nep-cba New Economics Papers
on Central Banking
Issue of 2013‒07‒05
eight papers chosen by
Maria Semenova
Higher School of Economics

  1. Evolution of Monetary Policy Transmission Mechanism in Malawi: A TVP-VAR Approach By Chance Mwabutwa; Manoel Bittencourt; Nicola Viegi
  2. The Effects of Central Bank Independence and Inflation Targeting on Macroeconomic Performance: Evidence from Natural Experiments By Michael Parkin
  3. Signaling Effects of Monetary Policy By Leonardo Melosi
  4. Time-Varying Business Volatility, Price Setting, and the Real Effects of Monetary Policy By Ruediger Bachmann; Benjamin Born; Steffen Elstner; Christian Grimme
  5. Debt dilution and sovereign default risk By Leonardo Martinez; Cesar Sosa Padilla; Juan Hatchondo
  6. Optimal Fiscal and Monetary Rules in Normal and Abnormal Times By Cristiano Cantore; Paul Levine; Giovanni Melina; Joseph Pearlman
  7. Sovereign debt markets in turbulent times: Creditor discrimination and crowding-out effects By Fernando Broner; Aitor Erce; Alberto Martin; Jaume Ventura
  8. Bailouts, Time Inconsistency, and Optimal Regulation By V.V. Chari; Patrick J. Kehoe

  1. By: Chance Mwabutwa (Department of Economics, University of Pretoria); Manoel Bittencourt (Department of Economics, University of Pretoria); Nicola Viegi (Department of Economics, University of Pretoria)
    Abstract: This paper investigates the evolution of monetary transmission mechanism in Malawi between 1981 and 2010 using a time varying parameter vector autoregressive (TVP-VAR) model with stochastic volatility. We evaluate how the responses of real output and general price level to bank rate, exchange rate and credit shocks changed over time since Malawi adopted financial reforms in 1980s. The paper finds that inflation, real output and exchange rate responses to monetary policy shocks changed over the period under review. Importantly, beginning mid-2000, the monetary policy transmission performed consistently with predictions of economic theory and there is no evidence of price puzzle as found in the previous literature on Malawi. However, the statistical significance of the private credit supply remains weak and this calls for more financial reforms targeting the credit market which can contribute to monetary transmission and promote further economic growth in Malawi.
    Keywords: Monetary Policy Transmission Mechanism, Price Puzzle, Financial Reforms, Bayesian TVP-VAR
    JEL: C49 D12 D91 E21 E44
    Date: 2013–06
  2. By: Michael Parkin (University of Western Ontario)
    Abstract: not available
    Keywords: none available
    Date: 2013
  3. By: Leonardo Melosi (Federal Reserve Bank of Chicago)
    Abstract: We develop a DSGE model in which the policy rate signals to price setters the central bank’s view about macroeconomic developments. The model is estimated with likelihood methods on a U.S. data set that includes the Survey of Professional Forecasters as a measure of price setters’ inflation expectations. We find that the model fits the data better than a prototypical New Keynesian DSGE model because the signaling effects of monetary policy help the model account for the run-up in inflation expectations in the 1970s. The estimated model with signaling effects delivers large and persistent real effects of monetary disturbances even though the average duration of price contracts is fairly short. While the signaling effects do not substantially alter the transmission of technology shocks, they bring about deflationary pressures in the aftermath of positive demand shocks. The signaling effects of monetary policy have contributed (i ) to heightening inflation expectations in the 1970s, (ii ) to raising inflation and to exacerbating the recession during the first years of Volcker’s monetary tightening, and (iii ) to subduing inflation and to stimulating economic activity from 1991 through 2007.
    Keywords: Bayesian econometrics; price puzzle; persistent real effects of nominal shocks; imperfect common knowledge; public signal; heterogeneous beliefs
    JEL: E52 C11 C52 D83
    Date: 2013–03–01
  4. By: Ruediger Bachmann; Benjamin Born; Steffen Elstner; Christian Grimme
    Abstract: Does time-varying business volatility affect the price setting of firms and thus the transmission of monetary policy into the real economy? To address this question, we estimate from the firm-level micro data of the German IFO Business Climate Survey the impact of idiosyncratic volatility on the price setting behavior of firms. In a second step, we use a calibrated New Keynesian business cycle model to gauge the effects of time-varying volatility on the transmission of monetary policy to output. Our results are twofold. Heightened business volatility increases the probability of a price change, though the effect is small: the tripling of volatility during the recession of 08/09 caused the average quarterly likelihood of a price change to increase from 31.6% to 32.3%. Second, the effects of this increase in volatility on monetary policy are also small; the initial effect of a 25 basis point monetary policy shock to output declines from 0.347% to 0.341%.
    JEL: E30 E31 E32 E5
    Date: 2013–06
  5. By: Leonardo Martinez (International Monetary Fund); Cesar Sosa Padilla (University of Maryland); Juan Hatchondo (Federal Reserve Bank of Richmond)
    Abstract: We measure the effects of debt dilution on sovereign default risk and show how these effects can be mitigated with debt contracts promising borrowing-contingent payments. First, we calibrate a baseline model `a la Eaton and Gersovitz (1981) to match features of the data. In this model, bondsâ values can be diluted. Second, we present a model in which sovereign bonds contain a covenant promising that after each time the government borrows it it pays to the holder of each bond issued in previous periods the difference between the bond market price that would have been observed absent current-period borrowing and the observed market price. This covenant eliminates debt dilution by making the value of each bond independent from future borrowing decisions. We quantify the effects of dilution by comparing the simulations of the model with and without borrowing-contingent payments. We find that dilution accounts for 84% of the default risk in the baseline economy. Similar default risk reductions can be obtained with borrowing-contingent payments that depend only on the bond market price. Using borrowing-contingent payments is welfare enhancing because it reduces the frequency of default episodes.
    Date: 2012
  6. By: Cristiano Cantore (University of Surrey); Paul Levine (University of Surrey); Giovanni Melina (International Monetary Fund); Joseph Pearlman (City University, London)
    JEL: E62 E30
    Date: 2013–06
  7. By: Fernando Broner; Aitor Erce; Alberto Martin; Jaume Ventura
    Abstract: In 2007, countries in the Euro periphery were enjoying stable growth, low deficits, and low spreads. Then the financial crisis erupted and pushed them into deep recessions, raising their deficits and debt levels. By 2010, they were facing severe debt problems. Spreads increased and, surprisingly, so did the share of the debt held by domestic creditors. Credit was reallocated from the private to the public sectors, reducing investment and deepening the recessions even further. To account for these facts, we propose a simple model of sovereign risk in which debt can be traded in secondary markets. The model has two key ingredients: creditor discrimination and crowding-out effects. Creditor discrimination arises because, in turbulent times, sovereign debt offers a higher expected return to domestic creditors than to foreign ones. This provides incentives for domestic purchases of debt. Crowding-out effects arise because private borrowing is limited by financial frictions. This implies that domestic debt purchases displace productive investment. The model shows that these purchases reduce growth and welfare, and may lead to self-fulfilling crises. It also shows how crowding-out effects can be transmitted to other countries in the Eurozone, and how they may be addressed by policies at the European level.
    Keywords: sovereign debt, rollover crises, secondary markets, economic growth.
    JEL: F32 F34 F36 F41 F43 F44 G15
    Date: 2013–06
  8. By: V.V. Chari; Patrick J. Kehoe
    Abstract: We develop a model in which, in order to provide managerial incentives, it is optimal to have costly bankruptcy. If benevolent governments can commit to their policies, it is optimal not to interfere with private contracts. Such policies are time inconsistent in the sense that, without commitment, governments have incentives to bail out firms by buying up the debt of distressed firms and renegotiating their contracts with managers. From an ex ante perspective, however, such bailouts are costly because they worsen incentives and thereby reduce welfare. We show that regulation in the form of limits on the debt-to-value ratio of firms mitigates the time-inconsistency problem by eliminating the incentives of governments to undertake bailouts. In terms of the cyclical properties of regulation, we show that regulation should be tightest in aggregate states in which resources lost to bankruptcy in the equilibrium without a government are largest.
    JEL: E0 E44 E6 E61
    Date: 2013–06

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