nep-cba New Economics Papers
on Central Banking
Issue of 2013‒06‒09
nineteen papers chosen by
Maria Semenova
Higher School of Economics

  1. A simple Empirical Measure of Central Bank's Conservatism By Grégory Levieuge; Yannick Lucotte
  2. Close but not a Central Bank: The New York Clearing House and issues of clearing house loan certificates By Jon R Moen; Ellis W Tallman
  3. The Bank of Russia at the Crossroads: Does the Monetary Policy Needs Easing By Eugene Goryunov; Pavel Trunin
  4. Monetary Policy and Credit Cycles: A DSGE Analysis By Florina-Cristina Badarau; Alexandra Popescu
  5. An Integrated Financial Framework for the Banking Union: Don’t Forget Macro-Prudential Supervision By Dirk Schoenmaker
  6. Fiscal Sustainability in the Presence of Systemic Banks: the Case of EU countries By Agnès Bénassy-Quéré; Guillaume Roussellet
  7. Finance at Center Stage: Some Lessons of the Euro Crisis By Maurice Obstfeld
  8. Reserve Requirement Analysis using a Dynamical System of a Bank based on Monti-Klein model of Bank's Profit Function By Novriana Sumarti; Iman Gunadi
  9. Should non-euro area countries join the single supervisory mechanism? By Zsolt Darvas; Guntram B. Wolff
  10. Global Banks, Financial Shocks and International Business Cycles: Evidence from Estimated Models By Robert Kollmann
  11. Optimal Term Length for an Overconfident Central Banker By Etienne Farvaque; Norimichi Matsueda
  12. Country adjustment to a ‘sudden stop’: Does the euro make a difference? By Daniel Gros; Cinzia Alcidi
  13. Strategic Complementarity, Fragility, and Regulation By Xavier Vives
  14. Recovering from the Global Financial Crisis: achieving financial stability in times of uncertainty By Ojo, Marianne
  15. Post-Crisis Reversal in Banking and Insurance Integration: An Empirical Survey By Dirk Schoenmaker
  16. Estimating the Effects of Standard Fiscal and Bank Rescue Measures By Werner Roeger; Robert Kollmann; Marco Ratto; Jan in 't Veld
  17. Do central banks’ forecasts take into account public opinion and views? By Ricardo Nunes
  18. Big Banks and Macroeconomic Outcomes: Theory and Cross-Country Evidence of Granularity By Franziska Bremus; Claudia Buch; Katheryn Russ; Monika Schnitzer
  19. Coping with the Recent Financial Crisis, did Inflation Targeting Make Any Difference? By Armand Fouejieu Azangue

  1. By: Grégory Levieuge (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR7322 - Université d'Orléans); Yannick Lucotte (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR7322 - Université d'Orléans)
    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 & M endez [Southern Economic Journal, 2005]. We nally 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
    Date: 2012–05–04
  2. By: Jon R Moen; Ellis W Tallman
    Abstract: The paper examines the New York Clearing House (NYCH) as a lender of last resort by looking at clearing-house-loan-certificate borrowing during five banking panics of the National Banking Era (1863–1913). In that system, adequate aggregate liquidity provision was passive and dependent upon member bank borrowing. We document bank borrowing behavior using bank-level data for clearing-house loan certif cates issued to NYCH member banks. The historical record reveals that the large New York City banks behaved in ways that resembled those of a central bank in 1884 and in 1890, but less so in the more severe crises.
    Keywords: Financial institutions ; Clearinghouses (Banking) ; Financial markets
    Date: 2013
  3. By: Eugene Goryunov (Gaidar Institute for Economic Policy); Pavel Trunin (Gaidar Institute for Economic Policy)
    Abstract: This study develops the approach of corruption measurement based on the income-expenditure comparison. Using micro-level data on reported household earnings, expenditures and assets provided by Russian Longitudinal Monitoring Survey for the period 2000-2009 we find that households with workers in the public sector receive lower earnings than their private sector counterparts, but enjoy the same level of consumption expenditures, in other words there exists an expenditure-income gap in favor of the public sector. Controlling for the reported level of earnings, households with workers in the private sector do not show neither a significantly higher probability of possessing country houses, cars and computers, nor living in better housing conditions, nor having higher financial wealth. The analysis of current and accumulated savings, risk aversion and volatility of wages does not show any sign of distinction between two sectors. Thus, differences in assets and precautionary motives of workers cannot reconcile the sizeable expenditure-income gap. Unexplained differences are referred to unreported income, or bribes.
    Keywords: Central Bank, monetary policy, monetary easing.
    JEL: E42 E51 E52 E58 E61 E63
    Date: 2013
  4. By: Florina-Cristina Badarau (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - Université Montesquieu - Bordeaux IV : EA2954); Alexandra Popescu (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR7322 - Université d'Orléans)
    Abstract: The recent fi nancial crisis revealed several flaws in both monetary and fi nancial regulation. Contrary to what was believed, price stability is not a suffi cient condition for financial stability. At the same time, micro-prudential regulation alone becomes insu fficient to ensure the financial stability objective. In this paper, we propose an ex-post analysis of what a central bank could have done to improve the reaction of the economy to the financial bubble. We study by means of a fi nancial accelerator DSGE model the dynamics of our economy when the central bank has, fi rst, only traditional objectives, and second, when an additional financial stability objective is added. Overall, results indicate that a more aggressive monetary policy would have had little success in improving the response of the economy to the financial bubble, as the actions of the central bank would have remained limited by the use of a single instrument, the interest rate.
    Keywords: bank capital channel, credit cycles, financial stability, monetary policy.
    Date: 2012–09–18
  5. By: Dirk Schoenmaker
    Abstract: This essay reviews the sequencing of the functions of supervision, resolution, deposit insurance and the fiscal backstop in the Banking Union. All these functions deal with the soundness of individual banks. In the run-up to the 2007-2009 financial crisis, we overlooked the bigger picture of the stability of the wider financial system. This essay puts forward a concrete proposal for conducting macro-prudential policy in the prospective Banking Union. We suggest giving the lead on applying macro-prudential tools in the Banking Union to the ECB to foster a coherent approach, with important input from the national competent authorities to allow for much needed differentiation at the national level. Next, we argue that the ECB should separate the macro-prudential and micro-prudential functions. Otherwise, we may again be bogged down by the details of individual banks (micro), while losing sight of emerging imbalances in the wider financial system (macro).
    JEL: E58 G01 G21 G28
    Date: 2013–04
  6. By: Agnès Bénassy-Quéré (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CEPII - Centre d'Etudes Prospectives et d'Informations Internationales - Centre d'analyse stratégique); Guillaume Roussellet (ENSAE - École Nationale de la Statistique et de l'Administration Économique - ENSAE ParisTech, Centre de recherche de la Banque de France - Banque de France, CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris IX - Paris Dauphine)
    Abstract: We provide a first attempt to include off-balance sheet, implicit insurance to SIFIs into a consistent assessment of fiscal sustainability, for 27 countries of the European Union. We first calculate tax gaps à la Blanchard (1990) and Blanchard et al. (1990). We then introduce two alternative measures of implicit off-balance sheet liabilities related to the risk of a systemic bank crisis. The first one relies on microeconomic data at the bank level. The second one is based on econometric estimations of the probability and the cost of a systemic banking crisis. The former approach provides an upper evaluation of the fiscal cost of systemic banking crises, whereas the latter one provides a lower one. Hence we believe that the combined use of these two methodologies helps to gauge the range of fiscal risk.
    Keywords: fiscal sustainability ; tax gap ; systemic banking risk ; off-balance sheet liabilities
    Date: 2013
  7. By: Maurice Obstfeld
    Abstract: Because of recent economic crises, financial fragility has regained prominence in both the theory and practice of macroeconomic policy. Consistent with macroeconomic paradigms prevalent at the time, the original architecture of the euro zone assumed that safeguards against inflation and excessive government deficits would suffice to guarantee macroeconomic stability. Recent events, in both Europe and the industrial world at large, challenge this assumption. After reviewing the roots of the euro crisis in financial-market developments, this essay draws some conclusions for the reform of euro area institutions. The euro area is moving quickly to correct one flaw in the Maastricht treaty, the vesting of all financial supervisory functions with national authorities. However, the sheer size of bank balance sheets suggest that the euro area must also confront a financial/fiscal trilemma: countries in the euro zone can no longer enjoy all three of financial integration with other member states, financial stability, and fiscal independence, because the costs of banking rescues may now go beyond national fiscal capacities. Thus, plans to reform the euro zone architecture must combine centralized supervision with some centralized fiscal backstop to finance bank resolution in situations of insolvency.
    JEL: E44 F36 G15 G21
    Date: 2013–04
  8. By: Novriana Sumarti; Iman Gunadi
    Abstract: Commercial banks and other depository institutions in some countries are required to hold in reserve against deposits made by their customers at their Central Bank or Federal Reserve. Although some countries have been eliminated it, this requirement is useful as one of many Central Bank's regulation made to control rate of inflation and conditions of excess liquidity in banks which could affect the monetary stability. The amount of this reserve is affected by the volumes of the commercial bank's loan and deposit, and also by the bank's Loan to Deposit Ratio (LDR) value. In this research, a dynamical system of the volume of deposits (dD/dt) and loans (dL/dt) of a bank is constructed from the bank profit equation by Monti-Klein. The model is implemented using the regulation of Bank of Indonesia, and analysed in terms of the behaviour of the solution. Based on some simplifying assumptions in this model, the results show that eventhough the LDR values at the initial points of two solutions are the same, the behavior of solutions will be significantly different due to different magnitude of L and D volumes.
    Date: 2013–06
  9. By: Zsolt Darvas; Guntram B. Wolff
    Abstract: Highlights 1) Irrespective of the euro crisis, a European banking union makes sense, including for non-euro area countries, because of the extent of European Union financial integration. The Single Supervisory Mechanism (SSM) is the first element of the banking union. 2) From the point of view of non-euro countries, the draft SSM regulation as amended by the EU?Council includes strong safeguards relating to decision-making, accountability, attention to financial stability in small countries and the applicability of national macro-prudential measures. Non-euro countries will also have the right to leave the SSM and thereby exempt themselves from a supervisory decision. 3) The SSM by itself cannot bring the full benefits of the banking union, but would foster financial integration, improve the supervision of cross-border banks, ensure greater consistency of supervisory practices, increase the quality of supervision, avoid competitive distortions and provide ample supervisory information. 4) While the decision to join the SSM is made difficult by the uncertainty about other elements of the banking union, including the possible burden sharing, we conclude that non-euro EU?members should stand ready to join the SSM and be prepared for the negotiations of the other elements of the banking union.
    Keywords: euro crisis, European banking union, bank supervision, single supervisory mechanism
    JEL: G21
    Date: 2013–05
  10. By: Robert Kollmann (ECARES, Université Libre de Bruxelles a)
    Abstract: This paper takes a two-country model with a global bank to US and Euro Area (EA) data. The estimation results (based on Bayesian methods) suggest that global banking strengthens the positive international transmission of real economic disturbances. Shocks that originate in the banking sector account for roughly 20% of the forecast error variance of investment, and about 5% of the forecast variance of US and EA GDP. Bank shocks explain 5%-20% of the fall in US and EA real activity, during the Great Recession.
    Date: 2012
  11. By: Etienne Farvaque (Faculty of International Affairs, The University of Le Havre); Norimichi Matsueda (School of Economics, Kwansei Gakuin University)
    Abstract: This paper discusses the implications of overconfidence when it affects a monetary policy-maker. We consider two forms of overconfidence: the illusion of precision and the illusion of control. Embedding them in a standard New Keynesian framework, we derive the optimal term length of a central banker and examine how it depends on the types and degrees of overconfidence. In particular, we show that the legal mandate should be lengthened when these two types of biases increase concurrently.
    Keywords: central banker; overcondence; legal mandate; optimal term length
    JEL: E58 H11
    Date: 2013–06
  12. By: Daniel Gros; Cinzia Alcidi
    Abstract: A ‘sudden stop’ to (private) capital inflows is usually very disruptive to an economy because it forces an almost immediate reversal in the current account unless the country in question receives substantial balance of payments assistance. The analysis presented in this paper starts from the observation that two groups of European countries, neither of which could use the exchange rate as an adjustment instrument, experienced a sudden stop after the outbreak of the global financial crisis. The first group comprises five euro area member states under financial stress during the euro area debt crisis (“GIIPS”). The second group comprises four newer EU Member States in Central and Eastern Europe (“BELL”). We highlight the differences in the adjustment paths of these two groups and analyse the factors which can explain them. The main finding is that the adjustment was quicker outside EMU than inside. The shock absorbers provided by the financial ‘plumbing’ of the Eurosystem offset much of the reversal in private capital flows and seem to have created an environment in which the pressure for a quick adjustment was much weaker. We also find that the structure of the domestic banking industry plays a key role. Foreign ownership of banks provided a loss absorber in the BELL favouring a quick correction, while the legacy of the banking crisis in some of GIIPS, where foreign ownership of banks was limited, is likely to weight for long time on their still incomplete.
    JEL: E20 F32 F36 H60
    Date: 2013–04
  13. By: Xavier Vives (IESE BUSINESS SCHOOL)
    Abstract: The paper analyzes a very stylized model of crises and demonstrates how the degree of strategic complementarity in the actions of investors is an important determinant of fragility. It is shown how the balance sheet composition of a financial intermediary, parameters of the information structure (precisions of public and private information), and the level of stress indicators in the market impinge on strategic complementarity and fragility. The model distinguishes between solvency and liquidity risk and characterizes them. Both a solvency (leverage) and a liquidity ratio are required to control the probabilities of insolvency and illiquidity. It is found that in a more competitive environment (with higher return on short-term debt) the solvency requirement has to be strengthened, and in an environment where the fire sales penalty is higher and fund managers are more conservative the liquidity requirement has to be strengthened while the solvency one relaxed. Higher disclosure or introducing a derivatives market may backfire, aggravating fragility (in particular when the asset side of a financial intermediary is opaque). The model is applied to interpret the 2007 run on SIV and ABCP conduits.
    Date: 2012
  14. By: Ojo, Marianne
    Abstract: Why are some global financial crises more difficult to recover from and overcome than others? What steps are necessary in ensuring that financial stability and recovery is facilitated? What kind of environment has the previous financial environment evolved to and what kind of financial products have also contributed to greater vulnerability in the triggering of systemic risks? These are amongst some of the questions which this book attempts to address. In highlighting the role and importance of various actors in post crises reforms and the huge impacts certain factors and products have contributed in exacerbating the magnitude and speed of transmission of financial contagion, it also provides an insight into why global financial crises have become more complicated to address than was previously the case. As well as considering and highlighting why matters related to pro cyclicality and capital measures should not constitute the sole focus of attention of the G20's initiatives, the book is aimed at identifying other important issues such as liquidity risks and requirements which have constituted, to a large extent, the focus of international standard setters and regulators. It also aims to direct regulators, central bank officials and supervisors, academics, business and legal professionals and other relevant interested parties in the field to current and previously ignored issues such as the "cartelisation" of capital markets. The need and concern for increased regulation of bond, equity markets, as well as other complex financial instruments which can be traded in OTC (Over-the-Counter) derivatives markets is evidenced by Basel III's focus. "Cartelisation" and organised activities relating to rate rigging in global capital markets have been evidenced recently by sophisticated EURIBOR and LIBOR rate rigging practices and occurences. The aims and objectives of the book would not be complete by merely identifying and highlighting the general root causes of global financial crises, and current issues to be focussed on. Hence each chapter will also recommend (as well as highlight) measures which should be (and have been) put forward in order to address the issues and factors which contribute to the magnitude and severity of global financial crises.
    Keywords: Financial stability; pro cyclicality; supervisors; systemic risks; counter party risks
    JEL: E51 E52 E58 K2 M4 M41
    Date: 2013–04–29
  15. By: Dirk Schoenmaker
    Abstract: This empirical essay reviews post-crisis integration in banking and insurance. Looking at aggregate data, we find that cross-border banking flows have been reversed, in particular into the CESEE and peripheral counties (Portugal, Ireland and Greece). But data at the individual firm level for banks and insurers indicate that cross-border activities remain persuasive within Europe. This intensity of cross-border activities indicates that the potential for coordination failure among national authorities remains high. Host country supervisors have so far responded by ring-fencing activities in subsidiaries, leading to further fragmentation. This essay argues that if we want to keep the benefits of both the single financial market and financial stability, we need new supranational institutions that encourage integration. The advance to Banking Union with integrated supervision and resolution can provide the necessary policy push for an integrated approach.
    JEL: G21 G22 G28 H41
    Date: 2013–04
  16. By: Werner Roeger (European Commission); Robert Kollmann (ECARES, Université Libre de Bruxelles a); Marco Ratto (European Commission); Jan in 't Veld (European Commission)
    Abstract: A key dimension of fiscal policy during the financial crisis was massive government support for the banking system. The macroeconomic effects of that support have, so far, received little attention in the literature. This paper fills this gap, using a quantitative dynamic model with a banking sector. We estimate the model for a Euro area quarterly dataset. The GDP multiplier of state aid to banks is in the same range as conventional fiscal spending multipliers. Our results suggest that state aid for banks may have a strong positive effect on real activity. Bank state aid multipliers are in the same range as conventional fiscal spending multipliers. Support for banks has a positive effect on investment, while a rise in government purchases crowds out investment.
    Date: 2012
  17. By: Ricardo Nunes
    Abstract: The Federal Reserve through the Federal Open Market Committee (FOMC) regularly releases macroeconomic forecasts to the general public and the US congress with the purpose of explaining the likely evolution of the economy and the appropriate stance of monetary policy. Immediately before doing so, the FOMC receives a forecast produced by the Federal Reserve staff which remains private for five years. The literature has pointed out that, despite the informational advantage of the FOMC, its forecast differs from and is not always more accurate than the staff forecast. This finding has raised concerns regarding the loss of relevant information and the usefulness of the FOMC forecasts. This paper brings evidence that the FOMC forecast also incorporates other publicly available forecasts and views, and that the weight attributed to public forecasts is larger than what is optimal given a mean squared error objective. These findings are consistent with i) the institutional role of the FOMC in being representative of a variety of public views, ii) the academic literature recommendation to use equal weights and not to overfit specific forecasts based on past performance. The statistical model can also account for several empirical regularities of the forecasts.
    Date: 2013
  18. By: Franziska Bremus; Claudia Buch; Katheryn Russ; Monika Schnitzer
    Abstract: Does the mere presence of big banks affect macroeconomic outcomes? In this paper, we develop a theory of granularity (Gabaix, 2011) for the banking sector, introducing Bertrand competition and heterogeneous banks charging variable markups. Using this framework, we show conditions under which idiosyncratic shocks to bank lending can generate aggregate fluctuations in the credit supply when the banking sector is highly concentrated. We empirically assess the relevance of these granular effects in banking using a linked micro-macro dataset of more than 80 countries for the years 1995-2009. The banking sector for many countries is indeed granular, as the right tail of the bank size distribution follows a power law. We then demonstrate granular effects in the banking sector on macroeconomic outcomes. The presence of big banks measured by high market concentration is associated with a positive and significant relationship between bank-level credit growth and aggregate growth of credit or gross domestic product.
    JEL: E32 E44 F4 G0 G21
    Date: 2013–05
  19. By: Armand Fouejieu Azangue (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR7322 - Université d'Orléans)
    Abstract: The effects of the 2008/2009 financial crisis went largely among the financial markets and hit the real economy, generating one of the greatest global economic shocks. The aim of this study is to investigate whether inflation targeting has made a difference during this crisis. We first present some arguments suggesting that inflation targeters can be expected to do better when facing a global shock. Applying difference in difference in the spirit of Ball and Sheridan (2005), we assess the difference between targeters and non-targeters and find that there is no significant difference concerning inflation rate and GDP growth. However, the rise in interest rates and inflation volatility during the crisis has been significantly less pronounced for targeters.
    Keywords: inflation targeting, financial crisis, macroeconomic performances, difference in difference.
    Date: 2012–05–22

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