the post-crisis period. These results are not attributable to looser monetary policy - oil price increases were associated with expectations of a faster monetary tightening after the crisis. Overall, the findings are consistent with some impact of commodity prices on long-term inflation expectations and/or on inflation rate risk. |
| Keywords: | Agricultural prices , Commodity prices , External shocks , Inflation , Monetary policy , Oil prices , Price increases , |
| Date: | 2012–03–27 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/89&r=cba |
| By: | Graham M. Voss (Department of Economics, University of Victoria); M. Chaban |
| Abstract: | We examine the behaviour of national and provincial inflation in Canada under inflation targeting to determine the extent to which the inflation targeting regime adopted by the Bank of Canada in the 1990s has anchored inflation expectations. Inflation expectations are well anchored when there are no predictable departures of inflation from target at sufficiently distant horizons. To examine this condition, we consider the out of sample prediction of monthly inflation with specific focus on whether deviations from the 1-3% target band are consistently predictable. We find support for well anchored inflation expectations at the national level and some but not all provinces. |
| Keywords: | Inflation, monetary policy, inflation targeting, forecasting |
| JEL: | E31 E58 |
| Date: | 2012–04–13 |
| URL: | http://d.repec.org/n?u=RePEc:vic:vicddp:1201&r=cba |
| By: | Monique Reid |
| Abstract: | The majority of academic research on central bank communication has analysed a central bank’s audience as a single group. Analyses, especially empirical research have focused almost exclusively on a central bank’s interaction with the financial markets, facilitated by the availability of high-quality, high-frequency asset price data. In practice, a central bank’s audience is heterogeneous, and recognising this is advantageous for both modelling purposes and effective central bank communication. Many central banks use a range of communication tools to reach their various audiences, but little formal analysis has been conducted to guide policy design and communication strategies. Gathering and processing information are costly for the general public, so they make rational decisions that limit the time and resources they allocate to these tasks. As a result, aggregate inflation expectations of the public as a whole can be described as ‘stick' in that the spread of information about inflation expectations through the economy is not instantaneous. A body of literature has emerged over the past decade, led by Mankiw and Reis (2001), who developed the Sticky Information Phillips Curve (SIPC), and Carroll (2002, 2003), who proposed microfoundations for the SIPC. This paper follows Carroll (2002, 2003) in adopting epidemiological models to provide insight into how the general public in South Africa forms its inflation expectations. This enables an estimation of the speed at which the South African general public updates its inflation expectations (information stickiness). Agent-based models, which explain the complex aggregate inflation expectations of the general public from the agent level upwards, are then used to verify these estimates of information stickiness and explore the microfoundations of aggregate inflation expectations |
| Keywords: | South Africa, sticky information, inflation expectations, inattentive general public |
| JEL: | D82 D83 E31 E52 E58 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:278&r=cba |
| By: | Banerjee, A.; Malik, S. |
| Abstract: | Using a Bayesian structural vector autoregression (TVP-SVAR) with time-varying parameters and volatility we investigate monetary policy in the United States, in particular its interaction with the formation of inflation expectations and the linkages between monetary policy, inflation expectations and the behaviour of CPI inflation. We use Livingston Survey data for expected inflation, measured at a bi-annual frequency, actual inflation, unemployment and a nominal interest rate to estimate the VAR and show the significant changes that have occurred in the responses of these variables to monetary policy shocks or to shocks to expected and actual inflation. In so doing, we generalize the analysis undertaken by Leduc, Sill and Stark (2007) to allow for a more nuanced and detailed look at questions such as the impact of different chairmanship regimes at the Federal Reserve Board, the role of good policy versus good luck, and second round inflation effects. While some of the questions asked have a relatively long history, the methods used to undertake our investigations are very new, and the time-varying structure allows us to offer a more detailed picture. In using these methods we also undertake a substantial technical discussion to unearth the appropriateness of the TVP-SVAR models hitherto estimated in the literature, in particular the role of the choice of priors in determining the outcome of the estimations. As we discuss in the paper, this is an important issue which has remained rather hidden in the discussions surrounding the estimation of TVP-SVARs, yet may have a substantially important role to play in determining the results obtained. |
| Keywords: | monetary policy, expectations, inflation, time variation, VARs, impulse responses. |
| JEL: | E52 E31 C32 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:376&r=cba |
| By: | Jagjit S. Chadha; Luisa Corrado; Jack Meaning |
| Abstract: | The financial crisis and its aftermath has stimulated a vigorous debate on the use of macro-prudential instruments for both regulating the banking system and for providing additional tools for monetary policy makers. The widespread adoption of non-conventional monetary policies has provided some evidence on the efficacy of liquidity and asset purchases for offsetting the lower zero bound. Central banks have thus been reminded as to the effectiveness of extended open market operations as a supplementary tool of monetary policy. These tools are essentially fiscal instruments, as they issue central bank liabilities backed by fiscal transfers. And so having written these tools into the fiscal budget constraint, we can examine the consequences of these operations within the context of a micro-founded macroeconomic model of banking and money. We can mimic the responses of the Federal Reserve balance sheet to the crisis. Specifically, we examine the role of reserves for bond and capital swaps in stabilising the economy and also the impact of changing the composition of the central bank balance sheet. We find that such policies can significantly enhance the ability of the central bank to stabilise the economy. This is because balance sheet operations supply (remove) liquidity to a financial market that is otherwise short (long) of liquidity and hence allows other .nancial spreads to move less violently over the cycle to compensate. |
| Keywords: | non-conventional monetary interest on reserves; monetary and fiscal policy instruments; Basel III |
| JEL: | E31 E40 E51 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:1208&r=cba |
| By: | Andrew Filardo |
| Abstract: | Asian central banks have adopted monetary policy frameworks over the past decade that have, by and large, worked well both to ensure price stability during the pre-crisis period and to navigate the shoals during the recent international financial crisis. Inflation concerns in recent years nonetheless raise the possibility that existing monetary policy frameworks in Asia may be contributing to procyclical inflation swings. Three particular aspects of the policy environment are highlighted. They include the approach of monetary policy to commodity price cycles, to the uneven global recovery and to the new financial stability mandates. |
| Keywords: | Central banking, international financial crisis, monetary policy frameworks in Asia, commodity prices, financial stability and monetary policy |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:378&r=cba |
| By: | Roman Horváth (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Kateøina Šmídková (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Jan Zápal (London School of Economics); Marek Rusnák (Czech National Bank) |
| Abstract: | We examine the determinants of the dissent in central bank boards’ voting records about monetary policy rates in the Czech Republic, Hungary, Sweden, the U.K. and the U.S. In contrast to previous studies, we consider about 25 different macroeconomic, financial, institutional, psychological or preference-related factors jointly and deal formally with the attendant model uncertainty using Bayesian model averaging. We find that the rate of dissent is between 5% and 20% in these central banks. Our results suggest that most regressors, including those capturing the effect of inflation and output, are not robust determinants of voting dissent. The difference in central bankers’ preferences is likely to drive the dissent in the U.S. Fed and the Bank of England. For the Czech and Hungarian central banks, average dissent tends to be larger when policy rates are changed. Some evidence is also found that food price volatility tends to increase the voting dissent in the U.S. Fed and in Riksbank. |
| Keywords: | monetary policy, voting record, dissent |
| JEL: | E52 E58 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2012_05&r=cba |
| By: | Balázs Égert; Evžen Kočenda |
| Abstract: | We analyze the impact of macroeconomic news and central bank communication on the exchange rates of three Central and Eastern European (CEE) currencies against the euro. In doing so, we first estimate standard and extended versions of the monetary model to capture deviations from the long-term monetary equilibrium. In the second stage, we employ a high-frequency GARCH model that includes accurately identified macroeconomic news, central bank communication and emerging market risk and allows for non-linear behavior as regards the deviation from equilibrium. Surprisingly, there is little support for non-linearity in the data. During the pre-crisis period (2004–2007) the major CEE currencies generally respond to macroeconomic news in an intuitive manner that corresponds to exchange rate-related theories. During the crisis (2008–2009), the responsiveness breaks down and the currencies react to news on the key economic indicator (real GDP growth). There is a lack of responsiveness to central bank communications during the pre-crisis period but all currencies react to central bank verbal interventions during the crisis. Our results show that the CEE currencies react to both macroeconomic news and central bank communications but this responsiveness differs during the pre-crisis and crisis periods. Detailed responses vary across the currencies and we conjecture that the exchange rate regime and the extent to which particular currencies are traded on the international forex market are potential explanations behind these differences. |
| Keywords: | exchange rate, macroeconomic news, central bank communication, monetary model, Central Europe, European Union |
| JEL: | E31 F31 O11 P17 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2012-20&r=cba |
| By: | Romain Baeriswyl (Swiss National Bank - Swiss National Bank); Camille Cornand (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure - Lyon) |
| Abstract: | This article analyses the effects of economic transparency on the optimal monetary policy in an economy affected by demand shocks. In an environment of imperfect common knowledge, demand shocks create a trade-off between stabilising the price level and stabilising the output gap. The monetary policy implemented by the central bank tends, on the one hand, to offset demand shocks but, on the other hand, to distort the economy because of its mistaken view of the fundamental state of the economy. Transparency is optimal as long as the central bank does not weight the stabilisation of the output gap too heavily in its objective function. |
| Keywords: | Information, monetary policy, transparency |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00651028&r=cba |
| By: | Barnett, Alina (Bank of England); Ellison, Martin (Department of Economics, University of Oxford, and Bank of Finland) |
| Abstract: | Disinflationary episodes are a valuable source of information for economic agents trying to learn about the economy. In this paper we are particularly interested in how policymakers can themselves learn by disinflating. The approach differs from the existing literature, which typically focuses on the learning of private agents during a disinflation. We build a model where both the policymaker and private agents learn, and ask what happens if the policymaker has to disinflate to satisfy a new central bank mandate specifying greater emphasis on inflation stabilisation. In this case, our results show that inflation may fall dramatically before it gradually rises to its new long run level. The potential for inflation to undershoot its long run level during a disinflationary episode suggests that caution should be exercised when assessing the success of any change in the policymaker’s mandate. |
| Keywords: | disinflation; escape dynamics; learning; monetary policy |
| JEL: | D83 E52 E58 |
| Date: | 2012–03–30 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2012_010&r=cba |
| By: | Marco M. Sorge |
| Abstract: | Recent research has renewed interest in the exploration of the optimal design of monetary policy institutions in the presence of uncertainty. In this paper, we revisit the rationale for delegation to a weight-conservative central banker when the social planner’s knowledge about the true preferences of delegates is ex ante ambiguous and he exhibits a preference for robustness. In this context, a robust (worst-case oriented) delegation strategy is intended to minimize the maximum welfare loss over the uncertainty set, when no prior probability distribution for the preference bias (conservatism-gap) is available. We find that both over and underconservatism may emerge with respect to the certainty case, for robust delegation is shown to be model-dependent. Most importantly, under reasonable model’s parameterizations, Rogoff’s principle is reversed: it is optimal for society to appoint a weight-liberal central banker. |
| Keywords: | Delegation; Conservative central bank; Preference uncertainty; Minmax policy. |
| JEL: | E52 E58 |
| Date: | 2012–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:eei:rpaper:eeri_rp_2012_05&r=cba |
| By: | Nwaobi, Godwin |
| Abstract: | Traditionally, the task of monetary management is usually performed by the monetary authority on behalf of government. However, a key challenge in monetary management is how to deal with uncertainty. Thus, the relevant policy questions must include how best the available instruments of monetary policy be deployed in shock prone mature stabilizers. Therefore, the basic thrust of this paper is to evaluate monetary policy - tradeoffs using a dynamic stochastic general equilibrium(DSGE)model estimated on data for Nigeria. |
| Keywords: | dynamic; stochastic; general; equilibrium; dsge; nigeria; monetary management; shocks; var; monetary policy; fiscal policy; exchange rate; central bank |
| JEL: | D50 C68 C63 C50 E58 |
| Date: | 2012–04–17 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:38167&r=cba |
| By: | Domenico Ferraro; Kenneth S. Rogoff; Barbara Rossi |
| Abstract: | This paper investigates whether oil prices have a reliable and stable out-of-sample relationship with the Canadian/U.S dollar nominal exchange rate. Despite state-of-the-art methodologies, we find little systematic relation between oil prices and the exchange rate at the monthly and quarterly frequencies. In contrast, the main contribution is to show the existence of a very short-term relationship at the daily frequency, which is rather robust and holds no matter whether we use contemporaneous (realized) or lagged oil prices in our regression. However, in the latter case the predictive ability is ephemeral, mostly appearing after instabilities have been appropriately taken into account |
| JEL: | C22 C53 F31 F37 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17998&r=cba |
| By: | Vadim Khramov |
| Abstract: | The simulated results of this paper show that New Keynesian DSGE models with capital accumulation can generate substantial persistencies in the dynamics of the main economic variables, due to the stock nature of capital. Empirical estimates on U.S. data from 1960:I to 2008:I show the response of monetary policy to inflation was almost twice lower than traditionally considered, as capital accumulation creates an additional channel of influence through real interest rates in the production sector. Versions of the model with indeterminacy empirically outperform determinate versions. This paper allows for the reconsideration of previous findings and has significant monetary policy implications. |
| Keywords: | Capital accumulation , Economic models , Monetary policy , |
| Date: | 2012–03–21 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/83&r=cba |
| By: | Jaromir Benes; Alfredo Baldini; Mai Dao; Rafael Portillo; Andrew Berg |
| Abstract: | We develop a DSGE model with a banking sector to analyze the impact of the financial crisis on Zambia and the role of the monetary policy response. We view the crisis as a combination of three related shocks: a worsening in the terms of the trade, an increase in the country’s risk premium, and a decrease in the risk appetite of local banks. We characterize monetary policy as "stop and go": initially tight, subsequently loose. Simulations of the model broadly match the path of the economy during this period. We find that the initial policy response contributed to the domestic impact of the crisis by further tightening financial conditions. We study the factors driving the "stop" part of policy and derive policy implications for central banks in low-income countries. |
| Date: | 2012–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/94&r=cba |
| By: | Zlatina Balabanova (Department of Economics, University of Konstanz, Germany); Ralf Brüggemann (Department of Economics, University of Konstanz, Germany) |
| Abstract: | We investigate the e_ects of monetary policy shocks in the new European Union member states Czech Republic, Hungary, Poland and Slovakia. In contrast to existing studies, we explicitly account for external developments in European Monetary Union (EMU) countries and in other acceding countries. We do so by using factor-augmented vector-autoregressive models that employ the information from non-stationary factor time series. One set of VAR models includes factors obtained from a large cross-section of time series from EMU countries, while another set includes factors obtained from other acceding countries. We use cohesion analysis to facilitate the interpretation of the different factor time series. We find that including the EMU factors does not greatly affect the impulse response patterns in acceding countries. In contrast, including factors from other accession countries leads to substantial changes in impulse responses and to economically more plausible results. Overall, our analysis highlights that taking into account external economic developments properly is crucial for the analysis of monetary policy in the new EU member states. |
| Keywords: | Factor-augmented VARs, impulse-response analysis, monetary policy shocks, central and eastern European countries, European monetary union |
| JEL: | C32 C50 E52 C38 |
| Date: | 2012–03–27 |
| URL: | http://d.repec.org/n?u=RePEc:knz:dpteco:1205&r=cba |
| By: | Agnieszka Gehringer |
| Abstract: | The paper discusses the seriousness of current account imbalances in the last few decades in Europe, with a particular focus on the European Monetary Union. A closer look at the development of current accounts in European economies suggests the existence of some serious structural problems that might jeopardize economic performance of single countries, but even more importantly, of the entire monetary union. Although current account positions have been subject of numerous research projects till now, scarce interest has been offered regarding specifically the situation in the member states of the euro area and in the euro candidate countries. This lack of interest could be justified among others with the myopic conviction expressed in the literature that current account positions become irrelevant in a monetary union. Instead, there are conceptual reasons to be worried about external imbalances in a currency area, and particularly, in the current as well as potentially enlarged EMU. |
| Keywords: | current account imbalances, monetary union, central and eastern European countries, southern European countries |
| JEL: | F F F |
| Date: | 2012–03–05 |
| URL: | http://d.repec.org/n?u=RePEc:got:cegedp:132&r=cba |
| By: | Mehmet Pinar (Fondazione Eni Enrico Mattei); Thanasis Stengos (University of Guelph.); M. Ege Yazgan (Istanbul Bilgi University) |
| Abstract: | The forecast combination puzzle refers to the finding that a simple average forecast combination outperforms more sophisticated weighting schemes and/or the best individual model. The paper derives optimal (worst) forecast combinations based on stochastic dominance (SD) analysis with differential forecast weights. For the optimal (worst) forecast combination, this index will minimize (maximize) forecasts errors by combining time-series model based forecasts at a given probability level. By weighting each forecast differently, we find the optimal (worst) forecast combination that does not rely on arbitrary weights. Using two exchange rate series on weekly data for the Japanese Yen/U.S. Dollar and U.S. Dollar/Great Britain Pound for the period from 1975 to 2010 we find that the simple average forecast combination is neither the worst nor the best forecast combination something that provides partial support for the forecast combination puzzle. In that context, the random walk model is the model that consistently contributes with considerably more than an equal weight to the worst forecast combination for all variables being forecasted and for all forecast horizons, whereas a flexible Neural Network autoregressive model and a self-exciting threshold autoregressive model always enter the best forecast combination with much greater than equal weights. |
| Keywords: | Nonparametric Stochastic Dominance, Mixed Integer Programming; Forecast combinations; Forecast combination |
| JEL: | C53 C61 C63 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:gue:guelph:2012-06.&r=cba |
| By: | Menkhoff, Lukas |
| Abstract: | Nowadays foreign exchange interventions occur in emerging market economies whereas empirical studies on interventions mainly refer to advanced economies. However, interventions in emerging markets are different from those in advanced economies: they occur "regularly" and central banks have considerable leverage, derived from relatively high reserves, some non-sterilization, the central bank's information advantage and capital controls. Consequently, these interventions often successfully impact the level and volatility of exchange rates. Nevertheless, more research on interventions in emerging markets is needed analyzing the influence of heterogeneous institutional circumstances, examining the role of central bank communication and using high-frequency data. |
| Keywords: | foreign exchange, central bank intervention, emerging markets, transmission channels |
| JEL: | F31 E58 O23 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:han:dpaper:dp-498&r=cba |
| By: | Fève, Patrick; Jidoud, Ahmat |
| Abstract: | This paper assesses SVARs as relevant tools at identifying the aggregate effects of news shocks. When the econometrician and private agents’ information sets are not aligned, the dynamic responses identified from SVARs are biased. However, the bias vanishes when news shocks account for the bulk of fluctuations in the economy. A simple correlation diagnostic test shows that under this condition, news shocks identified through long–run and short–run restrictions have a correlation close to unity. |
| Keywords: | , Information Flows, News shocks, Non–fundamentalness, SVARs, Identification |
| JEL: | C32 C52 E32 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:25752&r=cba |
| By: | Reinout De Bock; Alexander Demyanets |
| Abstract: | This paper assesses the vulnerability of emerging markets and their banks to aggregate shocks. We find significant links between banks’ asset quality, credit and macroeconomic aggregates. Lower economic growth, an exchange rate depreciation, weaker terms of trade and a fall in debt-creating capital inflows reduce credit growth while loan quality deteriorates. Particularly noteworthy is the sharp deterioration of balance sheets following a reversal of portfolio inflows. We also find evidence of feedback effects from the financial sector on the wider economy. GDP growth falls after shocks that drive non-performing loans higher or generate a contraction in credit. This analysis was used in chapter 1 of the Global Financial Stability Report (September 2011) to help evaluate the sensitivity of banks’ capital adequacy ratios to macroeconomic and funding cost shocks. |
| Keywords: | Banks , Business cycles , Capital flows , Capital markets , Emerging markets , External shocks , Spillovers , |
| Date: | 2012–03–07 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/71&r=cba |
| By: | Vanessa Le Leslé; Sofiya Avramova |
| Abstract: | In this paper, we provide an overview of the concerns surrounding the variations in the calculation of risk-weighted assets (RWAs) across banks and jurisdictions and how this might undermine the Basel III capital adequacy framework. We discuss the key drivers behind the differences in these calculations, drawing upon a sample of systemically important banks from Europe, North America, and Asia Pacific. We then discuss a range of policy options that could be explored to fix the actual and perceived problems with RWAs, and improve the use of risk-sensitive capital ratios. |
| Keywords: | Asia and Pacific , Bank regulations , Bank supervision , Banking sector , Capital , Credit risk , Cross country analysis , Europe , North America , Risk management , |
| Date: | 2012–03–28 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/90&r=cba |
| By: | Stefan Avdjiev; Robert McCauley; Patrick McGuire |
| Abstract: | Very low interest rates in major currencies have raised concerns over international credit flows to robustly growing economies in Asia. This paper examines three components of international credit and highlights several of the policy challenges that arise in constraining such credit. Our empirical findings suggest that international credit enables domestic credit booms in emerging markets. Furthermore, we demonstrate that higher levels of international credit on the eve of a crisis are associated with larger subsequent contractions in overall credit and real output. In Asia today, international credit generally is small in relation to overall credit - as was not the case before the Asian crisis. So even though dollar credit is growing very rapidly in some Asian economies, its contribution to overall credit growth has been modest outside the more dollarised economies of Asia. |
| Keywords: | international credit, credit booms, cross-border lending, emerging markets |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:377&r=cba |
| By: | Chang, Chia-Ying |
| Abstract: | Along the studies suggesting IMF to promote private capital flows, this paper sheds light on the links of banking crisis and sudden stops and provides suggestions which are flexible and more specific for countries in various situations of sudden stops. In this overlapping generation framework in an open economy with international credit markets, both the default risks of firms’ loan repayment, and the possibilities of bank runs are considered. As a result, there are good and bad equilibriums, depending on whether bank runs would occur in the lifetime. In the four bad equilibrium discussed in the paper, sudden stops may be unnecessary or unavoidable coinside with the expectation of bank runs, which may or may not occur as expected. There are bad equilibriums in which sudden stops are unnecessary. These are the cases when IMF’s assistance could prevent sudden stops, and the repayment to IMF’s short-term lending facilities can be guaranteed. In the bad equilibriums when bank runs are unavoidable and when sudden stops cannot be prevented and may last for a long period of time, it could be very costly to assist countries in such equilibrium without certain policies becoming effective. Assisting several countries under this circumstances all together could jeopardize IMF’s situation. These findings are consistent with those in [Eichengreen, Guptam and Mody (2006)], and the suggestions for countries in various situations are more specific. |
| Keywords: | bank runs, international capital flows, credit markets, sudden stops, IMF, |
| Date: | 2012–03–16 |
| URL: | http://d.repec.org/n?u=RePEc:vuw:vuwecf:2063&r=cba |
| By: | Zuzana Fungáèová (Bank of Finland, Institute for Economies in Transition (BOFIT)); Petr Jakubík (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic) |
| Abstract: | The recent financial crisis emphasised the need for effective financial stability analyses and tools for detecting systemic risk. This paper looks at assessment of banking sector resilience through stress testing. We argue such analyses are valuable even in emerging economies that suffer from limited data availability, short time series and structural breaks. We propose a top-down stress test methodology that employs relatively limited information to overcome this data problem. Moreover, as credit growth in emerging economies tends to be rather volatile, we rely on dynamic approach projecting key balance sheet items. Application of our proposed stress test framework to the Russian banking sector reveals a high sensitivity of the capital adequacy ratio to the economic cycle that shows up in both of the two-year macroeconomic scenarios considered: a baseline and an adverse one. Both scenarios indicate the need for capital increase in the Russian banking sector. Furthermore, given that Russia’s banking sector is small and fragmented relative to advanced economies, the loss of external financing can cause profound economic stress, especially for medium-sized and small enterprises. The Russian state has a low public debt-to-GDP ratio and plays decisive role in the banking sector. These factors allow sufficient fiscal space for recapitalisation of problematic banks under both of our proposed baseline and adverse scenarios. |
| Keywords: | stress testing, bank, Russia |
| JEL: | G28 P34 G21 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2012_04&r=cba |
| By: | Makram El-Shagi; Tobias Knedlik; Gregor von Schweinitz |
| Abstract: | The signals approach as an early warning system has been fairly successful in detecting crises, but it has so far failed to gain popularity in the scientific community because it does not distinguish between randomly achieved in-sample fit and true predictive power. To overcome this obstacle, we test the null hypothesis of no correlation between indicators and crisis probability in three applications of the signals approach to different crisis types. To that end, we propose bootstraps specifically tailored to the characteristics of the respective datasets. We find (1) that previous applications of the signals approach yield economically meaningful and statistically significant results and (2) that composite indicators aggregating information contained in individual indicators add value to the signals approach, even where most individual indicators are not statistically significant on their own. |
| Keywords: | early warning system, signals approach, bootstrap |
| JEL: | C15 E60 F01 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:iwh:dispap:3-12&r=cba |
| By: | Zdenìk Kudrna (Austrian Academy of Sciences, Vienna); Juraj Medzihorsky (Central European University, Budapest) |
| Abstract: | This paper compares the bank regulatory regimes in the enlarged European Union in order to test the thesis claiming that international banking standards need to be adapted to emerging market circumstances. On the basis of World Bank surveys, we compile structural indices for the 10 post-communist EU members (emerging markets) as well as 17 advanced EU economies and compare them using Bayesian statistical procedures. Our findings show that there were systematic and significant differences, two-thirds of which can be explained by 8 of the 52 structural characteristics. The new member states regulatory regimes are more rule-based and leave less discretion for authorities, which is consistent with the thesis that the emerging market regulatory regimes — including those within the EU — needed to compensate for limited regulatory resources and higher political and economic volatility. Hence, the new generation of international banking standards should recognize these limitations. |
| Keywords: | banking, emerging markets, European Union, international standards, regulation |
| JEL: | G21 K23 P51 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2012_06&r=cba |
| By: | Gianni De Nicoló; Marcella Lucchetta; Andrea Gamba |
| Abstract: | This paper studies the impact of bank regulation and taxation in a dynamic model with banks exposed to credit and liquidity risk. We find an inverted U-shaped relationship between capital requirements and bank lending, efficiency, and welfare, with their benefits turning into costs beyond a certain requirement threshold. By contrast, liquidity requirements reduce lending, efficiency and welfare significantly. The costs of high capital and liquidity requirements represent a lower bound on the benefits of these regulations in abating systemic risks. On taxation, corporate income taxes generate higher government revenues and entail lower efficiency and welfare costs than taxes on non-deposit liabilities. |
| Keywords: | Bank regulations , Banking , Capital , Credit risk , Economic models , Liquidity , Taxation , |
| Date: | 2012–03–08 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/72&r=cba |
| By: | Jia-Wen Gu; Wai-Ki Ching; Tak-Kuen Siu; Harry Zheng |
| Abstract: | In this paper we propose a simple and efficient method to compute the ordered default time distributions in both the homogeneous case and the two-group heterogeneous case under the interacting intensity default contagion model. We give the analytical expressions for the ordered default time distributions with recursive formulas for the coefficients, which makes the calculation fast and efficient in finding rates of basket CDSs. In the homogeneous case, we explore the ordered default time in limiting case and further include the exponential decay and the multistate stochastic intensity process. The numerical study indicates that, in the valuation of the swap rates and their sensitivities with respect to underlying parameters, our proposed model outperforms the Monte Carlo method. |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1204.4025&r=cba |
| By: | Pesaran, Hashem (University of Cambridge); Yamagata, Takashi (University of York) |
| Abstract: | This paper is concerned with testing the time series implications of the capital asset pricing model (CAPM) due to Sharpe (1964) and Lintner (1965), when the number of securities, N, is large relative to the time dimension, T, of the return series. In the case of cross-sectionally correlated errors, using a threshold estimator of the average squares of pair-wise error correlations a test is proposed and is shown to be valid even if N is much larger than T. Monte Carlo evidence show that the proposed test works well in small samples. The test is then applied to all securities in the S&P 500 index with 60 months of return data at the end of each month over the period September 1989-September 2011. Statistically significant evidence against Sharpe-Lintner CAPM is found mainly during the recent financial crisis. Furthermore, a strong negative correlation is found between a twelve-month moving average p-values of the test and the returns of long/short equity strategies relative to the return on S&P 500 over the period December 2006 to September 2011, suggesting that abnormal profits are earned during episodes of market inefficiencies. |
| Keywords: | CAPM, testing for alpha, market efficiency, long/short equity returns, large panels, weak and strong cross-sectional dependence |
| JEL: | C12 C15 C23 G11 G12 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp6469&r=cba |