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on Central Banking |
| By: | Volha Audzei |
| Abstract: | Investor sentiment proved to be an important factor during the recent financial and current euro crises. At the same time many existing general equilibrium models do not account for agents' expectations, market volatility, or over-pessimism of investors' forecasts. In this paper we incorporate into the DSGE model a financial sector populated by a continuum of banks with heterogeneous forecasts. We simulate the model with expectational shocks calibrated by the values observed during the financial crisis. Our results suggest that expectational shocks alone could generate a recession of a magnitude comparable to the recent crisis. We then conduct a simple exercise to mimic the credit support policy of a central bank. The results indicate that without influencing agents' expectations, the liquidity provision alone reduces the magnitude of the recession, but neither stops it nor shortens its duration. One reason for low ec ciency of the policy in our model is that banks hoard the liquidity provided by a central bank. |
| Keywords: | financial intermediation; expectations; DSGE; liquidity provision; |
| JEL: | E22 E32 G01 G18 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp477&r=cba |
| By: | Michael McAleer (Erasmus University Rotterdam); Juan-Ángel Jiménez-Martín (Complutense University of Madrid); Teodosio Pérez-Amaral (Complutense University of Madrid) |
| Abstract: | The Basel II Accord requires that banks and other Authorized Deposit-taking Institutions (ADIs) communicate their daily risk forecasts to the appropriate monetary authorities at the beginning of each trading day, using one or more risk models to measure Value-at-Risk (VaR). The risk estimates of these models are used to determine capital requirements and associated capital costs of ADIs, depending in part on the number of previous violations, whereby realised losses exceed the estimated VaR. In this paper we define risk management in terms of choosing from a variety of risk models, and discuss the selection of optimal risk models. A new approach to model selection for predicting VaR is proposed, consisting of combining alternative risk models, and we compare conservative and aggressive strategies for choosing between VaR models. We then examine how different risk management strategies performed during the 2008-09 global financial crisis. These issues are illustrated using Standard and Poor’s 500 Composite Index. |
| Keywords: | Value-at-Risk (VaR), daily capital charges, violation penalties, optimizing strategy, risk forecasts, aggressive or conservative risk management strategies, Basel Accord, global financial crisis |
| JEL: | G32 G11 G17 C53 C22 |
| Date: | 2013–01–08 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2013010&r=cba |
| By: | Sweder van Wijnbergen (University of Amsterdam); Timotej Homar (University of Amsterdam) |
| Abstract: | Systemic banking crises often continue into recessions with large output losses (Reinhart & Rogoff 2009a). In this paper we ask whether the way Governments intervene in the financial sector has an impact on the economy's subsequent performance. Our theoretical analysis focuses on bank incentives to manage bad loans. We show that interventions involving bank restructuring provide banks with incentives to restructure bad loans and free up resources for new economic activity. Other interventions lead banks to roll over bad loans, tying up resources in distressed firms. Our analysis suggests that zombie banks are a drag on economic recovery. We then analyze 65 systemic banking crises from the period 1980-2012, of which 25 are part of the recent global financial crisis, to answer the question: how effective are intervention measures from the macro perspective, in particular how do they affect recession duration? We find that bank restructuring, which includes bank recapitalizations, significantly reduces recession duration. The effect of liquidity support on the probability of recovery is positive but smaller. Blanket guarantees on bank liabilities and monetary policy do not have a significant effect. |
| Keywords: | Financial crises, intervention policies, zombie banks, economic recovery, bank restructuring, bank recapitalization |
| JEL: | E44 E58 G21 G28 |
| Date: | 2013–03–04 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2013039&r=cba |
| By: | Riccardo De Bonis (Bank of Italy) |
| Abstract: | This paper summarizes the results attained by the Eurosystem in harmonizing the statistics used for the conduct of monetary policy. Since the creation of the euro area, in January 1999, significant progress has been made in the harmonization of data on banks’ balance sheets, central banks and money market funds; on interest rates on deposits and loans; on non-bank financial intermediaries, especially mutual funds and financial vehicle corporations engaged in securitization; and on financial accounts. The paper also outlines the debate on statistical information gaps that came to the fore after the 2007-08 financial crisis. |
| Keywords: | banks, money, credit, interest rates, financial accounts, statistics and the financial crisis |
| JEL: | G21 G23 C8 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_145_13&r=cba |
| By: | Christiaan van der Kwaak (University of Amsterdam); Sweder van Wijnbergen (University of Amsterdam) |
| Abstract: | We analyze the interaction between bank rescues, financial fragility and sovereign debt discounts. We construct a model that contains balance sheet constrained financial intermediaries financing both capital expenditure of intermediate goods producers and government deficits. The financial intermediaries face the risk of a (partial) default of the government on its debt obligations. We analyse the impact of a financial crisis, first under full government credibility and then with an endogenous sovereign debt discount. The introduction of the default possibility does not have any impact IF all government debt is short term. Interest rates on debt reflect higher default probabilities, but because all debt is short term, bank balance sheets are unaffected and no further negative effects arise through the endogenous sovereign debt channel. But once long term government debt is introduced, the possibility of capital losses on bank balance sheets arises. Then o utcomes significantly deteriorate compared to the short term debt only case. Higher interest rates on new debt lead to capital losses on banks' holding of existing long term government debt. The associated increase in credit tightness leads to a negative amplification effect, significantly increasing output losses and declines in investment after a financial crisis. This causes potentially conflicting macroeconomic effects of a debt financed recapitalization of banks. We investigate the case where the government announces a bankrecapitalization to occur 4 quarters after announcement. Under the parameter values chosen, the positive effects from an anticipated capital injection dominate the effects of the associated increase in sovereign default risk. |
| Keywords: | Financial Intermediation; Macrofinancial Fragility; Fiscal Policy; Sovereign Default Risk |
| JEL: | E44 E62 H30 |
| Date: | 2013–04–02 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2013052&r=cba |
| By: | Keyra Primus |
| Abstract: | This paper examines the financial and real effects of excess reserves in a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model with monopoly banking, credit market imperfections and a cost channel. The model explicitly accounts for the fact that banks hold excess reserves and they incur costs in holding these assets. Simulations of a shock to required reserves show that although raising reserve requirements is successful in sterilizing excess reserves, it creates a procyclical effect for real economic activity. This result implies that financial stability may come at a cost of macroeconomic stability. The findings also indicate that using an augmented Taylor rule in which the policy interest rate is adjusted in response to changes in excess reserves reduces volatility in output and inflation but increases fluctuations in financial variables. To the contrary, using a countercyclical reserve requirement rule helps to mitigate fluctuations in excess reserves, but increases volatility in real variables. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:183&r=cba |
| By: | Dirk Schoenmaker (Duisenberg School of Finance); Arjen Siegmann (VU University Amsterdam) |
| Abstract: | An anticipated benefit of the prospective European Banking Union is stronger supervision of European banks. Another benefit would be enhanced resolution of banks in distress. While national governments confine themselves to the domestic effects of a banking failure, a European Resolution Authority would follow a supranational approach, under which domestic and cross-border effects within Europe are incorporated. Using a model of recapitalising banks, this paper develops indicators to measure the efficiency improvement of resolution. Next, these efficiency indicators are applied to the hypothetical resolution of the top 25 European banks, which count for the vast majority of cross-border banking in Europe. Our cost-benefit analysis indicates that the UK, Spain, Sweden, and the Netherlands are the main beneficiaries and thus have the largest economic incentives to join Europe’s Banking Union. |
| Keywords: | Financial Stability, Financial Crises, Public Good, International Banking |
| JEL: | F33 G01 G28 H41 |
| Date: | 2013–02–11 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2013026&r=cba |
| By: | Matteo Cacciatore; Giuseppe Fiori; Fabio Ghironi |
| Abstract: | The wave of crises that began in 2008 reheated the debate on market deregulation as a tool to improve economic performance. This paper addresses the consequences of increased flexibility in goods and labor markets for the conduct of monetary policy in a monetary union. We model a two-country monetary union with endogenous product creation, labor market frictions, and price and wage rigidities. Regulation affects producer entry costs, employment protection, and unemployment benefits. We first characterize optimal monetary policy when regulation is high in both countries and show that the Ramsey allocation requires significant departures from price stability both in the long run and over the business cycle. Welfare gains from the Ramsey-optimal policy are sizable. Second, we show that the adjustment to market reform requires expansionary policy to reduce transition costs. Third, deregulation reduces static and dynamic inefficiencies, making price stability more desirable. International synchronization of reforms can eliminate policy tradeoffs generated by asymmetric deregulation. |
| JEL: | E24 E32 E52 F41 J64 L51 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19025&r=cba |
| By: | Benjamin Chabot; Charles C. Moul |
| Abstract: | Governments often attempt to increase the confidence of financial market participants by making implicit or explicit guarantees of uncertain credibility. Confidence in these guarantees presumably alters the size of the financial sector, but observing the long-run consequences of failed guarantees is difficult in the modern era. We look to America’s free-banking era and compare the consequences of a broken guarantee during the Indiana-centered Panic of 1854 to the Panic of 1857 in which guarantees were honored. Our estimates of a model of endogenous market structure indicate substantial negative long-run consequences to financial depth when panics cast doubt upon a government’s ability to honor its guarantees. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-2013-03&r=cba |
| By: | Petreski, Marjan |
| Abstract: | The objective of this paper is to assess if inflation targeting post-communist economies performed better, in terms of output growth, during the crisis than their non-inflation targeting counterparts. The paper also puts the issue in the context of the preconditions of inflation targeters to adopt this regime. 26 post-communist economies of Central and Eastern Europe and the Commonwealth of Independent States are analyzed during the ongoing economic crisis. Results suggest that inflation targeters of those countries performed worse than non-inflation targeters. The growth decline in inflation targeters post-communist economies has been estimated to be deeper by about four percentage points than that in non-inflation targeters. The study finds very limited role of the preconditions for growth decline. Only the lower amount of monetary financing of the budget may have contributed in inflation-targeting countries to have gone through the crisis better. |
| Keywords: | inflation targeting, pre-conditions for adoption, post-communist economies |
| JEL: | E42 E52 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:47018&r=cba |