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on Central Banking |
| By: | Roman Horvath (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Dan Vaško (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic) |
| Abstract: | We develop a comprehensive index of the transparency of central banks regarding their policy framework to promote financial stability for 110 countries from 2000 to 2011 and examine the determinants and effects of this transparency. We find that the degree of transparency increased in the 2000s, though it still varied greatly across the countries in our study. Our regression results suggest that more developed countries exhibit greater transparency, that episodes of high financial stress have a negative effect on transparency and that the legal origin matters, too. Importantly, we find that transparency regarding the level of financial stability is strongly affected by monetary policy transparency. The central banks that have a transparent monetary policy are more likely to show increased transparency in their framework for financial stability. Our results also suggest a non-linear effect of central bank financial stability transparency on financial stress. Unless the financial sector experiences severe distress, greater transparency is beneficial for financial stability. |
| Keywords: | financial stability, transparency, central banks |
| JEL: | E52 E58 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2012_25&r=cba |
| By: | Inoue, Takeshi |
| Abstract: | This paper examines the causal relationship between central bank intervention and exchange returns in India. Using monthly data from December 1997 to December 2011, the empirical results derived from the CCF approach of Cheung and Ng (1996) suggest that there is causality-in-variance from exchange rate returns to central bank intervention, but not vice versa. These findings are robust in the sense that they hold in cases where the returns were measured from either the spot rate or the forward rate. Therefore, the results of this paper suggest that the Indian central bank has intervened in the foreign exchange market to respond to exchange rate volatility, although the volatility has not been influenced by central bank intervention in the form of net purchases of foreign currency in the market. |
| Keywords: | India, Foreign exchange, Exchange control, Central bank, Causality-in-variance, Exchange rate, Intervention |
| JEL: | E58 F31 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:jet:dpaper:dpaper353&r=cba |
| By: | Jan Willem van den End; Marco Hoeberichts |
| Abstract: | We analyse the relationship between tail risk and crisis measures by governments and the central bank. Using an adjusted Merton model in a game theoretical set-up, the analysis shows that the participation constraint for interventions by the central bank and the governments is less binding if the risk of contagion is high. The strategic interaction between governments and the central bank also influences the effectiveness of the interventions. A joint effort of both the governments and central bank leads to a better outcome. To prevent a bad equilibrium a sizable commitment by both players is required. Our stylized model sheds light on the strategic interaction between EMU governments and the Eurosystem in the context of the Outright Monetary Transactions program (OMT). |
| Keywords: | Financial crisis; Monetary policy; Central banks; Policy coordination |
| JEL: | E42 E52 E61 G01 G18 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:352&r=cba |
| By: | Mohamed Belhaj (Centrale Marseille (Aix-Marseille School of Economics), CNRS & EHESS); Nataliya Klimenko (Aix-Marseille Université, Greqam) |
| Abstract: | Early regulator interventions into problem banks are one of the key suggestions of Basel II. However, no guidance is given on their design. To fill this gap, we outline an incentive-based preventive supervision strategy that eliminates bad asset management in banks. Two supervision techniques are combined: continuous regulator intervention and random audits. Random audit technologies differ as to quality and cost. Our design ensures good management without excessive supervision costs, through a gradual adjustment of supervision effort to the bank's financial health. We also consider preventive supervision in a setting where audits can be delegated to an independent audit agency, showing how to induce agency compliance with regulatory instructions in the least costly way. |
| Keywords: | banking supervision, random audit, incentives, moral hazard, delegation. |
| JEL: | G21 G28 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1201&r=cba |
| By: | Wojciech Charemza; Daniel Ladley |
| Abstract: | This paper considers the effectiveness of monetary policy committee voting when the inflation forecast signals, upon which decisions are based, may be subject to manipulation. Using a discrete time intertemporal model, we examine the distortions resulting from such manipulation under a three-way voting system, similar to that used by the Bank of Sweden. We find that voting itself creates persistence in inflation. Whilst altering the forecast signal, even if well intentioned, results in a diminished probability of achieving the inflation target. However, if committee members ‘learn’ in a Bayesian manner, this problem is mitigated. |
| Keywords: | Voting Rules; Monetary Policy; Inflation Targeting |
| JEL: | E47 E52 E58 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:lec:leecon:12/23&r=cba |
| By: | Anna Sznajderska (National Bank of Poland) |
| Abstract: | Asymmetric effects in a monetary policy rule could appear due to asymmetric preferences of the central bank or/and due to nonlinearities in the economic system. It might be suspected that monetary authorities are more aggressive to the inflation rate when it is above its target level than when it is below. It also seems probable that monetary authorities have different preferences and react more strongly when the level of economic activity is low than when it is high. In this paper we investigate whether the reaction function of the National Bank of Poland (NBP) is asymmetric according to the level of inflation gap and the level of output gap. Moreover, we test whether these asymmetries might possibly stem from the nonlinearities in the Phillips curve. Threshold models are applied and two cases of unknown and known threshold value are investigated. |
| Keywords: | nonlinear Taylor rule, nonlinear Phillips curve, asymmetries, threshold models |
| JEL: | E52 E58 E30 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:125&r=cba |
| By: | Yuriy Gorodnichenko (UC Berkeley); Johannes Wieland (University of California, Berkeley); Olivier Coibion (College of William and Mary) |
| Abstract: | We study the effects of positive steady-state inflation in New Keynesian models subject to the zero bound on interest rates. We derive the utility-based welfare loss function taking into account the effects of positive steady-state inflation and solve for the optimal level of inflation in the model. For plausible calibrations with costly but infrequent episodes at the zero-lower bound, the optimal inflation rate is low, typically less than two percent, even after considering a variety of extensions, including optimal stabilization policy, price indexation, endogenous and state- dependent price stickiness, capital formation, model-uncertainty, and downward nominal wage rigidities. On the normative side, price level targeting delivers large welfare gains and a very low optimal inflation rate consistent with price stability. These results suggest that raising the inflation target is too blunt an instrument to efficiently reduce the severe costs of zero-bound episodes. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:70&r=cba |
| By: | Saki Bigio (New York University) |
| Abstract: | Financial crises appear to persist if banks fail to be recapitalized quickly after large losses. I explain this impediment through a model where banks provide intermediation services in asset markets with informational asymmetries. Intermediation is risky because banks take positions over assets under disadvantageous information. Large losses reduce bank net worth and, therefore, the capacity to bear further losses. Losing this capacity leads to reductions in intermediation volumes that exacerbate adverse selection. Adverse selection, in turn, lowers bank prots which explains the failure to attract new equity. These financial crises are characterized by a depression in economic growth that is overcome only as banks slowly strengthen by retaining earnings. The model is calibrated and used to analyze several policy interventions. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:97&r=cba |
| By: | Bonner, C.; Eijffinger, S.C.W. (Tilburg University, Center for Economic Research) |
| Abstract: | Abstract: This paper analyses the impact of the Basel 3 Liquidity Coverage Ratio (LCR) on the unsecured interbank money market and therefore on the implementation of monetary policy. Combining two unique datasets, we show that banks which are just above/below their short-term regulatory liquidity requirement pay and charge higher interest rates for unsecured interbank loans. The effect is larger for longer maturities and increases after the failure of Lehman Brothers. During a crisis, being close to the minimum liquidity requirement induces banks to decrease lending volumes. Given the high importance of a well-functioning interbank money market, our results suggest that the current design of the LCR is likely to dampen the effectiveness of monetary policy. |
| Keywords: | Monetary Policy;Interbank Market;Basel 3. |
| JEL: | G21 E42 E43 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2012075&r=cba |
| By: | Azusa Takeyama (Deputy Director and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: azusa.takeyama@boj.or.jp)); Nick Constantinou (Lectuer, Essex Business School, University of Essex (E-mail: nconst@essex.ac.uk)); Dmitri Vinogradov (Lectuer, Essex Business School, University of Essex (E-mail:dvinog@essex.ac.uk)) |
| Abstract: | This paper investigates how the market valuation of credit risk changed during 2008-2009 via a separation of the probability of default (PD) and the loss given default (LGD) of credit default swaps ( CDSs), using the information implied by equity options. While the Lehman Brothers collapse in September 2008 harmed the stability of the financial systems in major industrialized countries, the CDS spreads of some major UK banks did not increase in response to this turmoil in financial markets including the decline in their own stock prices. This implies that the CDS spreads of financial institutions may not reflect all their credit risk due to the government interventions. Since CDS spreads are not appropriate to analyze the impact of the government interventions on credit risk and the cross sectional movement of credit risk, we investigate how the government interventions affect the PD and LGD of financial institutions and how the PD and LGD of financial institutions were related with those of non-financial firms. We demonstrate that the rise in the credit risk of financial institutions did not bring about that of non-financial firms (credit risk contagion) both in the US and UK using principal component analysis. |
| Keywords: | Credit Default Swap (CDS), Probability of Default (PD), Loss Given Default (LGD), Credit Risk Contagion |
| JEL: | C12 C53 G13 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:12-e-15&r=cba |
| By: | James M. Nason; Ellis W. Tallman |
| Abstract: | This paper explores the hypothesis that the sources of economic and financial crises differ from non-crisis business cycle fluctuations. We employ Markov-switching Bayesian vector autoregressions (MS-BVARs) to gather evidence about the hypothesis on a long annual U.S. sample running from 1890 to 2010. The sample covers several episodes useful for understanding U.S. economic and financial history, which generate variation in the data that aids in identifying credit supply and demand shocks. We identify these shocks within MS-BVARs by tying credit supply and demand movements to inside money and its intertemporal price. The model space is limited to stochastic volatility (SV) in the errors of the MS-BVARs. Of the 15 MS-BVARs estimated, the data favor a MS-BVAR in which economic and financial crises and non-crisis business cycle regimes recur throughout the long annual sample. The best-fitting MS-BVAR also isolates SV regimes in which shocks to inside money dominate aggregate fluctuations. |
| Keywords: | Markov processes |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:12-24&r=cba |
| By: | Jakub Muck (National Bank of Poland, Economic Institute; Warsaw School of Economics, Institute of Econometrics); Pawel Skrzypczynski (National Bank of Poland, Economic Institute) |
| Abstract: | It is commonly known that various econometric techniques fail to consistently outperform a simple random walk model in forecasting exchange rates. The aim of this study is to analyse whether this also holds for selected currencies of the CEE region as the literature relating to the ability of forecasting these exchange rates is scarce. We tackle this issue by comparing the random walk based out-of-sample forecast errors of the Polish zloty, the Czech koruna and the Hungarian forint exchange rates against the euro with the corresponding errors generated by various single- and multi-equation models of these exchange rates. The results confirm that it is very difficult to outperform a simple random walk model in our CEE currencies forecasting contest. |
| Keywords: | CEE currencies, exchange rate forecasting, random walk,VAR, BVAR |
| JEL: | C22 C32 C53 F31 G17 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:127&r=cba |
| By: | Adam, Klaus; Grill, Michael |
| Abstract: | When is it optimal for a government to default on its legal repayment obligations? We answer this question for a small open economy with domestic production risk in which the government optimally fi…nances itself by issuing non-contingent debt. We show that Ramsey optimal policies occasionally deviate from the legal repayment obligation and repay debt only partially, even if such deviations give rise to signi…cant ‘default costs’. Optimal default improves the international diversi…cation of domestic output risk, increases the efficiency of domestic investment and - for a wide range of default costs - signi…cantly increase welfare relative to a situation where default is simply ruled out from Ramsey optimal plans. We show analytically that default is optimal following adverse shocks to domestic output, especially for very negative international wealth positions. A quantitative analysis reveals that for empirically plausible wealth levels, default is optimal only in response to disaster-like shocks to domestic output, and that default can be Ramsey optimal even if the net foreign asset position is positive. |
| Keywords: | incomplete markets; optimal default; Ramsey optimal fiscal policy |
| JEL: | E62 F34 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9178&r=cba |
| By: | Ruggero GRILLI (Universit… Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali); Gabriele TEDESCHI (Universit… Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali); Mauro GALLEGATI (Universit… Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali) |
| Abstract: | In this paper we investigate the sources of instability in credit and financial systems and the effect of credit linkages on the macroeconomic activity. By developing an agent-based model, we analyze the evolving dynamics of the economy as a complex, adaptive and interactive system, which allows us to explain some key elements occurred during the recent economic and financial crisis. In particular, we study the repercussions of inter-bank connectivity on agents' performances, bankruptcy waves and business cycle fluctuations. Interbank linkages, in fact, let participants share risk but also creates a potential for one bank's crisis to spread through the network. The purpose of the model is, therefore, to build up the dependence among agents at the micro-level and to estimate their impact on the macro stability. |
| Keywords: | Systemic risk, business cycle, giant component, network connectivity, volatility |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wpaper:382&r=cba |