nep-cba New Economics Papers
on Central Banking
Issue of 2012‒07‒29
nine papers chosen by
Maria Semenova
Higher School of Economics

  1. The effectiveness of monetary policy in steering money market rates during the financial crisis By Abbassi, Puriya; Linzert, Tobias
  2. Real exchange rate dynamics in sticky-price models with capital By Carlos Carvalho; Fernanda Nechio
  3. Forecasting Inflation With a Random Walk By Pablo Pincheira; Carlos Medel
  4. Optimal disclosure policy and undue diligence By David Andolfatto; Aleksander Berentsen; Christopher Waller
  5. An Anatomy of Credit Booms and their Demise By Enrique Mendoza; Marco Terrones
  6. Supervising Cross-Border Banks: Theory, Evidence and Policy (Revised version of CentER Discussion Paper 2011-127) By Beck, T.H.L.; Todorov, R.I.; Wagner, W.B.
  7. On the Relevance of Soft Information in Credit Rating: The Case of a Social Bank Financing Small Businesses By Simon Cornée
  8. Consumer Bankruptcy and Information By Jason Allen; H. Evren Damar; David Martinez-Miera
  9. Is More Finance Better? Disentangling Intermediation and Size Effects of Financial Systems By Beck, T.H.L.; Degryse, H.A.; Kneer, E.C.

  1. By: Abbassi, Puriya; Linzert, Tobias
    Abstract: The financial crisis has deeply affected money markets and thus, potentially, the proper functioning of the interest rate channel of monetary policy transmission. Therefore, we analyze the effectiveness of monetary policy in steering euro area money market rates looking at, first, the predictability of money market rates on the basis of monetary policy expectations, and second the impact of extraordinary central bank measures on money market rates. We find that during the crisis money market rates up to 12 months still respond to revisions in the expected path of future rates, even though to a lesser extent than before August 2007. We attribute part of the loss in monetary policy effectiveness to money market rates being driven by higher liquidity premia and increased uncertainty about future interest rates. Our results also indicate that the ECB's non-standard monetary policy measures as of October 2008 were effective in addressing the disruptions in the euro area money market. In fact, our estimates suggest that non-standard monetary policy measures helped to lower Euribor rates by more than 80 basis points. These findings show that central banks have effective tools at hand to conduct monetary policy in times of crises. --
    Keywords: Monetary transmission mechanism,Non-standard monetary policy measures,European Central Bank,Interbank money market
    JEL: E43 E52 E58
    Date: 2012
  2. By: Carlos Carvalho; Fernanda Nechio
    Abstract: The standard argument for abstracting from capital accumulation in sticky-price macro models is based on their short-run focus: over this horizon, capital does not move much. This argument is more problematic in the context of real exchange rate (RER) dynamics, which are very persistent. In this paper we study RER dynamics in sticky-price models with capital accumulation. We analyze both a model with an economy-wide rental market for homogeneous capital, and an economy in which capital is sector specific. We find that, in response to monetary shocks, capital increases the persistence and reduces the volatility of RERs. Nevertheless, versions of the multi-sector sticky-price model of Carvalho and Nechio (2011) augmented with capital accumulation can match the persistence and volatility of RERs seen in the data, irrespective of the type of capital. When comparing the implications of capital specificity, we find that, perhaps surprisingly, switching from economy-wide capital markets to sector-specific capital tends to decrease the persistence of RERs in response to monetary shocks. Finally, we study how RER dynamics are affected by monetary policy and find that the source of interest rate persistence - policy inertia or persistent policy shocks - is key.
    Keywords: Capital ; Monetary policy
    Date: 2012
  3. By: Pablo Pincheira; Carlos Medel
    Abstract: The use of different time-series models to generate forecasts is fairly usual in the forecasting literature in general, and in the inflation forecast literature in particular. When the predicted variable is stationary, the use of processes with unit roots may seem counterintuitive. Nevertheless, in this paper we demonstrate that forecasting a stationary variable with driftless unit-root-based forecasts generates bounded Mean Squared Prediction Errors errors at every single horizon. We also show via simulations that persistent stationary processes may be better predicted by unit-root-based forecasts than by forecasts coming from a model that is correctly specified but that is subject to a higher degree of parameter uncertainty. Finally we provide an empirical illustration in the context of CPI inflation forecasts for three industrialized countries.
    Date: 2012–07
  4. By: David Andolfatto; Aleksander Berentsen; Christopher Waller
    Abstract: While both public and private financial agencies supply asset markets with large quantities of information, they do not necessarily disclose all asset-related information to the general public. This observation leads us to ask what principles might govern the optimal disclosure policy for an asset manager or financial regulator. To investigate this question, we study the properties of a dynamic economy endowed with a risky asset, and with individuals that lack commitment. Information relating to future asset returns is available to society at zero cost. Legislation dictates whether this information is to be made public or not. Given the nature of our environment, nondisclosure is generally desirable. This result is overturned, however, when individuals are able to access hidden information - what we call undue diligence - at sufficiently low cost. Information disclosure is desirable, in other words, only in the event that individuals can easily discover it for themselves.
    Keywords: Monetary policy, liquidity, financial markets
    JEL: E52 E58 E59
    Date: 2011–11
  5. By: Enrique Mendoza; Marco Terrones
    Abstract: What are the stylized facts that characterize the dynamics of credit booms and the associated fluctuations in macro-economic aggregates? This paper answers this question by applying a method proposed in our earlier work for measuring and identifying credit booms to data for 61 emerging and industrialized countries over the 1960-2010 period. We identify 70 credit boom events, half of them in each group of countries. Event analysis shows a systematic relationship between credit booms and a boom-bust cycle in production and absorption, asset prices, real exchange rates, capital inflows, and external deficits. Credit booms are synchronized internationally and show three striking similarities between industrialized and emerging economies: (1) credit booms are similar in duration and magnitude, normalized by the cyclical variability of credit; (2) banking crises, currency crises or sudden stops often follow credit booms, and they do so at similar frequencies in industrialized and emerging economies; and (3) credit booms often follow surges in capital inflows, TFP gains, and financial reforms, and are far more common with managed than flexible exchange rates.
    Date: 2012–07
  6. By: Beck, T.H.L.; Todorov, R.I.; Wagner, W.B. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: This paper analyzes the distortions that banks’ cross-border activities, such as foreign assets, deposits and equity, can introduce into regulatory interventions. We find that while each individual dimension of cross-border activities distorts the incentives of a domestic regulator, a balanced amount of cross-border activities does not necessarily cause inefficiencies, as the various distortions can offset each other. Empirical analysis using bank-level data from the recent crisis provide support to our theoretical findings. Specifically, banks with a higher share of foreign deposits and assets and a lower foreign equity share were intervened at a more fragile state, reflecting the distorted incentives of national regulators. We discuss several implications for the supervision of cross-border banks in Europe.
    Keywords: Bank regulation;bank resolution;cross-border banking.
    JEL: G21 G28
    Date: 2012
  7. By: Simon Cornée (University of Rennes 1 - CREM, UMR CNRS 6211)
    Abstract: Based on a unique hand-collected database of 389 loans obtained from a French social bank dealing with small businesses, this paper compares two predictive models of future default events: the first relies on soft information (SI model), the second on hard information (HI model). The results indicate that the SI model outperforms the HI model in terms of forecast quality and goodness of fit. In so doing, this paper provides further empirical evidence that, when they serve small businesses, small or decentralized banks have a greater ability to collect and act on soft information. This empirical conclusion conveys practical implication for social banks’ internal credit rating procedures, especially in their calibration of capital requirements.
    Keywords: Credit Rating, Debt Default, Small Business Lending, Relationship Lending, Social Banking
    JEL: G21 M21
    Date: 2012–06
  8. By: Jason Allen; H. Evren Damar; David Martinez-Miera
    Abstract: We analyze the relationship between the intensity of banks’ use of soft-information and household bankruptcy patterns. Using a unique data set on the universe of Canadian household bankruptcies, we document that bankruptcy rates are higher in markets where the collection of soft, or qualitative locally gathered information, is the weakest. Using two Canadian bank mergers as exogenous variation in local market structure, we show that the differences in bankruptcy rates are not due to changes in the supply of credit. Our findings indicate that screening via hard-information is not a perfect substitute for soft-information. Instead, the two appear to be complements.
    Keywords: Financial institutions; Financial services
    JEL: G2 D4
    Date: 2012
  9. By: Beck, T.H.L.; Degryse, H.A.; Kneer, E.C. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: Financial systems all over the world have grown dramatically over recent decades. But is more finance necessarily better? And what concept of finance – the size of the financial sector, including both intermediation and other auxiliary “non-intermediation†activities, or a focus on traditional intermediation activity – is relevant for its impact on real sector outcomes? This paper assesses the relationship between the size of the financial system and the degree of intermediation, on the one hand, and GDP per capita growth and growth volatility, on the other hand. Based on a sample of 77 countries for the period 1980-2007, we find that intermediation activities increase growth and reduce volatility in the long run. An expansion of the financial sectors along other dimensions has no long-run effect on real sector outcomes. Over shorter time horizons a large financial sector stimulates growth at the cost of higher volatility in high-income countries. Intermediation activities stabilize the economy in the medium run especially in low-income countries.
    Keywords: Financial intermediation;economic growth;growth volatility.
    JEL: G2 O4
    Date: 2012

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