nep-cba New Economics Papers
on Central Banking
Issue of 2012‒11‒03
sixteen papers chosen by
Maria Semenova
Higher School of Economics

  1. Monetary and macroprudential policies By Paolo Angelini; Stefano Neri; Fabio Panetta
  2. Optimal Policy for Macro-Financial Stability By Gianluca Benigno; Huigang Chen; Chris Otrok; Alessandro Rebucci; Eric Young
  3. A Macroprudential Framework for Monitoring and Examining Financial Soundness By Albert, Jose Ramon G.; Schou-Zibell, Lotte; Song, Lei Lei
  4. Why Countries Matter for Monetary Policy Decision-Making in the ESCB By Bernd Hayo; Pierre-Guillaume Méon
  5. Capital Regulation, Monetary Policy and Financial Stability By Pierre-Richard Agenor; Koray Alper; Luiz Pereira da Silva
  6. Feedback to the ECB's monetary analysis: the Bank of Russia's experience with some key tools By Alexey Ponomarenko; Elena Vasilieva; Franziska Schobert
  7. Access policy and money market segmentation By Sébastien Philippe Kraenzlin; Thomas Nellen
  8. What is the SARB's inflation targeting policy, and is it appropriate? By Ellyne, Mark; Veller, Carl
  9. An Information-Based Theory of International Currency By Zhang, Cathy
  10. An Experiment on the Causes of Bank Run Contagions By Surajeet Chakravarty; Miguel A. Fonseca; Todd Kaplan
  11. The dynamics of a banking duopoly with capital regulations. By Luciano Fanti
  12. Dynamic provisioning: a buffer rather than a countercyclical tool? By Santiago Fernandez de Lis; Alicia Garcia-Herrero
  13. Ranking Systemically Important Financial Institutions By Mardi Dungey; Mattéo Luciani; David Veredas
  14. Systemic Importance Index for financial institutions: A Principal Component Analysis approach By Carlos León; Andrés Murcia
  15. Estimating bank loans loss given default by generalized additive models By Raffaella Calabrese
  16. Financial Disclosure and Market Transparency with Costly Information Processing By Marco Di Maggio; Marco Pagano

  1. By: Paolo Angelini (Banca d’Italia); Stefano Neri (Banca d’Italia); Fabio Panetta (Banca d’Italia)
    Abstract: We use a dynamic general equilibrium model featuring a banking sector to assess the interaction between macroprudential policy and monetary policy. We find that in “normal” times (when the economic cycle is driven by supply shocks) macroprudential policy generates only modest benefits for macroeconomic stability over a “monetary-policy-only” world. And lack of cooperation between the macroprudential authority and the central bank may even result in conflicting policies, hence suboptimal results. The benefits of introducing macroprudential policy tend to be sizeable when financial shocks, which affect the supply of loans, are important drivers of economic dynamics. In these cases a cooperative central bank will “lend a hand” to the macroprudential authority, working for broader objectives than just price stability in order to improve overall economic stability. From a welfare perspective, the results do not yield a uniform ranking of the regimes and, at the same time, highlight important redistributive effects of both supply and financial shocks. JEL Classification: E44, E58, E61
    Keywords: Macroprudential policy, monetary policy, capital requirements
    Date: 2012–07
  2. By: Gianluca Benigno; Huigang Chen; Chris Otrok; Alessandro Rebucci; Eric Young
    Abstract: In this paper we study whether policy makers should wait to intervene until a financial crisis strikes or rather act in a preemptive manner. We study this question in a relatively simple dynamic stochastic general equilibrium model in which crises are endogenous events induced by the presence of an occasionally binding borrowing constraint as in Mendoza (2010). First, we show that the same set of taxes that replicates the constrained social planner allocation could be used optimally by a Ramsey planner to achieve the first best unconstrained equilibrium: in both cases without any precautionary intervention. Second, we show that the extent to which policymakers should intervene in a preemptive manner depends critically on the set of policy tools available and what these instruments can achieve when a crisis strikes. For example, in the context of our model, we find that, if the policy tools is constrained so that the first best cannot be achieved and the policy make r has access to only one tax instrument, it is always desirable to intervene before the crisis regardless of the instrument used. If however the policy maker has access to two instruments, it is optimal to act only during crisis times. Third and finally, we propose a computational algorithm to solve Markov-Perfect optimal policy for problems in which the policy function is not differentiable.
    Keywords: Bailouts, capital controls, exchange rate policy, financial frictions, financial crises, macro-financial stability, macro-prudential policies
    JEL: E52 F37 F41
    Date: 2012–10
  3. By: Albert, Jose Ramon G.; Schou-Zibell, Lotte; Song, Lei Lei
    Abstract: This paper describes concepts and tools behind macroprudential monitoring and the growing importance of macroprudential tools for assessing the stability of financial systems. This paper also employs a macroprudential approach in examining financial soundness and identifying its determinants. Using data from selected developing economies in Asia, South America, and Europe as well as selected economies from the developed world, panel regressions are estimated to quantify the impacts of the major influences on key financial soundness indicators, including capital adequacy, asset quality, and earnings and profitability.
    Keywords: early warning system, banking regulation, macroprudential, banks, banking crises, banking supervision, stress testing
    Date: 2012
  4. By: Bernd Hayo; Pierre-Guillaume Méon
    Keywords: European Central Bank, Monetary Policy Committee, Decision rules
    Date: 2012–04
  5. By: Pierre-Richard Agenor; Koray Alper; Luiz Pereira da Silva
    Abstract: This paper examines the roles of bank capital regulation and monetary policy in mitigating procyclicality and promoting macroeconomic and financial stability. The analysis is based on a dynamic stochastic model with imperfect credit markets. Macroeconomic stability is defined in terms of a weighted average of inflation and output gap volatility, whereas financial stability is defined in terms of three alternative indicators (real house prices, the credit-to-GDP ratio, and the loan spread), both individually and in combination. Numerical experiments associated with a housing demand shock show that in a number of cases, even if monetary policy can react strongly to inflation deviations from target, combining a credit-augmented interest rate rule and a Basel III-type countercyclical capital regulatory rule may be optimal for promoting overall economic stability. The greater the degree of policy interest rate smoothing, and the stronger the policymaker’s concern with financial stability, the larger is the sensitivity of the regulatory rule to credit growth gaps.
    Keywords: Financial Stability, Credit, Monetary Policy
    JEL: E44 E51
    Date: 2012
  6. By: Alexey Ponomarenko (Bank of Russia); Elena Vasilieva (Bank of Russia); Franziska Schobert (Deutsche Bundesbank)
    Abstract: The paper investigates to what extent some basic tools of the ECBs monetary analysis can be useful for other central banks given their specific institutional, economic and financial environment. We take the case of the Bank of Russia in order to show how to adjust methods and techniques of monetary analysis for an economy that differs from the euro area as regards, for instance, the role of the exchange rate, the impact of dollarization and the functioning of sovereign wealth funds. A special focus of the analysis is the estimation of money demand functions for different monetary aggregates. The results suggest that there are stable relationships with respect to income and wealth and to a lesser extent to uncertainty variables and opportunity costs. Furthermore, the analysis also delivers preliminary results of the information content of money for inflation and for real economic development. JEL Classification: E41, E52, E58
    Keywords: Money demand, transition countries, cointegration analysis, inflation, real economic activity
    Date: 2012–09
  7. By: Sébastien Philippe Kraenzlin; Thomas Nellen
    Abstract: We analyse deviations between interest rates paid in the Swiss franc unsecured money market and the respective Libor rate. First, banks that have access to the secured interbank market and the SNB's monetary policy operations pay less than banks without access. Second, domestically unchartered, foreign banks pay more than domestic banks. We find that these segmentations are limited both during normal times and during the financial crisis starting 2007 thanks to open access to the secured interbank market and the SNB's monetary policy operations. These findings reveal that a neglected aspect of monetary policy implementation matters, namely access policy.
    Keywords: access to central bank money, unsecured interbank money market, money market integration and segmentation, financialcrisis
    JEL: E58 G21 G28
    Date: 2012
  8. By: Ellyne, Mark; Veller, Carl
    Abstract: Since its adoption of inflation targeting in 2000, the South African Reserve Bank has been accused of placing too great an emphasis on meeting its inflation target, and too small an emphasis on the high rate of unemployment in the country. On the other hand, the SARB has regularly missed its inflation target. We attempt to characterise the SARB's inflation targeting policy by analysing the Bank's interest rate setting behaviour before and after the adoption of inflation targeting, making use of Taylor-like rules to determine whether the SARB has emphasised inflation, the output gap, the real exchange rate, and asset price deviations in its monetary policy. We find that the SARB has significantly changed its behaviour with the adoption of inflation targeting, and show that the SARB runs a very flexible inflation targeting regime, with strong emphasis on the output gap. Indeed, we find evidence that the emphasis on inflation is too low, and potentially conducive to instability in the inflation process.
    Keywords: South Africa; monetary policy; inflation targeting
    JEL: E58 E52
    Date: 2011–08–30
  9. By: Zhang, Cathy
    Abstract: This paper develops an information-based theory of international currency based on search frictions, private trading histories, and imperfect recognizability of assets. Using an open-economy search model with multiple competing currencies, the value of each currency is determined without requiring agents to use a particular currency to purchase a country's goods. Strategic complementarities in portfolio choices and information acquisition decisions generate multiple equilibria with different types of payment arrangements. While some inflation can benefit the country issuing an international currency, the threat of losing international status puts an inflation discipline on the issuing country. When monetary authorities interact in a simple policy game, the temptation to inflate can lead optimal policy to deviate from the Friedman rule. A calibration of the generalized model shows that for the U.S. dollar, the welfare cost of losing international status ranges from 1.3% to 2.1% of GDP per year.
    Keywords: international currencies; monetary search; liquidity; information frictions
    JEL: E42 E4
    Date: 2013–10–18
  10. By: Surajeet Chakravarty (Department of Economics, University of Exeter); Miguel A. Fonseca (Department of Economics, University of Exeter); Todd Kaplan (Department of Economics, University of Exeter)
    Abstract: To understand the mechanisms behind bank run contagions, we conduct bank run experiments in a modified Diamond-Dybvig setup with two banks (Left and Right). The banks' liquidity levels are either linked or independent. Left Bank depositors see their bank's liquidity level before deciding. Right Bank depositors only see Left Bank withdrawals before deciding. We find that Left Bank depositors' actions signicantly affect Right Bank depositors' behavior, even when liquidities are independent. Furthermore, a panic may be a one-way street: an increase in Left Bank withdrawals can cause a panic run on the Right Bank, but a decrease cannot calm markets.
    Keywords: bank runs, contagion, experiment, multiple equilibria.
    JEL: C72 C92 D43
    Date: 2012
  11. By: Luciano Fanti
    Abstract: We analyse the dynamics of a banking duopoly game with heterogeneous players (as regards the type of expectations’ formation) ,to investigate the effects of the capital requirements introduced by international accords (Basel-I in 1988 and more recently Basel-II and Basel-III), in the context of the Monti-Klein model. This analysis reveals that the policy of introducing a capital requirement may stabilise the market equilibrium. Moreover, we show that when the capital standard is reduced the market stability is lost through a flip bifurcation and subsequently a cascade of flip bifurcations may lead to periodic cycles and chaos. Therefore, although on the one side the capital regulation is harmful for the equilibrium loans’ volume and profit, on the other side it is effective in keeping or restoring the stability of the Cournot-Nash equilibrium in the banking duopoly.
    Keywords: Bifurcation; Chaos; Cournot; Oligopoly; Banking; Capital regulation.
    JEL: C62 G21 G28 D43 L13
    Date: 2012–09–01
  12. By: Santiago Fernandez de Lis; Alicia Garcia-Herrero
    Abstract: This paper analyzes whether dynamic provisioning systems act as a dampener -as intended- or as a buffer. After briefly reviewing the literature, we explain the rationale for dynamic provisions and analyze the experience of three of the few countries that adopted them: Spain, Colombia and Peru. We conclude that in the case of Spain, which is the only one where dynamic provisions worked over a complete cycle, the fact that market discipline only operated in the downturn implied that the system acted more as a buffer than as a dampener. We also observe that even rule-based systems tend to be applied in a discretionary way, since they require a very reliable calibration of the cycle "ex ante", an assumption that has proven unrealistic. The comparison of the Spanish system versus the Peruvian and Colombian raises interesting policy conclusions on whether dynamic provisioning should be applied differently to industrial versus emerging countries.
    Keywords: Financial Stability, Macroprudential, Anticyclical
    JEL: E52 E58
    Date: 2012–10
  13. By: Mardi Dungey; Mattéo Luciani; David Veredas
    Abstract: We propose a simple network–based methodology for ranking systemically importantfinancial institutions. We view the risks of firms –including both the financial sectorand the real economy– as a network with nodes representing the volatility shocks. Themetric for the connections of the nodes is the correlation between these shocks. Dailydynamic centrality measures allow us to rank firms in terms of risk connectedness and firmcharacteristics. We present a general systemic risk index for the financial sector. Resultsfrom applying this approach to all firms in the S&P500 for 2003–2011 are twofold. First,Bank of America, JP Morgan and Wells Fargo are consistently in the top 10 throughoutthe sample. Citigroup and Lehman Brothers also were consistently in the top 10 up tolate 2008. At the end of the sample, insurance firms emerge as systemic. Second, thesystemic risk in the financial sector built–up from early 2005, peaked in September 2008,and greatly reduced after the introduction of TARP and the rescue of AIG. Anxiety aboutEuropean debt markets saw the systemic risk begin to rise again from April 2010. Wefurther decompose these results to find that the systemic risk of insurance and deposit–taking institutions differs importantly, the latter experienced a decline from late 2007, inline with the burst of the housing price bubble, while the former continued to climb upto the rescue of AIG
    Keywords: systemic risk; ranking; financial institutions; Lehman
    JEL: G10 G18 G20 G32 G38
    Date: 2012–10
  14. By: Carlos León; Andrés Murcia
    Abstract: As a result of the most recent global financial crisis literature has embraced size, connectedness and substitutability as key indicators for financial institutions’ systemic importance. Despite the intuitiveness of these concepts, identifying systemic important institutions remain a non-trivial task that implies two primary challenges. First, designing metrics for connectedness and substitutability may require, as acknowledged by literature, non-standard data sources and techniques. Second, choosing a methodology capable of aggregating the metrics designed for the three aforementioned concepts into a systemic importance index may be intricate. The herein paper addresses the second challenge. The chosen approach is to apply Principal Components Analysis to the metrics designed by León and Machado (2011) for assessing size, connectedness and substitutability, where those metrics rely on a combination of balance sheet data and the application of network theory to large-value payment system’s information. Results (i) demonstrate that the three concepts and their metrics are explanatory and non-redundant for differentiating financial institutions’ relative systemic importance; (ii) allow for constructing a PCA-based Systemic Importance Index, a valuable tool for financial authorities’ policy and decision-making; and (iii) confirm the importance of the too-connected-to-fail criteria and the presence of non-banking firms among the most systemically important financial institutions in the Colombian case.
    Keywords: Systemic Importance, Systemic Risk, Principal Components Analysis, Too-connected-to-fail, Too-big-to-fail. Classification JEL: D85, C63, E58, G28
    Date: 2012–10
  15. By: Raffaella Calabrese (University of Milano-Bicocca)
    Abstract: With the implementation of the Basel II accord, the development of accurate loss given default models is becoming increasingly important. The main objective of this paper is to propose a new model to estimate Loss Given Default (LGD) for bank loans by applying generalized additive models. Our proposal allows to represent the high concentration of LGDs at the boundaries. The model is useful in uncovering nonlinear covariate effects and in estimating the mean and the variance of LGDs. The suggested model is applied to a comprehensive survey on loan recovery process of Italian banks. To model LGD in downturn conditions, we include macroeconomic variables in the model. Out-of-time validation shows that our model outperforms popular models like Tobit, decision tree and linear regression models for different time horizons.
    Keywords: downturn LGD, generalized additive model, Basel II
    Date: 2012–10–22
  16. By: Marco Di Maggio (MIT); Marco Pagano (University of Naples "Federico II", CSEF, EIEF and CEPR)
    Abstract: We study a model where some investors (“hedgers”) are bad at information processing, while others (“speculators”) have superior information-processing ability and trade purely to exploit it. The disclosure of financial information induces a trade externality: if speculators refrain from trading, hedgers do the same, depressing the asset price. Market transparency reinforces this mechanism, by making speculators’ trades more visible to hedgers. As a consequence, asset sellers will oppose both the disclosure of fundamentals and trading transparency. This is socially inefficient if a large fraction of market participants are speculators and hedgers have low processing costs. But in these circumstances, forbidding hedgers’ access to the market may dominate mandatory disclosure.
    Date: 2012

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