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on Central Banking |
| By: | Vicente da Gama Machado |
| Abstract: | Following recent episodes of financial distress, the interaction between monetary policy and asset price fluctuations has gained renewed attention. Here, we assess the role of asset price misalignments in monetary policy in an adaptive learning context. Our model first extends Bullard and Mitra (2002), including an additional role for asset prices. From the point of view of the E-Stability criterion, commonly used in the learning literature, we find that a response to stock prices is not desirable under both a forward expectations policy rule and an interest rate rule responding to contemporaneous values. Heterogeneous beliefs about the dynamics of asset price fluctuations, inflation and the output gap are introduced and we also evaluate an optimal monetary policy rule including a weight on asset prices. Overall we find that the Taylor principle remains important over all interest rate rules analysed and that central banks should act cautiously when considering the introduction of stock prices in monetary policy. |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:274&r=cba |
| By: | Roman Horváth (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Michal Franta (Czech National Bank); Marek Rusnák (Czech National Bank) |
| Abstract: | We investigate the evolution of the monetary policy transmission mechanism in the Czech Republic over the 1996-2010 period by employing a time-varying parameters Bayesian vector autoregression model with stochastic volatility. We evaluate whether the response of GDP and the price level to exchange rate or interest rate shocks changes over time, with a focus on the period of the recent financial crisis. Furthermore, we augment the estimated system with a lending rate and credit growth to shed light on the relative importance of financial shocks for the macroeconomic environment. Our results suggest that output and prices have become increasingly responsive to monetary policy shocks, probably reflecting financial sector deepening, more persistent monetary policy shocks, and overall economic development associated with disinflation. On the other hand, exchange rate pass-through has weakened somewhat over time, suggesting improved credibility of inflation targeting in the Czech Republic with anchored inflation expectations. We find that credit shocks had a more sizeable impact on output and prices during the period of bank restructuring with difficult access to credit. In general, our results show that financial shocks are less important for the aggregate economy in an environment of a stable financial system. |
| Keywords: | Monetary policy transmission; Sign restrictions; Time-varying parameters |
| JEL: | E44 E52 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2012_11&r=cba |
| By: | Alex Haberis; Anna Lipinska |
| Abstract: | In this paper, we consider how monetary policy in a large, foreign economy affects optimal monetary policy in a small open economy (`home') in response to a large global demand shock that pushes both economies to the zero lower bound (ZLB) on nominal interest rates. We show that the inability of foreign monetary policy to stabilise the foreign economy at the ZLB creates a spillover that affects how well the home policymaker is able to stabilise its own economy. We show that more stimulatory foreign policy worsens the home policymaker's trade-off between stabilising inflation and the output gap when home and foreign goods are close substitutes. This reflects the fact that looser foreign policy leads to a relatively more appreciated home real exchange rate, which induces large expenditure switching away from home goods when goods are highly substitutable--just at a time (at the ZLB) when home policy is trying to boost demand for home goods. When goods are not close substitutes the home policymaker's ability to stabilise the economy benefits from more stimulatory foreign policy. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2012-23&r=cba |
| By: | Panzera, Fabio S. |
| Abstract: | During the two decades preceding the 2007-8 financial crisis, both advanced and emerging market economies experienced larger credit growth and asset price fluctuations than in the more distant past. These phenomena were largely due to the establishment of credible inflation targeting regimes, whose excessive focus on medium-run price stability bred unsustainable credit and asset price dynamics, to the detriment of financial stability over longer time horizons. As the financial crisis spread to the whole economy in the late 2008, many economists came to believe that monetary policy should actively lean against financial imbalances - thus challenging the canonical New Keynesian paradigm. This paper reviews the relevance of that paradigm in light of the recent financial crisis, arguing that the whole macrofinancial stability framework, rather than monetary policy per se, needs to be considered anew. In particular, some macro-prudential tools and a counter-cyclical tax on private debt could be useful instruments to counter overly credit expansion and, accordingly, smooth asset price fluctuations. |
| Keywords: | inflation targeting ; New Keynesian consensus ; financial imbalances ; macro-prudential regulation ; counter-cyclical tax on debt |
| JEL: | E32 E58 G01 G18 |
| Date: | 2011–12–15 |
| URL: | http://d.repec.org/n?u=RePEc:fri:fribow:fribow00423&r=cba |
| By: | Minford, Patrick (Cardiff Business School); Ou, Zhirong (Cardiff Business School) |
| Abstract: | We investigate the relative roles of monetary policy and shocks in causing the Great Moderation, using indirect inference where a DSGE model is tested for its ability to mimic a VAR describing the data. A New Keynesian model with a Taylor Rule and one with the Optimal Timeless Rule are both tested. The latter easily dominates, whether calibrated or estimated, implying that the Fed's policy in the 1970s was neither inadequate nor a cause of indeterminacy; it was both optimal and essentially unchanged during the 1980s. By implication it was largely the reduced shocks that caused the Great Moderation — among them monetary policy shocks the Fed injected into inflation. |
| Keywords: | Great Moderation; Shocks; Monetary policy; Optimal Timeless Rule; Taylor Rule; Indirect Inference; Wald statistic |
| JEL: | E42 E52 E58 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2012/9&r=cba |
| By: | Monique Reid (Department of Economics, University of Stellenbosch) |
| 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 ‘sticky’ 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:sza:wpaper:wpapers160&r=cba |
| By: | Fabian Valencia; Kenichi Ueda |
| Abstract: | We consider the optimality of various institutional arrangements for agencies that conduct macro-prudential regulation and monetary policy. When a central bank is in charge of price and financial stability, a new time inconsistency problem may arise. Ex-ante, the central bank chooses the socially optimal level of inflation. Ex-post, however, the central bank chooses inflation above the social optimum to reduce the real value of private debt. This inefficient outcome arises when macro-prudential policies cannot be adjusted as frequently as monetary. Importantly, this result arises even when the central bank is politically independent. We then consider the role of political pressures in the spirit of Barro and Gordon (1983). We show that if either the macro-prudential regulator or the central bank (or both) are not politically independent, separation of price and financial stability objectives does not deliver the social optimum. |
| Keywords: | Central bank autonomy , Central banks , Economic models , Monetary policy , |
| Date: | 2012–04–23 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/101&r=cba |
| By: | Thomas I. Palley |
| Abstract: | The financial crisis and Great Recession have prompted a rethink of monetary policy and central banking. The status quo insider rethink focuses on the role of monetary policy in dealing with asset bubbles; making the central bank the banking system supervisor; and how to deal with the problem of the zero lower bound to nominal interest rates. This paper presents an outsider reform program that focuses on central bank governance and independence; reshaping the economic philosophy of central banks to be more intellectually open-minded; major monetary policy reform that includes adoption of an inflation target equal to the minimum unemployment rate of inflation (MURI) and implementation of asset based reserve requirements; and regulatory reform that addresses problems of flawed incentives, excessive leverage, and maturity mismatch.The proposed outsider reform program is rooted in a rethink of macroeconomic theory compelled by the crisis. There are some overlaps between the insider and outsider reform programs but they are more form than substance. That is dangerous because it can confuse debate if similarity of form is mistaken for similarity of substance.The insider program makes no changes to macroeconomic theory and is uncritical of the Federal Reserve's past actions. From its perspective, any failings of the Federal Reserve have been unwitting sins of omission. The outsider program fundamentally challenges existing macroeconomic theory and is also highly critical of the Federal Reserve. From its perspective the failings of the Federal Reserve have included significant sins of commission rooted in political capture, cognitive capture and intellectual hubris.The outsider critique can be taken even further. The Federal Reserve is already legally mandated to pursue maximum employment with price stability. However, it needs institutional transformation that makes it think of itself as an agent for helping realize the "American Dream". That means it should have a duty to shape the allocation of credit and the financial system in ways that ensure growth, full employment and a fair shake for all. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:imk:wpaper:8-2011&r=cba |
| By: | Troeger, Vera (University of Warwick) |
| Abstract: | This paper argues that the degree of monetary flexibility a government enjoys does not only depend on the implemented monetary institutions such as exchange rate arrangements and central bank independence but also on the economic and financial relationships with key currency areas. I develop a formal theoretical framework explaining the degree of monetary independence in open economies under flexible exchange rate regimes by trading relations and financial integration. The model suggests that a) higher import shares from the key currency area increase the imported inflation when monetary authorities try to offset an exogenous shock by cutting back the interest rate while the base country does not encounter a similar shock, and b) the more cross border assets of a country are denominated in the base currency the higher the exchange rate effects of interest rate differences to the interest rate of the key currency area. The presented empirical evidence largely supports the theoretical predictions. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:cge:warwcg:81&r=cba |
| By: | Stephen Hansen; Michael McMahon |
| Abstract: | We first establish that policymakers on the Bank of England's Monetary Policy Committee choose lower interest rates with experience. We then reject increasing confidence in private information or learning about the structure of the macroeconomy as explanations for this shift. Instead, a model in which voters signal their hawkishness to observers better ts the data. The motivation for signalling is consistent with wanting to control inflation expectations, but not career concerns or pleasing colleagues. There is also no evidence of capture by industry. The paper suggests that policy-motivated reputation building may be important for explaining dynamics in experts' policy choices. |
| Keywords: | Signalling, Learning, Monetary Policy |
| JEL: | D78 E52 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:572&r=cba |
| By: | Luca Sessa (Bank of Italy) |
| Abstract: | Monetary growth targeting is often seen as an effective way of supporting macroeconomic stability. We scrutinize this property by checking whether multiplicity of equilibria, in the form of local indeterminacy (LI), can be both a possible and a plausible outcome of a basic model with an exogenous money growth policy rule. We address the question in different versions of the Sidrauski-Brock-Calvo framework, which isolates the contribution of monetary non-neutralities and monetary targeting. In line with previous literature, real effects of money are found to be a necessary condition for LI: we identify a single pattern for their magnitude if they are to be sufficient too. While the most elementary setups are unable to plausibly generate large enough real effects, LI becomes significantly more likely as one realistically considers additional channels of transmission of monetary expansions onto the real economy: in particular, we show that models in which holding money is valuable to both households and firms may yield a LI outcome for empirically relevant parameterizations, therefore casting some doubt on the stabilizing properties of monetary monitoring. |
| Keywords: | local indeterminacy, monetary targeting, real effects of money, money-in-the-utility-function, money-in-the-production-function |
| JEL: | E5 E58 E52 E41 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_858_12&r=cba |
| By: | Zsolt Darvas |
| Abstract: | We study the transmission of monetary policy to macroeconomic variables with structural time-varying coefficient vector autoregressions in the Czech Republic, Hungary and Poland, in comparison with that in the euro area. These three countries have experienced changes in monetary policy regimes and went through substantial structural changes, which call for the use of a timevarying parameter analysis. Our results indicate that the impact on output of a monetary shock changed over time. At the point of the last observation of our sample, the fourth quarter of 2011, among the three countries, monetary policy was most powerful in Poland and not much less strong than the transmission in the euro area. We discuss various factors that can contribute to differences in monetary transmission, such as financial structure, labour market rigidities, industry composition, exchange rate regime, credibility of monetary policy and trade openness. |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:bre:wpaper:722&r=cba |
| By: | David Andolfatto; Fernando M. Martin |
| Abstract: | When commitment is lacking, intertemporal trade is facilitated with the use of exchange media—interpreted broadly to include monetary and collateral assets. We study the properties of a model commonly used to motivate monetary exchange, extended to include a physical asset whose expected short-run return is subject to a news shock, but whose expected long-run return is stable. The nondisclosure of news enhances the asset’s property as an exchange medium, and generally improves social welfare. When a nondisclosure policy is infeasible, the framework admits a role for government debt, including fiat money. When lump-sum taxation is not permitted, fiat money may still improve welfare—but only if its circulation is supported by a cash-in-advance constraint.> |
| Keywords: | Disclosure of information ; Monetary policy - United States |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2012-012&r=cba |
| By: | Dominik Bernhofer; Till van Treeck (IMK at the Hans Boeckler Foundation) |
| Abstract: | We analyse the bank interest rate pass-through in the euro area for the period 1999:1 - 2009:11, relating market interest rates to bank retail rates of comparable maturities. We first estimate single equation error correction models for seven interest rate categories and ten euro area countries and find that the interest rate pass-through displays substantial heterogeneity especially in the short run, but also in the long run. We then apply the pooled mean group estimator (PMGE) advanced by Pesaran et al. (1999), allowing for country-specific interest rate pass-through in the short run, while constraining the long-run pass-through to be homogeneous across countries. We find significant evidence of substantial heterogeneity in the short-run passthrough. Finally, we conduct sub-sample analysis and conclude that the degree of heterogeneity and the overall efficiency of the interest rate pass-through have not improved in the second half of the existence of the European Monetary Union. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:imk:wpaper:12-2011&r=cba |
| By: | Manmohan Singh; Peter Stella |
| Abstract: | Between 1980 and before the recent crisis, the ratio of financial market debt to liquid assets rose exponentially in the U.S. (and in other financial markets), reflecting in part the greater use of securitized assets to collateralize borrowing. The subsequent crisis has reduced the pool of assets considered acceptable as collateral, resulting in a liquidity shortage. When trying to address this, policy makers will need to consider concepts of liquidity besides the traditional metric of excess bank reserves and do more than merely substitute central bank money for collateral that currently remains highly liquid. |
| Keywords: | Asset management , Central banks , Money , Securities markets , |
| Date: | 2012–04–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/95&r=cba |
| By: | Willi Semmler; Lucas Bernard |
| Abstract: | Recent history suggests that many boom-bust cycles are naturally driven by linkages between the credit market and asset prices. Additionally, new structured securities have been developed, e.g., MBS, CDOs, and CDS, which have acted as instruments of risk transfer. We show that there is a certain non-robustness in the pricing of these instruments and we create a model in which their role in the recent financial market meltdown, and in which the mechanism by which they exacerbate leverage cycles, is explicit. We first discuss the extent to which complex securities can amplify boom-bust cycles. Then, we propose a model in which distinct financial market boom-bust cycles emerge naturally. We demonstrate the interaction of leveraging and asset pricing in a dynamical model and spell out some implications for monetary policy. |
| Keywords: | Credit, Leverage, Mortgage, Credit Risk, Structured Finance, Leveraged Financing, Mortgage-backed Security, Collateral, Collateralized Default Obligation, Booms, Busts, Dynamic, Cycles |
| JEL: | C61 C63 G21 D83 D92 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:deg:conpap:c016_034&r=cba |
| By: | Stephanie Schmitt-Grohe; Martin Uribe |
| Abstract: | This paper shows that in a small open economy model with downward nominal wage rigidity pegging the nominal exchange rate creates a negative pecuniary externality. This peg-induced externality is shown to cause unemployment, overborrowing, and depressed levels of consumption. The paper characterizes the optimal capital control policy in this model and shows that it is prudential in nature. For it restricts capital inflows in good times and subsidizes external borrowing in bad times. Under plausible calibrations of the model, this type of macro prudential policy is shown to lower the average unemployment rate by 10 percentage points, reduce average external debt by more than 50 percent, and increase welfare by over 7 percent of consumption per period. |
| JEL: | E31 E62 F41 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18031&r=cba |
| By: | Catherine Prettner (Department of Economics, Vienna University of Economics and Business); Klaus Prettner (Harvard University, Center for Population and Development Studies) |
| Abstract: | This article investigates the interrelations between the initial members of the Euro area and five important Central and Eastern European economies. We set up a theoretical open economy model to derive the Purchasing Power Parity, the Interest Rate Parity, the Fisher Inflation Parity, and an output gap relation. After taking convergence into account, they are used as restrictions on the cointegration space of a structural vector error correction model. We then employ generalized impulse response analysis to assess the dynamic effects of shocks in output and interest rates on the respective other area as well as the implications of shocks in the exchange rate and in relative prices on both areas. The results show a high degree of interconnectedness between the two economies. There are strong positive spillovers in output to the respective other region with the magnitude of the impact being similarly strong in both areas. Furthermore, we find a multiplier effect being present in Eastern Europe and some evidence for the European Central Banks’ desire towards price stability. |
| Keywords: | European Economic Integration, Structural Vector Error Correction Model, Generalized Impulse Response Analysis |
| JEL: | C11 C32 F41 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwwuw:wuwp138&r=cba |
| By: | Joshua Aizenman; Yothin Jinjarak; Minsoo Lee; Donghyun Park |
| Abstract: | The global crisis highlights the continued vulnerability of developing countries to shocks from advanced economies. Just a few years after the global crisis, the eurozone sovereign debt crisis has emerged as the single biggest threat to the global outlook. In this paper, we apply the event study methodology to gauge the scope for financial contagion from the EU to developing countries. More specifically, we estimate the responsiveness of equity and bond markets in developing countries to global crisis news and euro crisis news. Overall, we find that whereas global crisis news had a consistently negative effect on returns of equity and bond markets in developing countries, the effect of euro crisis news was more mixed and limited. |
| JEL: | F30 F32 G15 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18028&r=cba |
| By: | Morten L. Bech; Elizabeth Klee; Viktors Stebunovs |
| Abstract: | This paper examines the link between the federal funds and repo markets, before, during, and emerging from the financial crisis that began in August 2007. In particular, the paper investigates the initial transmission of monetary policy to closely related money markets, pricing of risk, and liquidity effects, and then shows how these could interact if the Federal Reserve removes the substantial amount of liquidity currently in the federal funds market. The results suggest that pass-through from the federal funds rate to the repo deteriorated somewhat during the zero lower bound period, likely due to limits to arbitrage and idiosyncratic market factors. In addition, during the early part of the crisis, the pricing of federal funds, which are unsecured loans, indicated a marked jump in perceived credit risk. Moreover, the liquidity effect for the federal funds rate, or the change in the federal funds rate associated with an exogenous change in reserve balances, weakened greatly with the increase in supply of these balances over the crisis, implying a non-linear demand for federal funds. Using these analyses, the paper then shows simulations of the dynamic effects and balance sheet mechanics of liquidity draining on the federal funds and repo rates--a tool that might be used in an exit strategy to tighten monetary policy. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2012-21&r=cba |
| By: | Jordi Galí |
| Abstract: | I examine the impact of alternative monetary policy rules on a rational asset price bubble, through the lens of an OLG model with nominal rigidities. A systematic increase in interest rates in response to a growing bubble is shown to enhance the fluctuations in the latter, through its positive effect on bubble growth. The optimal monetary policy seeks to strike a balance between stabilization of the bubble and stabilization of aggregate demand. The paper's main findings call into question the theoretical foundations of the case for "leaning against the wind" monetary policies. |
| Keywords: | monetary policy rules, stabilization policies, asset price volatility |
| JEL: | E44 E52 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:592&r=cba |
| By: | Gregor Semieniuk; Till van Treeck (IMK at the Hans Boeckler Foundation); Achim Truger |
| Abstract: | We analyse the newly updated Stability Programmes of the Euro area governments by applying the simple accounting identity by which the financial balances of the government, the private sector and the foreign sector always sum to zero. While the focus of the old Stability and Growth Pact was solely on the government balance, the current euro crisis has shown that this narrow focus was wrong and that macroeconomic stability within the monetary union requires reducing imbalances between all three sectors of individual member states. While the need for overcoming these imbalances is now increasingly recognised by economists and policymakers, we argue that the projections for achieving stability in the current Stability Programmes are very likely too optimistic. We show that, individually, the Stability Programmes rely on optimistic assumptions about GDP growth; collectively, they require an improvement of the Euro area's current account with the rest of the world, the continuation of significant current account imbalances within the Euro area, and a steep drop of private balances in some countries. Based on some simple counterfactual simulations, we conclude that a symmetric effort at rebalancing current accounts would most likely require a slowdown of fiscal consolidation (in the current account surplus countries) but would be required to successfully address the euro area's macroeconomic challenges and thereby not only allow for consolidation in the medium term but also lead to the desired stability. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:imk:wpaper:11-2011&r=cba |
| By: | Layal Mansour (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France) |
| Abstract: | The primary aim of this paper is to explore the effectiveness of Hoarding International Reserves and Sterilization in dollarized and indebted countries such as Turkey and Lebanon, by measuring the sterilization coefficient, and the offset coefficient. It also focuses on exploring the link between the sources of Reserves and the external debt. Using monthly data collected from the International Monetary Fund and from the Central Banks of Turkey and Lebanon between January 1994 and February 2011, we applied a 2SLS regression models and we identified explanatory variables that enabled us to estimate the aforementioned coefficients. Our results showed that despite their theoretical practice of sterilization policy, economic constrains of these countries contribute to weaken the efficacy expected from monetary policies. |
| Keywords: | Monetary policy, International Reserve, Sterilization, Foreign Liabilities,Dollarized countries, Turkey, Lebanon |
| JEL: | E52 E58 F30 F34 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:1208&r=cba |
| By: | Stefan Mittnik; Willi Semmler |
| Abstract: | This paper studies the issue of local instability of the banking sector and how it may spillover to the macroeconomy. The banking sector is considered here as representing a wealth fund that accumulates capital assets, can heavily borrow and pays bonuses. We presume that the banking system faces not only loan losses but is also exposed to a deterioration of its balances sheets due to adverse movements in asset prices. In contrast to previous studies that use the financial accelerator – which is locally amplifying but globally stable and mean reverting – our model shows local instability and globally multiple regimes. Whereas the financial accelerator leads, in terms of econometrics, to a one-regime VAR we demonstrate the usefulness of a multi-regime VAR (MRVAR). We estimate our model for the US with a MRVAR using a constructed financial stress index and industrial production. We also undertake an impulse-response study with an MRVAR which allows us to explore regime dependent shocks. We show that the shocks have asymmetric effects depending on the regime the economy is in and the size of the shocks. As to the recently discussed unconventional monetary policy of quantitative easing we demonstrate that the effects of monetary shocks are also dependent on the size of the shocks. |
| JEL: | E2 E6 C13 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:deg:conpap:c016_080&r=cba |
| By: | Tobias Adrian; Adam B. Ashcraft |
| Abstract: | Shadow banks conduct credit intermediation without direct, explicit access to public sources of liquidity and credit guarantees. Shadow banks contributed to the credit boom in the early 2000s and collapsed during the financial crisis of 2007-09. We review the rapidly growing literature on shadow banking and provide a conceptual framework for its regulation. Since the financial crisis, regulatory reform efforts have aimed at strengthening the stability of the shadow banking system. We review the implications of these reform efforts for shadow funding sources including asset-backed commercial paper, triparty repurchase agreements, money market mutual funds, and securitization. Despite significant efforts by lawmakers, regulators, and accountants, we find that progress in achieving a more stable shadow banking system has been uneven. |
| Keywords: | Intermediation (Finance) ; Banks and banking - Regulations ; Financial market regulatory reform ; Credit |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:559&r=cba |
| By: | Armen Hovakimian; Edward J. Kane; Luc Laeven |
| Abstract: | This paper proposes a theoretically sound and easy-to-implement way to measure the systemic risk of financial institutions using publicly available accounting and stock market data. The measure models credit risk of banks as a put option on bank assets, a tradition that originated with Merton (1974). We extend his contribution by expressing the value of banking-sector losses from systemic default risk as the value of a put option written on a portfolio of aggregate bank assets whose exercise price equals the face value of aggregate bank debt. We conceive of an individual bank’s systemic risk as its contribution to the value of this potential sector-wide put on the financial safety net. To track the interaction of private and governmental sources of systemic risk during and in advance of successive business-cycle contractions, we apply our model to quarterly data over the period 1974-2010. Results indicate that systemic risk reached unprecedented highs during the years 2008-2010, and that bank size, leverage, and asset risk are key drivers of systemic risk. |
| JEL: | G01 G21 G28 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18043&r=cba |
| By: | Diana Hancock; Wayne Passmore |
| Abstract: | We provide an empirical analysis of the effects of the Federal Reserve's asset holdings on MBS yields and mortgage rates. We argue that understanding the particulars of the U.S. mortgage markets, particularly the linkages between the secondary and primary mortgage markets, is important. We find evidence that the Federal Reserve's portfolio holdings influence mortgage markets, through both a "portfolio balancing channel" and an "excess reserves" channel. These two channels can work in opposite directions and their magnitudes are difficult to estimate, but on net, larger Federal Reserve's portfolio holdings seem to have placed a significant downward influence on MBS yields and mortgage rates. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2012-22&r=cba |
| By: | Stéphane GOUTTE (CNRS, Laboratoire de Probabilités et Modèles Aléatoires, Paris 7); Benteng Zou (CREA, University of Luxembourg) |
| Abstract: | Under Hamilton (1989)’s type Markov regime switching framework, modified Cox-Ingersoll-Ross model is employed to study foreign exchange rate, where all parameters value depend on the value of a continuous time Markov chain. Basing on real data of some foreign exchange rates, the Expectation-Maximization algorithm is presented and is employed to calibrate all parameters. We compare the obtained results regarding to results obtained with non regime switching models. We illustrate our model on various foreign exchange rate data and clarify some significant economic time periods in which financial or economic crisis appeared, thus, regime switching obtained. |
| Keywords: | Foreign exchange rate; Regime switching model; calibration; financial crisis. |
| JEL: | F31 C58 C51 C01 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:luc:wpaper:11-16&r=cba |
| By: | Anders Aslund (Peterson Institute for International Economics) |
| Abstract: | The response of the ten new eastern members of the European Union to the global financial crisis has valuable lessons of crisis resolution for the euro area. These countries were severely hit by the crisis in the fall of 2008 and responded with extensive reforms. Crisis made the unthinkable possible. This paper outlines the main reform measures that the ten Central and East European (CEE) countries carried out. It then quantifies to what extent the CEE countries resolved the macroeconomic crisis and explores the effects of the reforms on future growth prospects. The fourth and major section discusses how the political economy of the crisis resolution actually worked. Finally, the author examines what lessons euro area countries can learn from the crisis resolution of the newest members of the European Union. |
| Keywords: | Financial Crises, Central and Eastern Europe, Policy |
| JEL: | P16 G01 E61 E62 F30 H0 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:iie:wpaper:wp12-7&r=cba |
| By: | Christian Schoder; Christian R. Proaño; Willi Semmler |
| Abstract: | Using parametric and non-parametric estimation techniques, we analyze the sustainability of the recently growing current account imbalances in the euro area and test whether the European Monetary Union has aggravated these imbalances. Two alternative criteria for the as-sessment of external debt sustainability are considered: One based on the Transversality Condition of intertemporal optimization, and the other based on the stationarity properties of the stochastic process of the debt-GDP ratio. Econometric sustainability tests are performed using the pooled mean-group estimator and panel unit root tests, respectively. Variants of both test procedures with varying coefficients using penalized splines estimation are applied. We find empirical evidence suggesting that the introduction of the euro is associated with a regime shift from sustainability to unsustainability of external debt accumulation for the euro area. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:imk:wpaper:90-2012&r=cba |
| By: | Alberto Martin; Filippo Taddei |
| Abstract: | The financial crisis of 2007-08 has underscored the importance of adverse selection in financial markets. This friction has been mostly neglected by macroeconomic models of financial frictions, however, which have focused almost exclusively on the effects of limited pledgeability. In this paper, well this gap by developing a standard growth model with adverse selection. Our main results are that, by fostering unproductive investment, adverse selection: (i) leads to an increase in the economys equilibrium interest rate, and; (ii) it generates a negative wedge between the marginal return to investment and the equilibrium interest rate. Under financial integration, we show how this translates into excessive capital inflows and endogenous cycles. We also explore how these results change when limited pledgeability is added to the model. We conclude that both frictions complement one another and argue that limited pledgeability exacerbates the effects of adverse selection. |
| Keywords: | Limited Pledgeability, Adverse Selection, International Capital Flows, Credit Market Imperfections |
| JEL: | D53 D82 E22 F34 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:518&r=cba |
| By: | Tomasz Wieladek; Sergi Lanau |
| Abstract: | This paper examines the relationship between financial regulation and the current account in an intertemporal model of the current account where financial regulation affects the current account through liquidity constraints. Greater liquidity constraints decrease the size and persistence of the current account response to a net output shock. The theory is tested with an interacted panel VAR model where the coefficients are allowed to vary with the degree of financial regulation. The current account reaction to an output shock is 60% larger and substantially more persistent in a country with low financial regulation than in one with high financial regulation. |
| Keywords: | Current account , Economic models , Liquidity controls , |
| Date: | 2012–04–12 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/98&r=cba |
| By: | Nidhi Aggarwal (Indira Gandhi Institute of Development Research); Manish Singh (Indira Gandhi Institute of Development Research); Susan Thomas (Indira Gandhi Institute of Development Research) |
| Abstract: | Distance-to-default (DtD) from the Merton model has been used in the credit risk literature, most successfully as an input into reduced form models for forecasting default. In this paper, we suggest that the change in the DtD is informative for predicting change in the credit rating. This is directly useful for situations where forecasts of credit rating changes are required. More generally, it contributes to our knowledge about reduced form models of credit risk. |
| Keywords: | Distance to Default, rating downgrades, rating change, forecasts, event study analysis, probit models, simulation, bootstrap, crisis analysis |
| JEL: | C53 C58 G14 G17 G21 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:ind:igiwpp:2012-010&r=cba |
| By: | Ricardo Bebczuk (Central Bank of Argentina); Tamara Burdisso (Central Bank of Argentina); Jorge Carrera (Central Bank of Argentina); Máximo Sangiácomo (Central Bank of Argentina) |
| Abstract: | The goal of this paper is to provide up-to-date worldwide evidence on the short-term relationship between credit changes and output changes. Standard correlation methods, state of-the-art panel Granger causality tests, and panel regressions were applied on a maximum sample of 144 countries over the period 1990-2007. Our results openly clash with two popular economic statements, namely, that credit is procyclical and that changes in credit have strong effects on private expenditure. According to the evidence produced, credit procyclicality -in the sense that the simple correlation coefficient is positive and significant at 10% or less- prevails in just 45% of the countries when annual data are used (23% with quarterly data). As for time precedence, our work suggests that, for the full sample, Granger causality runs from GDP to credit, while the often claimed causality from credit to GDP is a feature observable much less frequently –this behavior is observed only in financially developed countries. Results are robust to random resampling. Furthermore, after considering the potential presence of endogeneity, we contend that our results uncover not just mere Granger causality but economic causality. All in all, these findings have vast academic and policy implications. |
| Keywords: | credit procyclicality, financial system, Granger causality, panel regressions |
| JEL: | C33 E32 G10 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:bcr:wpaper:201155&r=cba |
| By: | Farla, Kristine (UNU-MERIT / MGSOG, Maastricht University) |
| Abstract: | It is well-known that the extent of credit lent to private agents differs widely between countries. The `financial deepening' of the economy offers opportunities as well as financial risks. This study investigates the extent to which institutional characteristics are re- lated to countries' level of credit depth. The findings suggest that the formalization of property rights, contracting, and competition institutions is positively related to an increase in the level of credit to the private sector. This result remains robust when controlling for the effect of financial policy. The effect of institutional characteristics on banks' lending capacity and investment is mixed. However, overall, institutional formalization has a positive impact on credit deepening and investment. |
| Keywords: | Institutions, Financial Development, Property Rights, Contract, Competition |
| JEL: | E44 G18 O11 O43 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:unumer:2012038&r=cba |
| By: | Torsten Wezel; Francesco Columba; Jorge A. Chan Lau |
| Abstract: | This simulation-based paper investigates the impact of different methods of dynamic provisioning on bank soundness and shows that this increasingly popular macroprudential tool can smooth provisioning costs over the credit cycle and lower banks’ probability of default. In addition, the paper offers an in-depth guide to implementation that addresses pertinent issues related to data requirements, calibration and safeguards as well as accounting, disclosure and tax treatment. It also discusses the interaction of dynamic provisioning with other macroprudential instruments such as countercyclical capital. |
| Keywords: | Bank soundness , Banks , Business cycles , Capital , Credit risk , Loans , |
| Date: | 2012–05–02 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/110&r=cba |
| By: | Richard P.C. Brown (School of Economics, The University of Queensland); Fabrizio Carmignani (School of Economics, The University of Queensland) |
| Abstract: | We investigate the effect of remittances on bank credit in developing countries. Understanding this link is important in view of the growing relevance of remittances as a source of external finance and of the beneficial impact that financial intermediation is likely to have on economic growth. Using a simple theoretical formalization, we predict the relationship to be U-shaped. We test this prediction using panel data for a large group of developing and emerging economies over the period 1960-2009. The empirical results suggest that at initially low levels of remittances, an increase in remittances reduces the volume of credit extended by banks. However, at sufficiently high levels of remittances, the effect becomes positive. The turning point of the relationship occurs at a level of remittances of about 2.5% of GDP. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:qld:uq2004:461&r=cba |