nep-cba New Economics Papers
on Central Banking
Issue of 2013‒08‒10
ten papers chosen by
Maria Semenova
Higher School of Economics

  1. Asset Allocation under the Basel Accord Risk Measures By Zaiwen Wen; Xianhua Peng; Xin Liu; Xiaoling Sun; Xiaodi Bai
  2. Leverage ratios and Basel III: proposed Basel III leverage and supplementary leverage ratios By Ojo, Marianne
  3. The Basel capital adequacy and regulatory framework: balancing risk sensitivity, simplicity and comparability By Ojo, Marianne
  4. The Liquidity Coverage Ratio: the need for further complementary ratios? By Ojo, Marianne
  5. What do Nominal Rigidities and Monetary Policy tell us about the Real Yield Curve? By Francisco Palomino; Alex Hsu
  6. Woodford's Approach to Robust Policy Analysis in a Linear-Quadratic Framework By Jianjun Miao; Hyosung Kwon
  7. Currency Crises During the Great Recession: Is This Time Different? By Tiziano Arduini; Giuseppe De Arcangelis; Carlo L. Del Bello
  8. Foreign Exchange Market Interventions and the $-¥ Exchange Rate in the Long-Run By Joscha Beckmann; Ansgar Belke; Michael Kühl
  9. A macroeconomic model of liquidity crises By Keiichiro Kobayashi; Tomoyuki Nakajima
  10. Statistical Modeling of Monetary Policy and its Effects By Sims, Christopher A.

  1. By: Zaiwen Wen; Xianhua Peng; Xin Liu; Xiaoling Sun; Xiaodi Bai
    Abstract: Financial institutions are currently required to meet more stringent capital requirements than they were before the recent financial crisis; in particular, the capital requirement for a large bank's trading book under the Basel 2.5 Accord more than doubles that under the Basel II Accord. The significant increase in capital requirements renders it necessary for banks to take into account the constraint of capital requirement when they make asset allocation decisions. In this paper, we propose a new asset allocation model that incorporates the regulatory capital requirements under both the Basel 2.5 Accord, which is currently in effect, and the Basel III Accord, which was recently proposed and is currently under discussion. We propose an unified algorithm based on the alternating direction augmented Lagrangian method to solve the model; we also establish the first-order optimality of the limit points of the sequence generated by the algorithm under some mild conditions. The algorithm is simple and easy to implement; each step of the algorithm consists of solving convex quadratic programming or one-dimensional subproblems. Numerical experiments on simulated and real market data show that the algorithm compares favorably with other existing methods, especially in cases in which the model is non-convex.
    Date: 2013–08
  2. By: Ojo, Marianne
    Abstract: The Basel III Leverage Ratio, as originally agreed upon in December 2010, has recently undergone revisions and updates – both in relation to those proposed by the Basel Committee on Banking Supervision – as well as proposals introduced in the United States. Whilst recent proposals have been introduced by the Basel Committee to improve, particularly, the denominator component of the Leverage Ratio, new requirements have been introduced in the U.S to upgrade and increase these ratios, and it is those updates which relate to the Basel III Supplementary Leverage Ratio that have primarily generated a lot of interests. This is attributed not only to concerns that many subsidiaries of US Bank Holding Companies (BHCs) will find it cumbersome to meet such requirements, but also to potential or possible increases in regulatory capital arbitrage: a phenomenon which plagued the era of the original 1988 Basel Capital Accord and which also partially provided impetus for the introduction of Basel II. This paper is aimed at providing an analysis of the recent updates which have taken place in respect of the Basel III Leverage Ratio and the Basel III Supplementary Leverage Ratio – both in respect of recent amendments introduced by the Basel Committee and proposals introduced in the United States. It will also consider the consequences – as well as the impact - which the U.S Leverage ratios could have on Basel III. There are ongoing debates in relation to revision by the Basel Committee, as well as the most recent U.S proposals to update Basel III Leverage ratios and whilst these revisions have been welcomed to a large extent, in view of the need to address Tier One capital requirements and exposure criteria, there is every likelihood, indication, as well as tendency that many global systemically important banks (GSIBS), and particularly their subsidiaries, will resort to capital arbitrage. What is likely to be the impact of the recent proposals in the U.S.? The recent U.S proposals are certainly very encouraging and should also serve as impetus for other jurisdictions to adopt a pro-active approach – particularly where existing ratios or standards appear to be inadequate. This paper also adopts the approach of evaluating the causes and consequences of the most recent updates by the Basel Committee, as well as those revisions which have taken place in the U.S, by attempting to balance the merits of the respective legislative updates and proposals. The value of adopting leverage ratios as a supplementary regulatory tool will also be illustrated by way of reference to the impact of the recent legislative changes on risk taking activities, as well as the need to also supplement capital adequacy requirements with the Basel Leverage ratios and the Basel liquidity standards.
    Keywords: global systemically important banks (G-SIBs); risk weighted assets; leverage ratios; harmonisation; accounting rules; capital arbitrage; disclosure; stress testing techniques; U.S Basel III Final Rule
    JEL: E3 E5 G2 G3 K2
    Date: 2013–07–31
  3. By: Ojo, Marianne
    Abstract: As well as highlighting the importance of cost benefit analyses in decision- making processes where (expected) outcomes are very difficult to predict – given the degree of prevailing and potential risks and uncertainties, as well as the unquantifiable nature of such risks and uncertainties, this paper also illustrates the importance of complementary measures in the current Basel risk based capital adequacy framework. As technological advances and societal changes contribute towards the generation of certain levels of risks – some of which were previously not in existence, it is increasingly becoming evident that risks certainly have a dual nature. Institutional risks comprise of risks which are not only attributable to the firm or organisation where models (such as internal controls) or techniques are operated, namely internal control risks, but also the risks involved in managing those risks. In view of such uncertainties, and the continual evolution of risks, it becomes immediately apparent that certain outcomes cannot be predicted with high accuracy and certainty – hence the need to weigh the investment of high expenditure in such unpredictable outcomes. Is the desire to achieve comparability, as well as simplicity, greater than the need to attain accurate, reliable and more relevant results through investment in more complex techniques? Such techniques involving not only initially high outlays but also costs (as well as risks) involved in managing such techniques? These constitute some of the questions which this paper attempts to address.
    Keywords: comparability; simplicity; risk based capital adequacy framework; bank stress testing; risks; risk theories; Basel leverage ratios; liquidity standards
    JEL: E6 G2 G28 G3 K2
    Date: 2013–08–01
  4. By: Ojo, Marianne
    Abstract: This paper considers components of the Liquidity Coverage Ratio – as well as certain prevailing gaps which may necessitate the introduction of a complementary liquidity ratio. The definitions and objectives accorded to the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) highlight the focus which is accorded to time horizons for funding bank operations. A ratio which would focus on the rate of liquidity transformations and which could also serve as a complementary metric given certain gaps which currently prevail with the Liquidity Coverage Ratio, as well as existing gaps with other complementary liquidity monitoring tools, is proposed.
    Keywords: Liquidity Coverage Ratio (LCR); Net Stable Funding Ratio (NSFR); High Quality Liquid Assets (HQLA); liquidity monitoring tools; objectivity; comparability; transparency; disclosure
    JEL: E0 E02 G2 G3 K2
    Date: 2013–08–04
  5. By: Francisco Palomino (University of Michigan); Alex Hsu (Georgia Tech)
    Abstract: We study term and inflation risk premia in real and nominal bonds, respectively, in an equilibrium model calibrated to United States data. Nominal wage and price rigidities, and an interest-rate monetary policy rule characterize our model economy. Wage rigidities induce positive term and inflation risk premia for permanent productivity shocks: they generate high marginal utility, expected consumption growth, inflation, and bond yields, simultaneously. Policy and inflation-target shocks increase real and nominal yield variability, respectively. Real-nominal bond return correlations are increased by the rigidities. Stronger policy responses to output and inflation reduce real term premia and increase inflation risk premia.
    Date: 2013
  6. By: Jianjun Miao (Boston University); Hyosung Kwon (Boston University)
    Abstract: This paper extends Woodford's (2010) approach to the robustly monetary policy to a general linear quadratic framwork. We provide algorithms to solve for a time-invariant linear robustly optimal policy from a timeless perspective and for a time-invariant linear Markov perfect equilibrium under discretation. We apply our methods to two New Keynesian models of monetary policy: (i) a model with persistent cost-push shocks and (ii) a model with inflation persistence. We find that the robustly optimal commitment inflation is less responsive to a cost-push shock when the shock is more persistent and that the robustly optimal discretionary policy is more responsive to lagged inflation in the presence inflation inertia.
    Date: 2013
  7. By: Tiziano Arduini (Sapienza, University of Rome); Giuseppe De Arcangelis (Sapienza, University of Rome); Carlo L. Del Bello (Sapienza, University of Rome)
    Abstract: During the 2007-2009 financial crisis the foreign exchange market was characterized by large volatility and wide currency swings. In this paper we evaluate whether during the period of the Great Recession there has been a structural break in the relationship between fundamentals and exchange rates within an early-warning framework. This is done by extending the original data set by Kaminsky and Reinhart (1999) and including not only the most recent period, but also 17 new countries. Our analysis considers two variations of the original early-warning system. First, we propose two new methods to obtain the probability distribution of the early-warning indicator (conditional on the occurrence of a crisis) - one fully parametric and one based on a novel distribution-free semi-parametric approach. Second, we compare the original early-warning indicator with a core indicator that includes only "pseudo-nancial variables" (domestic credit/GDP, the real exchange rate, international reserves and the real interest-rate dierential) and we evaluate their performance not only for currency crises during the Great Recession, but also for the Asian Crisis. All tests make us conclude that "this time is different", i.e. early-warning systems based on traditional macroeconomic variables have not only failed to forecast currency crises during the Great Recession, but have also significantly worsened with respect to the period of the Asian crisis.
    Keywords: EarlyWarning Systems, Exchange Rates, Semi-parametric Methods.
    JEL: F31 F47 F30
  8. By: Joscha Beckmann; Ansgar Belke; Michael Kühl
    Abstract: This paper tries to clarify the question of whether foreign exchange market interventions conducted by the Bank of Japan are important for the Dollar-Yen exchange rate in the long-run. Our strategy relies on a re-examination of the empirical performance of a monetary exchange rate model. This is basically not a new topic; however, we put our focus on two new questions. Firstly, does the consideration of periods of massive interventions in the foreign exchange market help to uncover a potential long-run relationship between the exchange rate and its fundamentals? Secondly, do Forex interventions support the adjustment towards a long-run equilibrium value? Our overall results suggest that taking periods of interventions into account within a monetary model does improve the goodness of fit of an identified long-run relationship to a significant degree. Furthermore, Forex interventions increase the speed of adjustment towards long-run equilibrium in some periods, particularly in periods of coordinated Forex interventions. Our results indicate that only coordinated interventions seem to stabilize the Dollar-Yen exchange rate in a long-run perspective. This is a novel contribution to the literature.
    Keywords: Structural exchange rate models; cointegration; intervention analysis
    JEL: E44 F31 G12
    Date: 2013–07
  9. By: Keiichiro Kobayashi (Keio University); Tomoyuki Nakajima (Kyoto University)
    Abstract: We develop a simple macroeconomic model that captures key features of a liquidity crisis. During a crisis, the supply of short-term loans vanishes, the interest rate rises sharply, and the level of economic activity declines. A crisis may be caused either by self-fulfilling beliefs or by fundamental shocks. It occurs as a result of market failure due to debt overhang in short-term loans. The government's commitment to deposit guarantee reduces the likelihood of self-fulfilling crisis but increases that of fundamental crisis.
    Keywords: Debt overhang, liquidity, working capital, systemic crisis.
    JEL: E30 G01 G21
    Date: 2013–08
  10. By: Sims, Christopher A. (Princeton University)
    Abstract: Nobel Prize lecture, 8 December 2011
    Keywords: Causation; Macroeconomics
    JEL: C32 E60
    Date: 2013–08–08

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