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on Central Banking |
| By: | Christiaan Pattipeilohy; Jan Willem van den End; Mostafa Tabbae; Jon Frost; Jakob de Haan |
| Abstract: | We first sketch how central banks have used unconventional monetary policy measures by using three indicators based on the composition of the balance sheet of eleven central banks. Our analysis suggests that although the ECB’s balance sheet has increased dramatically during the crisis, the non-standard monetary policy measures had only a moderate impact on the composition of the ECB’s balance sheet compared to other central banks, such as the Fed and the Bank of England. Next, we take stock of research analysing the effects of unconventional monetary policy of the ECB after the onset of the crisis. A crucial question is to what extent these measures have been able to affect interest rates, thereby restoring the monetary policy transmission process and supporting the central bank objectives. Finally, we offer new evidence on the effectiveness of the ECB’s unconventional monetary policy measures, i.e. extended liquidity provision (LTRO) and the Securities Market Programme (SMP). Our results suggest that the LTRO interventions in general had a favorable (short-term) effect on government bond yields. Changes in the SMP only had a visible downward effect on bond yields in Summer 2011, when the program was reactivated for Italy and Spain, but this effect dissipated within a few weeks. |
| Keywords: | unconventional monetary policy; non-standard monetary policy; central bank balance sheet; European Central Bank |
| JEL: | E40 E50 E58 E60 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:381&r=cba |
| By: | Carl Chiarella; Corrado Di Guilmi |
| Abstract: | The paper presents an agent based model to study the possible effects of different fiscal and monetary policies in the context of debt deflation. We introduce a modified Taylor rule which includes the financial position of firms as a target. Monte Carlo simulations show that an excessive sensitivity of the central bank to inflation, the output gap and firms' debt can have undesired and destabilising effects on the system, while an active fiscal policy appears to be able to effectively stabilise the economy. The paper also addresses the puzzle of low inflation during stock market booms by testing different behavioural rules for the central bank. We find that, in a context of sticky prices and volatile expectations, endogenous credit can be identified as the main source of the divergent dynamics of prices in the real and financial sector. |
| Keywords: | Financial fragility, monetary policy, debt deflation, agent based modelling, complex dynamics. |
| JEL: | E12 E31 E44 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2013-42&r=cba |
| By: | Saroj Bhattarai; Jae Won Lee; Woong Yong Park |
| Abstract: | We introduce “financial imperfections” - asymmetric net wealth positions, incomplete risksharing, and interest rate spread across member countries - in a prototypical two-country currency union model and study implications for monetary policy transmission mechanism and optimal policy. In addition to, and independent from, the standard transmission mechanism associated with nominal rigidities, financial imperfections introduce a wealth redistribution role for monetary policy. Moreover, the two mechanisms reinforce each other and amplify the effects of monetary policy. On the normative side, financial imperfections, via interactions with nominal rigidities, generate two novel policy trade-offs. First, the central bank needs to pay attention to distributional efficiency in addition to macroeconomic (and price level) stability, which implies that a strict inflation targeting policy of setting union-wide inflation to zero is never optimal. Second, the interactions lead to a trade-off in stabilizing relative consumption versus the relative price gap (the deviation of relative prices from their efficient level) across countries, which implies that the central bank allows for less flexibility in relative prices. Finally, we consider how the central bank should respond to a financial shock that causes an increase in the interest rate spread. Under optimal policy, the central bank strongly decreases the deposit rate, which reduces aggregate and distributional inefficiencies by mitigating the drop in output and inflation and the rise in relative consumption and prices. Such a policy response can be well approximated by a spreadadjusted Taylor rule as it helps the real interest rate track the efficient rate of interest. |
| Keywords: | Price levels ; Money supply |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:150&r=cba |
| By: | Arie Krampf |
| Abstract: | During the 20th century, the institution called central bank was diffused globally. However, central banking practices differed significantly between European market-based economies and developing economies. This paper traces the ideas and norms that shaped and legitimized central banking practices in the two areas. The paper argues that during the period from the 1940s to the 1970s two central banking policy norms existed: the liberal norm, which emerged in Europe, and the developmental central banking norm, which emerged in Latin America and diffused to East Asia. The paper seeks to trace the life cycles of the two norms: to specify the ideational content of each norm and to identify the actors and networks that produced, promoted and diffused them. The paper makes two contributions. First, theoretically, on the basis of Finnemore and Sikkink’s theory of international norms’ dynamics, it introduces a mechanism that explains the emergence and internationalization of an alternative international norm in the periphery that challenges the standard international norm. Second, it contributes to the literature on comparative regionalism by historicizing the liberal/European standard of central banking practices and by identifying the existence of an alternative standard for central banking practices in developing countries. The paper covers the period from the 1940s to the 1970s. |
| Keywords: | regulations; European Central Bank; European Central Bank; economics; history |
| Date: | 2013–04–23 |
| URL: | http://d.repec.org/n?u=RePEc:erp:kfgxxx:p0049&r=cba |
| By: | Ruth Reyes Nidia; José Eduardo Gómez G.; 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. |
| Keywords: | Monetary policy transmission; Bank lending channel; Risk taking channel; Colombia. Classification JEL: E5; E52; E59; G21. |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:772&r=cba |
| By: | Christopher M. Gunn (Department of Economics, Carleton University); Alok Johri (Department of Economics, McMaster University) |
| Abstract: | What is the effect of the fear of future sovereign default on the economy of the defaulting country? The typical sovereign default model does not address this question. In this paper we wish to explore the possibility that changing expectations about future default themselves can lead to financial stress (as measured by credit spreads) and recessionary outcomes. We exploit the \news-shock" framework to consider an environment in which sovereign debt-holders receive imperfect signals about the portion of debt that a sovereign may default on in the future. We then investigate how domestic banks can play a role in transmitting the expectation of default into a realized recession through the interaction of the domestic banks' holdings of government debt and their risk-weighted capital requirements. Our results suggest that, consistent with the data, even in the absence of actual realized government default, an increase in pessimism regarding the prospect of future default results in a rise in yields on government debt and an increase in interest rates on private domestic loans, as well as a recession in the economy. |
| Keywords: | expectations-driven business cycles, sovereign defaults; financial intermediation, news shocks, business cycles, interest rate spreads, capital adequacy requirements. |
| JEL: | E3 E44 F36 F37 F4 G21 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:car:carecp:13-03&r=cba |
| By: | Feldkircher, Martin (BOFIT); Horvath, Roman (BOFIT); Rusnak, Marek (BOFIT) |
| Abstract: | In this paper, we examine whether pre-crisis leading indicators help explain pressures on the exchange rate (and its volatility) during the global financial crisis. We use a unique data set that covers 149 countries and 58 indicators, and estimation techniques that are robust to model uncertainty. Our results are threefold: First and foremost, we find that price stability plays a pivotal role as a determinant of exchange rate pressures. More specifically, the currencies of countries that experienced higher inflation prior to the crisis tend to be more affected in times of stress. Second, we investigate potential effects that vary with the level of pre-crisis inflation. In this vein, our results reveal that domestic savings reduce the severity of pressures in countries that experienced a low-infation environment prior to the crisis. Finally, we find evidence of the mitigating effects of international reserves on the volatility of exchange rate pressures. |
| Keywords: | exchange market pressures; financial crisis |
| JEL: | F31 F37 |
| Date: | 2013–05–29 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2013_011&r=cba |
| By: | Nicolas Veron (Peterson Institute for International Economics) |
| Abstract: | New obstacles to the European banking union have emerged over the last year, but a successful transition is both necessary and possible. European leaders have to acknowledge a sequence of policy changes that must take place before the banking union can be completed. Specifically, in the second half of 2014, the European Central Bank (ECB) will gain supervisory authority over most of Europe’s banking system. This handover is the first of two milestones that will define the eventual success or failure of the banking union project. The second milestone will be a change in the European treaties that will establish the robust legal basis needed for a sustainable union. Together, these two milestones are a bridge that will allow Europe to cross the choppy waters that separate it from a sustainable policy framework. |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:iie:pbrief:pb13-17&r=cba |
| By: | Naohisa Hirakata; Yoshihiko Hogen; Nao Sudo; Kozo Ueda |
| Abstract: | In this paper, we study bank loan responses to monetary policy and bank capital shocks using Japan’s disaggregated data sorted by borrower firms’ size and industry. Employing a block recursive VAR, we demonstrate that bank loan responses exhibit large sectoral heterogeneity. Among a broad range of indicators about borrower firms’ characteristics, the heterogeneity is tightly linked to borrower firms’ liability conditions. Firms with a lower capital ratio tend to experience larger drops in bank loans following a contractionary monetary policy shock and/or a negative bank capital shock. In addition, we find that firms’ substitution motive from alternative financial measures also explains the heterogeneity, while the firms’ inventory motive that is stressed in the empirical literature for U.S. banks does not. Our results indicate the importance of considering a compositional shift of bank loans across borrower firms in implementing accommodative monetary policy and capital injection policy. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:149&r=cba |
| By: | Hasan, Iftekhar (Fordham University and Bank of Finland); Marinc , Matej (University of Ljubljana and ACLE) |
| Abstract: | This article investigates the nexus of competition and stability in European banking. It analyzes the European legal framework for competition policy in banking and several cases that pertain to anti-cartel policy, merger policy, and state-aid control. It discusses whether and how competition policy should be amended in order to preserve the stability of the banking system during crises. The article argues for increased cooperation between prudential regulators and competition authorities, as well as an enhanced framework for bank regulation, supervision, and resolution that could mitigate the need to change competition policy in crisis times. |
| Keywords: | banking; competition policy; financial crisis |
| JEL: | G21 G28 K21 L40 |
| Date: | 2013–05–19 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2013_007&r=cba |
| By: | James A. Clouse |
| Abstract: | The financial crisis and its aftermath have raised numerous questions about the appropriate role of financial stability considerations in the conduct of monetary policy. This paper develops a simple example of the possible connections between financial stability and monetary policy. We find that even without an explicit financial stability goal for monetary policy, financial stability considerations arise naturally in the context of standard models of optimal monetary policy if the potential magnitude of financial stability shocks is affected by the stance of policy. In this case, similar to the classic analysis of Brainard (1967), policymakers may seek to reduce the variance of output by scaling back the level of policy accommodation provided today in response to an aggregate demand shock relative to the level that would otherwise be provided. However, the policy implications of this possible connection between monetary policy and financial stability are complex even in the simple example considered here. In particular, financial stability considerations may also increase the relative benefits of following a commitment policy relative to a discretionary strategy. |
| Keywords: | Monetary policy |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2013-41&r=cba |
| By: | Scott J. Dressler (Department of Economics and Statistics, Villanova School of Business, Villanova University); Erasmus Kersting (Department of Economics and Statistics, Villanova School of Business, Villanova University) |
| Abstract: | This paper examines a DSGE environment with endogenous excess reserve holdings in the banking sector. Excess reserves act as an extensive margin of bank lending which is inactive in traditional limited participation models where banks hold minimal reserves by assumption. The results of our model suggest that this extensive margin of bank lending can dampen and even overcome the standard liquidity effect of monetary contractions, amplify the output response to productivity shocks, and bring about large, short-run responses to changes in the interest rate paid on reserves. |
| Keywords: | Financial Intermediation; Excess Reserves; Liquidity Effect; Output Amplification |
| JEL: | C68 E44 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:vil:papers:24&r=cba |
| By: | Fumio Hayashi (Hitotsubashi University); Junko Koeda (The University of Tokyo) |
| Abstract: | Central banks of major market economies have recently adopted QE (quantitative easing), allowing excess reserves to build up while maintaining the policy rate at very low levels. We develop a regime-switching SVAR (structural vector autoregression) in which the monetary policy regime, chosen by the central bank responding to economic conditions, is endogenous and observable. The model can incorporate the exit condition for terminating QE. We then apply the model to Japan, a country that has accumulated, by our count, 130 months of QE as of December 2012. Our impulse response analysis yields two findings about QE. First, an increase in reserves raises inflation and output. Second, terminating QE is not necessarily deflationary. |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:cfi:fseres:cf322&r=cba |
| By: | Michael Hatcher |
| Abstract: | This paper presents a DSGE model in which long run inflation risk matters for social welfare. Optimal indexation of long-term government debt is studied under two monetary policy regimes: inflation targeting (IT) and price-level targeting (PT). Under IT, full indexation is optimal because long run inflation risk is substantial due to base-level drift, making indexed bonds a much better store of value than nominal bonds. Under PT, where long run inflation risk is largely eliminated, optimal indexation is substantially lower because nominal bonds become a better store of value relative to indexed bonds. These results are robust to the PT target horizon, imperfect credibility of PT and model calibration, but the assumption that indexation is lagged is crucial. From a policy perspective, a key finding is that accounting for optimal indexation has important welfare implications for comparisons of IT and PT. |
| Keywords: | government debt, inflation risk, inflation targeting, price-level targeting. |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2013_11&r=cba |
| By: | Eva Schliephake (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg) |
| Abstract: | Minimum capital requirement regulation forces banks to refund a substantial amount of their investments with equity. This creates a buffer against losses, but also increases the cost of funding. If higher refunding costs translate into higher loan interest rates, then borrowers are likely to become more risky, which may destabilize the lending bank. This paper argues that, in addition to the buffer and cost effect of capital regulation, there is a strategic effect. A binding capital requirement regulation restricts the lending capacity of banks, and therefore reduces the intensity of loan interest rate competition and increases the banks' price setting power as shown in Schliephake and Kirstein (2013). This paper discusses the impact of this indirect effect from capital regulation on the stability of the banking sector. It is shown that the enhanced price setting power can reverse the net effect that capital requirements have under perfect competition. |
| Keywords: | Capital Requirement Regulation, Competition; Financial Stabilityt |
| JEL: | G21 K23 L13 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:mag:wpaper:130012&r=cba |
| By: | John C. Williams |
| Abstract: | This paper examines the implications of uncertainty about the effects of monetary policy for optimal monetary policy with an application to the current situation. Using a stylized macroeconomic model, I derive optimal policies under uncertainty for both conventional and unconventional monetary policies. According to an estimated version of this model, the U.S. economy is currently suffering from a large and persistent adverse demand shock. Optimal monetary policy absent uncertainty would quickly restore real GDP close to its potential level and allow the inflation rate to rise temporarily above the longer-run target. By contrast, the optimal policy under uncertainty is more muted in its response. As a result, output and inflation return to target levels only gradually. This analysis highlights three important insights for monetary policy under uncertainty. First, even in the presence of considerable uncertainty about the effects of monetary policy, the optimal policy nevertheless responds strongly to shocks: uncertainty does not imply inaction. Second, one cannot simply look at point forecasts and judge whether policy is optimal. Indeed, once one recognizes uncertainty, some moderation in monetary policy may well be optimal. Third, in the context of multiple policy instruments, the optimal strategy is to rely on the instrument associated with the least uncertainty and use alternative, more uncertain instruments only when the least uncertain instrument is employed to its fullest extent possible. |
| Keywords: | Monetary policy |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2013-15&r=cba |
| By: | Eva Schliephake (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg) |
| Abstract: | Microprudential capital requirements are designed to reduce the excessive risk taking of banks. If banks are required to use more equity funding for risky assets they invest more funds into safe assets. This paper analyzes a government that simultaneously regulates the banking sector and borrows from it. I argue that a government may have the incentive to use capital requirements to alleviate its budget burden. The risk weights for risky assets may be placed relatively too high compared to the risk weight on government bonds. This could have a negative impact on welfare. The supply of loans for the risky sector shrinks, which may have a negative impact on long term growth. Moreover, the government may be tempted to increase its debt level due to better funding conditions, which increases the risk of a future sovereign debt crisis. A short term focused government may be tempted to neglect the risk and, thereby, may introduce systemic risk in the banking sector. |
| Keywords: | Capital Requirement Regulation, Government Debt |
| JEL: | G21 G28 G32 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:mag:wpaper:130011&r=cba |
| By: | Christian Merkl |
| Abstract: | This paper shows that announced credible disinflations under inflation targeting lead to a boom in a standard New Keynesian model (i.e. a disinflationary boom). This finding is robust with respect to various parameterizations and disinflationary experiments. Thus, it differs from previous findings about disinflationary booms under monetary targeting |
| Keywords: | Disinflation, Disinflationary Boom, Inflation Targeting |
| JEL: | E30 E31 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1851&r=cba |
| By: | Vespignani, Joaquin L.; Ratti, Ronald A |
| Abstract: | This paper examines the influence of monetary shocks in China on the U.S. economy over 1996-2012. The influence on the U.S. is through the sheer scale of China’s growth through effects in demand for imports, particularly that of commodities. China’s growth influences world commodity/oil prices and this is reflected in significantly higher inflation in the U.S. China’s monetary expansion is also associated with significant decreases in the trade weighted value of the U.S. dollar that is due to the operation of a pegged currency. China manages the exchange rate and has extensive capital controls in place. In terms of the Mundell–Fleming model, with imperfect capital mobility, sterilization actions under a managed exchange rate permit China to pursue an independent monetary policy with consequences for the U.S. |
| Keywords: | International monetary transmission, U.S. Macroeconomics, China’s monetary policy |
| JEL: | E42 E5 E50 E52 E58 |
| Date: | 2013–07–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:48050&r=cba |
| By: | Gunes Kamber; Christoph Thoenissen |
| Abstract: | This paper analyzes the transmission mechanism of banking sector shocks in an international real business cycle model with heterogeneous bank sizes. We examine to what extent the financial exposure of the banking sector affects the transmission of foreign banking sector shocks. In our model, the more exposed domestic banks are to the foreign economy via lending to foreign firms, the greater are the spillovers from foreign financial shocks to the home economy. The model highlights the role of openness to trade and the dynamics of the terms of trade in the international transmission mechanism of banking sector shocks Spillovers from foreign banking sector shocks are greater the more open the home economy is to trade and the less the terms of trade respond to foreign shocks. |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2013-39&r=cba |
| By: | Mark Setterfield (Department of Economics, Trinity College); Bill Gibson (Department of Economics,) |
| Abstract: | Previous analyses of macroeconomic imbalances have employed models that either focus exclusively on real-side e?ects or financial-side disturbances. Structuralist models make the highly unrealistic assumption that financial surplus firms e?ortlessly and costlessly transfer those surpluses to deficit firms, which require additional savings to sustain their plans for capital accumulation. On the other hand, there exists a well-developed, rigorous and elegant literature that uses the multi-agent systems (MAS) approach to analyze the recent financial crisis. This literature focuses exclusively on the financial sector to the neglect of the real economy. In this paper, we build on the MAS model of Setterfield and Budd (2011), relaxing some of the restrictive assumptions regarding the goods market in that model, and adding a financial sector. The latter is inspired by the financial models of Johansen et al. (2000), Sornette (2003), Voit (2005), LeBaron (2012), Thurner et al. (2012), and others. The result is a robust model of the economy in which the real and financial sectors are integrated and interact with one another. The contribution is to show that real financial interactions increase the likelihood of crises, while preferentially attached financial networks decrease financial instability. |
| Keywords: | Stock market; Crash; Bubbles; Herding; Adaptation; Agent-based models |
| JEL: | D58 G01 G12 B16 C00 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:tri:wpaper:1309&r=cba |
| By: | Miele, Maria Grazia |
| Abstract: | This paper addresses the following questions: which was the contribution of banks’assets to the US’ expansion in the period until the financial crisis? Did commercial banks respect capital requirements? The two questions are strictly interrelated as, according to a recent literature, business cycle is directly related to banks’ capital requirements for market and credit risk. The analysis highlight that US commercial banks actually respected capital requirements but these were not relevant in the explanation of US growth; it confirms that most of the growth can instead be explained by the rise in productivity. Nevertheless, the analysis does not consider the role of the non banking intermediation (investment banks, broker dealers, mutual funds, etc.) that steadily increased until the crisis. Its effects over real economy could be investigated in further work. |
| Keywords: | commercial banks, crisis, capital requirements, business cycle |
| JEL: | E32 E44 G01 G21 |
| Date: | 2013–07–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:48165&r=cba |
| By: | Michael B. Devereux; Viktoria V. Hnatkovska |
| Abstract: | Models of risk-sharing predict that relative consumption growth rates across locations should be positively related to real exchange rate growth rates across the same areas. We investigate this hypothesis using a new multi-country and multi-regional data set. Within countries, we find evidence for risk-sharing: episodes of high relative regional consumption growth are associated with regional real exchange rate depreciation. Across countries however, the association is reversed: relative consumption and real exchange rates are negatively correlated. We define this reversal as a border effect and show that it accounts for 53 percent of the deviations from full risk-sharing. Since crossborder real exchange rates involve different currencies, it is natural to ask how much of the border effect is accounted for by movements in exchange rates? We find that over one-third of the border effect is due to nominal exchange rate fluctuations. We develop a simple open economy model that is consistent with the importance of nominal exchange rate variability in accounting for deviations from cross-country risk-sharing. |
| Keywords: | Real exchange rate, risk sharing, border effect, intranational economics |
| JEL: | F3 F4 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2013-37&r=cba |
| By: | Quamrul Ashraf; Boris Gershman; Peter Howitt |
| Abstract: | We use an agent-based computational approach to show how inflation can worsen macroeconomic performance by disrupting the mechanism of exchange in a decentralized market economy. We find that, in our model economy, increasing the trend rate of inflation above 3 percent has a substantial deleterious effect, but lowering it below 3 percent has no significant macroeconomic consequences. Our finding remains qualitatively robust to changes in parameter values and to modifications to our model that partly address the Lucas critique. Finally, we contribute a novel explanation for why cross-country regressions may fail to detect a significant negative effect of trend inflation on output even when such an effect exists in reality. |
| Keywords: | Agent-based computational model, inflation, price dispersion, firm turnover |
| JEL: | C63 E00 E31 E50 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:amu:wpaper:2013-10&r=cba |