nep-cba New Economics Papers
on Central Banking
Issue of 2012‒05‒02
fifteen papers chosen by
Maria Semenova
Higher School of Economics

  1. Reserves, Liquidity and Money: An Assessment of Balance Sheet Policies By Jagjit S. Chadhay; Luisa Corrado; Jack Meaning
  2. How forward looking are central banks? Some evidence from their forecasts By Michał Brzoza-Brzezina; Jacek Kotłowski; Agata Miśkowiec
  3. Does Monetary Cooperation or Confrontation Lead to Successful Fiscal Consolidation? By Tomas Hellebrandt; Adam S. Posen; Marilyne Tolle
  4. Voting by monetary policy committees: evidence from the CEE inflation-targeting countries By Alexander Jung; Gergely Kiss
  5. Capital Controls with International Reserve Accumulation: Can this Be Optimal? By Bacchetta, Philippe; Benhima, Kenza; Kalantzis, Yannick
  6. Liquidity Effects of Quantitative Easing on Long-Term Interest Rates By Signe Krogstrup; Samuel Reynard; Barbara Sutter
  7. Trilemma Policy Convergence Patterns and Output Volatility By Joshua Aizenman; Hiro Ito
  8. Comparative Analysis of Zero Coupon Yield Curve Estimation Methods Using JGB Price Data By Kentaro Kikuchi; Kohei Shintani
  9. Evaluating the impact of fair value accounting on financial institutions: implications for accounting standards setting and bank supervision By Sanders Shaffer
  10. Estimating financial institutions’ intraday liquidity risk: a Monte Carlo simulation approach By Carlos Léon
  11. A Note on the Current Account Sustainability of European Transition Economies By Juan Carlos Cuestas
  12. Problems with the Measurement of Banking Services in a National Accounting Framework. By Erwin Diewert; Dennis Fixler; Kimberly Zieschang
  13. The Evolving Importance of Banks and Securities Markets By Asli Demirguc-Kunt; Erik Feyen; Ross Levine
  14. Forecasting the Brazilian Real and the Mexican Peso: Asymmetric Loss, Forecast Rationality, and Forecaster Herding By Ingrid Groessl; Nadine Levratto
  15. Financial Liberalization and Institutional Development By Markus Alzer; Ramin Dadasov

  1. By: Jagjit S. Chadhay (School of Economics, Keynes College, University of Kent); Luisa Corrado (Faculty of Economics, University of Rome "Tor Vergata"); Jack Meaning (School of Economics, Keynes College, University of Kent)
    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 o¤setting 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 ?scal 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 financial spreads to move less violently over the cycle to compensate.
    Keywords: non-conventional monetary interest on reserves, monetary and ?scal policy instruments, Basel III.
    JEL: E31 E40 E51
    Date: 2012–04–18
  2. By: Michał Brzoza-Brzezina (National Bank of Poland, Warsaw School of Economics); Jacek Kotłowski (National Bank of Poland, Warsaw School of Economics); Agata Miśkowiec (Warsaw School of Economics)
    Abstract: We estimate forward-looking Taylor rules on data from macroeconomic forecasts of three central banks (Bank of England, National Bank of Poland and Swiss National Bank) in order to determine the extent to which these banks are forward looking in their monetary policy decisions. We find that all three banks are to some extent forward-looking, however to a varying degree. With respect to inflation, the NBP and the SNB look far into the future, while the BoE seems to concentrate on current inflation. As to output, the BoE and the SNB take into account its future or current value while for the NBP this variable is insignificant. We also find that central banks prefer to concentrate on one particular horizon rather than take into account the whole forecast.
    Keywords: Taylor rule, forward-looking monetary policy, feedback horizon
    JEL: C25 E52 E58
    Date: 2012
  3. By: Tomas Hellebrandt (Bank of England); Adam S. Posen (Peterson Institute for International Economics); Marilyne Tolle (Bank of England)
    Abstract: Active accommodation of fiscal consolidations by monetary policy is controversial, as can be seen in current euro area discussions. While many observers acknowledge that there is usually a place for monetary accommodation in response to fiscal consolidation, a sequencing argument is often heard today that fiscal commitment must precede any loosening. Some analysts go further to suggest that toughness by central banks taking a hard line on adjustment is critical to inducing sustained fiscal stabilization. This policy brief looks at the recent historical record of central bank behavior vis-à-vis fiscal authorities, at least until the current crisis period, and whether accommodative approaches ahead of consolidations have proven dangerous or helpful. The authors also try to assess the market credibility of fiscal consolidations as a function of the central banks' monetary stance prior to fiscal consolidation. They find clear evidence of positive associations between the degree of monetary ease in advance of fiscal consolidation programs and both those programs' success and their market credibility. For a wide range of cases of fiscal consolidation, monetary policymakers did not hesitate to pursue accommodative policies and try to improve economic conditions ahead of those programs' implementation.
    Date: 2012–04
  4. By: Alexander Jung (European Central Bank); Gergely Kiss (Fitch Ratings)
    Abstract: The aim of this paper is to study preference heterogeneity in monetary policy committees of inflation-targeting (IT) countries in Central and Eastern Europe (CEE) during the period 2005–2010. It employs (individual) voting records of the Monetary Council of the Magyar Nemzeti Bank (the central bank of Hungary) and of the Monetary Policy Council of the National Bank of Poland. Preference heterogeneity in committees is not directly observable. Therefore, we pursue an indirect measurement and conduct an econometric analysis based on (pooled) Taylor-type reaction functions estimated using real-time information on economic and financial indicators and voting records. Recent evidence for the monetary policy committees (MPCs) of advanced economies (see Besley et al., 2008; Jung, 2011) suggests that preference heterogeneity among its members is systematic. Unlike for monetary policy committees of advanced countries, the present paper finds preference heterogeneity to be random for both the members of the Monetary Policy Council of the National Bank of Poland (NBP), and the members of the Monetary Council of the Magyar Nemzeti Bank (MNB). But, similar to the committees of advanced economies, the diversity of views on the inflation forecast is measurable in both committees. A separate cluster analysis shows that different preferences of MPC members may be attributable to their status (chairman, internal member, external member) and that members may also differ in their desired response to changes in the economic outlook.
    Keywords: central banking, monetary policy committee, inflation targeting, collective decision-making, voting, preferences, pooled regressions
    JEL: C23 D72 D83 E58
    Date: 2012
  5. By: Bacchetta, Philippe (University of Lausanne, CEPR); Benhima, Kenza (University of Lausanne); Kalantzis, Yannick (Banque de France)
    Abstract: Motivated by the Chinese experience, we analyze a semi-open economy where the central bank has access to international capital markets, but the private sector has not. This enables the central bank to choose an interest rate different from the international rate. We examine the optimal policy of the central bank by modelling it as a Ramsey planner who can choose the level of domestic public debt and of international reserves. The central bank can improve savings opportunities of credit-constrained consumers modelled as in Woodford (1990). We find that in a steady state it is optimal for the central bank to replicate the open economy, i.e., to issue debt financed by the accumulation of reserves so that the domestic interest rate equals the foreign rate. When the economy is in transition, however, a rapidly growing economy has a higher welfare without capital mobility and the optimal interest rate differs from the international rate. We argue that the domestic interest rate should be temporarily above the international rate. We also find that capital controls can still help reach the first best when the planner has more fiscal instruments.
    Date: 2012–04
  6. By: Signe Krogstrup; Samuel Reynard; Barbara Sutter
    Abstract: This paper argues that the expansion in reserves following recent quantitative easing programs of the Federal Reserve may have affected long-term interest rates through liquidity effects. The data lends some support for liquidity effects, in that reserves were negatively correlated with long-term yields at the zero lower bound. Estimates suggest that between January 2009 and 2011, 10-year US Treasury yields fell 46-85 basis points as a result of liquidity effects. The liquidity effect is separate from the portfolio balance effect of the change in the public supply of Treasury bonds, which is estimated to have reduced yields by another 20 basis points during that period.
    Keywords: Quantitative Easing, Reserves, Liquidity Effect, Long-Term Interest Rates, Zero Lower Bound, Monetary Policy, Portfolio Balance
    JEL: E43 E52 E58
    Date: 2012
  7. By: Joshua Aizenman (University of California, Santa Cruz and National Bureau of Economic Research and Hong Kong Institute for Monetary Research); Hiro Ito (Portland State University)
    Abstract: We examine the development of open macroeconomic policy choices among developing economies from the perspective of the powerful "trilemma" hypothesis. We construct an index of divergence of the three trilemma policy choices, and evaluate its patterns in recent decades. We find that the three dimensions of the trilemma configurations are converging towards a "middle ground" among emerging market economies, equipped with managed exchange rate flexibility, underpinned by sizable holdings of international reserves, and intermediate levels of monetary independence and financial integration. We also find emerging market economies with more converged policy choices tend to experience smaller output volatility in the last two decades. Emerging markets with relatively low international reserves/GDP could experience higher levels of output volatility when they choose a policy combination with a greater degree of policy divergence while this heightened output volatility effect does not apply to economies with relatively high international reserves/GDP holding.
    Keywords: Impossible Trinity, International Reserves, Financial Liberalization, Exchange Rate Regime
    JEL: F31 F36 F41 O24
    Date: 2012–04
  8. By: Kentaro Kikuchi (Deputy Director and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Kohei Shintani (Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: This paper conducts a comparative analysis of the diverse methods for estimating the Japanese government bond (JGB) zero coupon yield curve (hereafter, zero curve) according to the criteria that estimation methods should meet. Previous studies propose many methods for estimating the zero curve from the market prices of coupon-bearing bonds. In estimating the JGB zero curve, however, an undesirable method may fail to accurately grasp the features of the zero curve. In order to select an appropriate estimation method for the JGB, we set the following criteria for the zero curve: (1) estimates should not fall below zero, (2) estimates should not take abnormal values, (3) estimates should have a good fit to market prices, and (4) the zero curve should have little unevenness. The method which meets these criteria enables us to estimate the zero curve with a good fit to the JGB market prices and a proper interpolation to grasp the features of the zero curve. Based on our analysis, we conclude that the method proposed in Steeley [1991] is the best in light of the criteria for the JGB price data. In fact, the zero curve based on this method can fully capture the characteristics of the JGB zero curve in a prolonged period of accommodative monetary policy.
    Keywords: coupon-bearing government bond, zero coupon yield, piecewise polynomial function
    JEL: C13 C14 G12
    Date: 2012–04
  9. By: Sanders Shaffer
    Abstract: Recent standard-setting activity related to fair value accounting has injected new life into questions of whether fair value provides information useful for decision-making, and whether there might be unintended consequences on financial stability. This discussion paper provides insight into these questions by performing a holistic evaluation of fair value accounting’s usefulness, the potential impacts it may have on financial institutions and any broader macroeconomic effects. Materials reviewed as part of this analysis include public bank regulatory filings, financial statements, and fair value research. The bank supervisory rating approach referred to as CAMELS is used as an organizing principle for the paper. CAMELS serves as a convenient way to both categorize potential impacts of fair value on financial institutions, as well as provide a bank supervisory perspective alongside the more traditional investor’s views on decision usefulness. ; The overall conclusion based on the evidence presented is that implementing fair value accounting more broadly may not necessarily provide financial statement users with more transparent and useful reporting. Additionally, financial stability may be negatively impacted by fair value accounting due to the interconnectedness of financial institutions, markets and the broader economy. The analysis suggests that the current direction in which accounting standard setters and bank regulators are moving may represent a possible solution to address these concerns. U.S. accounting standard setters have recently proposed that fair value, along with enhanced disclosures, be applied in a more targeted manner. Bank regulators are developing new supervisory tools and approaches which may alleviate some of the potential negative impact of fair value on financial stability. Additional policy implications and areas for future study are suggested.
    Keywords: Financial stability ; Accounting ; Bank supervision ; Fair value
    Date: 2012
  10. By: Carlos Léon
    Abstract: The most recent financial crisis unveiled that liquidity risk is far more important and intricate than regulation have conceived. The shift from bank-based to market-based financial systems and from Deferred Net Systems to liquidity-demanding Real-Time Gross Settlement of payments explains some of the shortcomings of traditional liquidity risk management. Although liquidity regulations do exist, they still are in an early stage of development and discussion. Moreover, no all connotations of liquidity are equally addressed. Unlike market and funding liquidity, intraday liquidity has been absent from financial regulation, and has appeared only recently, after the crisis. This paper addresses the measurement of Large-Value Payment System’s intraday liquidity risk. Based on the generation of bivariate Poisson random numbers for simulating the minute-by-minute arrival of received and executed payments, each financial institution’s intraday payments time-varying volume and degree of synchrony (i.e. timing) is modeled. To model intraday payments’ uncertainty allows for (i) overseeing participants’ intraday behavior; (ii) assessing their ability to fulfill intraday payments at a certain confidence level; (iii) identifying participants non-resilient to changes in payments’ timing mismatches; (iv) estimating intraday liquidity buffers. Vis-à-vis the increasing importance of liquidity risk as a source of systemic risk, and the recent regulatory amendments, results are useful for financial authorities and institutions.
    Date: 2012–04–11
  11. By: Juan Carlos Cuestas (Department of Economics, The University of Sheffield)
    Abstract: This paper analyses the sustainability of the current accounts of a group of Central and Eastern European countries. Given the link between national savings (public and private) and investment, current account may yield stabilities in the former fundamental macroeconomic variables. Hence, this analysis is of paramount importance given the 2008-2011 debt crises faced by many European economies, and the addition of new EU countries to the EMU. By means of unit root tests and fractional integration it shows that, in general, the ratio of current account to gross domestic product is a stationary and mean reverting process, although in some cases shocks tend to have long lasting effects, implying that there is no evidence of a potential debt default in this group of countries.
    Keywords: unit roots; fractional integration; current account; EU
    JEL: C32 E24
    Date: 2012
  12. By: Erwin Diewert (University of British Columbia and School of Economics, The University of New South Wales); Dennis Fixler (Bureau of Economic Analysis); Kimberly Zieschang (International Monetary Fund.)
    Abstract: The paper considers some of the problems associated with the indirectly measured components of financial service outputs in the System of National Accounts (SNA), termed FISIM (Financial Intermediation Services Indirectly Measured). The paper utilizes a user cost and supplier benefit approach to the determination of the value of various financial services in the banking sector. The present paper also attempts to integrate the balance sheet accounts in the SNA with the usual flow accounts. An empirical example of various nominal output concepts that could be applied to the U.S. commercial banking sector is presented.
    Keywords: User costs, banking services, deposit services, loan services, production accounts, System of National Accounts, FISIM, Financial Intermediation Services Indirectly Measured.
    JEL: C43 C67 C82 D24 D57 E22 E41
    Date: 2012–04
  13. By: Asli Demirguc-Kunt; Erik Feyen; Ross Levine
    Abstract: This paper examines the evolving importance of banks and securities markets during the process of economic development. We find that as countries develop economically, (1) the size of both banks and securities markets increases relative to the size of the economy, (2) the association between an increase in economic output and an increase in bank development becomes smaller, and (3) the association between an increase in economic output and an increase in securities market development becomes larger. The results are consistent with theories predicting that as economies develop, the services provided by securities markets become more important for economic activity, while those provided by banks become less important.
    JEL: F3 G1 G2 O16
    Date: 2012–04
  14. By: Ingrid Groessl (Universitaet Hamburg, School of Business, Economics and Social Sciences, Department of Socioeconomics); Nadine Levratto (Université de Paris ouest Nanterre)
    Abstract: Economic theory conjectures complementarities between the ranking of creditors in formal insolvency proceedings and the use of collateral in bank loan contracts as well as the existence of relational compared to arm’s length lending. In this paper we seek evidence for these hypotheses taking France and Germany as examples which differ significantly concerning the ranking of in particular secured creditors. On closer scrutiny of empirical studies as well as statistical information we can neither confirm that a high priority for se-cured lenders explains an excessive use of collateral in bank loans nor that a priority for inside collateral promotes relational lending. Regarding relational lending we point to variables lying outside the insolvency law, like culture and history.
    Keywords: Insolvency; France; Germany; bank-borrower-relationships; collateral; variety-of-capital-approach; law and finance
    JEL: K12 K22 G21 G33
    Date: 2012–04
  15. By: Markus Alzer (University of Aachen); Ramin Dadasov (University of Aachen)
    Abstract: This paper empirically analyzes the effects of de jure financial openness on institutional quality as captured by indicators on investment risk, corruption level, impartiality of judiciary system as well as the effectiveness of bureaucratic authorities. Using a panel data set of more than 110 countries and a time span from 1984 to 2005, we show that a higher degree of financial openness improves institutional quality in particular by reducing investment risks. We also study the effect of a single liberalization reform on the development of institutional quality. Again, we find evidence for the beneficial impact of financial liberalization with the exception of the level of corruption. We additionally show that if financial liberalization is supported by simultaneous political liberalization, the benign consequences of financial opening for the institutional performance are even larger, while financial deregulation in former socialist countries tends to worsen institutional quality.
    Keywords: financial integration, liberalization reform, institutional development, institutional dimensions
    JEL: F02 D72 P48
    Date: 2012

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