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on Central Banking |
| By: | Tanya Molodtsova; David Papell |
| Abstract: | This paper evaluates out-of-sample exchange rate predictability of Taylor rule models, where the central bank sets the interest rate in response to inflation and either the output or the unemployment gap, for the euro/dollar exchange rate with real-time data before, during, and after the financial crisis of 2008-2009. While all Taylor rule specifications outperform the random walk with forecasts ending between 2007:Q1 and 2008:Q2, only the specification with both estimated coefficients and the unemployment gap consistently outperforms the random walk from 2007:Q1 through 2012:Q1. Several Taylor rule models that are augmented with credit spreads or financial condition indexes outperform the original Taylor rule models. The performance of the Taylor rule models is superior to the interest rate differentials, monetary, and purchasing power parity models. |
| JEL: | C22 F31 |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18330&r=cba |
| By: | Saroj Bhattarai; Jae Won Lee; Woong Yong Park |
| Abstract: | We investigate the roles of a time-varying inflation target and monetary and fiscal policy stances on the dynamics of inflation in a DSGE model. Under an active monetary and passive fiscal policy regime, inflation closely follows the path of the inflation target and a stronger reaction of monetary policy to inflation decreases the equilibrium response of inflation to non-policy shocks. In sharp contrast, under an active fiscal and passive monetary policy regime, inflation moves in an opposite direction from the inflation target and a stronger reaction of monetary policy to inflation increases the equilibrium response of inflation to non-policy shocks. Moreover, a weaker response of fiscal policy to debt decreases the response of inflation to non-policy shocks. These results are due to variation in the value of public debt that leads to wealth effects on households. Finally, under a passive monetary and passive fiscal policy regime, both monetary and fiscal policy stances affect inflation dynamics, but because of a role for self-fulfilling beliefs due to equilibrium indeterminacy, theory provides no clear answer on the overall behavior of inflation. We characterize these results analytically in a simple model and numerically in a richer quantitative model. |
| Keywords: | Price levels ; Monetary policy ; Macroeconomics |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:124&r=cba |
| By: | Beau, D.; Clerc, L.; Mojon, B. |
| Abstract: | In this paper, we analyse the interactions between monetary and macro-prudential policies and the circumstances under which such interactions call for their coordinated implementation. We start with a review of the interdependencies between monetary and macro-prudential policies. Then, we use a DSGE model incorporating financial frictions, heterogeneous agents and housing, which is estimated for the euro area over the period 1985 -2010, to identify the circumstances under which monetary and macro-prudential policies may have compounding, neutral or conflicting impacts on price stability. We compare inflation dynamics across four “policy regimes” depending on: (a) the monetary policy objectives – that is, whether the policy instrument, the short-term interest rate factors in financial stability considerations by leaning against credit growth; and (b) the existence, or not, of an authority in charge of a financial stability objective through the implementation of macro-prudential policies that can “lean against credit” without affecting the short-term interest rate. |
| Keywords: | Monetary Policy; Financial Stability; Macro-prudential Policy; ESRB. |
| JEL: | E51 E58 E37 G13 G18 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:390&r=cba |
| By: | Orphanides, Athanasios; Wieland, Volker |
| Abstract: | The complexity resulting from intertwined uncertainties regarding model misspecification and mismeasurement of the state of the economy defines the monetary policy landscape. Using the euro area as laboratory this paper explores the design of robust policy guides aiming to maintain stability in the economy while recognizing this complexity. We document substantial output gap mismeasurement and make use of a new model data base to capture the evolution of model specification. A simple interest rate rule is employed to interpret ECB policy since 1999. An evaluation of alternative policy rules across 11 models of the euro area confirms the fragility of policy analysis optimized for any specific model and shows the merits of model averaging in policy design. Interestingly, a simple difference rule with the same coefficients on inflation and output growth as the one used to interpret ECB policy is quite robust as long as it responds to current outcomes of these variables. |
| Keywords: | complexity; ECB; Financial crisis; model uncertainty; monetary policy; robust simple rules |
| JEL: | E50 E52 E58 |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9107&r=cba |
| By: | Luiz Awazu Pereira da Silva; Ricardo Eyer Harris |
| Abstract: | Brazil sailed well through the global financial storm, using counter-cyclical policies to engineer its fast V-shaped recovery in 2010. In order to deal with inflationary pressures arising from its strong recovery, after the peak of the crisis, it used standard aggregate demand management instruments (tight fiscal and monetary policies). Brazil had also to deal with the post-QE global environment of excess liquidity in 2010-2011 where excessive capital inflows were exacerbating domestic credit growth with potentially destabilizing effects for price and financial stability. In that front, Brazil maintained and strengthened its strong financial sector regulation and supervision to continue to ensure financial stability, in particular, using a set of macroprudential instruments. While combining monetary and macroprudential instruments to lean against the financial cycle, the Central Bank of Brazil has always made clear that macroprudential measures are not a substitute for monetary policy action and are primarily geared at addressing financial stability risks. In fact, many policy makers after the global financial crisis seem to see now a complementarity between macroprudential measures and monetary policy. Accordingly, the (new) separation principle seems to evolve into using two instruments (the central bank’s base rate and a set of macroprudential tools) to address two objectives (the inflation target and a composite set of financial stability indicators). Brazil’s recent experience with monetary and macroprudential policies is a successful example of this new approach. More time and other countries’ experiences are needed to assess properly if this policy option can be generalized and replicated with similar results elsewhere. |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:290&r=cba |
| By: | Milne, Alistair |
| Abstract: | A fundamental cause of the global financial crisis was excessive creation of short-term money-like liabilities (quasi-money), notably in shadow banking holdings of sub-prime MBS and other US dollar structured credit instruments and in cross-border flow of capital to the uncompetitive Euro area periphery. This paper proposes a registration system for: (i) controlling quasi-money and resulting economic externalities and systemic risks; and (ii) supporting public sector monetary issue to counter collapse of private sector credit in the aftermath of crises. This policy would trigger a profound but also economically beneficial change in the business models of both banks and long-term investors. -- |
| Keywords: | Basel III,debt deflation,endogenous money,financial regulation,global financial crisis,limited purpose banking,maturity mismatch,narrow money,Pigouvian taxes,ring fencing,systemic financial risk,systemic financial externalities,Tobin tax |
| JEL: | E44 G21 G28 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:201234&r=cba |
| By: | Rose, Andrew (Haas School of Business); Wieladek, Tomasz (Bank of England) |
| Abstract: | During the 2007-09 financial crisis, the banking sector received an extraordinary level of public support. In this empirical paper, we examine the determinants of a number of public sector interventions: government funding or central bank liquidity insurance schemes, public capital injections, and nationalisations. We use bank-level data spanning all British and foreign banks operating within the United Kingdom. We use multinomial logit regression techniques and find that a bank’s size, relative to the size of the entire banking system, typically has a large positive and non-linear effect on the probability of public sector intervention for a bank. We also use instrumental variable techniques to show that British interventions helped; there is fragile evidence that the wholesale (non-core) funding of an affected institution increased significantly following capital injection or nationalisation. |
| Keywords: | nationalisation; capital injection; liquidity; crisis; foreign; empirical; data; logit |
| JEL: | G38 |
| Date: | 2012–08–21 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0460&r=cba |
| By: | Marco A. Hernandez Vega |
| Abstract: | The behavior of the real exchange rate, measuring movements in the relative consumer price indexes between countries, remains a prominent puzzle in international macroeconomics. Two key theories of the real exchange rate differ in the role played by goods not traded internationally. On one hand, the theory of Balassa-Samuelson, on the other hand, models with sticky prices. This study provides new empirical evidence on nontraded goods importance in real exchange volatility by using more highly disaggregated data than used in previous literature on prices and trade between the U.S. and Mexico for the period 2002-2009. The main results suggest that the nontraded component accounts for between 69 and up to 84 percent of the real exchange rate volatility. In addition, the results show that the nontraded component is negatively correlated with the traded component despite both countries being in a flexible exchange rate regime contradicting previous literature. These results generally support the Balassa-Samuelson theory. |
| Keywords: | Real exchange rates, Relative prices. |
| JEL: | F31 |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:bdm:wpaper:2012-05&r=cba |
| By: | Challe, E.; Mojon, B.; Ragot, X. |
| Abstract: | We analyze the risk-taking behavior of heterogenous intermediaries that are protected by limited liability and choose both their amount of leverage and the risk exposure of their portfolio. Due to the opacity of the financial sector, outside providers of funds cannot distinguish “prudent” intermediaries from “imprudent” ones that voluntarily hold high-risk portfolios and expose themselves to the risk of bankrupcy. We show how the number of imprudent intermediaries is determined in equilibrium jointly with the interest rate, and how both ultimately depend on the cross-sectional distribution of intermediaries’ capital. One implication of our analysis is that an exogenous increase in the supply of funds to the intermediary sector (following, e.g., capital inflows) lowers interest rates and raises the number of imprudent intermediaries (the risk-taking channel of low interest rates). Another one is that easy financing may lead an increasing number of intermediaries to gamble for resurrection following a bad shock to the sector’s capital, again raising economy wide systemic risk (the gambling-for-resurrection channel of falling equity). |
| Keywords: | Risk shifting; Portfolio correlation; Systemic risk; Financial opacity. |
| JEL: | E44 G01 G20 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:391&r=cba |
| By: | Entrop, Oliver; Memmel, Christoph; Ruprecht, Benedikt; Wilkens, Marco |
| Abstract: | This paper explores the extent to which interest risk exposure is priced in bank margins. Our contribution to the literature is twofold: First, we present an extended model of Ho and Saunders (1981) that explicitly captures interest rate risk and returns from maturity transformation. Banks price interest risk according to their individual exposure separately in loan and deposit rates, but reduce these charges when they expect returns from maturity transformation. Second, using a comprehensive dataset covering the German universal banks between 2000 and 2009, we test the model-implied hypotheses not only for the commonly investigated net interest income, but additionally for interest income and expenses separately. Controlling for earnings from bank-individual maturity transformation strategies, we find all banks to charge additional fees for macroeconomic interest volatility exposure. Microeconomic on-balance interest risk exposure from maturity transformation, however, only affects the smaller savings and cooperative banks, but not private commercial banks. Returns are only priced in income margins. -- |
| Keywords: | Interest rate risk,Interest margins,Maturity transformation |
| JEL: | D21 G21 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:172012&r=cba |
| By: | Aizenman, Joshua; Inoue, Kenta |
| Abstract: | We study the curious patterns of gold holding and trading by central banksduring 1979-2010. With the exception of several discrete step adjustments,central banks keep maintaining passive stocks of gold, independently of thepatterns of the real price of gold. We also observe the synchronization of goldsales by central banks, as most reduced their positions in tandem, and theirtendency to report international reserves valuation excluding gold positions.Our analysis suggests that the intensity of holding gold is correlated with ‘globalpower’ – by the history of being a past empire, or by the sheer size of a country,especially by countries that are or were the suppliers of key currencies. Theseresults are consistent with the view that central bank’s gold position signalseconomic might, and that gold retains the stature of a ‘safe haven’ asset at timesof global turbulence. The under-reporting of gold positions in the internationalreserve/GDP statistics is consistent with loss aversion, wishing to maintain asizeable gold position, while minimizing the criticism that may occur at a timewhen the price of gold declines |
| Keywords: | Economics, International reserves, Central banks, Gold, exchange rate regimes |
| Date: | 2012–02–26 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:ucscec:qt7bx7h0q4&r=cba |