nep-cba New Economics Papers
on Central Banking
Issue of 2013‒05‒11
eight papers chosen by
Maria Semenova
Higher School of Economics

  1. A simple empirical measure of central banks' conservatism By Levieuge, Grégory; Lucotte, Yannick
  2. Central bank transparency with the cost channel. By Meixing Dai; Qiao Zhang
  3. Do Strict Capital Requirements Raise the Cost of Capital? Banking Regulation and the Low Risk Anomaly By Malcolm Baker; Jeffrey Wurgler
  4. Business cycle and monetary policy analysis with market rigidities and financial frictions By Miguel Casares; Luca Deidda; Jose E. Galdon-Sanchez
  5. Evaluating the effects of the EU directive proposal for risk-based deposit insurance premiums in Spain By Pilar Gómez-Fernández-Aguado; Antonio Partal-Ureña; Antonio Trujillo-Ponce
  6. On the Role of Financial Depth in Determining the Asymmetric Impact of Monetary Policy By Mustafa Caglayan; Ozge Kandemir Kocaaslan; Kostas Mouratidis
  7. Pledgability and Liquidity: A New Monetarist Model of Financial and Macroeconomic Activity By Venky Venkateswaran; Randall Wright
  8. Identifying, ranking and tracking systemically important financial institutions (SIFIs), from a global, EU and Eurozone perspective By Masciantonio, Sergio

  1. By: Levieuge, Grégory; Lucotte, Yannick
    Abstract: In this paper we suggest a simple empirical and model-independent measure of Central Banks' Conservatism, based on the Taylor curve. This new indicator can easily be extended in time and space, whatever the underlying monetary regime of the considered countries. We demonstrate that it evolves in accordance with the monetary experiences of 32 OECD member countries from 1980, and is largely equivalent to the model-based measure provided by Krause & Méndez [Southern Economic Journal, 2005]. We finally bring forward the interest of such an indicator for further empirical analysis dealing with the preferences of Central Banks.
    Keywords: Central Banks' preferences; Conservatism; Taylor curve; Taylor rule
    JEL: E43 E58 E52 E47
    Date: 2012–04–28
  2. By: Meixing Dai; Qiao Zhang
    Abstract: Using a New Keynesian model with the cost channel, characterized by distortions due to monopolistic competition and the firms’ need to pre-finance their production, we show that central bank transparency affects the economy not only through the effects of inflation shocks but also of demand shocks. The economy is affected by opacity in the same way, but with smaller amplitude, in the case of demand shocks than in the case of inflation shocks except when the latter have a significantly lower variance. Generally, imperfect transparency could discipline the price-setting behavior of firms by reducing the average reaction of inflation to inflation and demand shocks and hence the volatility of inflation while increasing these of the output gap, and more so when these shocks are highly persistent. It could thus significantly improve social welfare if the society assigns a very low weight to output-gap stabilization. The presence of the cost channel reinforces significantly the effects of opacity on the responses of endogenous variables and their volatility to inflation shocks.
    Keywords: Cost channel, central bank transparency, distortions, disciplining effect of imperfect transparency.
    JEL: E52 E58
    Date: 2013
  3. By: Malcolm Baker; Jeffrey Wurgler
    Abstract: Minimum capital requirements are a central tool of banking regulation. Setting them balances a number of factors, including any effects on the cost of capital and in turn the rates available to borrowers. Standard theory predicts that, in perfect and efficient capital markets, reducing banks’ leverage reduces the risk and cost of equity but leaves the overall weighted average cost of capital unchanged. We test these two predictions using U.S. data. We confirm that the equity of better-capitalized banks has lower systematic risk (beta) and lower idiosyncratic risk. However, over the last 40 years, lower risk banks have higher stock returns on a risk-adjusted or even a raw basis, consistent with a stock market anomaly previously documented in other samples. The size of the low risk anomaly within banks suggests that the cost of capital effects of capital requirements may be considerable. Assuming competitive lending markets, banks’ low asset betas implied an average risk premium of only 40 basis points above Treasury yields in our sample period; a calibration suggests that a ten percentage-point increase in Tier 1 capital to risk-weighted assets may have increased this to between 100 and 130 basis points per year. In summary, the low risk anomaly in the stock market produces a potentially significant cost of capital requirements.
    JEL: G14 G21 G32
    Date: 2013–05
  4. By: Miguel Casares (Departamento de Economía-UPNA); Luca Deidda (Università di Sassari. Italia); Jose E. Galdon-Sanchez (Departamento de Economía-UPNA)
    Abstract: We describe a dynamic macroeconomic model that incorporates firm-level borrowing constraints, competitive CES loan production, and rigidities on both setting prices and wages. The external finance premium (interest-rate spread) is countercyclical with technology and financial shocks, and procyclical with consumption spending shocks. The real effects of financial shocks are significantly amplified when either considering greater rigidities for price/wage setting or a low elasticity of substitution in loan production (banking real rigidities). In the monetary policy analysis, a stabilizing Taylor (1983)-style rule performs slightly better when incorporating a positive and small response coefficient to the external finance premium.
    Keywords: financial accelerator, nominal rigidities, real rigidities donations
    JEL: E32 E44
    Date: 2013
  5. By: Pilar Gómez-Fernández-Aguado (Department of Financial Economics and Accounting, Universidad de Jaén); Antonio Partal-Ureña (Department of Financial Economics and Accounting, Universidad de Jaén); Antonio Trujillo-Ponce (Department of Financial Economics and Accounting, Universidad Pablo de Olavide)
    Abstract: Using This paper analyzes the effects on the Spanish banking system of the EU proposal for a new Directive on deposit insurance systems based on risk-sensitive premiums. To do this, we examine the risk profile of Spanish banks during the 2007-2011 period according to several indicators reflecting capital adequacy, asset quality, profitability and liquidity. We conclude that most of banks would increase their contributions with the proposed system, evidencing the cyclical character of the new model. Our results also suggest that risk-based schemes could provide an incentive for sound management by reducing the premiums for those banks with better risk profiles.
    Keywords: Banking regulation; financial safety net; deposit insurance premiums; deposit insurance system; moral hazard; European banking system
    Date: 2013–05
  6. By: Mustafa Caglayan (School of Management and Languages, Heriot-Watt University, UK); Ozge Kandemir Kocaaslan (Department of Economics, Hacettepe University, Ankara, Turkey); Kostas Mouratidis (Department of Economics, University of Sheffield, UK)
    Abstract: This paper examines the asymmetric impact of monetary policy shocks on real output growth considering the role of financial depth. We carry out our examination using quarterly US data over 1980:q1-2011:q4 and implement an instrumental variables Markov regime switching methodology to account for the endogeneity between monetary policy and output growth. Our investigation shows that the impact of monetary policy shocks on output growth is stronger during recessions than expansions. More interestingly, we show that financial depth dampens the real effects of monetary policy shocks. We show that the results are robust to several alternative financial depth measures.
    Keywords: Output growth; asymmetric effects; monetary policy; financial depth; Markov switching; instrumental variables
    JEL: E32 E52
    Date: 2013
  7. By: Venky Venkateswaran; Randall Wright
    Abstract: When limited commitment hinders unsecured credit, assets help by serving as collateral. We study models where assets differ in pledgability – the extent to which they can be used to secure loans – and hence liquidity. Although many previous analyses of imperfect credit focus on producers, we emphasize consumers. Household debt limits are determined by the cost households incur when assets are seized in the event of default. The framework, which nests standard growth and asset-pricing theory, is calibrated to analyze the effects of monetary policy and financial innovation. We show that inflation can raise output, employment and investment, plus improve housing and stock markets. For the baseline calibration, optimal inflation is positive. Increases in pledgability can generate booms and busts in economic activity, but may still be good for welfare.
    JEL: E41 E43 E44 E52 G12
    Date: 2013–05
  8. By: Masciantonio, Sergio
    Abstract: This paper develops a methodology to identify systemically important financial institutions building on that developed by the BCBS (2011) and used by the Financial Stability Board in its yearly G-SIFIs identification. This methodology is based on publicly available data, providing fully transparent results with a G-SIFIs list that helps to bridge the gap between market knowledge and supervisory decisions. Moreover the results encompass a complete ranking of the banks considered, according to their systemic importance scores. The methodology has then been applied to EU and Eurozone samples of banks to obtain their systemic importance ranking and SIFIs lists. A statistical analysis and some geographical and historical evidence provide further insight into the notion of systemic importance, its policy implications and the future applications of this methodology.
    Keywords: banks, balance sheets, systemic risk, SIFIs, financial stability, regulation
    JEL: C81 G01 G10 G18 G20 G21 G28
    Date: 2013–04–01

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