nep-cba New Economics Papers
on Central Banking
Issue of 2013‒04‒20
ten papers chosen by
Maria Semenova
Higher School of Economics

  1. Countercyclical Bank Capital Requirement and Optimized Monetary Policy Rules By Carlos De Resende; Ali Dib; René Lalonde; Nikita Perevalov
  2. The Simple Analytics of Monetary Policy: A Post-Crisis Approach By Benjamin M. Friedman
  3. Macroeconomic Implications of U.S. Banking Liberalisation By Stefan Notz
  4. Asymmetric forecasting and commitment policy in a robust control problem By Taro Ikeda
  5. Announcements of interest rate forecasts: Do policymakers stick to them? By Nikola Mirkov; Gisle James Natvik
  6. Monetary Policy Regimes and the Term Structure of Interests Rates with Recursive Utility By Tanaka Hiroatsu
  7. Inflation targeting and interest rates By Lanzafame, Matteo; Nogueira, Reginaldo
  8. Money demand and the role of monetary indicators in forecasting euro area inflation By Christian Dreger; Jürgen Wolters
  9. Measuring the default risk of sovereign debt from the perspective of network By Hongwei Chuang; Hwai-Chung Ho
  10. Prolonged reserves accumulation, credit booms, asset prices and monetary policy in Asia By Filardo , Andrew J.; Siklos , Pierre L.

  1. By: Carlos De Resende; Ali Dib; René Lalonde; Nikita Perevalov
    Abstract: Using BoC-GEM-Fin, a large-scale DSGE model with real, nominal and financial frictions featuring a banking sector, we explore the macroeconomic implications of various types of countercyclical bank capital regulations. Results suggest that countercyclical capital requirements have a significant stabilizing effect on key macroeconomic variables, but mostly after financial shocks. Moreover, the bank capital regulatory policy and monetary policy interact, and this interaction is contingent on the type of shocks that drive the economic cycle. Finally, we analyze loss functions based on macroeconomic and financial variables to arrive at an optimal countercyclical regulatory policy in a class of simple implementable Taylor-type rules. Compared to bank capital regulatory policy, monetary policy is able to stabilize the economy more efficiently after real shocks. On the other hand, financial shocks require the regulator to be more aggressive in loosening/tightening capital requirements for banks, even as monetary policy works to counter the deviations of inflation from the target.
    Keywords: Economic models; Financial Institutions; Financial stability; International topics
    JEL: E32 E44 E5 G1 G2
    Date: 2013
  2. By: Benjamin M. Friedman
    Abstract: The standard workhorse models of monetary policy now commonly in use, both for teaching macroeconomics to students and for supporting policymaking within many central banks, are incapable of incorporating the most widely accepted accounts of how the 2007-9 financial crisis occurred and incapable too of analyzing the actions that monetary policymakers took in response to it. They also offer no point of entry for the frontier research that many economists have subsequently undertaken, especially research revolving around frictions in financial intermediation. This paper suggests a simple model that bridges this gap by distinguishing the interest rate that the central bank sets from the interest rate that matters for the spending decisions of households and firms. One version of this model adds to the canonical “new Keynesian” model a fourth equation representing the spread between these two interest rates. An alternate version replaces this reduced-form expression for the spread with explicit supply and demand equations for privately issued credit obligations. The discussion illustrates the use of both versions of the model for analyzing the kind of breakdown in financial intermediation that triggered the 2007-9 crisis, as well as “unconventional” central bank actions like large-scale asset purchases and forward guidance on the policy interest rate.
    JEL: E52
    Date: 2013–04
  3. By: Stefan Notz (University of Zurich)
    Abstract: I develop a Dynamic Stochastic General Equilibrium (DSGE) model featuring imperfect competition in banking to shed light on the macroeconomic repercussions of U.S. banking deregulation during the 1980s and 1990s. Banks function as traditional financial intermediaries, transferring funds from private households to entrepreneurs in the economy. Prior to deregulation, banks exploit their market power and charge high interest rates on loans to entrepreneurs. Financial liberalisation leads to more vigorous competition among banks, which effectively ameliorates credit market access of investors. I construct model generated panel data and reproduce various regression exercises implemented in related studies. In doing so, I contribute to bridging the gap between my theoretical framework and the vast empirical literature on U.S. banking deregulation. The model succeeds in both qualitatively and quantitatively replicating several empirical findings. In particular, bank market integration is associated with (i) an increase in investment in new firms, (ii) a decline in average firm size, (iii) an erosion of the bank capital ratio, (iv) a reduction of state business cycle volatility, and (v) improved consumption risk sharing of entrepreneurs.
    Date: 2012
  4. By: Taro Ikeda (Kurume University, Faculty of Economics)
    Abstract: This paper provides a piece of results regarding asymmetric forecasting and commitment monetary policy with a robust control algorithm. Previous studies provide no clarification of the connection between asymmetric preference and robust commitment policy. Three results emerge from general equilibrium modeling with asymmetric preference: (i) the condition for system stability implies an average inflation bias with respect to asymmetry (ii) the effect of asymmetry can be mitigated if policy makers relinquish a concern for robustness, and (iii) commitment policy may be superior to discretionary policy under widely used calibration sets, regardless of asymmetry.
    Keywords: asymmetric forecasting, commitment monetary policy, robust control
    JEL: E50 E52 E58
    Date: 2013–04
  5. By: Nikola Mirkov (Universität St.Gallen); Gisle James Natvik (Norges Bank (Central Bank of Norway))
    Abstract: If central banks value the ex-post accuracy of their forecasts, previously announced interest rate paths might affect the current policy rate. We explore whether this "forecast adherence" has influenced the monetary policies of the Reserve Bank of New Zealand and the Norges Bank, the two central banks with the longest history of publishing interest rate paths. We derive and estimate a policy rule for a central bank that is reluctant to deviate from its forecasts. The rule can nest a variety of interest rate rules. We find that policymakers appear to be constrained by their most recently announced forecasts.
    Keywords: Interest rates, Forecasts, Taylor rule, Adherence
    JEL: E43 E52 E58
    Date: 2013–04–11
  6. By: Tanaka Hiroatsu (Federal Reserve Board)
    Abstract: I study how two different monetary policy regimes characterized by their difference in degrees of credibility (a 'commitment' regime, in which the central bank can credibly commit to future policy and a 'discretion' regime, in which it cannot) affect the term structure of interest rates and attempt to evaluate which monetary policy regime seems more consistent with the data on macroeconomic variables and term structure dynamics. To this end, I construct a no-arbitrage affine-term structure model based on a New-Keynesian type micro-foundation. The model is augmented with Epstein-Zin (EZ) preferences, real wage rigidity and a simple central bank optimization problem. A shock structure that exhibits stochastic volatility in long-run risk of TFP growth parsimoniously generates time-varying term premia. The estimation of the model suggests that the assumption of a discretion regime performs better than a commitment regime in terms of quantitatively ÃÂfitting some salient features of the US data on the term structure and the business cycle during the Volcker-Greenspan-Bernanke era. The lack of policy credibility leads to volatile and persistent inflation, which generates volatile expected long-run inflation that is negatively correlated with future continuation values. This is perceived particularly risky by EZ nominal bond holders and results in upward sloping average nominal yields, long-term yield volatility and excess return predictability closer to the magnitude observed in the data while keeping the unconditional volatilities of consumption growth and inflation realistic.
    Date: 2012
  7. By: Lanzafame, Matteo; Nogueira, Reginaldo
    Abstract: Inflation Targeting (IT) can be expected to play a role in structurally reducing nominal interest rates, by lowering a country’s inflation expectations and risk premium. Relying on a panel of 52 advanced and emerging economies over the 1975-2009 years, we carry out a formal investigation of this hypothesis. Our econometric strategy adopts a flexible and efficient panel estimation framework, controlling for a number of issues usually neglected in the literature, such as parameter heterogeneity and cross-section dependence. Our findings are supportive of the optimistic view on IT, indicating that adoption of this monetary regime leads to lower nominal interest rates.
    Keywords: Inflation targeting; Interest rates; panel data; multifactor modeling.
    JEL: E40 E52 E58
    Date: 2013–03
  8. By: Christian Dreger; Jürgen Wolters
    Abstract: This paper examines the stability of money demand and the forecasting performance of a broad monetary aggregate (M3) in predicting euro area inflation. Excess liquidity is measured as the difference between the actual money stock and its fundamental value, the latter determined by a money demand function. The out-of sample forecasting performance is compared to widely used alternatives, such as the term structure of interest rates. The results indicate that the evolution of M3 is still in line with money demand even in the period of the financial and economic crisis. Monetary indi-cators are useful to predict inflation, if the forecasting equations are based on measures of excess liquidity.
    Keywords: Money demand, excess liquidity, inflation forecasts
    JEL: C22 C52 E41
    Date: 2013–04
  9. By: Hongwei Chuang; Hwai-Chung Ho
    Abstract: Recently, there has been a growing interest in network research, especially in these fields of biology, computer science, and sociology. It is natural to address complex financial issues such as the European sovereign debt crisis from the perspective of network. In this article, we construct a network model according to the debt--credit relations instead of using the conventional methodology to measure the default risk. Based on the model, a risk index is examined using the quarterly report of consolidated foreign claims from the Bank for International Settlements (BIS) and debt/GDP ratios among these reporting countries. The empirical results show that this index can help the regulators and practitioners not only to determine the status of interconnectivity but also to point out the degree of the sovereign debt default risk. Our approach sheds new light on the investigation of quantifying the systemic risk.
    Date: 2013–04
  10. By: Filardo , Andrew J. (BOFIT); Siklos , Pierre L. (BOFIT)
    Abstract: This paper examines past evidence of prolonged periods of reserve accumulation in Asian emerging market economies and the direct and indirect implications for monetary stability through the potential impact of such episodes on financial stability. The empirical research focuses on identifying periods of prolonged interventions and correlations with key macrofinancial aggregates. Related changes in central bank balance sheets are also examined, especially in periods when the interventions are linked to strong capital inflows. In particular, we consider whether changes in the central bank's balance sheet from prolonged intervention lead to spillovers to the balance sheet of the private sector. We explore the possible forms of the spillovers and the consequences on asset prices (e.g., housing prices, equity prices, the growth in domestic credit). Policy implications are drawn. Finally, we propose a new indicator of reserves adequacy and excessive foreign exchange reserves accumulation based on a factor model. Two broad conclusions emerge from the stylized facts and the econometric evidence. First, the best protection against costly reserves accumulation is a more flexible exchange rate. Second, the necessity to accumulate reserves as a bulwark against goods price inflation is misplaced. Instead, there is a strong link between asset price movements and the likelihood of accumulating foreign exchange reserves that are costly.
    Keywords: foreign exchange reserves accumulation; monetary and financial stability
    JEL: D52 E44 F32 F41
    Date: 2013–03–28

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