nep-cba New Economics Papers
on Central Banking
Issue of 2012‒06‒05
fifteen papers chosen by
Maria Semenova
Higher School of Economics

  1. Realised and Optimal Monetary Policy Rules in an Estimated Markov-Switching DSGE Model of the United Kingdom By Chen, Xiaoshan; MacDonald, Ronald
  2. Liquidity Traps and Expectation Dynamics: Fiscal Stimulus or Fiscal Austerity? By Jess Benhabib; George W. Evans; Seppo Honkapohja
  3. Forecasting UK GDP growth, inflation and interest rates under structural change: a comparison of models with time-varying parameters By Barnett, Alina; Mumtaz, Haroon; Theodoridis, Konstantinos
  4. The Dynamics of UK and US Inflation Expectations By Gefang, Deborah; Koop, Gary; Potter, Simon M.
  5. On Measuring the Efficiency of Monetary Policy By Briec, Walter; Gabillon, Emmanuelle; Lasselle, Laurence
  6. Forecasting Inflation Using Dynamic Model Averaging By Koop, Gary; Korobilis, Dimitris
  7. Understanding Liquidity and Credit Risks in the Financial Crisis By Gefang, Deborah; Koop, Gary; Potter, Simon M.
  8. Fixed interest rates over finite horizons By Blake, Andrew
  9. Securitized Banking, Asymmetric Information, and Financial Crisis: Regulating Systemic Risk Away By Sudipto Bhattacharya; Georgy Chabakauri; Kjell G. Nyborg
  10. Macroprudential Policy, Countercyclical Bank Capital Buffers and Credit Supply: Evidence from the Spanish Dynamic Provisioning Experiments By Gabriel Jiménez; Steven Ongena; José-Luis Peydró; Jesús Saurina
  11. Ensuring Stability and Efficiency of the Hungarian Financial Sector By Olena Havrylchyk
  12. Regulatory Arbitrage and International Bank Flows By Joel F. Houston; Chen Lin; Yue Ma
  13. The Insufficiency of Traditional Safety Nets: What Bank Resolution Fund for Europe? By Maria J. Nieto; Gillian G. Garcia
  14. Creditor Rights, Country Governance, and Corporate Cash Holdings By Bruce Seifert; Olubunmi Faleye; Halit Gonenc
  15. Asymmetric information and financial markets By Estrada, Fernando

  1. By: Chen, Xiaoshan; MacDonald, Ronald
    Abstract: This paper investigates underlying changes in the UK economy over the past thirtyfive years using a small open economy DSGE model. Using Bayesian analysis, we find UK monetary policy, nominal price rigidity and exogenous shocks, are all subject to regime shifting. A model incorporating these changes is used to estimate the realised monetary policy and derive the optimal monetary policy for the UK. This allows us to assess the effectiveness of the realised policy in terms of stabilising economic fluctuations, and, in turn, provide an indication of whether there is room for monetary authorities to further improve their policies.
    Keywords: Markov-switching, Bayesian analysis, DSGE models,
    Date: 2011
  2. By: Jess Benhabib; George W. Evans; Seppo Honkapohja
    Abstract: We examine global dynamics under infinite-horizon learning in New Keynesian models where the interest-rate rule is subject to the zero lower bound. As in Evans, Guse and Honkapohja (2008), the intended steady state is locally but not globally stable. Unstable deflationary paths emerge after large pessimistic shocks to expectations. For large expectation shocks that push interest rates to the zero bound, a temporary fiscal stimulus or a policy of fiscal austerity, appropriately tailored in magnitude and duration, will insulate the economy from deflation traps. However "fiscal switching rules" that automatically kick in without discretionary fine tuning can be equally effective.
    JEL: E52 E58 E63
    Date: 2012–05
  3. By: Barnett, Alina (Bank of England); Mumtaz, Haroon (Bank of England); Theodoridis, Konstantinos (Bank of England)
    Abstract: Evidence from a large and growing empirical literature strongly suggests that there have been changes in inflation and output dynamics in the United Kingdom. This is largely based on a class of econometric models that allow for time-variation in coefficients and volatilities of shocks. While these have been used extensively to study evolving dynamics and for structural analysis, there is little evidence on their usefulness in forecasting UK output growth, inflation and the short-term interest rate. This paper attempts to fill this gap by comparing the performance of a wide variety of time-varying parameter models in forecasting output growth, inflation and a short rate. We find that allowing for time-varying parameters can lead to large and statistically significant gains in forecast accuracy.
    Keywords: Time-varying parameters; stochastic volatility; VAR; FAVAR; forecasting; Bayesian estimation
    JEL: C32 E37 E47
    Date: 2012–05–18
  4. By: Gefang, Deborah; Koop, Gary; Potter, Simon M.
    Abstract: This paper investigates the relationship between short term and long term inflation expectations in the US and the UK with a focus on inflation pass through (i.e. how changes in short term expectations affect long term expectations). An econometric methodology is used which allows us to uncover the relationship between inflation pass through and various explanatory variables. We relate our empirical results to theoretical models of anchored, contained and unmoored inflation expectations. For neither country do we fi nd anchored or unmoored inflation expectations. For the US, contained inflation expectations are found. For the UK, our findings are not consistent with the specifi c model of contained inflation expectations presented here, but are consistent with a more broad view of expectations being constrained by the existence of an inflation target.
    Date: 2011
  5. By: Briec, Walter; Gabillon, Emmanuelle; Lasselle, Laurence
    Abstract: Cecchetti et al. (2006) develop a method for allocating macroeconomic performance changes among the structure of the economy, variability of supply shocks and monetary policy. We propose a dual approach of their method by borrowing well-known tools from production theory, namely the Farrell measure and the Malmquist index. Following FÄare et al (1994) we propose a decomposition of the efficiency of monetary policy. It is shown that the global efficiency changes can be rewritten as the product of the changes in macroeconomic performance, minimum quadratic loss, and efficiency frontier.
    Keywords: e±ciency frontier, inflation variability, Farrell measure, Malmquist index,
    Date: 2011
  6. By: Koop, Gary; Korobilis, Dimitris
    Abstract: We forecast quarterly US inflation based on the generalized Phillips curve using econometric methods which incorporate dynamic model averaging. These methods not only allow for coe¢ cients to change over time, but also allow for the entire forecasting model to change over time. We nd that dynamic model averaging leads to substantial forecasting improvements over simple benchmark regressions and more sophisticated approaches such as those using time varying coe¢ cient models. We also provide evidence on which sets of predictors are relevant for forecasting in each period.
    Keywords: Bayesian, State space model, Phillips curve,
    Date: 2011
  7. By: Gefang, Deborah; Koop, Gary; Potter, Simon M.
    Abstract: This paper develops a structured dynamic factor model for the spreads between London Interbank Offered Rate (LIBOR) and overnight index swap (OIS) rates for a panel of banks. Our model involves latent factors which reflect liquidity and credit risk. Our empirical results show that surges in the short term LIBOR-OIS spreads during the 2007-2009 fi nancial crisis were largely driven by liquidity risk. However, credit risk played a more signifi cant role in the longer term (twelve-month) LIBOR-OIS spread. The liquidity risk factors are more volatile than the credit risk factor. Most of the familiar events in the financial crisis are linked more to movements in liquidity risk than credit risk.
    Date: 2011
  8. By: Blake, Andrew (Bank of England)
    Abstract: We consider finite horizon conditioning paths for nominal interest rates in New Keynesian monetary policy models. This is done two ways. First, we develop a simple way to use policy interventions in the form of interest rate shocks to achieve the conditioning path and show this yields a unique solution. We then modify this method to generate an infinity of solutions making the model better behaved but effectively indeterminate. Second, we use two-part rules where a specially designed targeting rule generates fixed interest rates endogenously over the initial period before reverting to a more conventional instrument rule. We show that the two approaches are equivalent. We discuss appropriate selection criteria over the resulting equilibria.
    Keywords: Fixed nominal interest rates; uniqueness; indeterminacy
    JEL: C63 E47 E61
    Date: 2012–05–18
  9. By: Sudipto Bhattacharya; Georgy Chabakauri; Kjell G. Nyborg
    Abstract: We develop a model of securitized (Originate, then Distribute) lending, in which both publicly observed aggregate shocks to values of securitized loan portfolios, and later some asymmetrically observed discernment of varying qualities of subsets thereof, play crucial roles. We nd that originators and potential buyers of such assets may dier in their preferences over their timing of trades, leading to a reduction in the aggregate surplus accruing from securitization. In addition, heterogeneity in sellers' selected timing of trades { arising from dierences in their ex ante beliefs { coupled with initial leverage choices based on pre-shock prices, may lead to nancial crises, implying uncoordinated asset liquidations inconsistent with any inter-temporal market equilibrium. We consider and contrast two mitigating regulatory interventions: leverage restrictions, and ex ante specied resale price guarantees on securitized asset portfolios. We show that the latter tool performs strictly better than the former, by ensuring not only bank survival, but also enhanced social surplus arising from securitized lending. It does so by inducing a more coordinated market equilibrium, that does not lead to interim leverage buildup to support a \cherry picking" seller trading strategy.
    Date: 2012–05
  10. By: Gabriel Jiménez; Steven Ongena; José-Luis Peydró; Jesús Saurina
    Abstract: We analyze the impact of the countercyclical capital buffers held by banks on the supply of credit to firms and their subsequent performance. Countercyclical ‘‘dynamic’’ provisioning that is unrelated to specific loan losses was introduced in Spain in 2000, and modified in 2005 and 2008. These policy experiments which entailed bank-specific shocks to capital buffers, combined with the financial crisis that shocked banks according to their available pre-crisis buffers, underpin our identification strategy. Our estimates from comprehensive bank-, firm-, loan-, and loan application-level data suggest that countercyclical capital buffers help smooth credit supply cycles and in bad times have positive effects on firm credit availability, assets, employment and survival. Our findings therefore hold important implications for theory and macroprudential policy.
    Keywords: bank capital, dynamic provisioning, credit availability, financial crisis
    JEL: E51 E58 E60 G21 G28
    Date: 2012–05
  11. By: Olena Havrylchyk
    Abstract: Loan creation has not recovered after the crisis owing to a combination of demand and supply factors. Although the banking sector is sufficiently capitalised in the short term, banks are deleveraging by cutting down their dependence on cross-border financing. The ability of the financial sector to supply credit has been further stifled by a high financial levy, a de facto ban on foreign currency lending for mortgages, future uncertainties about parent banks’ funding and undermined creditors’ rights. Up to recently, new measures to restructure household loans did not help borrowers with real repayment difficulties while weakening banks’ solvency. The mid-December 2011 agreement between the government and the banking sector was a welcome step towards fair burden sharing. Bank recapitalisation, if necessary, should be done by raising the level of capital so as not to downsize loan portfolios. In the long term, the demand for credit is hampered by large price-cost margins, which call for stiffer competition. The development of the financial markets has also been adversely affected by the de facto nationalisation of mandatory pension funds, which played a crucial role in the accumulation of long-term savings. The regulation of mandatory and voluntary pension funds requires harmonisation and transparency to increase their cost-efficiency. An effective cooperation between micro and macro-prudential regulation should be ensured in practice and the financial independence of the financial supervisor strengthened. Co-operation between host and home regulatory authorities should be enhanced in a manner that accounts for systemic risks in Hungary. Finally, an effective independence of the central bank has to be guaranteed. This Working Paper relates to the 2012 OECD Economic Survey of Hungary (<P>Assurer la stabilité et l'efficience du secteur financier hongrois<BR>La production de prêts n’a pas redémarré à l’issue de la crise du fait d’une combinaison de facteurs liés à l’offre et la demande. Bien que les banques soient suffisamment capitalisées à court terme, elles diminuent leur effet de levier en réduisant leur dépendance aux financements transnationaux. La capacité du secteur financier à offrir des crédits a de plus été bridée par une taxe financière élevée, une interdiction de fait des prêts en devises, des incertitudes quant aux financements futurs émanant des maisons mères et une limitation des droits des créanciers. Jusqu’à récemment, les nouvelles mesures de restructuration des prêts ne permettaient pas d’aider les ménages confrontés à de réelles difficultés de remboursement, et réduisaient la solvabilité des banques. L’accord conclu à la mi décembre 2011 entre le gouvernement et les banques marque une étape bienvenue vers un juste partage de la charge de restructuration. La recapitalisation éventuelle des banques doit passer par une augmentation de capital afin de ne pas réduire le portefeuille de prêts. À long terme, la demande de crédit se voit freinée par des taux de marge élevés, ce qui milite en faveur d’une concurrence accrue. Le développement des marchés financiers a également subi les conséquences de la nationalisation de fait des fonds de pension obligatoires, qui ont joué un rôle essentiel dans l’accumulation de l’épargne à long terme. La réglementation des fonds de pension obligatoires et des fonds volontaires doit mettre l’accent sur l’harmonisation et la transparence afin d’augmenter leur efficacité-coût. Une coopération effective entre la réglementation prudentielle au niveau micro et macro doit être assurée et l’indépendance financière de l’autorité de supervision financière accrue. La coopération entre les autorités de tutelle des pays d’accueil et leurs homologues étrangers doit être renforcée de manière à tenir compte des risques systémiques en Hongrie. Enfin, une indépendance effective de la banque centrale doit être garantie. Ce Document de travail se rapporte à l’Étude économique de l’OCDE de la Hongrie, 2012 (
    Keywords: Hungary, competition, cost-efficiency, financial stability, banks, pension funds, Hongrie, concurrence, fonds de pension, stabilité financière, banques, efficience-coût
    JEL: D4 G21 G23 G28
    Date: 2012–05–23
  12. By: Joel F. Houston (University of Florida); Chen Lin (The Chinese University of Hong Kong and Hong Kong Institute for Monetary Research); Yue Ma (Lingnan University and Hong Kong Institute for Monetary Research)
    Abstract: We study whether cross-country differences in regulations have affected international bank flows. We find strong evidence that banks have transferred funds to markets with fewer regulations. This form of regulatory arbitrage suggests there may be a destructive "race to the bottom" in global regulations which restricts domestic regulators' ability to limit bank risk-taking. However, we also find that the links between regulation differences and bank flows are significantly stronger if the recipient country is a developed country with strong property rights and creditor rights. This suggests that while differences in regulations have important influences, that without a strong institutional environment, lax regulations are not enough to encourage massive capital flows.
    Date: 2012–05
  13. By: Maria J. Nieto; Gillian G. Garcia
    Abstract: This paper analyzes the rationale for Bank Recovery and Resolution Funds (BRRFs) in the context of the present European Union’s (EU) decentralized safety net. As compared to pure micro and macro prudential regulation, BRRF’s objective is to limit losses given financial institutions´ default while allowing for a balanced share of costs between private investors and tax payers. Most important, BRRFs contribute to shifting the government’s tradeoff between bailing out and restructuring in favor of restructuring, to the extent that there is also an effective bank resolution legal framework. In turn, banks´ contributions to BRRFs aim at discouraging their excess systemic risk creation particularly through financial system leverage. The paper makes some reflections on the governance aspects of BRRFs that would require minimum harmonization in the EU, emphasizing that BRRFs are only one institutional component of financial institutions´ effective and credible resolution regime. This paper focuses on depository institutions, but the rationale of BRRFs could be extended to other credit institutions.
    Date: 2012–05
  14. By: Bruce Seifert (Old Dominion University); Olubunmi Faleye (Northeastern University); Halit Gonenc (University of Groningen)
    Abstract: This study examines the impact of creditor rights on cash holdings using a sample of firms from 48 countries. We argue that creditor rights affect the willingness of lenders to provide credit, which in turn affects the need for internal liquidity and cash holdings. Consistent with this, we find that corporate cash holdings decline with the strength of creditor rights. We also find that this relation depends on the quality of country governance. Among well-governed countries, firms hold less cash as creditor rights strengthen. In contrast, cash holdings increase with creditor rights in poorly governed countries. In these countries, it appears that the fear of expropriation motivates creditors with stronger rights to require higher levels of cash holding by borrowers.
    Keywords: Corporate governance; Cash levels; Creditor rights; International markets.
    JEL: G34 G32 G15
    Date: 2012–05
  15. By: Estrada, Fernando
    Abstract: This paper aims to explore the relevance of the Asymmetric Information and the Theory of Argumentation TA in the complex area of financial crises. Specifically, we investigated the scope of the phenomenon of persuasion in advertising. It examines advertisements in publications notable economic movement in Colombia. The financial communication is important to distinguish how to run the models of behavior based on beliefs of agents. Consequently, investors' beliefs can also change systematically with changes in market prices
    Keywords: Financial crises; Financial markets; economy; theory argumentation; information; advertising
    JEL: G14 G11 D81 M3 M37 D8 D85 G01
    Date: 2012

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