nep-cba New Economics Papers
on Central Banking
Issue of 2013‒04‒27
eleven papers chosen by
Maria Semenova
Higher School of Economics

  1. The Bank Lending Channel and Monetary Policy Rules for European Banks: Further Extensions By Nicholas Apergis; Stephen M. Miller; Effrosyni Alevizopoulou
  2. New bank equity capital rules in the European Union: A critical evaluation By Schuster, Thomas; Kövener, Felix; Matthes, Jürgen
  3. Inflation Targeting: Does It Improve Economic Performance? By Stephen M. Miller; WenShwo Fang; Ozkan Eren
  4. Financial Globalization and Monetary Transmission By Simone Meier
  5. The Case for Four Percent Inflation By Laurence Ball
  6. The empirical (ir)relevance of the interest rate assumption for central bank forecasts By Knüppel, Malte; Schultefrankenfeld, Guido
  7. Quantitative forward guidance and the predictability of monetary policy - A wavelet based jump detection approach - By Lars Winkelmann; ; ;
  8. Testing Macroprudential Stress Tests: The Risk of Regulatory Risk Weights By Viral V. Acharya; Robert Engle; Diane Pierret
  9. Public debt and changing inflation targets By Krause, Michael U.; Moyen, Stéphane
  10. Optimal sovereign default By Adam, Klaus; Grill, Michael
  11. On the Stability of Euro Area Money Demand and its Implications for Monetary Policy By Matteo Barigozzi; Antonio Conti

  1. By: Nicholas Apergis (Department of Banking and Financial Management, University of Piraeus); Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas); Effrosyni Alevizopoulou (Department of Banking and Financial Management, University of Piraeus)
    Abstract: The monetary authorities affect the macroeconomic activity through various channels of influence. This paper examines the bank lending channel, which considers how central bank actions affect deposits, loan supply, and real spending. The monetary authorities influence deposits and loan supplies through its main indicator of policy, the real short-term interest rate. This paper employs the endogenously determined target interest rate emanating from the central bank’s monetary policy rule to examine the operation of the bank lending channel. Furthermore, it examines whether different bank-specific characteristics affect how European banks react to monetary shocks. That is, do sounder banks react more to the monetary policy rule than less-sound banks. In addition, inflation and output expectations alter the central bank’s decision for its target interest rate, which, in turn, affect the banking system’s deposits and loan supply. Robustness tests, using additional control variables, (i.e., the growth rate of consumption, the ratio loans to total deposits, and the growth rate of total deposits) support the previous results.
    Keywords: Monetary policy rules, bank lending channel, European banks, GMM methodology
    Date: 2012–04
  2. By: Schuster, Thomas; Kövener, Felix; Matthes, Jürgen
    Abstract: This paper presents and critically evaluates the bank capital requirement rules proposed by the European Union - the capital requirements directive CRD IV and the capital requirements regulation CRR. First, the rules of the Basel III accord about equity capital standards of banks are briefly described. Second, the EU proposal based on Basel III is presented. The article differentiates between rules fully in line with Basel III, modified rules, and new rules not covered by Basel III. Third, the EU proposals are critically evaluated. The paper concludes that the proposals lead in the right direction, but there is still much room for improvement. In fact, some of the planned rules should be urgently revised. Above all, risk weights for member state government bonds must be introduced, liquidity requirements should not overly favour government bonds, and member states should be able to set capital requirements which are greater than 18% of risk-weighted assets. --
    Keywords: Banken und Versicherungen,Europäische Währungsunion,Finanzmärkte,Finanzmarktregulierung
    JEL: G21 G18 G32
    Date: 2013
  3. By: Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas); WenShwo Fang (Department of Economics, Feng Chia University); Ozkan Eren (Department of Economics, University of Nevada, Las Vegas)
    Abstract: The last two decades witnessed a dramatic transformation of how central banks operate. An increasing number of central banks now use inflation targeting as their monetary policy control mechanism. A series of papers attempt to measure the effectiveness of inflation targeting on economic performance. The basic challenge in such tests is that inflation targeting appeared during a time when inflation trended downward across nearly all countries – those that did and did not adopt inflation targeting. This paper reviews the existing methods used to test for the effectiveness of inflation targeting and compares the findings of these different methods for both developed and developing countries. In general, inflation targeting does not affect economic performance in developed countries but does exert a positive effect on economic performance in developing countries. We conclude that the effectiveness of inflation targeting policy garners little, or only transitory, support based on evidence from developed countries. Much more support exists for developing countries.
    Keywords: inflation targeting, difference in differences, fixed and random effects, treatment effects, developed and developing countries
    JEL: C52 E52 E58
    Date: 2012–12
  4. By: Simone Meier
    Abstract: This paper analyzes the way in which international financial integration affects the transmission of monetary policy in a New Keynesian open economy framework. It extends Woodford's (2010) analysis to a model with a richer financial markets structure, allowing for international trading in multiple assets and subject to financial intermediation costs. Two different forms of financial integration are considered, in particular an increase in the level of gross foreign asset holdings and a decrease in the costs of international asset trading. The simulations in the calibrated model show that none of the analyzed forms of financial integration undermine the effectiveness of monetary policy in influencing domestic output and inflation. Under realistic parameterizations, monetary policy is more, rather than less, effective as the positive impact of strengthened exchange rate and wealth channels more than offsets the negative impact of weakened interest rate channels. The paper also analyzes the interaction of financial integration with trade integration, varying both the importance of trade linkages and the degree of exchange rate pass-through. These interactions show that the positive effects of financial integration are amplified by trade integration. Overall, monetary policy is most effective in parameterizations with the highest degree of both financial and real integration.
    Keywords: Monetary policy transmission, International financial integration
    JEL: E52 F41 F42 F47
    Date: 2013
  5. By: Laurence Ball
    Abstract: Many central banks target an inflation rate near two percent. This essay argues that policymakers would do better to target four percent inflation. A four percent target would ease the constraints on monetary policy arising from the zero bound on interest rates, with the result that economic downturns would be less severe. This benefit would come at minimal cost, because four percent inflation does not harm an economy significantly.
    Date: 2013–04
  6. By: Knüppel, Malte; Schultefrankenfeld, Guido
    Abstract: The interest rate assumptions for macroeconomic forecasts differ considerably among central banks. Common approaches are given by the assumption of constant interest rates, interest rates expected by market participants, or the central bank's own interest rate expectations. From a theoretical point of view, the latter should yield the highest forecast accuracy. The lowest accuracy can be expected from forecasts conditioned on constant interest rates. However, when investigating the predictive accuracy of the forecasts for interest rates, inflation and output growth made by the Bank of England and the Banco do Brasil, we hardly find any significant differences between the forecasts based on different interest assumptions. We conclude that the choice of the interest rate assumption, while being a major concern from a theoretical point of view, appears to be at best of minor relevance empirically. --
    Keywords: Forecast Accuracy,Density Forecasts,Projections
    JEL: C12 C53
    Date: 2013
  7. By: Lars Winkelmann; ; ;
    Abstract: The publication of a projected path of future policy decisions by central banks is a controversially debated method to improve monetary policy guidance. This paper suggests a new approach to evaluate the impact of the guidance strategy on the predictability of monetary policy. Using the example of Norway, the empirical investigation is based on jump probabilities of interest rates on central bank announcement days before and after the introduction of quantitative guidance. Within the standard semimartingale framework, we propose a new methodology to detect jumps. We derive a representation of the quadratic variation in terms of a wavelet spectrum. An adaptive threshold procedure on wavelet spectrum estimates aims at localizing jumps. Our main empirical result indicates that quantitative guidance significantly improves the predictability of monetary policy.
    Keywords: Central bank communication, interest rate projections, semimartingales, Locally Stationary Wavelet processes, jump detection
    JEL: E58 C14 C58
    Date: 2013–04
  8. By: Viral V. Acharya; Robert Engle; Diane Pierret
    Abstract: Macroprudential stress tests have been employed by regulators in the United States and Europe to assess and address the solvency condition of financial firms in adverse macroeconomic scenarios. We provide a test of these stress tests by comparing their risk assessments and outcomes to those from a simple methodology that relies on publicly available market data and forecasts the capital shortfall of financial firms in severe market-wide downturns. We find that: (i) The losses projected on financial firm balance-sheets compare well between actual stress tests and the market-data based assessments, and both relate well to actual realized losses in case of future stress to the economy; (ii) In striking contrast, the required capitalization of financial firms in stress tests is found to be rather low, and inadequate ex post, compared to that implied by market data; (iii) This discrepancy arises due to the reliance on regulatory risk weights in determining required levels of capital once stress-test losses are taken into account. In particular, the continued reliance on regulatory risk weights in stress tests appears to have left financial sectors under-capitalized, especially during the European sovereign debt crisis, and likely also provided perverse incentives to build up exposures to low risk-weight assets.
    JEL: G01 G11 G21 G28
    Date: 2013–04
  9. By: Krause, Michael U.; Moyen, Stéphane
    Abstract: What are the effects of a higher central bank inflation target on the burden of real public debt? Several recent proposals have suggested that even a moderate increase in the inflation target can have a pronounced effect on real public debt. We consider this question in a New Keynesian model with a maturity structure of public debt and an imperfectly observed inflation target. We find that moderate changes in the inflation target only have significant effects on real public debt if they are essentially permanent. Moreover, the additional benefits of not communicating a change in the inflation target are minor. --
    Keywords: public debt,learning,inflation target,callable perpetuity,debt maturity
    JEL: E31 E52 H63
    Date: 2013
  10. 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 contracting frictions make it optimal for the government to finance 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 significant 'default costs'. Optimal default improves the international diversification of domestic output risk, increases the efficiency of domestic investment and - for a wide range of default costs - significantly increases 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 following such shocks default can be Ramsey optimal even if the net foreign asset position is positive. --
    Keywords: Fiscal Policy,Sovereign Risk
    JEL: E62 F34
    Date: 2013
  11. By: Matteo Barigozzi; Antonio Conti
    Abstract: We revisit the usefulness of long-run money demand equations for the European Central Bank. We first conduct a model evaluation exercise by means of a recent timeóvarying cointegration test. A stable relation for euro area M3 is not rejected by data only when accounting for both a speculative motive, represented by international financial markets, and a precautionary motive, proxied by changes in the unemployment rate. Second, relying on this finding, we propose and estimate a novel time-invariant specification for money demand which allows us (i) to build a leading indicator of stock market busts and (ii) to describe the anomalous behavior of M3 in the last decade. Excess liquidity matters for both financial and price stability.
    Keywords: money demand; timeóvarying cointegration; priceóearnings ratios; unemployment rate; monetary policy
    Date: 2013–04–23

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