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on Central Banking |
| By: | M. Falagiarda; M. Marzo |
| Abstract: | In this paper, we propose a DSGE model with the term structure of interest rates drawing on the framework introduced by Andrés et al. (2004) and Marzo et al. (2008). In particular, we reproduce segmentation in financial markets by introducing bonds of different maturities and bond adjustment costs non-zero at the steady state, introducing a structural liquidity frictions among bonds with different maturities: agents are assumed to pay a cost whenever they trade bonds. As a result, the model is able to generate a non-zero demand for bonds of different maturities, which become imperfect substitutes, due to differential liquidity conditions. The main properties of the model are analysed through both simulation and estimation exercises. The importance of the results are twofold. On one hand, the calibrated model is able to replicate the stylized facts regarding the yield curve and the term premium in the US over the period 1987:3-2011:3, without compromising its ability to match macro dynamics. On the other hand, the estimation, besides providing an empirical support to the theoretical setting, highlights the potentialities of the model to analyze the term premium in a microfounded macro framework. The results match very closely the behavior of actual yields, reflecting the recent activity of the Fed on longer maturities bonds. |
| JEL: | C5 E32 E37 E43 E44 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:wp830&r=cba |
| By: | Saroj Bhattarai; Jae Won Lee; Woong Yong Park |
| Abstract: | Using an estimated DSGE model that features monetary and fiscal policy interactions and allows for equilibrium indeterminacy, we find that a passive monetary and passive fiscal policy regime prevailed in the pre-Volcker period while an active monetary and passive fiscal policy regime prevailed post-Volcker. Since both monetary and fiscal policies were passive pre-Volcker, there was equilibrium indeterminacy which resulted in substantially different transmission mechanisms of policy as compared to conventional models: unanticipated increases in interest rates increased inflation and output while unanticipated increases in lump-sum taxes decreased inflation and output. Unanticipated shifts in monetary and fiscal policies however, played no substantial role in explaining the variation of inflation and output at any horizon in either of the time periods. Pre-Volcker, in sharp contrast to post- Volcker, we find that a time-varying inflation target does not explain low-frequency movements in inflation. A combination of shocks account for the dynamics of output, inflation, and government debt, with the relative importance of a particular shock quite different in the two time-periods due to changes in the systematic responses of policy. Finally, in a counterfactual exercise, we show that had the monetary policy regime of the post-Volcker era been in place pre-Volcker, inflation volatility would have been lower by 34% and the rise of inflation in the 1970s would not have occurred. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:109&r=cba |
| By: | Alexander Chudik; Marcel Fratzscher |
| Abstract: | The paper analyses the transmission of liquidity shocks and risk shocks to global financial markets. Using a Global VAR methodology, the findings reveal fundamental differences in the transmission strength and pattern between the 2007–08 financial crisis and the 2010–11 sovereign debt crisis. Unlike in the former crisis, emerging market economies have become much more resilient to adverse shocks in 2010–11. Moreover, a fight-to-safety phenomenon across asset classes has become particularly strong during the 2010–11 sovereign debt crisis, with risk shocks driving down bond yields in key advanced economies. The paper relates this evolving transmission pattern to portfolio choice decisions by investors and finds that countries' sovereign rating, quality of institutions and their financial exposure are determinants of cross-country differences in the transmission. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:107&r=cba |
| By: | Gunther Schnabl (Institute for Economic Policy, University of Leipzig) |
| Abstract: | The paper identifies based on the monetary overinvestment theories by Wicksell (1898), Mises (1912) and Hayek (1929) monetary policy mistakes in large industrial countries issuing international currencies. It its argued that a neglect towards monetary policy reform in a world dominated by financial markets has led to the erosion of the allocation and signaling function of the interest rate, which has triggered an excessive rise of the government debt and structural distortions in the world economy. The backlash of high government debt levels on monetary policy making is argued to have led to a hysteresis of the liquidity trap. In this context, monetary reform is discussed with respect to the exit from low interest rate and high debt policies, an adaption of monetary policy rules to financial market dominated economic development, and the displacement of the prevalent world monetary system. Enhanced competition between dollar and euro as international currencies moderated by East Asia is proposed to constitute a more stable international monetary system. |
| Keywords: | Economic Instability, Credit Cycles, Monetary Policy, Hayek, Mises, Monetary Policy Rules, Monetary Policy Reform, Currency Competition |
| JEL: | E42 E58 F33 F44 |
| Date: | 2012–05–28 |
| URL: | http://d.repec.org/n?u=RePEc:hlj:hljwrp:26-2012&r=cba |
| By: | Julian A. Parra POlanía |
| Abstract: | To evaluate whether transparency is beneficial, it is usual to assume that the central bank may choose one of two options, opacity versus truthful communication. However, the monetary policymaker may have incentives to misrepresent private information so as to reduce economic volatility by manipulating inflation expectations. Using a standard model, this paper points out the fact that if misrepresentation is included as a possible action there is no rational expectations equilibrium with inflation announcements. Therefore, even if transparency is preferred over secrecy the central bank cannot credibly commit to truth-telling, in contrast to what is commonly assumed in the literature on transparency. |
| Keywords: | Central Bank Announcements, Monetary Policy, Transparency. Classification JEL:E52, E58, D82 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:711&r=cba |
| By: | Vladislav Prokopov (International Business School, Brandeis University) |
| Abstract: | The global financial crisis revealed the fragility of the global fnancial framework under the current Basel agreements and provided an impetus not only for curtailing the risky activity of banks but also for rethinking what affects the stability of the global fnancial system. The recent Basel III agreement was designed to provide additional levers that should make national fnancial systems, and by extension the global fnancial system, stronger. This paper discusses the key fndings of a global survey of fnancial, economic and political stakeholders conducted by students from Brandeis International Business School on whether the Basel III agreement will be able to construct and maintain a sound financial regulatory framework. |
| Keywords: | Debt, Basel III, global financial system, banks, regulatory framework, regulations, banking |
| JEL: | G32 L26 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bui:rosgfb:04&r=cba |
| By: | Cousin, Violaine |
| Abstract: | The complexity of Basel II and III has reached China as well. In a revolutionary turn within seven years, the Chinese bank regulator has introduced capital adequacy as the tool of choice for supervision and ensured that banks in the process remain focused on implementing all the bits of the internationally developed Basel Accords. Will it make Chinese banks really more resilient? |
| Keywords: | bank; regulation; Basel II and III; China |
| JEL: | G38 G28 |
| Date: | 2012–05–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:39142&r=cba |
| By: | Moayedi, Vafa; Aminfard, Matin |
| Abstract: | This study examines the relationship between Japan’s financial structure and the country’s fiscal/monetary policy. Vector Error Correction models are utilized to investigate the effect of policy shocks on financial structure development during a sample period of 48 years. Our findings reveal signs of an existing long-run relationship between policy variables and financial structure. Policymakers in Japan may have effectively influenced Japan’s financial structure development via fiscal and monetary actions. This result strengthens the assumption of a volatile financial structure due to policy interference. This study is the first of its kind and is intended to stimulate further research and debate. |
| Keywords: | Financial Structure; Fiscal Policy; Japan; Monetary Policy; VEC |
| JEL: | E62 E63 |
| Date: | 2011–12–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:39185&r=cba |
| By: | Ivan Kitov |
| Abstract: | There is an extensive historical dataset on real GDP per capita prepared by Angus Maddison. This dataset covers the period since 1870 with continuous annual estimates in developed countries. All time series for individual economies have a clear structural break between 1940 and 1950. The behavior before 1940 and after 1950 can be accurately (R2 from 0.7 to 0.99) approximated by linear time trends. The corresponding slopes of regressions lines before and after the break differ by a factor of 4 (Switzerland) to 19 (Spain). We have extrapolated the early trends into the second interval and obtained much lower estimates of real GDP per capita in 2011: from 2.4 (Switzerland) to 5.0 (Japan) times smaller than the current levels. When the current linear trends are extrapolated into the past, they intercept the zero line between 1908 (Switzerland) and 1944 (Japan). There is likely an internal conflict between the estimating procedures before 1940 and after 1950. A reasonable explanation of the discrepancy is that the GDP deflator in developed countries has been highly underestimated since 1950. In the USA, the GDP deflator is underestimated by a factor of 1.4. This is exactly the ratio of the interest rate controlled by the Federal Reserve and the rate of inflation. Hence, the Federal Reserve actually retains its interest rate at the level of true price inflation when corrected for the bias in the GDP deflator. |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1206.0450&r=cba |
| By: | Andreas Bachmann |
| Abstract: | The extent to which exchange rate fluctuations are passed through to domestic prices is of high relevance for open economies and for monetary authorities targeting price stability. Existing empirical studies estimating the exchange rate pass-through for Switzerland are based on either single equation estimation or on VAR models. However, these approaches feature some major drawbacks. The former cannot account for dynamic interactions between the time series and both methods disregard long-run equilibrium relations between the variable levels. This paper contributes to the evidence on the exchange rate pass-through in Switzerland by using a vector error correction model, which has the advantage of incorporating both short-run dynamics and long-run equilibrium relations among variables. The results reveal a significant impact of exchange rate shocks on various price (sub-)indices. Pass-through to import prices is substantial both in the short-run and in the long-run and occurs relatively quickly. It is slower, but still considerable in the long-run for the consumer price index and some of its sub-indices. Producer prices react significantly to exchange rate shocks as well. In contrast, consumer price inflation for services and for goods of domestic origin show hardly any significant response. The findings of this paper indicate a decline in the pass-through over time. |
| Keywords: | Exchange rate pass-through; consumer prices; import prices; cointegration; vector error correction models; new open economy macroeconomic model |
| JEL: | E31 F31 F41 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:ube:dpvwib:dp1205&r=cba |
| By: | Jens H.E. Christensen; Jose A. Lopez; Glenn D. Rudebusch |
| Abstract: | We use an arbitrage-free term structure model with spanned stochastic volatility to determine the value of the deflation protection option embedded in Treasury inflation-protected securities (TIPS). The model accurately prices the deflation protection option prior to the financial crisis when its value was near zero; at the peak of the crisis in late 2008 when deflationary concerns spiked sharply; and in the post-crisis period. During 2009, the average value of this option at the five-year maturity was 41 basis points on a par-yield basis. |
| Keywords: | Deflation (Finance) ; Inflation-indexed bonds - United States |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2012-07&r=cba |
| By: | Michael Brei (EconomiX - CNRS : UMR7166 - Université Paris X - Paris Ouest Nanterre La Défense); Carlos Winograd (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, Université d'Evry - Val d'Essonne - Université d'Evry - Val d'Essonne, PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA) |
| Abstract: | This paper analyzes the risk taking of branches and subsidiaries of international bank holding institutions from the perspective of host country regulators in two Latin American financial systems: Argentina and Uruguay. Using both theory and empirics, we analyze differences in the risk attitudes of these institutions in the run up to the major financial crises of 2001-02. The empirical part of this paper is based on a rich bank-level dataset on corporate structures, balance sheets, and ownership of banks. We find that foreign banks branches have taken on fewer risks than subsidiaries and relate this to differences in the legal responsibility of parent banks. This research not only shows original results concerning banks corporate strategies in the face of country risk, but also contributes to the debate on appropriate banking regulation. |
| Keywords: | Financial Crises ; Argentina ; Uruguay ; Bank Corporate |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:hal:psewpa:halshs-00703738&r=cba |
| By: | César Calderón; Roberto Duncan; Klaus Schmidt-Hebbel |
| Abstract: | The literature has argued that developing countries are unable to adopt countercyclical monetary and fiscal policies due to financial imperfections and unfavorable political-economy conditions. Using a world sample of 115 industrial and developing countries for 1984-2008, we find that the level of institutional quality plays a key role in countries’ ability to implement counter-cyclical macroeconomic policies. The results show that countries with strong (weak) institutions adopt counter- (pro-) cyclical macroeconomic policies, reflected inextended monetary policy and fiscal policy rules. The threshold level of institutional quality at which monetary and fiscal policies are a-cyclical is found to be similar. |
| Keywords: | Counter-cyclical macroeconomic policies, institutions, fiscal policy, monetary policy |
| JEL: | E43 E52 E62 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:ioe:doctra:419&r=cba |
| By: | Jenny Poschmann (School of Economics and Business Administration, Friedrich-Schiller-University Jena) |
| Abstract: | Even though the sector of Non-bank financial intermediaries (NBFI) or shadow banks represent a large part of the contemporary financial system, these institutions received almost no attention in macroeconomic studies so far. Their presence has significant influence on the conduct of monetary policy and systemic risk within the financial system. Therefore, it is important to understand the nexus within the shadow banking sector and connections with the traditional banking sector. This work will examine specific institutions involved in the shadow banking system and their development. A stylized banking sector including NBFI will be introduced and provides the starting point for subsequent research on monetary transmission. |
| Keywords: | shadow banking, financial intermediation, financial architecture, monetary policy |
| JEL: | G10 E44 |
| Date: | 2012–05–28 |
| URL: | http://d.repec.org/n?u=RePEc:hlj:hljwrp:27-2012&r=cba |