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on Central Banking |
| By: | Klaus Schmidt-Hebbel; Francisco Muñoz |
| Abstract: | This paper contributes to the empirical understanding of monetary policy in five dimensions. First, specifiying a generalized Taylor equation that nests backward and forward-looking inflation and activity variables in setting policy rates. Second, using real-time data. Third, estimating the model on a world panel of monthly 1994-2011 data for 28 advanced and emerging economies. Fourth, using alternative panel data estimators to test for robustness. Fifth, testing for differences in monetary policy over time and across country groups. The findings are very supportive of the nested model and generally show that the Taylor principle is satisfied by the world's central banks. |
| Keywords: | monetary policy, Taylor rule, Taylor principle, heterogeneous panels |
| JEL: | E50 E52 E58 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:ioe:doctra:426&r=cba |
| By: | Michael McAleer (Erasmus University Rotterdam, The Netherlands; National Chung Hsing University, Taiwan); Juan-Angel Jimenez-Martin (Complutense University of Madrid, Spain); Teodosio Pérez-Amaral (Complutense University of Madrid, Spain) |
| 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 sensibly from a variety of risk models, discuss the selection of optimal risk models, consider combining alternative risk models, discuss the choice between a conservative and aggressive risk management strategy, and evaluate the effects of the Basel II Accord on risk management. We also examine how risk management strategies performed during the 2008-09 financial crisis, evaluate how the financial crisis affected risk management practices, forecasting VaR and daily capital charges, and discuss alternative policy recommendations, especially in light of the financial crisis. These issues are illustrated using Standard and Poor’s 500 Index, with an emphasis on how risk management practices were monitored and encouraged by the Basel II Accord regulations during the financial crisis. |
| Keywords: | Value-at-Risk (VaR), daily capital charges, exogenous and endogenous violations, violation penalties, optimizing strategy, risk forecasts, aggressive or conservative risk management strategies, Basel II Accord, financial crisis |
| JEL: | G32 G11 G17 C53 C22 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2009039&r=cba |
| By: | Issing, Otmar |
| Abstract: | -- |
| JEL: | E44 E52 E58 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:201206&r=cba |
| By: | Orphanides, Athanasios; Wieland, Volker |
| Abstract: | The complexity resulting from intertwined uncertainties regarding model misspecification and mismeasurement of the state of the economy defines the monetary policy landscape. Using the euro area as laboratory this paper explores the design of robust policy guides aiming to maintain stability in the economy while recognizing this complexity. We document substantial output gap mismeasurement and make use of a new model data base to capture the evolution of model specification. A simple interest rate rule is employed to interpret ECB policy since 1999. An evaluation of alternative policy rules across 11 models of the euro area confirms the fragility of policy analysis optimized for any specific model and shows the merits of model averaging in policy design. Interestingly, a simple difference rule with the same coefficients on inflation and output growth as the one used to interpret ECB policy is quite robust as long as it responds to current outcomes of these variables. -- |
| Keywords: | Financial Crisis,Complexity,Monetary Policy,Model Uncertainty,Robust Simple Rules,ECB |
| JEL: | E50 E52 E58 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:201211&r=cba |
| By: | Michael B. Devereux; James Yetman |
| Abstract: | The 'International Policy Trilemma' refers to the constraint on independent monetary policy that is forced on a country which remains open to international financial markets and simultaneously pursues an exchange rate target. This paper shows that, in a global economy with open financial markets, the problem of the zero bound introduces a new dimension to the international policy trilemma. International financial market openness may render monetary policy ineffective, even within a system of fully flexible exchange rates, because shocks that lead to a 'liquidity trap' in one country are propagated through financial markets to other countries. But monetary policy effectiveness may be restored by the imposition of capital controls, which inhibit the transmission of these shocks across countries. We derive an optimal monetary policy response to a global liquidity trap in the presence of capital controls. We further show that, even though capital controls may facilitate effective monetary policy, except in the case where monetary policy is further constrained (beyond the zero lower bound constraint), capital controls are not desirable in welfare terms. |
| JEL: | F3 F32 F33 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19091&r=cba |
| By: | Mei Li (University of Guelph); Frank Milne (Queen's University); Junfeng Qui (Central University of Finance and Economics) |
| Abstract: | This paper studies contagion and market freezes caused by uncertainty in financial network structures and provides theoretical guidance for central banks. We establish a formal model to demonstrate that, in a financial system where financial institutions are interconnected, a negative shock to an individual financial institution could spread to other institutions, causing market freezes because of creditors’ uncertainty about the financial network structure. Central bank policies to alleviate market freezes and contagion, such as information policy, bailout policy and the lender of last resort policy, are examined. |
| Keywords: | Interconnection, Market Freezes, Contagion, Financial Crises |
| JEL: | D82 G2 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1308&r=cba |
| By: | Ai-ru (Meg) Cheng; Kuntal Das (University of Canterbury); Takeshi Shimatani |
| Abstract: | This paper presents new empirical evidence on the effectiveness of Bank of Japan's foreign exchange interventions on the daily realized volatility of USD/JPY exchange rates using high frequency data. Following Huang and Tauchen (2005) and Barndorff-Nielsen and Shephard (2004, 2006), we use bi-power variation to decompose daily realized volatility into two components: the smooth persistent and the discontinuous jump components. We model exchange rate returns, the different components of realized volatility and the central bank intervention using a system of simultaneous equations. We find strong support that interventions by Bank of Japan had increased both the continuous and the jump components of daily realized volatility. This suggests that the interventions by Bank of Japan had increased market volatility which not only caused short-lived positive jumps but were also persistent over time. We did not find any evidence that interventions were effective in influencing the exchange rate returns for the entire sample period. |
| Keywords: | Foreign exchange intervention, Realized volatility, Simultaneous equations, Tobit model |
| JEL: | C34 E58 F31 F33 |
| Date: | 2013–05–16 |
| URL: | http://d.repec.org/n?u=RePEc:cbt:econwp:13/19&r=cba |
| By: | Juan-Angel Jimenez-Martin (Complutense University of Madrid, Spain); Michael McAleer (Complutense University of Madrid, Spain, Erasmus School of Economics, Erasmus University Rotterdam, The Netherlands, and Kyoto University, Japan); Teodosio Perez Amaral (Complutense University of Madrid, Spain); Paulo Araujo Santos (University of Lisbon, Portugal) |
| Abstract: | In this paper we provide further evidence on the suitability of the median of the point VaR forecasts of a set of models as a GFC-robust strategy by using an additional set of new extreme value forecasting models and by extending the sample period for comparison. These extreme value models include DPOT and Conditional EVT. Such models might be expected to be useful in explaining financial data, especially in the presence of extreme shocks that arise during a GFC. Our empirical results confirm that the median remains GFC-robust even in the presence of these new extreme value models. This is illustrated by using the S&P500 index before, during and after the 2008-09 GFC. We investigate the performance of a variety of single and combined VaR forecasts in terms of daily capital requirements and violation penalties under the Basel II Accord, as well as other criteria, including several tests for independence of the violations. The strategy based on the median, or more generally, on combined forecasts of single models, is straightforward to incorporate into existing computer software packages that are used by banks and other financial institutions. |
| Keywords: | Value-at-Risk (VaR), DPOT, daily capital charges, robust forecasts, violation penalties, optimizing strategy, aggressive risk management, conservative risk management, Basel, global financial crisis |
| JEL: | G32 G11 G17 C53 C22 |
| Date: | 2013–05–21 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2013070&r=cba |
| By: | Issing, Otmar; Wieland, Volker |
| Abstract: | In this paper, we provide some reflections on the development of monetary theory and monetary policy over the last 150 years. Rather than presenting an encompassing overview, which would be overambitious, we simply concentrate on a few selected aspects that we view as milestones in the development of this subject. We also try to illustrate some of the interactions with the political and financial system, academic discussion and the views and actions of central banks. -- |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:201220&r=cba |
| By: | Basu, Kaushik; Varoudakis, Aristomene |
| Abstract: | The paper is about the art of exchange rate management by central banks. It begins by reviewing the diversity of objectives and practices of central bank intervention in the foreign exchange market. Central banks typically exercise discretion in determining when and to what extent to intervene. Some central banks use publicly declared rules of intervention, with the aim of increasing visibility and strengthening the signaling channel of policy. There is tentative evidence that the volatility of foreign exchange reserves is comparatively lower in emerging market economies where central banks follow some form of rules-based foreign exchange intervention. The paper goes on to argue that when the foreign exchange market includes some large strategic participants, the central bank can achieve superior outcomes if intervention takes the form of a rule, or"schedule,"indicating commitments to buying and selling different quantities of foreign currency conditional on the exchange rate. Exchange rate management and reserve management can then be treated as two independent objectives by the central bank. In line with the stylized facts reviewed, this would enable a central bank to pursue exchange rate objectives with minimum reserve changes, or achieve reserve targets with minimum impact on the exchange rate. |
| Keywords: | Debt Markets,Emerging Markets,Currencies and Exchange Rates,Economic Stabilization,Economic Theory&Research |
| Date: | 2013–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6460&r=cba |
| By: | Issing, Otmar |
| Abstract: | -- |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:201302&r=cba |
| By: | Walker F. Todd |
| Abstract: | This working paper looks at excess reserves in historical context and analyzes whether they constitute a monetary policy problem for the Federal Reserve System (the "Fed") or a potential-ly inflationary problem for the rest of us. Generally, this analysis shows that both absolute and relative sizes of excess reserves are a big problem for the Fed as well as the general public because of their inflationary potential. However, like all contingencies, the timing and extent of the damage that reserve-driven inflation might cause are uncertain. It is even possible today to find articles in both scholarly circles and the popular press arguing either that the inflationary blow-off might never happen or that an increasing tendency toward prolonged deflation is the more probable outcome. |
| Keywords: | Excess Reserves; Federal Reserve; Fed; European Central Bank; ECB; Quantitative Easing; Monetary Stimulus |
| JEL: | E51 E52 E58 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_763&r=cba |
| By: | Christiaan Pattipeilohy |
| Abstract: | This paper investigates developments in the balance sheet and monetary policy of De Nederlandsche Bank in the period 1900-1998. We find that – given the institutional framework which is applicable - the composition of DNB’s balance sheet is to a large extent endogenous to monetary and financial-economic conditions. Historically, the Bank’s implementation of monetary policy was geared primarily towards the market for foreign exchange and the Dutch banking sector. However, it has not been uncommon for the Bank to also hold a portfolio of government bonds for monetary policy purposes. Our analysis suggests that monetary policy, its instruments and intermediate targets should not be viewed as fixed and unalterable concepts. Changing conditions and relations within the economy may warrant or even require innovations in the monetary policymakers’ toolbox. Clear communication is important to manage expectations on what can and cannot be expected from conventional and (previously) less conventional monetary policy measures. |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbocs:1103&r=cba |
| By: | Cheolbeom Park (Department of Economics, Korea University, Seoul, Republic of Korea); Sookyung Park (Department of Economics, Korea University, Seoul, Republic of Korea) |
| Abstract: | Many studies have pointed out that the underlying relations and functions for the monetary model (e.g. the PPP relation, the money demand function, monetary policy rule, etc.) have undergone parameter instabilities and that the relation between exchange rates and macro fundamentals are unstable due to the shift in the economic models in foreign exchange traders¡¯ views or the scapegoat effect in Bacchetta and van Wincoop (2009). Facing this, we consider a monetary model with time-varying cointegration coefficients in order to understand exchange rate movements. We provide statistical evidence against the standard monetary model with constant cointegration coefficients but find favorable evidence for the time-varying cointegration relationship between exchange rates and monetary fundamentals. Furthermore, we demonstrate that deviations between the exchange rate and fundamentals from the time-varying cointegration relation have strong predictive power for future changes in exchange rates through in-sample analysis, out-of-sample analysis, and directional accuracy tests. |
| Keywords: | Exchange rate, Monetary model, Predictability, Time-varying cointegration |
| JEL: | F31 F47 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:iek:wpaper:1302&r=cba |
| By: | Jan Kregel |
| Abstract: | In March of this year, the government of Cyprus, in response to a banking crisis and as part of a negotiation to secure emergency financial support for its financial system from the European Union (EU) and International Monetary Fund (IMF), proposed the assessment of a tax on bank deposits, including a levy (later dropped from the final plan) on insured demand deposits below the 100,000 euro insurance threshold. An understanding of banks’ dual operations and of the relationship between two types of deposits—deposits of customers’ currency and coin, and deposit accounts created by bank loans—helps clarify some of the problems with the Cypriot deposit tax, while illuminating both the purposes and limitations of deposit insurance. |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:lev:levypn:13-04&r=cba |
| By: | Pawel Baranowski; Mariusz Gorajski; Maciej Malaczewski; Grzegorz Szafranski (Department of Econometrics, Institute of Econometrics, Faculty of Economics and Sociology, University of Lodz) |
| Abstract: | We analyse the short-term dynamics of Polish economy with a prominent state-dependent pricing mechanism of Dotsey, King and Wolman (1999). We compare macroeconomic evidence of price rigidity in a small-scale DSGE model with a state-dependent Phillips curve (SDPC) derived by Bakhshi, Khan and Rudolf (2007) to a benchmark model including hybrid New-Keynesian Phillips Curve (NHPC) of Gali and Gertler (1999). To analyse monetary policy transmission mechanism we estimate both models with Bayesian techniques and focus on the comparison of distribution of price vintages, a degree of price stickiness, values of parameters in Phillips curve equations, and impulse responses to macroeconomic shocks. The estimated state-dependent pricing model generates a median duration of prices about 4 quarters compared to 8 quarters in a time-dependent model. In the state-dependent pricing model it takes more time to dampen inflation dynamics after a monetary policy relative to a time-dependent counterpart. The menu cost model is also able to identify higher variance of technology shocks, and higher persistence in preference shocks, while the dynamics of the impulse responses in time- and state-dependent pricing models are hard to distinguish. |
| Keywords: | state-dependent pricing, inflation, menu costs, monetary policy, Polish economy |
| JEL: | E31 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:tkk:dpaper:dp83&r=cba |