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on Central Banking |
| By: | Francesco Bianchi; Leonardo Melosi |
| Abstract: | We develop a theoretical framework to quantitatively assess the general equilibrium effects and welfare implications of central bank reputation and transparency. Monetary policy alternates between periods of active inflation stabilization and periods during which the emphasis on inflation stabilization is reduced. When the central bank only engages in short deviations from active monetary policy, inflation expectations remain anchored and the model captures the monetary approach described as constrained discretion. However, if the central bank deviates for a prolonged period of time, agents gradually become pessimistic about future monetary policy, the disanchoring of inflation expectations occurs, and uncertainty rises. Reputation determines the speed with which agents' pessimism accelerates once the central bank starts deviating. When the model is fitted to U.S. data, we find that the Federal Reserve can accommodate contractionary technology shocks for up to five years before inflation expectations take off. Increasing transparency would improve welfare by anchoring agents' expectations. Gains from transparency are even more sizeable for countries whose central banks have weak reputation. |
| Keywords: | Bayesian learning, reputation, uncertainty, inflation expectations, Markov-switching models, impulse response |
| JEL: | E52 D83 C11 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:duk:dukeec:13-13&r=cba |
| By: | Matthias Neuenkirch (University of Aachen) |
| Abstract: | In this paper, we explore the determinants of media coverage of Federal Reserve (Fed) communications. Our sample covers all 344 forward-looking communications made in the period May 1999 - May 2004. We find, first, that there is a higher likelihood of media coverage for monetary policy reports and speeches by Greenspan than for testimony and speeches by other Fed members. Furthermore, communications with an explicit monetary policy inclination or tone different from the current interest rate path are particularly likely to be covered. However, the release of important macroeconomic news reduces the likelihood of media coverage. Second, speeches by regional Fed presidents are relatively less likely to be reported than speeches by Board members. Nevertheless, media coverage of Fed president speeches is more likely if central bank communication is stale. Finally, our results indicate that Ben Bernanke played a distinguished role even before his chairmanship. |
| Keywords: | Central Bank Communication, Federal Open Market Committee, Federal Reserve, Media Coverage, Monetary Policy. |
| JEL: | D83 E52 E58 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:201330&r=cba |
| By: | Stig Helberg (Department of Economics, Norwegian University of Science and Technology); Snorre Lindset (Department of Economics, Norwegian University of Science and Technology) |
| Abstract: | We use a structural model of default risk to study how optimal bank capital and bond risk are influenced by deposit insurance, implicit guarantees, depositor preference, asset encumbrance, and bail-in resolution frameworks. We find that these features of bank financing, in addition to having an immediate impact on bond debt risk, also change optimal bank capital, countering the first-order effect on bond debt risk. Bondholders' risk is thereby not materially affected, but shareholder value and public sector value are. A gap between optimal capital and required capital represents a cost to shareholders, and increases the risk of regulatory arbitrage. Enhancing capital requirements, and at the same time adopting bank debt regulations that reduce the optimal capital, is to gain some and lose some in terms of financial stability. Based on a small sample of European banks, we find support for the central model predictions. |
| Keywords: | Bank debt regulations, optimal bank capital, bond risk. |
| JEL: | G21 G28 G32 |
| Date: | 2013–06–13 |
| URL: | http://d.repec.org/n?u=RePEc:nst:samfok:14813&r=cba |
| By: | Pierre-Richard Agénor; Roy Zilberman |
| Abstract: | Interactions between loan loss provisioning rules and business cycle fluctuations are studied in a dynamic stochastic general equilibrium model with credit market imperfections. With a backward-looking provisioning system, provisions are triggered by past due payments, which, in turn, depend on current economic conditions and the loan loss reserves-loan ratio. With a forward-looking system, both past due payments and expected losses over the whole business cycle are accounted for, and provisions are smoothed over the cycle. Experiments show that holding more provisions can reduce the procyclicality of the financial system. However, a forward-looking provisioning regime can increase or lower procyclicality, depending on whether holding more loan loss reserves translates into a higher or lower fraction of nonperforming loans. A credit gap-augmented Taylor rule, coupled with a backward-looking provisioning system may be quite effective at mitigating real and financial volatility |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:184&r=cba |
| By: | Francesco Papadia |
| Abstract: | During the Great Recession, central banks went well beyond their normal operations and provided liquidity in unlimited amounts, in foreign currency and to foreign banks. Central bank cooperation took the form of a swap network, and amounted to an episode of global monetary policy. However, though bank cooperation will continue to contribute to global governance, the swap network should not be made permanent and given an institutional basis to provide international lending of last resort. Swaps are a monetary policy tool and should continue to be decided on by central banks like all other monetary policy tools,to avoid impinging on their independence, which a difficult historical process has shown to be the best basis for price stability. In comments appended to this Policy Contribution, Edwin Truman, Senior Fellow, Peterson Institute for International Economics, concludes in favour of making the swap network permanent, while William Dudley, President of the Federal Reserve Bank of New York, stresses the importance of central banks around the world being able to coordinate closely so that there can be a viable, credible backstop on a global basis. |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polcon:782&r=cba |
| By: | Theophilos Papadimitriou; Periklis Gogas; Benjamin M. Tabak |
| Abstract: | Comprehensive and thorough supervision of all banking institutions under a Central Bank’s regulatory control has become necessary as recent banking crises show. Promptly identifying bank distress and contagion issues is of great importance to the regulators. This paper proposes a methodology that can be used additionally to the standard methods of bank supervision or the new ones proposed to be implemented. By this, one can reveal the degree of banks’ connectedness and thus identify “core” instead of just “big” banks. Core banks are central in the network in the sense that they are shown to be crucial for network supervision. Core banks can be used as gauges of bank distress over a sub-network and promptly raise a red flag so that the central bank can effectively and swiftly focus on the corresponding neighborhood of financial institutions. In this paper we demonstrated the proposed scheme using as an example the asset returns variable. The method may and should be used with alternative variables as well. |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:306&r=cba |
| By: | Etienne Farvaque (EDEHN-Université du Havre & Skema Business School, Lille (France)); Piotr Stanek (Cracow University of Economics); Stephane Vigeant (Equippe – Universités de Lille & IESEG School of Management, Lille (France)) |
| Abstract: | This paper examines the influence of the biographical experience of monetary policy committee members on their performance in managing inflation and output volatility. Our sample covers major OECD countries in the 1999 to 2010 period. Using data envelopment analysis, we study the efficiency of monetary policy committees. Then, we look at the determinants of these performances. The results in particular show that (i) a larger number of governors is more efficient, except in crisis time, (ii) a policymakers' background influence the performance, with a positive role for committee members issued from academia, central banks and the financial sector. It is also shown that some committees have reduced the inefficiency created by the crisis more rapidly than others. |
| Keywords: | Central banking, Committees, DEA, Economic volatility, Governance |
| JEL: | D20 D78 E31 E52 E58 E65 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:154&r=cba |
| By: | Ken Miyajima |
| Abstract: | Using monthly data for four selected emerging economies, sterilised central bank foreign exchange intervention is found to have little systematic influence on the near-term nominal exchange rate expectations in the direction intended by the central banks. In other words, central bank dollar purchases to stem exchange rate appreciation or related exchange rate volatility are not associated with an adjustment of the near-term exchange rate forecasts in the direction of depreciation, and vice versa. This suggests intervention may not change the nearterm exchange rate expectations. Moreover, intervention may have had unintended effects in the sense that it can lead to undesired volatility in the exchange rate, which is consistent with previous studies. |
| Keywords: | exchange rate expectation, foreign exchange intervention |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:414&r=cba |
| By: | Ruth Reyes Nidia; José Eduardo Gómez; Jair Ojeda Joya |
| Abstract: | We study the existence of a monetary policy transmission mechanism through banks in Colombia, using monthly banks’ balance sheet data for the period 1996:4 – 2012:12. We obtain results which are consistent with the basic postulates of the bank lending channel (and the risk-taking channel) literature. The impact of short-term interest rates on the growth rate of loans is negative, indicating that increases in these rates lead to reductions in the growth rate of loans. This impact is stronger for consumer loans than for commercial loans. We find important heterogeneity in the monetary policy transmission across banks depending on banks-specific characteristics. |
| Date: | 2013–06–16 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:010860&r=cba |
| By: | Alistair Milne (School of Business and Economics, Loughborough University, UK) |
| Abstract: | This paper analyses contingent-claims based measures of distance to default (D2D) for the 41 largest global banking institutions over the period 2006H2 to 20011H2. D2D falls from end-2006 through to end-2008. Cross-sectional differences in D2D prior to the crisis do not predict either bank failure or bank share prices decline, but D2D measured in mid-2008 does have some predictive value for failure by end-year. The ‘option value’ of the bank safety net remains small except at the height of the crisis and there is little indication of bank shareholders consciously using the safety net to shift risk onto taxpayers. (99 words) |
| Keywords: | bank default, bank moral hazard, bank regulation, bank safety net, contingent claims, early warning systems, global financial crisis, market-based risk measurement, systemic risk, risk shiftingCreation-Date: 110613 |
| JEL: | F15 F54 P33 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:lbo:lbowps:2013_03&r=cba |
| By: | Brendon, Charles (European University Institute); Paustian, Matthias (Bank of England); Yates, Tony (Bank of England) |
| Abstract: | We show that interest rate rules that feed back on the growth rates of target variables (such as output or asset prices) may induce recessions in the presence of a zero lower bound, through purely self-fulfilling dynamics. This pathology is illustrated in a small New Keynesian model with interest rates responding to the growth rate of output, and in a version of a model by Matteo Iacoviello where interest rates respond to the growth rate of house prices and credit. Our results provide a cautionary note, contrasting with previous work which has suggested several desirable properties of speed-limit rules, namely that they are devices enabling the policymaker (i) to side-step uncertainty about natural rates, (ii) to counter booms and busts in asset prices or (iii) to implement optimal commitment policies. |
| Keywords: | Speed-limit rules; commitment; zero lower bound; self-fulfilling prophecies |
| JEL: | E52 E58 E61 |
| Date: | 2013–06–14 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0473&r=cba |
| By: | Joseph S. Vavra |
| Abstract: | Is monetary policy less effective at increasing real output during periods of high volatility than during normal times? In this paper, I argue that greater volatility leads to an increase in aggregate price flexibility so that nominal stimulus mostly generates inflation rather than output growth. To do this, I construct price-setting models with "volatility shocks" and show these models match new facts in CPI micro data that standard price-setting models miss. I then show that these models imply output responds less to nominal stimulus during times of high volatility. Furthermore, since volatility is countercyclical, this implies that nominal stimulus has smaller real effects during downturns. For example, the estimated output response to additional nominal stimulus in September 1995, a time of low volatility, is 55 percent larger than the response in October 2001, a time of high volatility. |
| JEL: | D8 E10 E30 E31 E50 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19148&r=cba |
| By: | Volker Ziemann |
| Abstract: | Using a large panel of OECD countries this paper studies the link between debt and macroeconomic stability by comparing the evolution of balance sheet aggregates and economic output in high- and lowdebt environments. While the relationship between debt and economic growth has been extensively studied in the literature, only little attention has been paid to the impact of debt on volatility and higher moments of output growth distributions. This paper fills in this gap. Debt-fuelled expansions are found to typically last longer but to culminate in a more sizeable downturn. The greater amplitude of business cycles in high-debt environments reflects higher macroeconomic volatility but also higher tail risks and adverse asymmetries in output growth distributions. The induced welfare losses justify policy interventions aiming at preventing excessive build-ups in debt ex-ante.<P>Endettement et stabilité macroéconomique : L'endettement et le cycle économique<BR>S’appuyant sur un vaste ensemble de pays de l’OCDE, ce document étudie le lien entre la dette et la stabilité macroéconomique en comparant l’évolution des agrégats des bilans et de la production économique dans des contextes d’endettement élevé et de faible endettement. Si la relation entre la dette et la croissance économique a fait l’objet de nombreuses études, il n’a guère été prêté attention à l’impact de la dette sur la volatilité et les moments supérieurs des distributions de la croissance de la production. Ce document comble cette lacune. Il constate que les phases d’expansion financée par le recours à l’endettement durent généralement plus longtemps mais se terminent par un ralentissement plus marqué de l’activité. La plus grande amplitude des cycles conjoncturels en situation de fort endettement reflète une plus haute instabilité macroéconomique mais aussi des risques extrêmes plus élevés et des asymétries défavorables dans les distributions de la croissance de la production. Les pertes de bien-être liées à ces phénomènes justifient les interventions des pouvoirs publics visant à éviter une accumulation excessive de dette ex ante. |
| Keywords: | debt, macroeconomic stability, amplitude of business cycles, stabilité macroéconomique, amplitude des cycles conjoncturels |
| JEL: | C23 E32 E44 F34 G01 H63 |
| Date: | 2012–12–04 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:1005-en&r=cba |