nep-cba New Economics Papers
on Central Banking
Issue of 2012‒05‒22
28 papers chosen by
Maria Semenova
Higher School of Economics

  1. Milton Friedman, the Demand for Money and the ECB’s Monetary-Policy Strategy By Stephen Hall; P.A.V.B. Swamy; George S. Tavlas
  2. Bayesian Forecast Combination for Inflation Using Rolling Windows: An Emerging Country Case By Luis Fernando Melo; Rubén Albeiro Loaiza Maya
  3. Hemlock for policy response: Monetary policy, exchange rates and labour unions in SEE and CIS during the crisis By Branimir Jovanovic; Marjan Petreski
  4. Changes in the Effects of Monetary Policy on Disaggregate Price Dynamics By Christiane Baumeister; Philip Liu; Haroon Mumtaz
  5. Credit and Liquidity Risks in Euro-area Sovereign Yield Curves By Alain Monfort; Jean-Paul Renne
  6. Monetary Policy and Fiscal Limits with No-Default By Gliksberg, Baruch
  7. The High-Frequency Response of the Rand-Dollar Rate to Inflation Surprises By Greg Farrell; Shakill Hassan; Nicola Viegi
  8. "The Euro Debt Crisis and Germany's Euro Trilemma" By Jorg Bibow
  9. New Paradigms in Central Banking? By Athanasios Orphanides
  10. The failure of Financial Macroeconomics and What to Do About It. By Jean-Bernard Chatelain; Kirsten Ralf
  11. Inflation Derivatives Under Inflation Target Regimes By Mordecai Avriel; Jens Hilscher; Alon Raviv
  12. Monetary Policy, Liquidity, and Growth By Philippe Aghion; Emmanuel Farhi; Enisse Kharroubi
  13. Hoarding of International Reserves and Sterilization in Dollarized and Indebted Countries : an effective monetary policy? By Layal Mansour
  14. Sudden Floods, Macroprudential Regulation and Stability in an Open Economy By Pierre-Richard Agénor; K. Alper; L. Pereira da Silva
  15. Macro-Prudential Policy in a Fisherian model of Financial Innovation By Javier Bianchi; Emine Boz; Enrique G. Mendoza
  16. Empirical Evidence on the Generalized Taylor Principle By Mario Jovanovi´c
  17. Disinflation effects in a medium-scale New Keynesian model: money supply rule versus interest rate rule By Guido Ascari; Tiziano Ropele
  18. How do financial frictions affect the spending multiplier during a liquidity trap? By J. A. CARRILLO; C. POILLY
  19. "What Are the Driving Factors behind the Rise of Spreads and CDSs of Euro-area Sovereign Bonds? A FAVAR Model for Greece and Ireland" By Nicholas Apergis; Emmanuel Mamatzakis
  20. Relative price effects of monetary policy shock in Malaysia: a svar study By Abdul Karim, Zulkefly; Zaidi , Mohd. Azlan Shah; W.N.W, Azman-Saini
  21. External imbalances and financial fragility in the euro area By Pietro Alessandrini; Michele Fratianni; Andrew Hughes Hallett; Andrea Filippo Presbitero
  22. Inflation forecasting in Angola: a fractional approach By Carlos P. Barros; Luis A. Gil-Alana
  23. Contagion Effects in the Aftermath of Lehman's Collapse: Measuring the Collateral Damage By Nicolas Dumontaux; Adrian Pop
  24. Macroprudential banking regulation: Does one size fit all? By Doris Neuberger; Roger Rissi
  25. Bank regulation and stability: An examination of the Basel market risk framework By Alexander, Gordon J.; Baptista, Alexandre M.; Yan, Shu
  26. Milton Friedman, the Demand for Money and the ECB’s Monetary-Policy Strategy By Clive Fraser
  27. Estimating financial institutions’ intraday liquidity risk: a Monte Carlo simulation approach By Carlos León
  28. Capital regulation, liquidity requirements and taxation in a dynamic model of banking By De Nicolò, Gianni; Gamba, Andrea; Luccetta, Marcella

  1. By: Stephen Hall; P.A.V.B. Swamy; George S. Tavlas
    Abstract: The European Central Bank (ECB) assigns a greater weight to the role of money in its monetary-policy strategy than most, if not all, other major central banks. Nevertheless, reflecting the view that the demand for money became unstable in the early-2000s, some commentators in the press have reported that the ECB has “downgraded” the role of money-demand functions in its strategy. This paper explains the ECB’s monetary-policy strategy and shows the considerable influence of Milton Friedman’s contributions on the formulation of that strategy. The paper also provides new evidence on the stability of euro-area money-demand. Following a conjecture made by Friedman (1956), we assign a role to uncertainty in the money-demand function. We find that, although uncertainty is mean–reverting, it is none-the-less non-stationary, subject to wide swings, and has substantial effects on the demand for money.
    Keywords: ECB’s monetary-policy strategy; Milton Friedman; money demand
    JEL: C20 E41
    Date: 2012–04
  2. By: Luis Fernando Melo; Rubén Albeiro Loaiza Maya
    Abstract: Typically, when forecasting inflation rates, there are a variety of individual models and a combination of several of these models. We implement a Bayesian shrinkage combination methodology to include information that is not captured by the individual models using expert forecasts as prior information. To take into account two common characteristics in emerging countries’ economies, possible parameter instabilities and non-stationary dynamics, we use a rolling estimation windows technique for series integrated of order one. The empirical results of Colombian inflation show that the Bayesian forecast combination model outperforms the individual models and the random walk predictions for every evaluated forecast horizon. Moreover, these results outperform shrinkage forecasts that consider other priors as equal or zero weights.
    Keywords: Forecast combination, Shrinkage, Expert forecasts, Rolling window estimation, Inflation forecasts. Classification JEL: C22, C53, C11, E31.
    Date: 2012–04
  3. By: Branimir Jovanovic; Marjan Petreski
    Abstract: The objective of this paper is to assess whether the level of unionization and the rigidity of the exchange rate affected wages and monetary policy in SEE and CIS during the ongoing economic crisis. Towards that end, a New Keynesian model with price and wage rigidities is used. The model is estimated with a panel GMM over the period January 2002 – March 2011 on sample of 19 countries. Several findings emerge. First, the output gap is found not to depend on the real interest rate, in accordance with the underdeveloped financial markets in these economies. Second, inflation is found not to depend on the output gap, but on the wage gap, which stresses the relevance of the labour unions for the inflation dynamics in these countries. Third, the labour wedge that arises from the monopolistic competition in the labour market works mainly through the wage gap, not the output gap, in accordance with the high unemployment in these countries. Fourth, monetary policy responded counter-cyclically during the crisis in countries with weak trade unions, differently from countries with strong unions: in crisis times, weak economy drags wages down in low-unionized countries and monetary policy relaxes in these countries, both due to lower wages and due to the weaker economy; on the other hand, strong unions prevent a weak economy to drag wages down in crisis times and central banks in these countries are found not to react to economic activity, prices or wages. Fifth, the fixed exchange rate is found to restrain monetary policy in times of crisis, too – in countries with flexible exchange rates, monetary policy during the crisis responds to movements in output gap and reserves, in contrast to countries with fixed exchange rate, where monetary policy does not respond to any domestic macroeconomic variable.
    Keywords: monetary policy, fixed exchange rate, wage bargaining, unionization, SEE, CIS
    JEL: E52 F0 F31 J51 P20
    Date: 2012–05
  4. By: Christiane Baumeister; Philip Liu; Haroon Mumtaz
    Abstract: We examine the evolution of the effects of monetary policy shocks on the distribution of disaggregate prices and quantities of personal consumption expenditures to assess the contribution of monetary policy to changes in U.S. inflation dynamics. Given that the transmission of monetary policy to aggregate inflation is determined by the responses of its underlying components, the degree of monetary non-neutrality is ultimately the result of relative price effects at the sectoral level. We provide evidence of considerable heterogeneity in sectoral price responses by introducing time variation in a factoraugmented vector autoregression model. Over time the majority of individual prices respond negatively after a contractionary monetary policy shock and the price dispersion diminishes. We link these empirical findings to a multi-sector DSGE model and show that they are consistent with firms’ heterogeneous pricing decisions and changes in the importance of the cost channel of monetary policy and the degree of wage flexibility.
    Keywords: Econometric and statistical methods; Transmission of monetary policy
    JEL: E30 E32
    Date: 2012
  5. By: Alain Monfort (CREST, University of Maastricht); Jean-Paul Renne (Banque de France)
    Keywords: default risk, liquidity risk, term structure of interest rates, regime switching, euro-area spreads
    JEL: E43 E44 E47 G12 G24
    Date: 2011–07
  6. By: Gliksberg, Baruch (Department of Economics, University of Haifa)
    Abstract: This paper discusses monetary and fiscal interactions in fiscal stress with no outright default. Two distortions prevail in the economy: income taxes and liquidity constraints. Possible obstructions to fiscal policy include: a ceiling on the equilibrium Debt-to-GDP ratio; zero elasticity of tax revenues; a political intolerance of rising tax rates; A Laffer curve emerges endogenously. In equilibrium, fiscal solvency is brought about through adjustments to the level of nominal prices. Three regimes achieve this goal: FC - an interaction of a fiscal rule that targets both output and public debt with a neutral monetary policy; FD - an interaction of a fiscal rule that targets the primary deficit with an active monetary policy; FDA - an interaction of an austere fiscal rule with a passive monetary policy.
    Keywords: Distorting Taxes; Finance Constraint; Fiscal Limits; Fiscal Rules; Fiscal Theory of Prices;
    JEL: E42 E62 E63 H60
    Date: 2012–04–30
  7. By: Greg Farrell (South African Reserve Bank and Wits University); Shakill Hassan (South African Reserve Bank and University of Cape Town); Nicola Viegi (Department of Economics, University of Pretoria)
    Abstract: We examine the high-frequency response of the rand-dollar nominal rate within ten-minute intervals around five minutes before, five minutes after) official inflation announcements, and show that the rand appreciates (respectively, depreciates) on impact when inflation is higher (respectively, lower) than expected. The effect only applies after the adoption of inflation targeting, and is stronger for good news. Our findings are rationalisable by the belief, among market participants, in a credible (though perhaps not particularly aggressive) inflation targeting policy in South Africa; and can be used to monitor changes in currency market perceptions about the monetary policy regime.
    Keywords: High-frequency exchange rates, inflation surprises, Taylor rules, inflation targeting, credibility
    JEL: E31 E52 F30 F31
    Date: 2012–05
  8. By: Jorg Bibow
    Abstract: This paper investigates the causes behind the euro debt crisis, particularly Germany's role in it. It is argued that the crisis is not primarily a "sovereign debt crisis" but rather a (twin) banking and balance of payments crisis. Intra-area competitiveness and current account imbalances, and the corresponding debt flows that such imbalances give rise to, are at the heart of the matter, and they ultimately go back to competitive wage deflation on Germany's part since the late 1990s. Germany broke the golden rule of a monetary union: commitment to a common inflation rate. As a result, the country faces a trilemma of its own making and must make a critical choice, since it cannot have it all--perpetual export surpluses, a no transfer / no bailout monetary union, and a "clean," independent central bank. Misdiagnosis and the wrongly prescribed medication of austerity have made the situation worse by adding a growth crisis to the potpourri of internal stresses that threaten the euro's survival. The crisis in Euroland poses a global "too big to fail" threat, and presents a moral hazard of perhaps unprecedented scale to the global community.
    Keywords: Euro; Monetary Union; Banking Crisis; Balance-of-Payments Crisis; Sovereign Debt Crisis; Competitiveness Imbalances; Fiscal Transfers; Bailouts; Austerity
    JEL: E42 E52 E58 E65 F36 G01
    Date: 2012–05
  9. By: Athanasios Orphanides (Central Bank of Cyprus)
    Abstract: This paper reviews whether and how the ongoing financial crisis has influenced central banking policy practice. Taking a historical perspective, it argues that throughout the existence of central banks the main objective has remained the same¯stability. What has been evolving over time, and has been influenced by the crisis, is our understanding about how to achieve and maintain stability over time. The paper focuses on the role and relative importance of price stability, economic stability and financial stability arguing that while the crisis has not materially shifted views regarding the monetary policy framework, it has highlighted the need for greater emphasis on financial stability than was appreciated before the crisis. It further argues that central banks must not only have a strong role in macro-prudential supervision but have more direct involvement in micro-supervision of the banking sector. Lastly, the paper argues that the crisis has reaffirmed that strong economic governance is a prerequisite for stability in a monetary union and, in the context of the euro area sovereign crisis, discusses the tremendous costs stemming from of lack of sufficient progress regarding economic governance going forward.
    Keywords: Monetary policy, financial stability, economic governance, micro-prudential supervision, macro-prudential supervision
    JEL: E52 E58 E63
    Date: 2011–11
  10. By: Jean-Bernard Chatelain (Centre d'Economie de la Sorbonne - Paris School of Economics); Kirsten Ralf (Ecole Supérieure du Commerce Extérieur (ESCE))
    Abstract: The bargaining power of international banks is currently still very high as compared to what it was at the time of the Bretton Woods conference. As a consequence, systemic financial crises are likely to remain recurrent phenomena with large effects on macroeconomic aggregates. Mainstream macroeconomic models dealing with financial frictions failed to explain at least eight features of the ongoing crisis. We therefore suggest two complementary assumptions : (I) A systemic bankruptcy risk stable equilibrium may be feasible, besides another stable equilibrium related to a stability corridor, (II) inefficient financial markets rarely ensure that the price of an asset is equal to its "fundamental long term value". Both assumptions are compatible with a structural research programme taking into account the Lucas' critique (1976) but may start a creative destruction process of the Lucas' view of business cycles theory.
    Keywords: Asset prices, liquidity trap, monetary policy, financial stability, business cycles, liquidity trap, dynamic stochastic general equilibrium models.
    JEL: E3 E4 E5 E6
    Date: 2012–05
  11. By: Mordecai Avriel (Technion-Israel Institute of Technology); Jens Hilscher (International Business School, Brandeis University); Alon Raviv (International Business School, Brandeis University)
    Abstract: Inflation targeting -- the central bank practice of attempting to keep inflation levels within fixed bounds around a quantitative target -- has been adopted by more than twenty economies. Such practice has an important impact on the stochastic nature of inflation and, consequently, on the pricing of inflation derivatives. We develop a flexible model of inflation targeting in which the central bank's intervention to steer inflation towards the target depends on past deviations and the policymaker's ability or will to enforce the target. We use our model to price inflation derivatives and demonstrate the impact of inflation targeting on derivative pricing.
    Keywords: Infl?ation derivatives, Infl?ation targeting, Target zones, Option pricing
    JEL: G12 G13
    Date: 2012–04
  12. By: Philippe Aghion; Emmanuel Farhi; Enisse Kharroubi
    Abstract: In this paper, we use cross-industry, cross-country panel data to test whether industry growth is positively affected by the interaction between the reactivity of real short term interest rates to the business cycle and industry-level measures of financial constraints. Financial constraints are measured, either by the extent to which an industry is prone to being "credit constrained", or by the extent to which it is prone to being "liquidity constrained". Our main findings are that: (i) the interaction between credit or liquidity constraints and monetary policy countercyclicality, has a positive, significant, and robust impact on the average annual rate of labor productivity in the domestic industry; (ii) these interaction effects tend to be more significant in downturns than in upturns.
    JEL: E32 E43 E52
    Date: 2012–05
  13. By: Layal Mansour (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure - Lyon)
    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
    Date: 2012–05–09
  14. By: Pierre-Richard Agénor; K. Alper; L. Pereira da Silva
    Abstract: We develop a dynamic stochastic model of a middle-income, small open economy with a two-level banking intermediation structure, a risk-sensitive regulatory capital regime, and imperfect capital mobility. Firms borrow from a domestic bank and the bank borrows on world capital markets, in both cases subject to an endogenous premium. A sudden flood in capital flows generates an expansion in credit and activity, and asset price pressures. Countercyclical regulation, in the form of a Basel III-type rule based on real credit gaps, is effective at promoting macroeconomic stability (defined in terms of the volatility of a weighted average of inflation and the output gap) and financial stability (defined in terms of the volatility of a composite index of the nominal exchange rate and house prices). However, because the gain in terms of reduced volatility may exhibit diminishing returns, a countercyclical regulatory rule may need to be supplemented by other, more targeted, macroprudential instruments.
    Date: 2012
  15. By: Javier Bianchi; Emine Boz; Enrique G. Mendoza
    Abstract: The interaction between credit frictions, financial innovation, and a switch from optimistic to pessimistic beliefs played a central role in the 2008 financial crisis. This paper develops a quantitative general equilibrium framework in which this interaction drives the financial amplification mechanism to study the effects of macro-prudential policy. Financial innovation enhances the ability of agents to collateralize assets into debt, but the riskiness of this new regime can only be learned over time. Beliefs about transition probabilities across states with high and low ability to borrow change as agents learn from observed realizations of financial conditions. At the same time, the collateral constraint introduces a pecuniary externality, because agents fail to internalize the effect of their borrowing decisions on asset prices. Quantitative analysis shows that the effectiveness of macro-prudential policy in this environment depends on the government's information set, the tightness of credit constraints and the pace at which optimism surges in the early stages of financial innovation. The policy is least effective when the government is as uninformed as private agents, credit constraints are tight, and optimism builds quickly.
    JEL: D62 D82 E32 E44 F32 F41
    Date: 2012–05
  16. By: Mario Jovanovi´c
    Abstract: During financial crises central banks usually decrease interest rates in order to reduce financial uncertainty. This behavior increases inflation risk. The trade-off between inflation and uncertainty stabilization can be modeled by the generalized Taylor rule, which describes inflation sensitivity as a function of financial uncertainty instead of a constant parameter. Based on the GMM-estimation of the generalized approach I confirm the suggested uncertainty-dependent inflation sensitivity of the Fed. Prolonged deviations from the Taylor principle are not evident. This implies that the Fed does not deemphasize inflation stabilization in favor of uncertainty stabilization – especially during the peak of the latest sub-prime crisis.
    Keywords: Financial instability; time-varying inflation sensitivity
    JEL: E44 E58
    Date: 2012–04
  17. By: Guido Ascari (University of Pavia); Tiziano Ropele (Bank of Italy)
    Abstract: Empirical studies show that successful disinflations entail a period of output contraction. Using a medium-scale New Keynesian model, we compare the effects of disinflations of different speed and timing, implemented through either a money supply or an interest rate rule. In terms of transitional output loss, cold-turkey disinflations under an interest rate rule are less costly than those under a money supply rule and are accomplished more rapidly. Furthermore, gradual or anticipated disinflations deliver lower sacrifice ratios. From a welfare perspective, despite the transitional economic contraction, disinflations are overall welfare-improving. Interestingly, the overall welfare gain is not affected by how the disinflation is actually implemented: what really matters is the achievement of a permanently lower inflation rate.
    Keywords: disinflation, sacrifice ratio, nonlinearities
    JEL: E31 E5
    Date: 2012–04
    Abstract: We show that credit market imperfections substantially increase the government-spending multiplier when the economy enters a liquidity trap. This …finding is explained by the tight association between capital goods and …rmscollateral, a relationship that we highlight as the capital-accumulation channel. During a liquidity trap, a government spending expansion reduces the real interest rate, leading to a period of cheap credit. Entrepreneurs use this time to accumulate capital, which persistently improves their balance sheets and reduces their future costs of credit. A public spending expansion can thus encourage private investment, yielding consequently a large spending multiplier. This effect is further reinforced by Fishers debt- deation channel.
    Keywords: Financial Frictions, Zero Lower Bound, Fiscal Policy
    JEL: E62 E52
    Date: 2012–03
  19. By: Nicholas Apergis; Emmanuel Mamatzakis
    Abstract: This paper examines the underlying dynamics of selected euro-area sovereign bonds by employing a factor-augmenting vector autoregressive (FAVAR) model for the first time in the literature. This methodology allows for identifying the underlying transmission mechanisms of several factors; in particular, market liquidity and credit risk. Departing from the classical structural vector autoregressive (VAR) models, it allows us to relax limitations regarding the choice of variables that could drive spreads and credit default swaps (CDSs) of euro-area sovereign debts. The results show that liquidity, credit risk, and flight to quality drive both spreads and CDSs of five years' maturity over swaps for Greece and Ireland in recent years. Greece, in particular, is facing an elastic demand for its sovereign bonds that further stretches liquidity. Moreover, in current illiquid market conditions spreads will continue to follow a steep upward trend, with certain adverse financial stability implications. In addition, we observe a negative feedback effect from counterparty credit risk.
    Keywords: Sovereign Debt Crisis; Spreads; CDS; FAVAR Model; Greece and Ireland
    JEL: C32 G00 G01
    Date: 2012–05
  20. By: Abdul Karim, Zulkefly; Zaidi , Mohd. Azlan Shah; W.N.W, Azman-Saini
    Abstract: Studies on Malaysia monetary policy mostly examine the effect of monetary policy change on output and inflation in aggregate terms. While sectoral output effects of monetary policy have also been investigated, there is however a lack in the study on the effect of policy change on disaggregated inflation. This paper attempts to examine the later issue by employing structural vector autoregressive (SVAR) model. By estimating the model separately for each sub-group of Malaysian consumer price index, we find that a modest monetary policy shock results in varying degree of responses in disaggregated inflation. In other words, some sub-group inflation react instantly while others respond sluggishly to a monetary policy shock. In contrast to aggregate inflation response, there is also evidence of price puzzle. The results give some insight to monetary authority on how to control inflation in aggregate as well as in disaggregate terms and in turn manage the cost of living issues in Malaysia.
    Keywords: monetary policy; SVAR; inflation; relative price
    JEL: C32 E31 E52
    Date: 2011–06–15
  21. By: Pietro Alessandrini (Universit… Politecnica delle Marche, MoFiR); Michele Fratianni (Indiana University, Kelly School of Business, Bloomington US, Univ. Plitecnica Marche and MoFiR); Andrew Hughes Hallett (George Mason University); Andrea Filippo Presbitero (Universit… Politecnica delle Marche, MoFiR)
    Abstract: This paper presents two views of the European sovereign debt crisis. The first is that the South in the euro zone has been fiscally irresponsible, and has failed to implement supply-side policies such as liberalizing labor markets and the market for services. The second view holds that the crisis reflects a deep divide between the external surpluses of the North and external deficits of the South. Basic stylized facts raise some doubt about the validity of the thesis that the debt crisis in the Eurozone is driven primarily by fiscal fragility in the South. A relatively simple model shows how poor fundamentals can create a debt problem independently of fiscal responsibility. The empirical analysis of the determinants of government bond yield spreads relative to Germany suggests that both views in fact provide useful insights into the roots of the current sovereign crisis. Fiscal fragility and external imbalances explain a significant share of the widening spreads since the onset of the global financial crisis. However, differences in labor productivity growth between North and South assume a much relevant role since the Greek crisis erupted in 2010.
    Keywords: Sovereign yield spreads, adjustment burden, external imbalances, monetary union
    JEL: F32 F42 G12 H63
    Date: 2012–05
  22. By: Carlos P. Barros; Luis A. Gil-Alana
    Abstract: This paper forecasts inflation in Angola with an ARFIMA (AutoRegressive Fractionally Integrated Moving Average) model. It is found that inflation in Angola is a highly persistent variable with an order of integration constrained between 0 and 1. Moreover, a structural break is found in August, 1996. Using the second sub-sample for forecasting purposes, the results reveal that inflation will remain low, assuming that prudent macroeconomic policies are maintained.
    Keywords: Angola; inflation, long memory
    JEL: C22
    Date: 2012–02
  23. By: Nicolas Dumontaux (Banque de France - Banque de France); Adrian Pop (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272)
    Abstract: The spectacular failure of the 150-year old investment bank Lehman Brothers on September 15th, 2008 was a major turning point in the global financial crisis that broke out in the summer 2007. Through the use of stock market data and Credit Default Swap (CDS) spreads, this paper examines the investors' reaction to Lehman's collapse in an attempt to identify a contagion effect on the surviving financial institutions. The empirical analysis indicates that (i) the collateral damages were limited to the largest financial firms; (ii) the most affected institutions were the surviving "non-bank" financial services firms (mortgage and specialty finance, investment services, and diversified financial services firms); (iii) the negative effect was correlated with financial conditions of the surviving institutions. We also detect significant abnormal jumps in the CDS spreads after Lehman's failure that we interpret as evidence of sudden upward revisions in the market assessment of future default probabilities for the surviving financial firms.
    Keywords: systemic risk; financial crisis; bank failures; contagion; bailout; regulation; Credit Default Swap
    Date: 2012–05–09
  24. By: Doris Neuberger (University of Rostock); Roger Rissi (Lucerne University of Applied Sciences and Arts)
    Abstract: The macroprudential regulatory framework of Basel III imposes the same capital and liquidity requirements on all banks around the world to ensure global competitiveness of banks. Using an agent-based model of the financial system, we find that this is not a robust framework to achieve (inter)national financial stability, because efficient regulation has to embrace the economic structure and behaviour of financial market participants, which differ from country to country. Market-based financial systems do not profit from capital and liquidity regulations, but from a ban on proprietary trading (Volcker rule). In homogeneous or bank-based financial systems, the most effective regulatory policy to ensure financial stability depends on the stability measure used. Irrespective of financial system architecture, direct restrictions of banks’ investment portfolios are more effective than indirect restrictions through capital, leverage and liquidity regulations.
    Keywords: financial stability, systemic risk, financial system, banking regulation, agent-based model
    JEL: C63 G01 G11 G21 G28
    Date: 2012
  25. By: Alexander, Gordon J.; Baptista, Alexandre M.; Yan, Shu
    Abstract: In attempting to promote bank stability, the Basel Committee on Banking Supervision (2006) provides a framework that seeks to control the amount of tail risk that large banks take in their trading books. However, banks around the world suffered sizeable trading losses during the recent crisis. Due to the size and prevalence of losses, a formal examination of whether the Basel framework allows banks to take substantive tail risk in their trading books without a capital requirement penalty is of particular interest. In this paper, we provide such an examination and show that the Basel framework indeed allows banks to do so. Hence, our paper supports the view that the Basel framework leaves room for considerable improvements regarding the treatment of tail risk. --
    Keywords: Bank regulation,bank stability,Basel framework,crisis,tail risk
    JEL: G11 G21 G28 D81
    Date: 2012
  26. By: Clive Fraser
    Abstract: I model a single-club economy with heterogeneous consumers as an aggregative game. I give a sufficient condition, normality of demand for the club good in full income, for the existence and uniqueness of a Nash equilbrium by the Cornes-Hartley (2007) method. Then, confining attention to club quality functions that are homogeneous in the investment in the club facility and the aggregate usage of the club, I examine when the sufficient condition is satisfied. I show that, under common assumptions on the utility function, this occurs for all positive degrees of homogeneity.
    Keywords: Nash equilibrium; heterogeneous clubs; aggregative game; homogeneous function; existence; uniqueness
    JEL: C7 D1 D5 H4
    Date: 2012–03
  27. By: Carlos León
    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.
    Keywords: Payments Systems, Intraday, Liquidity Risk, Bivariate Poisson process, Monte Carlo Simulation, Liquidity Buffer, Oversight. Classification JEL: C15, C63, E47, G17, D81.
    Date: 2012–04
  28. By: De Nicolò, Gianni; Gamba, Andrea; Luccetta, Marcella
    Abstract: This paper studies the impact of bank regulation and taxation in a dynamic model where banks are exposed to credit and liquidity risk and can resolve financial distress in three costly forms: bond issuance, equity issuance or fire sales. 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 threshold. By contrast, liquidity requirements reduce lending, efficiency and welfare significantly. On taxation, corporate income taxes generate higher government revenues and entail lower efficiency and welfare costs than taxes on non-deposit liabilities. --
    Keywords: Bank Regulation,Taxation,Dynamic Banking Model
    JEL: G21 G28 G33
    Date: 2012

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