|
on Central Banking |
| By: | Covi, Giovanni |
| Abstract: | The general aim of the paper is to address the doubts that too often the Central Banks’ tools and operations don’t fit for a fine tuning of the economies, and this is even more true in harsh times. The paper begins with an overview on the great failures respectively of the Federal Reserve, the so called "golden silence" in the 1929 Great Crash, and of the European Central Bank during the second great contraction, the 2008 Financial Crisis. Then I critically appraise the so-called “Two pillar approach”, a methodological tool employed by the ECB for assessing the risks to price stability. I survey the literature on the subject with the purpose of going at the roots of the “technical” difficulties. The first outcome emphasizes the existing disagreement between the criticisms and the proposed solutions. The second outcome is the unanimity of the opinions that the inflation target chosen at 2% by ECB for the Eurozone is too low, thereby making the whole MPS excessively restrictive. I conclude observing that the “core” inflation-target of 2% is in fact at the very basis of the ECB non-intervention policy. For a simple and sobering reason: even if between 2003 and 2008 the stock market bubble was growing at unreal rate, since the inflation target wasn’t in any jeopardy, the European Central Bank didn’t do anything. Maintaining the goal of price stability was much more important than assuring financial stability, thereby preventing the Financial Crisis. |
| Keywords: | Monetary Policy – Central Banking – European Central Bank – Inflation - Financial Crisis |
| JEL: | E52 E58 |
| Date: | 2013–05–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:47085&r=cba |
| By: | Fernando M. Martin |
| Abstract: | Making the central bank more independent from political pressures lowers inflation and increases the primary deficit, persistently. In the long-run, however, fiscal considerations are paramount and inflation comes back up to accommodate the higher financial burden of accumulated public debt. Endowing instead the central bank with an explicit inflation target lowers long-run inflation and implies non-trivial welfare gains for private agents. Inflation-targeting has the added virtue of determining the primary deficit independently of political frictions. The theory helps explain several key developments in postwar U.S. policy. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2013-017&r=cba |
| By: | Paul Hubert (Ofce sciences-po) |
| Abstract: | The European Central Bank publishes inflation projections quarterly. This paper aims at establishing whether they influence private forecasts and whether they may be considered as an enhanced means of implementing policy decisions by facilitating private agents’ information processing. We provide original evidence that ECB inflation projections do influence private inflation expectations. We also find that ECB projections give information about future ECB rate movements, and that the ECB rate has different effects if complemented or not with the publication of ECB projections. We conclude that ECB projections enable private agents to correctly interpret and predict policy decisions. |
| Keywords: | Monetary policy, ECB, Private forecasts, Influence, Structural Var |
| JEL: | E52 E58 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:fce:doctra:1304&r=cba |
| By: | Xiong , Qiyue (BOFIT) |
| Abstract: | This paper focuses on the role the bank lending channel in transmission of monetary policy in China. Using unbalanced quarterly panel data from 2Q2000 to 4Q2011, a one-step GMM estimator is applied to establish the existence the bank lending channel. The findings suggest central bank monetary policy asymmetrically affects bank lending behavior. Small banks are found more sensitive to contractionary monetary policy in the Chinese context. Well capitalized banks appear to be more likely to adjust their lending behaviors in response to expansionary monetary policy, and conversely, undercapitalized banks tend to adjust with the advent of contractionary monetary policy. The importance of the bank lending channel declines after China introduced stricter capital regulations in early 2004, but the effect is still apparent in times of expansionary policy. |
| Keywords: | bank characteristics; capital regulation; bank lending channel; asymmetric effects |
| JEL: | E52 |
| Date: | 2013–05–02 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2013_007&r=cba |
| By: | Paul Hubert (Ofce sciences-po) |
| Abstract: | Policymakers at the Federal Open Market Committee (FOMC) publish forecasts since 1979. We examine the effects of publishing FOMC inflation forecasts in two steps using a structural VAR model. We assess whether they influence private inflation expectations and the underlying mechanism at work: do they convey policy signals for forward guidance or help interpreting current policy decisions? We provide original evidence that FOMC inflation forecasts are able to influence private ones. We also find that FOMC forecasts give information about future Fed rate movements and affect private expectations in a different way than Fed rate shocks. This body of evidence supports the use of central bank forecasts to affect inflation expectations especially while conventional policy instruments are at the zero lower bound |
| Keywords: | Monetary policy, Forecasts, FOMC, influence, Policy signals, structural Var |
| JEL: | E52 E58 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:fce:doctra:1303&r=cba |
| By: | Ippei Fujiwara, Tomoyuki Nakajima, Nao Sudo, Yuki Teranishi |
| Abstract: | How should monetary policy respond to a global liquidity trap," where the two countries may fall into a liquidity trap simultaneously? Using a two-country New Open Economy Macroeconomics model, we first characterise optimal monetary policy, and show that the optimal rate of inflation in one country is affected by whether or not the other country is in a liquidity trap. We next examine how well the optimal monetary policy is approximated by relatively simple monetary policy rules. The interest-rate rule targeting the producer price index performs very well in this respect. |
| Keywords: | Zero interest rate policy, two-country model, international spillover, monetary policy coordination |
| JEL: | E52 E58 F41 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:csg:ajrcwp:1304&r=cba |
| By: | Aleksander Berentsen; Alessandro Marchesiani; Christopher J. Waller |
| Abstract: | An increasing number of central banks implement monetary policy via a channel system or a floor system. We construct a general equilibrium model to study the properties of these systems. We find that the optimal framework is a floor system if and only if the target rate satisfies the Friedman rule. Unfortunately, the optimal floor system requires either transfers from the fiscal authority to the central bank or a reduction in seigniorage payments from the central bank to the government. This is the unpleasant fiscal arithmetic of a floor system. When the central bank faces financing constraints on its interest expense, we show that it is optimal to operate a channel system. |
| Keywords: | Monetary policy, floor system, channel system, standing facilities |
| JEL: | E52 E58 E59 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:121&r=cba |
| By: | Dabrowski , Marek (BOFIT) |
| Abstract: | Achieving price stability has been a serious challenge for CIS countries. In the first half of the 1990s, they experienced very high inflation or hyperinflation, which had originated in the perestroika period and following the dissolution of the ruble area. After the introduction of new currencies and stabilization programs in the mid-1990s, inflation moderated to two-digit levels. However, for lack of sufficient fiscal policy support, this partial progress did not succeed in preventing the financial crisis of 1998/99. The economic boom of the 2000s allowed for a return to macroeconomic stability with stronger fiscal fundamentals, but nevertheless proved insufficient to withstand the shock from the global financial crisis of 2008/09. The paper analyses the evolution monetary policy regimes of in the CIS countries over the decade of the 2000s and early 2010s and is based on the publicly available cross-country statistics and other information provided by the IMF. The paper compares financial openness in these economies both de jure and de facto. These findings will be tested against the empirical data on exchange rate movements and changes in central banks’ international reserves. The paper concludes with a discussion on practical choices which CIS countries have in respect of their future monetary policy regimes. |
| Keywords: | monetary policy; CIS; financial openness; inflation |
| JEL: | E42 E58 P24 P52 |
| Date: | 2013–05–02 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2013_008&r=cba |
| By: | Alex Nikolsko-Rzhevskyy (Lehigh University); David Papell (University of Houston) |
| Abstract: | The size of the output gap coefficient is the key determinant of whether quantitative easing since 2009 and continued near-zero interest rates can by justified by a Taylor rule. Fed Chair Ben Bernanke and Vice-Chair Janet Yellen have argued that John Taylor proposed a monetary policy rule with a larger output gap coefficient in his 1999 paper than in his 1993 paper, and have used this argument to justify negative prescribed interest rates in 2009-2010 and near-zero interest rates through 2015. While Taylor neither proposed nor advocated a different rule in 1999 than in 1993, he did not draw a distinction between the implications of the two rules. In accord with common practice at the time, Taylor used revised data. We show that, using real-time data available to policymakers (although not to Taylor when he wrote the paper), there is a sharp difference in the implications of rules with a smaller and a larger output gap coefficient. If John Taylor had been able to use real-time data in his 1999 paper, the importance of the distinction between Taylor’s original rule with a smaller output gap coefficient and other rules with a larger coefficient would have been evident much earlier. |
| Keywords: | Real-Time Data, Monetray Policy Rules, Taylor Rule |
| JEL: | E52 |
| Date: | 2013–05–20 |
| URL: | http://d.repec.org/n?u=RePEc:hou:wpaper:2013-140-17&r=cba |
| By: | Ian Christensen; Fuchun Li |
| Abstract: | The authors use the Financial Stress Index created by the International Monetary Fund to predict the likelihood of financial stress events for five developed countries: Canada, France, Germany, the United Kingdom and the United States. They use a semiparametric panel data model with nonparametric specification of the link functions and linear index function. The empirical results show that the semiparametric early warning model captures some well-known financial stress events. For Canada, Germany, the United Kingdom and the United States, the semiparametric model can provide much better out-of-sample predicted probabilities than the logit model for the time period from 2007Q2 to 2010Q2, while for France, the logit model provides better performance for non-financial stress events than the semiparametric model. |
| Keywords: | Econometric and statistical methods; Financial stability |
| JEL: | G01 G17 C12 C14 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:13-13&r=cba |
| By: | Silvana Tenreyro; Gregory Thwaites |
| Abstract: | We estimate the impulse response of key US macro series to the monetary policy shocks identified by Romer and Romer (2004), allowing the response to depend flexibly on the state of the business cycle. We find strong evidence that the effects of monetary policy on real and nominal variables are more powerful in expansions than in recessions. The magnitude of the difference is particularly large in durables expenditure and business investment. The effect is not attributable to differences in the response of fiscal variables or the external finance premium. We find some evidence that contractionary policy shocks have more powerful effects than expansionary shocks. But contractionary shocks have not been more common in booms, so this asymmetry cannot explain our main finding. |
| Keywords: | asymmetric effects of monetary policy, transmission mechanism, recession, durable goods, local projection methods |
| JEL: | E52 E32 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1218&r=cba |