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on Central Banking |
| By: | Winkler, Adalbert; Bindseil, Ulrich |
| Abstract: | In a dual liquidity crisis, both the government and the banking sector are under severe funding stress. By nature, dual crises have the potential of being particularly disruptive and damaging. Thus, understanding their mechanics, how they unfold and how they can be addressed under various monetary and international financial regimes, is crucial. We capture the logic of a dual crisis through a new, rigorous approach. A closed system of financial accounts allows for a systematic comparative review of underlying liquidity shocks as well as built-in liquidity buffers, including their limits beyond which a credit crunch materializes. Based on this we are able to (i) make precise the otherwise vague interpretations of liquidity flows and policy options; (ii) compare capacities to absorb shocks under alternative international financial systems; (iii) explain how various constraints interact; (iv) draw lessons for achieving higher resilience against self-fulfilling confidence crises. Most importantly, we analyze the role of a number of potential constraints to an elastic central bank liquidity provision, namely the availability of central bank eligible assets, limits deliberately imposed on the central bank`s ability to lend to or purchase assets of banks and governments (including monetary financing prohibitions), and limits in a fixed exchange rate regime relating to the gold or foreign currency reserves of the central bank. -- |
| JEL: | E50 E58 E42 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc12:62032&r=cba |
| By: | Schüder, Stefan |
| Abstract: | This paper develops an open economy portfolio balance model with endogenous asset supply. Domestic producers choose an optimal capital structure and finance capital goods through credit, bonds and equity assets. Private households hold a portfolio of domestic and foreign assets, shift balances depending on risk-return considerations, and maximise real consumption in accordance with the law of one price. Within this general equilibrium model, it will be shown that central bank interventions may promote an inefficient international allocation of real capital. The application of expansive monetary interventions throughout the course of economic crises maintains the domestic stock of real capital at the cost of inflation, currency devaluation, distortions of interest rates and asset prices, and risk clusters on the central bank s balance sheet. Exchange rate stabilising interventions have the result that the central bank can also stabilise the domestic stock of real capital. However, such interventions produce either risk clusters on the central bank s balance sheet or changes in the domestic price level. -- |
| JEL: | E10 E44 E52 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc12:65402&r=cba |
| By: | Buck, Florian; Schliephake, Eva |
| Abstract: | The paper argues that national regulators can improve the stability of the domestic banking sector via two substitutable policy instruments; minimum capital requirements and effort spend on domestic supervision. Both tools increase the soundness of a national banking system, but they imply different cost burdens between domestic banks and taxpayers. The optimal domestic policy choice is characterised by trading off marginal costs and benefits born by each party. However, the optimal policy choice changes if banks are allowed to be mobile. We show that countries are better off by harmonising capital requirements on an international standard la Basel, since harmonisation counters a regulatory race with other jurisdictions and will increase national utility. -- |
| JEL: | G18 L51 D78 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc12:62018&r=cba |
| By: | Flotho, Stefanie |
| Abstract: | This paper explicitly models strategic interaction between two independent national fiscal authorities and a single central bank in a simple New Keynesian model of a monetary union. Monetary policy is constrained by the zero lower bound on nominal interest rates. Coordination of fiscal policies does not always lead to the best welfare effects. It depends on the nature of the shocks whether governments prefer to coordinate or not coordinate. The size of the government multipliers depend on the combination of the intraunion competitiveness parameters. They get larger in case of implementation lags of fiscal policy. -- |
| JEL: | E52 E61 E63 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc12:62028&r=cba |
| By: | Radde, Sören |
| Abstract: | This paper presents a dynamic stochastic general equilibrium model which studies the business-cycle implications of financial frictions and liquidity risk at the bank-level. Following Holmstr m and Tirole (1998), demand for liquidity reserves arises from the anticipation of idiosyncratic operating expenses during the execution phase of bank-financed investment projects. Banks react to adverse aggregate shocks by hoarding liquidity while being forced to decrease their leverage. Both effects amplify recessionary dynamics, since they crowd out funds available for investment financing. This mechanism is triggered by a market liquidity squeeze modelled as a shock to the collateral value of banks assets. This novel type of aggregate risk induces a credit crunch scenario which shares key features with the Great Recession such as strong output decline, pro-cyclical leverage and counter-cyclical liquidity hoarding. Unconventional credit policy in the form of a wealth transfer from households to credit constrained banks is shown to mitigate the credit crunch. -- |
| JEL: | E22 E32 E44 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc12:65408&r=cba |
| By: | Itay Goldstein; Assaf Razin |
| Abstract: | In this paper, we review three branches of theoretical literature on financial crises. The first one deals with banking crises originating from coordination failures among bank creditors. The second one deals with frictions in credit and interbank markets due to problems of moral hazard and adverse selection. The third one deals with currency crises. We discuss the evolutions of these branches of the literature and how they have been integrated recently to explain the turmoil in the world economy. We discuss the relation of the models to the empirical evidence and their ability to guide policies to avoid or mitigate future crises. |
| JEL: | E61 F3 F33 G01 G1 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18670&r=cba |
| By: | Olivier Jeanne; Anton Korinek |
| Abstract: | This paper compares ex-ante policy measures (such as macroprudential regulation) and ex-post policy interventions (such as bailouts) to respond to financial crises in models of financial amplification, i.e. models in which falling asset prices, declining net worth and tightening financial constraints reinforce each other. The optimal policy mix in such models involves a combination of both types of measures since they offer alternative ways of mitigating binding financial constraints. Comparing their relative merits, ex-post policy interventions are only taken once a crisis has materialized and are therefore better targeted, whereas ex-ante measures are blunter since they depend on crisis expectations. However, ex-post interventions distort incentives and create moral hazard. This introduces a time consistency problem, which can in turn be solved by ex-ante policy measures. Limiting ex-post transfers to the revenue accumulated in a bailout fund reduces welfare. |
| JEL: | E44 G18 H23 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18675&r=cba |
| By: | Roth, Markus; Bursian, Dirk |
| Abstract: | The Taylor rule is a widely used concept in monetary macroeconomics and has been used in various areas either for positive or normative analyses. We examine whether the robustifying nature of Taylor rule cross-checking in the spirit of R island and Sveen (2011) also carries over to the case of parameter uncertainty. We find that adjusting monetary policy based on this kind of cross-checking can on average improve the outcome for the monetary authority in selected specifications. This, however, strongly depends on the functional form and also on the degree of the parameter misspecification as well as the information set of the monetary authority. In those specifications, increasing the relative weight attached to Taylor rule cross-checking results in a trade-off as higher average gains in terms of a reduction of loss are accompanied by higher standard deviations of the relative losses. -- |
| JEL: | E52 E47 E58 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc12:62078&r=cba |
| By: | Gurenko, Eugene N.; Itigin, Alexander |
| Abstract: | This paper compares solvency capital requirements under Solvency I and Solvency II for a sample mid-size insurance portfolio. According to the results of a study, changing the solvency capital regime from Solvency I to Solvency II will lead to a substantial additional solvency capital requirement that might represent a heavy burden for the company's shareholders. One way to reduce the capital requirement under Solvency II is to increase reinsurance protection, which will reduce the net retained risk exposure and hence also the solvency capital requirement. Therefore, this paper proposes an extended reinsurance structure that, under Solvency II, brings the capital requirement back to the level of that required under Solvency I. In a step-by-step approach, the paper demonstrates the extent of solvency relief attained by the insurer by applying different possible adjustments in the reinsurance structure. To evaluate the efficiency of reinsurance as the solvency capital relief instrument, the authors introduce a cost-of-capital based approach, which puts the achieved capital relief in relation to the costs of extending the reinsurance protection. This approach allows a direct comparison of reinsurance as a capital relief instrument with debt instruments available in the capital market. With the help of the introduced approach, the authors show that the best capital relief efficiency under all examined reinsurance alternatives is achieved when a financial quota share contract is chosen for proportional reinsurance. |
| Keywords: | Insurance&Risk Mitigation,Insurance Law,Debt Markets,Banking Law,Hazard Risk Management |
| Date: | 2013–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6306&r=cba |