nep-cba New Economics Papers
on Central Banking
Issue of 2013‒05‒22
eleven papers chosen by
Maria Semenova
Higher School of Economics

  1. Central Bank Communication Affects Long-Term Interest Rates By Fernando D. Chague; Rodrigo De-Losso, Bruno C. Giovannetti, Paulo Manoel
  2. The Basel III Financial Architecture and Emerging Regulatory Developments in Macro Prudential Tools By World Bank
  3. European and Best Practice Bank Resolution Mechanisms : An Assessment and Recommendations for Policy and Legal Reforms By World Bank
  4. Monetary Policy Under Discretion Or Commitment? -An Empirical Study By Fromlet, Pia
  5. Monetary Policy Shifts and the Forward Discount Puzzle By Michael Jetter; Alex Nikolsko-Rzhevskyy
  6. Business Fluctuations and Monetary Policy Rules in the Philippines: with Lessons from the 1984-1985 Contraction By Dante B. Canlas
  7. Market Deregulation and Optimal Monetary Policy in a Monetary Union By Giuseppe Fiori; Fabio Ghironi; Matteo Cacciatore
  8. Financial Crises and Exchange Rate Policy By Luca Fornaro
  9. Exchange Rate Predictability By Barbara Rossi
  10. Measuring Currency Pressures: The Cases of the Japanese Yen, the Chinese Yuan, and the U.K. Pound By Stephen Hall; Amangeldi Kenjegaliev; P.A.V.B. Swamy; George S. Tavlas
  11. Inflation Persistence in Central and Eastern European Countries By Zsolt Darvas; Balázs Varga

  1. By: Fernando D. Chague; Rodrigo De-Losso, Bruno C. Giovannetti, Paulo Manoel
    Abstract: We empirically study how the communication of the Central Bank of Brazil affects the term structure of interest rates. Using an algorithm that classifies the words from the Central Bank minutes into predetermined semantic themes, we estimate a time-series factor related to Central Bank optimism. Then, we show that the long-term interest rates are sensitive to the optimism factor: when Central Bank is more optimistic, long-term interest rates fall. The fact that minutes are released one week after the changes in the target rate allows us to identify the effect of the communication in isolation. Our result is in line with the idea that Central Bank communication can be an effective monetary policy instrument through its impact on market expectations, particularly at the longer maturities.
    Keywords: Brazilian Central Bank; central bank communication; text mining
    JEL: G14 E58
    Date: 2013–05–13
  2. By: World Bank
    Keywords: Banks and Banking Reform Finance and Financial Sector Development - Debt Markets Private Sector Development - Emerging Markets Finance and Financial Sector Development - Access to Finance Finance and Financial Sector Development - Bankruptcy and Resolution of Financial Distress
    Date: 2012
  3. By: World Bank
    Keywords: Finance and Financial Sector Development - Deposit Insurance Banks and Banking Reform Finance and Financial Sector Development - Debt Markets Private Sector Development - Emerging Markets Finance and Financial Sector Development - Bankruptcy and Resolution of Financial Distress
    Date: 2012–03
  4. By: Fromlet, Pia (Department of Economics)
    Abstract: In this paper, I investigate the monetary policy of five industrialized countries which have had explicit inflation targets for more than 15 years. Considering the case of discretionary policy as well as commitment, I estimate two first order conditions. The results support the theory of flexible in‡ation targeting under discretion for the United Kingdom. For New Zealand, the results under discretion suggests that monetary policymakers have been leaning with the wind rather than against the wind. The central banks of Canada, Sweden, and Australia have behaved in line with the theory of flexible in‡ation targeting under commitment.
    Keywords: Inflation targeting; optimal policy under discretion; optimal policy under commitment
    JEL: E31 E52 E58 E61
    Date: 2013–04–26
  5. By: Michael Jetter; Alex Nikolsko-Rzhevskyy
    Abstract: This paper argues that considerable switches in monetary policy are able to explain a major part of the forward discount puzzle. We build a theoretical model suggesting that violations of the uncovered interest rate parity are owed to shifts in monetary policy from a destabilizing (when the Taylor principle is violated) to a stabilizing regime (when a central bank follows a Taylor-type rule). Following the switch is an adjustment period" during which forecasters gradually update their expectations, eventually restoring the parity. It is in this adjustment period, when the forward discount puzzle arises. In the second part of the paper we test the model on the Canadian dollar, German mark, and British pound, all against the US dollar. Results indicate that the forward discount puzzle loses signi cance after allowing for an adjustment period of about 1 { 2 years. Our results are robust to various di erent speci cations, such as the use of di erent maturities or base currencies. Further, it seems unlikely that our results coincide with contemporaneous events.
    Date: 2013–04–13
  6. By: Dante B. Canlas (School of Economics, University of the Philippines Diliman)
    Abstract: The paper reviews recent research on macroeconomic theory of business fluctuations and its influence on monetary policy rules. It focuses on triggers to business fluctuations and the mechanisms that propagate the fluctuations once started. The Philippines is used as empirical setting. The theory’s predictions are examined using time-series data on aggregate output performance, money growth, and budget deficits of government. The paper casts a spotlight on the output contraction of 1984-1985, the longest downturn in the postwar economic history of the Philippines. The role of monetary policy and fiscal policy shocks in triggering that downturn is studied, followed by the role of subsequent macroeconomic policy adjustments that propagated the downturn. The paper points out that monetary policy rules evolved in the aftermath of the 1984-1985 downturn, culminating in the inflation-targeting rule that the monetary authority currently uses. The adoption of inflation targeting hinged on the introduction of legislation that enabled the creation of a central bank with policy and instrument independence from the fiscal authority.
    Date: 2012–06
  7. By: Giuseppe Fiori (University of Sao Paulo); Fabio Ghironi (Boston College); Matteo Cacciatore (HEC Montreal)
    Abstract: The global crisis that began in 2008 reheated the debate on market deregulation as a tool to spur 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. We allow regulation in goods and labor markets to differ across countries. We first characterize optimal monetary policy when regulation is high 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 coordination of reforms is beneficial as it eliminates policy tradeoffs generated by asymmetric deregulation.
    Date: 2012
  8. By: Luca Fornaro (London School of Economics)
    Abstract: This paper develops a dynamic small open economy model featuring an occasionally binding collateral constraint and nominal wage rigidities. The goal is to study the performance of alternative exchange rate policies in economies that endogenously alternate between tranquil times and crises. Financial frictions introduce a trade-off between price and financial stability. For low levels of foreign debt the probability of a future crisis is small and the best policy consists in targeting wage inflation. For high levels of foreign debt the probability of a future crisis is high and wage inflation targeting is dominated by a flexible exchange rate targeting rule, because the latter policy does a better job in mitigating the fall in output, consumption and capital inflows during crisis events. In contrast, pegging the exchange rate is always welfare dominated by targeting wage inflation. I also find that the exchange rate regime affects both the behavior of the economy during crisis events and the crisis probability, through its impact on debt accumulation during tranquil times.
    Date: 2012
  9. By: Barbara Rossi
    Abstract: The main goal of this article is to provide an answer to the question: “Does anything forecast exchange rates, and if so, which variables?†It is well known that exchange rate fluctuations are very difficult to predict using economic models, and that a random walk forecasts exchange rates better than any economic model (the Meese and Rogoff puzzle). However, the recent literature has identified a series of fundamentals/methodologies that claim to have resolved the puzzle. This article provides a critical review of the recent literature on exchange rate forecasting and illustrates the new methodologies and fundamentals that have been recently proposed in an up- to-date, thorough empirical analysis. Overall, our analysis of the literature and the data suggests that the answer to the question: "Are exchange rates predictable?" is, "It depends" –on the choice of predictor, forecast horizon, sample period, model, and forecast evaluation method. Predictability is most apparent when one or more of the following hold: the predictors are Taylor rule or net foreign assets, the model is linear, and a small number of parameters are estimated. The toughest benchmark is the random walk without drift.
    Keywords: exchange rates, forecasting, instability, forecast evaluation
    JEL: F3 C5
    Date: 2013–02
  10. By: Stephen Hall; Amangeldi Kenjegaliev; P.A.V.B. Swamy; George S. Tavlas
    Abstract: We investigate bilateral currency pressures against the U.S. dollar for three currencies: the Japanese yen, the Chinese yuan, and the U.K. pound during the period 2000:Q1 to 2009:Q4. We employ a model-based methodology to measure exchange market pressure over the period. Conversion factors required to estimate the pressure on these currencies are computed using a time-varying coefficient regression. We then use our measures of currency pressures to assess deviations of exchange rates from their market-equilibrium levels. For the yen, our measure of currency pressure suggests undervaluation during the initial part of our estimation period, a period during which the Bank of Japan sold yen in the foreign exchange market. We find persistent undervaluation of the yuan throughout the estimation period, with the undervaluation peaking at about 20 per cent in 2004 and 2007. For the pound, the results indicate low pressure - - suggesting a mainly free-floating currency - - throughout the sample period. These results appear consistent with the policies pursued by the central banks of the currencies in question.
    Keywords: Exchange Market Pressure; Currency Misalignment; Time-Varying-Coefficient
    JEL: C22 F31 F41
    Date: 2013–05
  11. By: Zsolt Darvas; Balázs Varga (OTP Fund Management and Corvinus University of Budapest)
    Abstract: This paper studies inflation persistence with time-varying-coefficient autoregressions for twelve Central-European countries, in comparison with the US and the euro-area. Inflation persistence tends to be higher in times of high inflation. Since the oil price shocks, inflation persistence declined both in the US and euro-area. In most central and eastern European countries, for which our time period covers 1993-2012, inflation persistence has also declined, with the main exceptions of the Czech Republic, Slovakia and Slovenia, where persistence seems to be rather stable. We also concluded that the OLS estimate of an autoregression is likely upward biased when the parameters change.
    Keywords: inflation persistence, flexible least squares, Kalman-filter, time-varying coefficient models
    JEL: C22 E31
    Date: 2013–02

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