nep-cba New Economics Papers
on Central Banking
Issue of 2013‒07‒28
fifteen papers chosen by
Maria Semenova
Higher School of Economics

  1. An Alternative Model to Basel Regulation By Sofiane Aboura; Emmanuel Lépinette
  2. Central Bank Design By Ricardo Reis
  3. A liquidity risk index as a regulatory tool for systemically important banks? An empirical assessment across two financial crises By Gianfranco Gianfelice; Giuseppe Marotta; Costanza Torricelli
  4. Should monetary policy lean against the wind? - an analysis based on a DSGE model with banking By Leonardo Gambacorta; Federico M Signoretti
  5. (Taylor) Rules versus Discretion in U.S. Monetary Policy By Alex Nikolsko-Rzhevskyy; David Papell; Ruxandra Prodan
  6. High Frequency Identification of Monetary Non-Neutrality By Emi Nakamura; Jón Steinsson
  7. Optimal Monetary Responses to Asset Price Levels and Fluctuations: The Ramsey Problem and A Primal Approach By Diogo Guillen; Wei Cui
  8. Contingent Liabilities and Sovereign Risk: Evidence from Banking Sectors By Serkan Arslanalp; Yin Liao
  9. New Empirics of monetary policy dynamics: evidence from the CFA franc zones By Asongu , Simplice A
  10. 'Institutions and Financial Dollarization: Indirect Effects based on a Policy Experiment' By Kyriakos C. Neanidis; Christos S. Savva
  11. Sovereign defaults and optimal reserves management By Leonardo Martinez; Juan Hatchondo; Javier Bianchi
  12. Global Financial Regulatory Trends and Challenges for Insurance and Pensions By Javier Alonso; Tatiana Alonso; Santiago Fernandez de Lis; Cristina Rohde; David Tuesta
  13. The interest rate effects of government debt maturity By Jagjit S Chadha; Philip Turner; Fabrizio Zampolli
  14. Banks, Asset Management or Consultancies' Inflation Forecasts: is there a better forecaster out there? By Tito Nícias Teixeira da Silva Filho
  15. Caveat creditor By Philip Turner

  1. By: Sofiane Aboura (CEREG - Centre de Recherche sur la gestion et la Finance - DRM UMR 7088 - Université Paris IX - Paris Dauphine); Emmanuel Lépinette (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris IX - Paris Dauphine)
    Abstract: The post-crisis financial reforms address the need for systemic regulation, focused not only on individual banks but also on the whole financial system. The regulator principal objective is to set banks' capital requirements equal to international minimum standards in order to mimimise systemic risk. Indeed, Basel agreement is designed to guide a judgement about minimum universal levels of capital and remains mainly microprudential in its focus rather than being macroprudential. An alternative model to Basel framework is derived where systemic risk is taken into account in each bank's dynamic. This might be a new departure for prudential policy. It allows for the regulator to compute capital and risk requirements for controlling systemic risk. Moreover, bank regulation is considered in a two-scale level, either at the bank level or at the system-wide level. We test the adequacy of the model on a data set containing 19 banks of 5 major countries from 2005 to 2012. We compute the capital ratio threshold per year for each bank and each country and we rank them according to their level of fragility. Our results suggest to consider an alternative measure of systemic risk that requires minimal capital ratios that are bank-specific and time-varying.
    Keywords: Systemic risk; Bank Regulation; Basel Accords
    Date: 2013–07–19
  2. By: Ricardo Reis
    Abstract: What set of institutions can support the activity of a central bank? Designing a central bank requires specifying its objective function, including the bank's mandate at different horizons and the choice of banker(s), specifying the resource constraint that limits the resources that the central bank generates, the assets it holds, or the payments on its liabilities, and finally specifying how the central bank will communicate with private agents to affect the way they respond to policy choices. This paper summarizes the relevant economic literature that bears on these choices, leading to twelve principles on central bank design.
    JEL: E5 E58
    Date: 2013–07
  3. By: Gianfranco Gianfelice; Giuseppe Marotta; Costanza Torricelli
    Abstract: We provide an assessment of the IMF suggestion, based on Severo (2012), to use an index of systemic liquidity risk (SLRI) that could help to estimate a Pigouvian tax on large banks for the externality on the international banking system out of their risk exposure. To this end we compute a parsimonious and fully documented SLRI and investigate its statistical significance in explaining level and variability of stock returns for a group of large international banks during the subprime financial and the Eurozone sovereign debt crises. The empirical investigation consistently fails to detect, within and across the two crises, a core group among the systemically important banks listed by the Financial Stability Board and thus supports a sceptical assessment of the proposal.
    Keywords: subprime crisis, Eurozone sovereign crisis, systemic risk, banks’ stock returns, macroprudential regulation
    JEL: C58 G01 G12 G13
    Date: 2013–07
  4. By: Leonardo Gambacorta; Federico M Signoretti
    Abstract: The global financial crisis has reaffirmed the importance of financial factors for macroeconomic fluctuations. Recent work has shown how the conventional pre-crisis prescription that monetary policy should pay no attention to financial variables over and above their effects on inflation may no longer be valid in models that consider frictions in financial intermediation (Cúrdia and Woodford, 2009). This paper analyzes whether Taylor rules augmented with asset prices and credit can improve upon a standard rule in terms of macroeconomic stabilization in a DSGE with both a firms' balance-sheet channel and a bank-lending channel and in which the spread between lending and policy rates endogenously depends on banks' leverage. The main result is that, even in a model in which financial stability does not represent a distinctive policy objective, leaning-against-the-wind policies are desirable in the case of supply-side shocks whenever the central bank is concerned with output stabilization, while both strict inflation targeting and a standard rule are less effective. The gains are amplified if the economy is characterized by high private sector indebtedness.
    Keywords: DSGE, monetary policy, asset prices, credit channel, Taylor rule, leaning-against-the-wind
    Date: 2013–07
  5. By: Alex Nikolsko-Rzhevskyy (Lehigh University); David Papell; Ruxandra Prodan
    Abstract: The Taylor rule has been the dominant metric for monetary policy evaluation over the past 20 years, and it has become common practice to identify periods where policy either adheres closely to or deviates from the Taylor rule benchmark. The purpose of this paper is to identify (Taylor) rules-based and discretionary eras solely from the data so that knowledge of subsequent economic outcomes cannot influence the choice of the dates. We define Taylor rules-based and discretionary eras by smaller and larger Taylor rule deviations, the absolute value of the difference between the actual federal funds rate and the federal funds rate prescribed by the original Taylor rule, and use tests for multiple structural changes and Markov switching models to identify the eras. Monetary policy in the U.S. is characterized by a Taylor rules-based (low deviations) era until 1974, a discretionary (high deviations) era from 1974 to about 1985, a rules-based era from about 1985 to 2000, and a discretionary era from 2001 to 2008. The Taylor rule deviations are about three times as large in the discretionary eras than in the rules-based eras and are almost four times larger in the most discretionary era (1974 to 1984) than in the least discretionary era (1985 to 2000). With the Markov switching models, which allow for regime changes at the beginning and end of the sample, we also identify a discretionary era from 1965 to 1968 and a rules-based era in 2006 and 2007. The discretionary and rules-based eras closely correspond to periods where the Taylor rule deviations are above and below two percent.
    Keywords: Taylor rules, rules versus discretion, monetary policy
    JEL: E52
    Date: 2013–07–17
  6. By: Emi Nakamura; Jón Steinsson
    Abstract: We provide new evidence on the responsiveness of real interest rates and inflation to monetary shocks. Our identifying assumption is that the increase in the volatility of interest rate news in a 30-minute window surrounding scheduled Federal Reserve announcements arises from news about monetary policy. Real and nominal yields and forward rates at horizons out to 3 years move close to one-for-one at these times implying that changes in expected inflation are small. At longer horizons, the response of expected inflation grows. Accounting for "background noise" in interest rates is crucial in identifying the effects of monetary policy on interest rates, particularly at longer horizons. We use structural macroeconomic models to show that the impact of changes in real interest rates on output is small or the impact of changes in output on prices is small or both. Furthermore, our evidence points towards substantial inflation inertia.
    JEL: E30 E40 E50
    Date: 2013–07
  7. By: Diogo Guillen (Princeton University); Wei Cui (Princeton University)
    Abstract: Should monetary policy react to asset prices levels and changes? In answering this question, we provide a tractable monetary Ramsey approach for a heterogeneous agents model with conventional policy (interest rate or money growth target) and unconventional policy (purchase of private illiquid assets) as instruments, in which heterogeneous agents' interaction is summarized in one implementability condition. We show that entrepreneurs hold too much liquid asset in a model with equity issuance and resale (liquidity) constraints. In the steady state, optimal policy involves paying interest on liquid assets or reducing the money supply available, leading to an equivalent increase of .40% in permanent consumption compared to the economy with no policy. In responding to liquidity shocks, the paths of macroeconomic variables under no policy and optimal policy are sharply different and suggest the need for policy on changing the rate of return on liquid assets. Finally, we prove that the unconventional policy dominates the conventional counterpart, but, quantitatively, the welfare difference of them is negligible.
    Date: 2012
  8. By: Serkan Arslanalp; Yin Liao
    Abstract: This paper proposes a simple method to estimate contingent liabilities that arise from (implicit and explicit) government guarantees to the banking sector. This method allows us to construct cross-country estimates on potential costs of bank failures. Furthermore, we empirically test whether the contingent liabilities from the banking sector is a significant determinant of sovereign risk based on the data from 32 countries. Our results suggest that a 1% of GDP increase in contingent liabilities is associated with an increase in sovereign CDS spreads of 24 basis points in advanced countries and 75 basis points in emerging economies
    Keywords: Contingent Liabilities, Sovereign Risk, Banking Sector
    JEL: G13 G21 G38
    Date: 2013–07
  9. By: Asongu , Simplice A
    Abstract: Purpose – A major lesson of the EMU crisis is that serious disequilibria in a monetary union result from arrangements not designed to be robust to a variety of shocks. With the specter of this crisis looming substantially and scarring existing monetary zones, the present study has complemented existing literature by analyzing the effects of monetary policy on economic activity (output and prices) in the CEMAC and UEMOA CFA franc zones. Design/methodology/approach – VARs within the frameworks of VECMs and Granger causality models are used to estimate the long-run and short-run effects respectively. Impulse response functions are further used to assess the tendencies of significant Granger causality findings. A battery of robustness checks are also employed to ensure consistency in the specifications and results. Findings – Hypothesis 1: Monetary policy variables affect prices in the long-run but not in the short-run in the CFA zones (Broadly untrue). This invalidity is more pronounced in CEMAC (relative to all monetary policy variables) than in UEMOA (with regard to financial dynamics of activity and size). Hypothesis 2: Monetary policy variables influence output in the short-term but not in the long-run in the CFA zones. Firstly, the absence of co-integration among real output and the monetary policy variables in both zones confirm the long-term dimension of the hypothesis on the neutrality of money. The validity of its short-run dimension is more relevant in the UEMOA zone (with the exception of overall money supply) than in the CEMAC zone (in which only financial dynamics of ‘financial system efficiency’ and financial activity support the hypothesis). Practical Implications – (1) Compared to the CEMAC region, the UEMOA zone’s monetary authority has more policy instruments for offsetting output shocks but fewer instruments for the management of short-run inflation. (2) The CEMAC region is more inclined to non-traditional policy regimes while the UEMOA zone dances more to the tune of traditional discretionary monetary policy arrangements. A wide range of policy implications are discussed. Inter alia: implications for the long-run neutrality of money and business cycles; implications for credit expansions and inflationary tendencies; implications of the findings to the ongoing debate; country-specific implications and measures of fighting surplus liquidity. Originality/value – By using a plethora of hitherto unemployed financial dynamics (that broadly reflect money supply), we have provided a significant contribution to the empirics of monetary policy. The conclusion of the analysis is a valuable contribution to the scholarly and policy debate on how money matters as an instrument of economic activity in developing countries and monetary unions.
    Keywords: Monetary Policy; Banking; Inflation; Output effects; Africa
    JEL: E51 E52 E58 E59 O55
    Date: 2013–01–14
  10. By: Kyriakos C. Neanidis; Christos S. Savva
    Abstract: We provide evidence that institutional improvements lead to lower levels of financial dollarization through previously unidentified channels. These indirect channels operate in addition to the direct impact identified in the literature and further illustrate the importance of institutions for the extent of banking dollarization. The analysis is based on a unique policy experiment: the admission process of countries to the European Union (EU).
    Date: 2013
  11. By: Leonardo Martinez (International Monetary Fund); Juan Hatchondo (Federal Reserve Bank of Richmond); Javier Bianchi (NYU and Wisconsin)
    Abstract: A long-standing puzzle of international capital flows is why countries hold large amount of external debt and foreign reserves at the same time. To address this puzzle, we propose a sovereign default model where the government decides jointly over the accumulation of long-duration bonds and foreign reserves. When calibrated to the data, the model can successfully explain the simultaneous holdings of debt and foreign reserves. We also show that the relationship between reserves and default risk may be non-monotonic.
    Date: 2012
  12. By: Javier Alonso; Tatiana Alonso; Santiago Fernandez de Lis; Cristina Rohde; David Tuesta
    Abstract: The financial system is undergoing an important regulatory overhaul, gradually increased during the last five years. Solvency II and Basel III are two of the most relevant global initiatives that try to reformulate the future landscape for finance. Under this scenario the Insurance and Pensions (I&P) industry, less affected in the crisis, is undergoing important changes that come from different channels. In this regard, this paper focuses on the main global regulatory trends affecting I&P, either directly from its own regulation or indirectly from changes in the banking sector regulation and strategies. After discussing the relevant characteristics of the different pieces of regulation, this study concludes that there is a great disparity among countries in the initial situation of the I&P sectors, both in terms of solvency levels and the diversification/riskiness of investment portfolios, which will cause different effects from a country base perspective: Notwithstanding this, there is a common challenge about how to reconcile more risk-sensitive regulation with the search for a yield in a world with consistently low interest rates. As a consequence of these new pieces of regulation, it is possible to anticipate a scenario of: higher fees; lower appetite for corporate debt; higher cost of derivatives hedging; reduced securitisation activity, an I&P industry more involved in infrastructure funding, and more real estate financing activity from the insurance sector. As regards sovereign debt, the present regulatory statu quo favours a higher demand of these securities by I&P, but the debate on whether to maintain its zero risk weight in Basel III and Solvency II may imply some changes in the future. What is clear in the near future is that regulators of banks, pensions and insurance sectors should analyse the interactions of new regulations; the associated trade-offs and risks and their consistency with a view to avoid creating wrong incentives for the long run.
    Keywords: Basel III, Solvency II, Regulation, Insurance, Pensions, Banking
    JEL: G18 G28 G38
    Date: 2013–06
  13. By: Jagjit S Chadha; Philip Turner; Fabrizio Zampolli
    Abstract: Federal Reserve purchases of bonds in recent years have meant that a smaller proportion of long-dated government debt has had to be held by other investors (private sector and foreign official institutions). But the US Treasury has been lengthening the maturity of its issuance at the same time. This paper reports estimates of the impact of these policies on long-term rates using an empirical model that builds on Laubach (2009). Lowering the average maturity of US Treasury debt held outside the Federal Reserve by one year is estimated to reduce the five-year forward 10-year yield by between 130 and 150 basis points. Such estimates assume that the decisions of debt managers are largely exogenous to cyclical interest rate developments; but they could be biased upwards if the issuance policies of debt managers are not exogenous but instead respond to interest rates. Central banks will face uncertainty not only about the true magnitude of maturity effects, but also about the size and concentration of interest rate risk exposures in the financial system. Nor do they know what the fiscal authorities and their debt managers will do as long-term rates change.
    Keywords: quantitative easing, sovereign debt management, long-term interest rate, portfolio balance effect
    Date: 2013–06
  14. By: Tito Nícias Teixeira da Silva Filho
    Abstract: The Focus Survey is a cunningly designed economic survey carried out by the Central Bank of Brazil. However, along its existence there have occasionally been some criticisms that its median forecast is “biased” due to allegedly strategic reasons. Although different groups of agents do have different strategic behaviours, one cannot take for granted that some groups predict differently from others. This paper tests if there are statistically significant differences in forecast accuracy between different groups of participants in the Focus Survey. Evidence shows some differences in forecasting ability among groups, but overall financial system forecasters have similar forecasting accuracy than consultancies.
    Date: 2013–07
  15. By: Philip Turner
    Abstract: One area where international monetary cooperation has failed is in the role of surplus or creditor countries in limiting or in correcting external imbalances. The stock dimensions of such imbalances - net external positions, leverage in national balance sheets, currency/maturity mismatches, the structure of ownership of assets and liabilities and over-reliance on debt - can threaten financial stability in creditor as in debtor countries. Creditor countries therefore have a responsibility both for avoiding "overlending" and for devising cooperative solutions to excessive or prolonged imbalances.
    Keywords: International adjustment, symmetry in adjustment, external financing and risk exposures, financial crisis
    Date: 2013–07

This nep-cba issue is ©2013 by Maria Semenova. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.