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on Central Banking |
| By: | Jaromir Baxa; Miroslav Plasil; Borek Vasicek |
| Abstract: | The purpose of this paper is to provide a novel look at the evolution of inflation dynamics in selected Central European (CE) countries. We use the lens of the New Keynesian Phillips Curve (NKPC) nested within a time-varying framework. Exploiting a time-varying regression model with stochastic volatility estimated using Bayesian techniques, we analyze both the closed and open-economy version of the NKPC. The results point to significant differences between the inflation processes in three CE countries. While inflation persistence has almost disappeared in the Czech Republic, it remains rather high in Hungary and Poland. In addition, the volatility of inflation shocks decreased quickly a few years after the adoption of inflation targeting in the Czech Republic and Poland, whereas it remains quite stable in Hungary even after ten years' experience of inflation targeting. Our results thus suggest that the degree of anchoring of inflation expectations varies across CE coutries. In addition, we found some evidence that the 'structural' parameters of the NKPC are somewhat related to the macroeconomic environment. |
| Keywords: | Bayesian model averaging, Central European countries, inflation dynamics, New Keynesian Phillips curve, time-varying parameter |
| JEL: | C11 C22 E31 E52 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2012/04&r=cba |
| By: | Yunus Aksoy (University of London); Henrique S. Basso (University of Warwick) |
| Abstract: | We propose a model that delivers endogenous variations in term spreads driven primarily by banks’ portfolio decision and their appetite to bear the risk of maturity transformation. We first show that fluctuations of the future profitability of banks’ portfolios affect their ability to cover for any liquidity shortage and hence influence the premium they require to carry maturity risk. During a boom, profitability is increasing and thus spreads are low, while during a recession profitability is decreasing and spreads are high, in accordance with the cyclical properties of term spreads in the data. Second, we use the model to look at monetary policy and show that allowing banks to sell long-term assets to the central bank after a liquidity shock leads to a sharp decrease in long-term rates and term spreads. Such interventions have significant impact on long-term investment, decreasing the amplitude of output responses after a liquidity shock. The short-term rate does not need to be decreased as much and inflation turns out to be much higher than if no QE interventions were implemented. Finally, we provide macro and micro-econometric evidence for the U.S. confirming the importance of expected financial business profitability in the determination of term spread fluctuations |
| Keywords: | Yield Curve, Quantitative Easing, Maturity Risk, Bank Portfolio |
| JEL: | E43 E44 E52 G20 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1223&r=cba |
| By: | Detzer, Daniel |
| Abstract: | This paper analyzes two instruments - asset-based reserve requirements put forward by Thomas Palley and asset-based capital requirements proposed by Charles Goodhart and Avinash Persaud - regarding their merits in reducing excessive asset price inflation. A theoretical framework of asset pricing based on the ideas of Keynes and Minsky is developed, within which the working of the instruments is demonstrated and analyzed. It is shown that in theory both instruments are able to reduce excessive asset price inflation by reducing the amount of credit money and investment flowing from financial institutions into a booming sector. It is found that asset-based reserve requirements will only work through a predictable price effect, while the effect of asset-based capital requirements is hard to predict and may even become a quantitative supply constraint. Hence, it is concluded that due to the higher predictability of asset-based reserve requirements those are more suitable for the task of tackling asset price bubbles. -- |
| Keywords: | Monetary Policy,Banking Regulation,Asset Prices,Bubbles,Minsky,Financial Instability Hypothesis,Asset Based Reserve Requirements,Capital Requirements,Macroprudential Regulation |
| JEL: | E12 E52 G12 G18 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ipewps:132012&r=cba |
| By: | Gros, Daniel |
| Abstract: | Lax financial conditions can foster credit booms. The global credit boom of the last decade led to large capital flows across the world, including large movements of resources from the Northern countries of the euro area towards the Southern part. Since the start of the crisis and more markedly after 2009, these flows have suddenly stopped, creating severe adjustment pressures. This paper argues that, at this point, the common monetary policy can only try to mitigate the unavoidable adjustment by maintaining overall financial stability. The challenge is to strike a delicate balance between providing liquidity for solvent institutions while keeping the overall pressure on for a rapid correction of the imbalances. |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:eps:cepswp:6865&r=cba |
| By: | Mimir, Yasin; Sunel, Enes; Taskin, Temel |
| Abstract: | This paper conducts a quantitative investigation of the role of reserve requirements as a macroprudential policy tool. We build a monetary DSGE model with a banking sector in which (i) an agency problem between households and banks leads to endogenous capital constraints for banks in obtaining funds from households, (ii) banks are subject to time-varying reserve requirements that countercyclically respond to expected credit growth, (iii) households face cash-in-advance constraints, requiring them to hold real balances, and (iv) standard productivity and money growth shocks are two sources of aggregate uncertainty. We calibrate the model to the Turkish economy which is representative of using reserve requirements as a macroprudential policy tool recently. We also consider the impact of financial shocks that affect the net worth of financial intermediaries. We find that (i) the time-varying required reserve ratio rule countervails the negative effects of the financial accelerator mechanism triggered by adverse macroeconomic and financial shocks, (ii) in response to TFP and money growth shocks, countercyclical reserves policy reduces the volatilities of key real macroeconomic and financial variables compared to fixed reserves policy over the business cycle, and (iii) a time-varying reserve requirement policy is welfare superior to a fixed reserve requirement policy. The credit policy is most effective when the economy is hit by a financial shock. Time-varying required reserves policy reduces the intertemporal distortions created by the credit spreads at expense of generating higher inflation volatility, indicating an interesting trade-off between price stability and financial stability. |
| Keywords: | Banking sector; time-varying reserve requirements; macroeconomic and financial shocks |
| JEL: | E51 E44 G28 G21 |
| Date: | 2012–06–22 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:39613&r=cba |
| By: | Michael T. Belongia (University of Mississippi); Peter N. Ireland (Boston College) |
| Abstract: | Over the last twenty-five years, a set of influential studies has placed interest rates at the heart of analyses that interpret and evaluate monetary policies. In light of this work, the Federal Reserve’s recent policy of "quantitative easing," with its goal of affecting the supply of liquid assets, appears as a radical break from standard practice. Superlative (Divisia) measures of money, however, often help in forecasting movements in key macroeconomic variables, and the statistical fit of a structural vector autoregression deteriorates significantly if such measures of money are excluded when identifying monetary policy shocks. These results cast doubt on the adequacy of conventional models that focus on interest rates alone. They also highlight that all monetary disturbances have an important "quantitative" component, which is captured by movements in a properly measured monetary aggregate. |
| Keywords: | quantitative easing, interest rates, Divisia index, monetary policy |
| JEL: | E51 E52 E58 |
| Date: | 2012–06–18 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:801&r=cba |
| By: | Pfajfar, D.; Santoro, E. (Tilburg University, Center for Economic Research) |
| Abstract: | Abstract: This paper examines the nexus between news coverage on inflation and households' inflation expectations. In doing so, we test the epidemiological foundations of the sticky information model (Carroll, 2003, 2006). We use both aggregate and household-level data from the Survey Research Center at the University of Michigan. We highlight a fundamental disconnection between news on inflation, consumers' frequency of expectation updating and the accuracy of their expectations. Our evidence provides at best weak support to the epidemiological framework, as most of the consumers who update their expectations do not revise them towards professional forecasters' mean forecast. |
| Keywords: | Inflation;Survey Expectations;News;Information Stickiness. |
| JEL: | C53 D84 E31 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2012048&r=cba |
| By: | Carlos A. Vegh; Guillermo Vuletin |
| Abstract: | Developing countries have typically pursued procyclical macroeconomic policies, which tend to amplify the underlying business cycle (the “when-it-rains-it-pours” phenomenon). There is, however, evidence to suggest that about a third of developing countries have shifted from procyclical to countercyclical fiscal policy over the last decade. We show that the same is true of monetary policy: around 35 percent of developing countries have become countercyclical over the last decade. We provide evidence that links procyclical monetary policy in developing countries to what we refer as the “fear of free falling;” that is, the need to raise interest rates in bad times to defend the domestic currency. |
| JEL: | E52 F41 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18175&r=cba |
| By: | Benos, Evangelos (Bank of England); Garratt, Rodney (University of California at Santa Barbara); zimmerman, Peter (Bank of England) |
| Abstract: | We use payments data for the period 2006-09 to study the impact of the global financial crisis on payment patterns in CHAPS, the United Kingdom’s large-value wholesale payments system. CHAPS functioned smoothly throughout the crisis and all CHAPS settlement banks continued to meet their payment obligations. However, the data show that in the two months following the Lehman Brothers failure, banks did, on average, make payments at a slower pace than before the failure. Our analysis suggests this was partly explained by concerns about counterparty default risk as well as system-wide risk. The ratio of payments made to liquidity used was 30% lower in the period from 15 September 2008 to 30 September 2009 than in the period preceding the default of Lehman Brothers. This was due initially to payment delay, but later was due to banks making more payments with their own liquidity, probably because quantitative easing increased the amount of reserves in the system. To assess the economic significance of the observed delays in the value of payments settled, we develop risk indicators, based on Markov models, to quantify the theoretical liquidity impact of delays during an operational outage. We find that payment delays in the months following the failure of Lehman Brothers led to a statistically significant but economically modest increase in these risk measures. |
| Keywords: | Payments; Intraday liquidity; Credit default swap; Operational outage; Insurance |
| JEL: | E42 |
| Date: | 2012–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0451&r=cba |
| By: | Rafael Repullo (CEMFI, Centro de Estudios Monetarios y Financieros); Javier Suarez (CEMFI, Centro de Estudios Monetarios y Financieros) |
| Abstract: | We develop and calibrate a dynamic equilibrium model of relationship lending in which banks are unable to access the equity markets every period and the business cycle is a Markov process that determines loans’ probabilities of default. Banks anticipate that shocks to their earnings and the possible variation of capital requirements over the cycle can impair their future lending capacity and, as a precaution, hold capital buffers. We compare the relative performance of several capital regulation regimes, including one that maximizes a measure of social welfare. We show that Basel II is significantly more procyclical than Basel I, but makes banks safer. For this reason, it dominates Basel I in terms of welfare except for small social costs of bank failure. We also show that for high values of this cost, Basel III points in the right direction, with higher but less cyclically-varying capital requirements. |
| Keywords: | Banking regulation, Basel capital requirements, Capital market frictions, Credit rationing, Loan defaults, Relationship banking, Social cost of bank failure. |
| JEL: | G21 G28 E44 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:cmf:wpaper:wp2012_1202&r=cba |
| By: | Sergio Cesaratto |
| Abstract: | The European crisis appears as the n-th “this time is different” episode of the financial liberalisation sequence cum fixed exchange rates, capital flows from the centre to the periphery, housing bubble, current account (CA) deficit and indebtedness, default. In the author’s view, although Reinhart and Rogoff (2009) is not a satisfactory account of the history and nature of defaults, their title conveys the sense of a recurring pattern of unfortunate events. In this contribution the author examines some conventional and heterodox explanations that have been given for the nature of the balance of payments (BoP) disequilibrium of the Eurozone (EZ) members in relation also to the presumed German mercantilism. The paper discusses next two different interpretations of the causes of the rise in the sovereign spread of periphery countries: both do not clearly identify the nature of the EZ crisis as a BoP crisis. Finally, it focuses on the novel and controversial features of the EZ BoP crisis compared to previous experiences. These original tracts regard the role of the European Central Bank in refinancing banks in peripheral countries. |
| Keywords: | European Monetary Union, financial crisis, Germany, neo-mercantilism, Balance of payment, capital flows, sudden stops, TARGET 2, Monetary sovereignty, MMT, Sinn |
| JEL: | B11 N14 F1 F33 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:usi:wpaper:640&r=cba |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1315&r=cba |
| By: | Carmassi, Jacopo; Micossi, Stefano |
| Abstract: | Excessive leverage and risk-taking by large international banks were the main causes of the 2008-09 financial crisis and the ensuing sharp drop in economic activity and employment. World leaders and central bankers promised that it would not happen again and, to this end, undertook to overhaul banking regulation, first and foremost by rectifying Basel prudential rules. This study argues that the new Basel III Accord and the ensuing EU Capital Requirements Directive IV fail to correct the two main shortcomings of international prudential rules: 1) reliance on banks’ risk management models for the calculation of capital requirements and 2) the lack of accountability by supervisors. Accordingly, the authors propose the calculation of capital requirements without risk adjustment and creation of a system of mandated action by supervisors modelled on the US framework of Prompt Corrective Action (PCA). They also recommend that banks should be required to issue large amounts of debentures that are convertible into equity in order to strengthen market discipline on management and shareholders. |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:eps:cepswp:6734&r=cba |
| By: | Nathan Bedock; Dalibor Stevanoviæ |
| Abstract: | In this paper we identify and measure the effects of credit shocks in a small open economy. To incorporate information from a large number of economic and financial indicators we use the structural factor-augmented VARMA model. In the theoretical framework of the financial accelerator, we approximate the external finance premium with credit spreads. We find that an adverse global credit shock generates a significant and persistent economic slowdown in Canada; the Canadian external finance premium rises immediately while interest rates and credit measures decline. Variance decomposition reveals that the credit shock has an important effect on real activity measures, including price and leading indicators, and credit spreads. On the other hand, an unexpected increase in the Canadian external finance premium shows no significant effect in Canada, suggesting that the effects of credit shocks in Canada are essentially caused by the unexpected changes in foreign credit market conditions. Given the identification procedure our structural factors have an economic interpretation. <P> |
| Keywords: | Credit shock, structural factor analysis, factor-augmented VARMA, |
| Date: | 2012–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2012s-16&r=cba |
| By: | Rafael Repullo (CEMFI, Centro de Estudios Monetarios y Financieros) |
| Abstract: | We present a simple model of an economy with heterogeneous banks that may be funded with uninsured deposits and equity capital. Capital serves to ameliorate a moral hazard problem in the choice of risk. There is a fixed aggregate supply of bank capital, so the cost of capital is endogenous. A regulator sets risk-sensitive capital requirements in order to maximize a social welfare function that incorporates a social cost of bank failure. We consider the effect of a negative shock to the supply of bank capital and show that optimal capital requirements should be lowered. Failure to do so would keep banks safer but produce a large reduction in aggregate investment. The result provides a rationale for the cyclical adjustment of risk-sensitive capital requirements. |
| Keywords: | Banking regulation, Basel II, capital requirements, procyclicality. |
| JEL: | G21 G28 E44 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:cmf:wpaper:wp2012_1205&r=cba |
| By: | Tatiana Damjanovic; Vladislav Damjanovic; Charles Nolan |
| Abstract: | A stylized macroeconomic model is developed with an indebted, heterogeneous Investment Banking Sector funded by borrowing from a retail banking sector. The government guarantees retail deposits. Investment banks choose how risky their activities should be. We compared the benefits of separated vs. universal banking modelled as a vertical integration of the retail and investment banks. The incidence of banking default is considered under different constellations of shocks and degrees of competitiveness. The benefits of universal banking rise in the volatility of idiosyncratic shocks to trading strategies and are positive even for very bad common shocks, even though government bailouts, which are costly, are larger compared to the case of separated banking entities. The welfare assessment of the structure of banks may depend crucially on the kinds of shock hitting the economy as well as on the efficiency of government intervention. |
| Keywords: | Risk in DSGE models, investment banking, financial intermediation, separating commercial and investment banking, competition and risk, moral hazard in banking, prudential regulation, systematic vs. idiosyncratic risks. |
| JEL: | E13 E44 G11 G24 G28 |
| Date: | 2012–01–17 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:1205&r=cba |
| By: | Schoenmaker, Dirk; Gros, Daniel |
| Abstract: | The eurozone is caught in a ‘diabolical loop’ in which weak domestic banking systems damage sovereign fiscal positions and conversely, in which risky sovereign positions disproportionately threaten domestic banking stability. A European-level banking system could go a long way towards breaking this unfortunate loop and stabilising the eurozone. This would require a European safety net for cross-border banks. This paper sketches the building blocks of a European Deposit Insurance Fund. We calculate that such a Fund would amount to €55 billion for the 35 largest European banks. This Fund could be created over ten years through risk-based deposit insurance premiums levied on the top 35 banks. Once fully up and running, the Fund could also deal with the resolution of one or more of these 35 banks. The Fund would then be turned into a European Deposit Insurance and Resolution Fund. The paper aims to promote debate among policy-makers, industry and academia. |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:eps:cepswp:6918&r=cba |
| By: | Stefan Haigner; Friedrich Schneider; Florian Wakolbinger |
| Abstract: | Policy programs on anti-money laundering and combating the financing of terrorism (AML/CFT) have largely called for preventive measures like keeping record of financial transactions and reporting suspicious ones. In this survey study, we analyze the extent of global money laundering and terrorist financing and discuss the preventive policies and their evaluations. Moreover, we investigate whether more effective tax information exchange would bolster AML/CFT policies in that it reduced tax evasion, thus the volume of transnational financial flows (i.e. to and from offshore financial centres) and thus in turn cover given to money laundering and terrorist financing. We conclude that such a strategy can reduce financial flows, yet due to a "weakest link problem" even a few countries not participating can greatly undo what others have achieved. |
| Keywords: | money laundering, terrorist financing, tax information exchange |
| JEL: | K42 H26 H56 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diweos:diweos65&r=cba |
| By: | Mircea Epure; Esteban Lafuente |
| Abstract: | This paper devises management and accounting tools for monitoring bank performance. We first propose a multidimensional efficiency measure that integrates credit risk and is adapted to the real banking technology. Second, traditional accounting ratios complement the analysis. Third, the impact of different risk measures over efficiency and accounting ratios is shown. Fourth, we examine the effect of CEO turnover on future performance. An empirical application considers a unique dataset of Costa Rican banks during 1998-2007. Results reveal that performance improvements follow regulatory changes and that risk explains differences in performance. Non-performing loans negatively affect efficiency and return on assets, whereas the capital adequacy ratio positively affects the net interest margin. This supports that incurring monitoring costs and having higher levels of capitalisation may enhance performance. Finally, results confirm that appointing CEOs from outside the bank significantly improves performance, thus suggesting the potential benefits of new organisational practices. |
| Keywords: | efficiency; accounting; performance; risk; CEO turnover. |
| JEL: | G21 G28 G3 M1 M2 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1310&r=cba |
| By: | Kuikeu, Oscar |
| Abstract: | In cfa franc zone, the exchange rate was devalued, in 1994, in order to deal with the major macroeconomic imbalances that have affected the members during the 1980 decade. Thus, the aim of this paper is to know if this devaluation was relevant, and, in the sense that the devaluation is relevant only if the real exchange rate is overvalued, we will assess the degree of the real exchange rate misalignment in the cfa franc zone. |
| Keywords: | equilibrium real exchange rate, cfa franc zone |
| JEL: | C33 F31 |
| Date: | 2012–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:39614&r=cba |