nep-cba New Economics Papers
on Central Banking
Issue of 2013‒03‒23
fifteen papers chosen by
Maria Semenova
Higher School of Economics

  1. Financial stability analysis: insights gained from consolidated banking data for the EU By Stefano Borgioli; Ana Cláudia Gouveia; Claudio Labanca
  2. Is Inflation Targeting Still on Target? The Recent Experience of Latin America By Luis Felipe Cespedes; Roberto Chang; Andres Velasco
  3. Lessons from the historical use of reserve requirements in the United States to promote bank liquidity By Mark A. Carlson
  4. Early warning for currency crises: what is the role of financial openness? By Jon Frost; Ayako Saiki
  5. Do heterogeneous expectations constitute a challenge for policy interaction? By Emanuel Gasteiger
  6. Financial stability monitoring By Tobias Adrian; Daniel Covitz; Nellie J. Liang
  7. Pre- versus Post-Crisis Central Banking in Qatar By Elsamadisy, Elsayed Mousa; Alkhater, Khalid Rashid; Basher, Syed Abul
  8. Does Monetary Policy Matter in China? A Narrative Approach By Sun, Rongrong
  9. The decentralised central bank: regional bank rate autonomy in Norway, 1850-1892. By Klovland, Jan Tore; Øksendal, Lars Fredrik
  10. International reserves and rollover risk By Javier Bianchi; Juan Carlos Hatchondo; Leonardo Martinez
  11. From Supervision to Resolution: Next Steps on the Road to European Banking Union By Nicolas Veron; Guntram B. Wolff
  12. Rollover risk as market discipline: a two-sided inefficiency By Thomas M. Eisenbach
  13. Monetary Integration, Soft Budget Constraints, and the EMU Sovereign Debt Crises By Thushyanthan Baskaran; Zohal Hessami
  14. Financial Fragility in the Current European crisis By Tropeano, D.
  15. Modeling monetary economies: an equivalence result By Gabriele Camera; YiLi Chien

  1. By: Stefano Borgioli (European Central Bank); Ana Cláudia Gouveia; Claudio Labanca
    Abstract: This occasional paper explores the Consolidated Banking Data (CBD), a key component of the ECB statistical toolbox for financial stability analysis. We show that non-consolidated, host-country Monetary Financial Institutions (MFI) balance sheet data, which constitutes a key source of input into monetary analysis, are a rather weak proxy for consolidated, home-country data and therefore cannot easily substitute CBD for the purposes of macro-prudential assessment. In addition, it is argued that, notwithstanding the relevance of large banks, medium-sized and small banks must also be taken into account in financial stability analysis, given their relevance in several EU countries and their different business models. A discussion follows on how aggregate data, broken down by bank size, can be used to complement micro data, in particular by signalling where and what to look for, again highlighting the differences between large banks on the one hand and small and mediumsized banks on the other. JEL Classification: C82, G21
    Keywords: Macro-prudential analysis, Consolidated Banking Data, banking indicators
    Date: 2013–01
  2. By: Luis Felipe Cespedes; Roberto Chang; Andres Velasco
    Abstract: This paper reviews the recent experience of a half-dozen Latin American inflation targeting (IT) nations. Repeated and large deviations from the standard IT framework are documented: exchange market interventions have been lasting and widespread; the real exchange rate has often become a target of policy, though this target is seldom made explicit; a range of other non-conventional policy tools, especially changes in reserve requirements but occasionally taxes or restrictions on international capital movements, also came into common use. As in developed nations, during the 2008-2009 crisis issues of liquidity provision took center stage. A first evaluation of the emerging modified framework of monetary policy is also attempted. In general terms, the new approach seems to have been effective, at the very least since the region weathered the crisis reasonably well. But also, and perhaps more importantly, many questions remain about the desirability of non-conventional monetary policies in Latin America.
    JEL: E52 E58 F41
    Date: 2013–03
  3. By: Mark A. Carlson
    Abstract: Efforts in the United States to promote bank liquidity through reserve requirements, a minimum ratio of liquid assets relative to liabilities, extend at least as far back as the aftermath of the Panic of 1837. These requirements were quite important during the National Banking Era. Nevertheless, suspensions of deposit convertibility and liquidity shortfalls continued to occur during banking panics. Eventually, efforts to ensure that banks remained liquid resulted in a shift away from reserve requirements in favor of a central bank able to add liquidity to the financial system. This paper reviews the issues raised in the historical debates about reserve requirements along with some empirical evidence on banks' holdings of reserves, to provide some insights and lessons that are relevant today. A key lesson is that individual bank liquidity during stress periods is inherently and intricately tied to the liquidity policies of the central bank.
    Date: 2013
  4. By: Jon Frost; Ayako Saiki
    Abstract: We explore the role of financial openness – capital account openness and gross capital inflows – and a newly constructed gravity-based contagion index to assess the importance of these factors in the run-up to currency crises. Using a quarterly data set of 46 advanced and emerging market economies (EMEs) during the period 1975Q1-2011Q4, we estimate a multi-variable probit model including in the post-Lehman period. Our key findings are as follows. First, capital account openness is a robust indicator, reducing the probability of currency crisis for advanced economies, but less so for EMEs. Second, surges in gross (but not net) capital inflows in general increase the risk of a currency crisis, but looking at a disaggregated level, gross portfolio flows increase the risk of a currency crisis for advanced economies, whereas gross FDI inflows decrease the risk of a crisis for EMEs. Third, contagion has a very strong impact, consistent with the past literature, especially during the post-Lehman shock episode. Last, our model performs well out-of-sample, confirming that early warning models were helpful in judging relative vulnerability of countries during and since the Lehman crisis.
    Keywords: Currency crisis; early warning; financial stability; capital account openness; capital flows; contagion; exchange rate regime
    JEL: F31 F32 F33 F41 G10 G15
    Date: 2013–03
  5. By: Emanuel Gasteiger
    Abstract: Yes, indeed; at least when it comes to fiscal and monetary policy interaction. We examine a Neo-Classical economy, where agents have either rational or adaptive expectations. We demonstrate that the monetarist solution can be unique and stationary under a passive fiscal/active monetary policy regime, because active monetary policy incorporates expectational heterogeneity. In contrast, under an active fiscal/passive monetary policy regime, the fiscalist solution is prone to explosive dynamics d e to empirically plausible expectational heterogeneity. However, conditional on stationarity, both regimes can yield promising business cycle dynamics, which are absent in the homogeneous expectations benchmark.
    Keywords: Inflation, Heterogeneous Expectations, Fiscal and Monetary Policy
    JEL: E31 D84 E52 E62
    Date: 2013–03–18
  6. By: Tobias Adrian; Daniel Covitz; Nellie J. Liang
    Abstract: While the Dodd-Frank Act (DFA) broadens the regulatory reach to reduce systemic risks to the U.S. financial system, it does not address some important risks that could migrate to or emanate from entities outside the federal safety net. At the same time, it limits the types of interventions by financial authorities to address systemic events when they occur. As a result, a broad and forward-looking monitoring program, which seeks to identify financial vulnerabilities and guide the development of preemptive policies to help mitigate them, is essential. Systemic vulnerabilities arise from market failures that can lead to excessive leverage, maturity transformation, interconnectedness, and complexity. These vulnerabilities, when hit by adverse shocks, can lead to fire-sale dynamics, negative feedback loops, and inefficient contractions in the supply of credit. We present a framework that centers on the vulnerabilities that propagate adverse shocks, rather than shocks themselves, which are difficult to predict. Vulnerabilities can emerge in four areas: 1) systemically important financial institutions (SIFIs), 2) shadow banking, 3) asset markets, and 4) the nonfinancial sector. This framework also highlights how policies that reduce the likelihood of systemic crises may do so only by raising the cost of financial intermediation in noncrisis periods.
    Keywords: Financial stability ; Systemic risk ; Financial risk management ; Financial Institutions Monitoring System
    Date: 2013
  7. By: Elsamadisy, Elsayed Mousa; Alkhater, Khalid Rashid; Basher, Syed Abul
    Abstract: In the years before the global financial crisis of 2008--2010, Qatar experienced a huge build-up of liquidity surplus in the banking system, mainly driven by surging net capital inflows. This paper identifies various sources of interbank liquidity in Qatar and discusses the various implications of structural primary liquidity surplus for the money market in particular and the economy at large. The paper attempts to evaluate the Qatar Central Bank policy making and conduct during the pre- and post-crisis periods within a framework of the Austrian monetary overinvestment theories, and concludes that the central bank had forcibly committed several forced monetary policy mistakes, which resulted in a breakdown in the interest rate channel of the monetary policy transmission mechanism. This led to the inability of the central bank to control the interbank interest rate and to an accelerating inflation rate during the pre-crisis years. In contrast, a dramatic change in the central bank's monetary policy framework and a deliberate monetary policy mistake on behalf of the central bank resulted in a restoration of the interest rate channel of the monetary policy transmission mechanism, stabilization of the interbank interest rate close to the central bank's policy rate and a sharp deceleration in the inflation rate in the post-crisis period. The paper concludes by offering brief policy recommendations.
    Keywords: Monetary policy framework; Monetary policy mistakes; Liquidity management; Structural liquidity surplus; Financial crisis.
    JEL: E51 E52 E58
    Date: 2013–03–21
  8. By: Sun, Rongrong
    Abstract: This paper applies the narrative approach to monetary policy in China to tackle two problems of policy measurement. The first problem arises because the PBC (the central bank of China) applies multiple instruments and none of them per se can adequately reflect changes in its monetary policy. The second one is the classical identification problem: the causation direction of the observed interaction between central bank actions and real activity needs to be identified. The PBC’s documents are used to infer the intentions behind policy movements. Three shocks are identified for the period 2000-2011 that are exogenous to real output. Estimates using these shocks and various robustness tests indicate that monetary policy has large and persistent impact on output in China.
    Keywords: exogenous shocks, the narrative approach, real effects of monetary policy
    JEL: E52 E58
    Date: 2012
  9. By: Klovland, Jan Tore (Dept. of Economics, Norwegian School of Economics and Business Administration); Øksendal, Lars Fredrik (Dept. of Economics, Norwegian School of Economics and Business Administration)
    Abstract: Before 1893 the regional branches of Norges Bank set their own bank rates. We discuss how bank rate autonomy could be reconciled with the fixed exchange rate commitments of the silver and gold standard. Although the headquarters of the bank was in Trondhjem, we find that the Christiania branch played the key role in providing leadership in bank rate policy. Foreign interest rate impulses were important for bank rate decisions, but there was also some leeway for responding to idiosyncratic shocks facing the Norwegian economy.
    Keywords: Bank rate; gold standard; monetary policy.
    JEL: E58 N23
    Date: 2013–03–11
  10. By: Javier Bianchi; Juan Carlos Hatchondo; Leonardo Martinez
    Abstract: Two striking facts about international capital flows in emerging economies motivate this paper: (1) Governments hold large amounts of international reserves, for which they obtain a return lower than their borrowing cost. (2) Purchases of domestic assets by nonresidents and purchases of foreign assets by residents are both procyclical and collapse during crises. We propose a dynamic model of endogenous default that can account for these facts. The government faces a trade-off between the benefits of keeping reserves as a buffer against rollover risk and the cost of having larger gross debt positions. Long-duration bonds, the countercyclical default premium, and sudden stops are important for the quantitative success of the model.
    Keywords: Economic growth ; Business cycles ; Financial markets ; Financial institutions
    Date: 2013
  11. By: Nicolas Veron (Peterson Institute for International Economics); Guntram B. Wolff (Bruegel)
    Abstract: Special resolution regimes for banks and systemically important financial institutions are an attractive alternative to both insolvency and public bailouts and have a compelling track record. The European Council has outlined a policy sequence of three successive steps including the Single Supervisory Mechanism (SSM), the Bank Recovery and Resolution (BRR) Directive and the operational framework for direct recapitalizations, and the Single Resolution Mechanism (SRM). Implementing this sequence will involve a complex balancing of short-term, medium-term, and long-term objectives. The creation of the SRM will be a key milestone and should take place as early as possible.
    Date: 2013–02
  12. By: Thomas M. Eisenbach
    Abstract: Why does the market discipline that banks face seem too weak during good times and too strong during bad times? This paper shows that using rollover risk as a disciplining device is effective only if all banks face purely idiosyncratic risk. However, if banks' assets are correlated, a two-sided inefficiency arises: Good aggregate states have banks taking excessive risks, while bad aggregate states suffer from fire sales. The driving force behind this inefficiency is an amplifying feedback loop between asset liquidation values and market discipline. This feedback loop operates in both good and bad aggregate states, but with opposite effects.
    Keywords: Risk management ; Bank investments ; Risk assessment ; Financial markets
    Date: 2013
  13. By: Thushyanthan Baskaran (Department of Economics, University of Göttingen, Germany); Zohal Hessami (Department of Economics, University of Konstanz, Germany)
    Abstract: One possible explanation for the European sovereign debt crises is that the European Economic and Monetary Union (EMU) gave rise to consolidation fatigue or even deliberate over-borrowing. This paper explores the validity of this explanation by studying how three decisive stages in the history of the EMU affected public borrowing in EU member states: the signing of the Maastricht treaty in 1992, the introduction of the Euro in 1999, and the suspension of the SGP in late 2003. The methodology relies on difference-in-difference regressions covering 26 OECD countries over the 1975-2009 period. The findings indicate that the first two 'treatments' reduced deficits especially in traditional high-deficit countries. In contrast, the watering down of the original SGP encouraged borrowing in countries which traditionally have had high deficits.
    Keywords: EMU, monetary union, fiscal policy, public deficits
    JEL: F15 F42 H62 H63
    Date: 2013–03–14
  14. By: Tropeano, D.
    Abstract: The paper argues that the European financial system in the years following the great financial crisis started in 2007 has become increasingly fragile. Minsky’s notion of fragility, on which it is based, is related to history, policy and institutions. In the current European environment, fragility depends on the rise of shadow banks’ assets, the expansion of derivatives and the changes in financial regulation. All these elements have jointly triggered several feedback loops. In Minsky’s opinion, policies should have the scope of thwarting self-enforcing feedback loops. Yet the policies that have been implemented so far seem to have produced the opposite effects. They have created new feedback loops that nurture fragility again. This outcome, however, is not surprising for policies may change initial conditions and have unintended consequences, as Minsky has taught us since a long time.
    Keywords: financial fragility; Minsky; European financial system; feedback loops; regulation; thwarting policies
    Date: 2013
  15. By: Gabriele Camera; YiLi Chien
    Abstract: This paper offers a methodological contribution to monetary theory. First, it presents a model economy with cash-in-advance constraints, following the work of Lucas in the early 80’s; then, it specializes the model to preferences and shocks assumed in the Lagos and Wright (2005) framework. Second, it derives the main equations describing allocations under competitive pricing and demonstrates that the two models—which on the surface appear different—are mathematically equivalent. Such equivalence result is extended to stationary equilibrium under non-competitive pricing; in both models, allocations depend on a free parameter controlling price markups.
    Keywords: Monetary theory ; Money ; Inflation (Finance)
    Date: 2013

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