nep-cba New Economics Papers
on Central Banking
Issue of 2013‒08‒23
37 papers chosen by
Maria Semenova
Higher School of Economics

  1. Monetary policy, macroprudential policy and banking stability: evidence from the euro area By Maddaloni, Angela; Peydró, José-Luis
  2. Are Central Bank Independence Reforms Necessary for Achieving Low and Stable Inflation? By Daunfeldt, Sve-Olov; Landström, Mats; Rudholm, Niklas
  3. Bank lending and monetary transmission in the euro area By De Santis, Roberto A.; Surico, Paolo
  4. Central bank liquidity provision, risk-taking and economic efficiency By Bindseil, Ulrich; Jabłecki, Juliusz
  5. Heterogeneous transmission mechanism: monetary policy and financial fragility in the euro area By Ciccarelli, Matteo; Maddaloni, Angela; Peydró, José-Luis
  6. The effectiveness of the non-standard policy measures during the financial crises: the experiences of the federal reserve and the European Central Bank By Carpenter, Seth; Demiralp, Selva; Eisenschmidt, Jens
  7. What's in a Second Opinion? Shadowing the ECB and the Bank of England By Matthias Neuenkirch; Pierre L. Siklos
  8. Exchange Market Pressures during the Financial Crisis: A Bayesian Model Averaging Evidence By Martin Feldkircher; Roman Horvath; Marek Rusnak
  9. Optimal Macroprudential Policy By Ko Munakata; Koji Nakamura; Yuki Teranishi
  10. Building a financial conditions index for the euro area and selected euro area countries: what does it tell us about the crisis? By Angelopoulou, Eleni; Balfoussia, Hiona; Gibson, Heather
  11. Risk, uncertainty and monetary policy By Bekaert, Geert; Hoerova, Marie; Lo Duca, Marco
  12. Determinants of banking system fragility: a regional perspective By Degryse, Hans; Elahi, Muhammad Ather; Penas, María Fabiana
  13. The ECB’s non-standard monetary policy measures: the role of institutional factors and financial structure By Cour-Thimann, Philippine; Winkler, Bernhard
  14. Optimal asset structure of a bank - bank reactions to stressful market conditions By Hałaj, Grzegorz
  15. A non-standard monetary policy shock: the ECB’s 3-year LTROs and the shift in credit supply By Darracq Pariès, Matthieu; De Santis, Roberto A.
  16. Booms and systemic banking crises By Boissay, Frederic; Collard, Fabrice; Smets, Frank
  17. A twin crisis with multiple banks of issue: Spain in the 1860s By Moro, Alessio; Nuño, Galo; Tedde, Pedro
  18. Evaluating early warning indicators of banking crises: Satisfying policy requirements By Mathias Drehmann; Mikael Juselius
  19. Professional forecasters and the real-time forecasting performance of an estimated new keynesian model for the euro area By Smets, Frank; Warne, Anders; Wouters, Raf
  20. Impact of Financial Deregulation on Monetary and Economic Policy in the Czech Republic, Hungary and Poland: 1990-2003 By Patricia McGrath
  21. A financial systemic stress index for Greece By Louzis, Dimitrios; Vouldis, Angelos
  22. The dynamics of spillover effects during the European sovereign debt crisis By Alter, Adrian; Beyer, Andreas
  23. On policymakers' loss function and the evaluation of early warning systems By Sarlin, Peter
  24. Retained interests in securitisations and implications for bank solvency By Sarkisyan, Anna; Casu, Barbara
  25. Bubbles, bank credit and macroprudential policies By Derviz, Alexis
  26. Fiscal policy coordination in monetary unions By Josef Schroth
  27. Real exchange rate forecasting: a calibrated half-life PPP model can beat the random walk By Ca' Zorzi, Michele; Muck, Jakub; Rubaszek, Michał
  28. The rhyme and reason for macroprudential policy : four guideposts to find your bearings By de la Torre, Augusto; Ize, Alain
  29. International monetary transmission to the Euro area: Evidence from the U.S., Japan and China By Vespignani, Joaquin L.; Ratti, Ronald A.
  30. The industrial impact of monetary shocks during the inflation targeting era in Australia By Vespignani, Joaquin L.
  31. The euro exchange rate during the European sovereign debt crisis - dancing to its own tune? By Ehrmann, Michael; Osbat, Chiara; Stráský, Jan; Uusküla, Lenno
  32. Instability: Monetary and Real By Michael T. Belongia; Peter N. Ireland
  33. A Tale of Two Eurozones: Banks’s Funding, Sovereign Risk & Unconventional Monetary Policies By Fulli-Lemaire, Nicolas
  34. The Benefits and Costs of Highly Expansionary Monetary Policy By Łukasz Rawdanowicz; Romain Bouis; Shingo Watanabe
  35. Interest Rate Pass-Through and Monetary Policy Asymmetry: A Journey into the Caucasian Black Box By Rustam Jamilov; Balázs Égert
  36. The Effectiveness of Monetary Policy since the Onset of the Financial Crisis By Romain Bouis; Łukasz Rawdanowicz; Jean-Paul Renne; Shingo Watanabe; Ane Kathrine Christensen
  37. The global effects of the euro debt crisis By Stracca, Livio

  1. By: Maddaloni, Angela; Peydró, José-Luis
    Abstract: We analyze the impact on lending standards of short-term interest rates and macroprudential policy before the 2008 crisis, and of the provision of central bank liquidity during the crisis. Exploiting the euro area institutional setting for monetary and prudential policy and using the Bank Lending Survey, we show that in the period prior to the crisis, in an environment of low monetary policy interest rates, bank lending conditions unrelated to borrowers’ risk were softened. During the same period, we also provide some suggestive evidence of excessive risktaking for mortgages loans. At the same time, we show that the impact of low monetary policy rates on the softening of standards may be reduced by more stringent prudential policies on either bank capital or loan-to-value ratios. After the start of the 2008 crisis, we find that low monetary rates helped to soften lending conditions that were tightened because of bank capital and liquidity constraints, especially for business loans. Importantly, this softening effect is stronger for banks that borrow more long-term liquidity from the Eurosystem. Therefore, the results suggest that monetary policy rates and central bank provision of long-term liquidity complement each other in working against a possible credit crunch for firms. JEL Classification: E51, E52, E58, G01, G21, G28
    Keywords: banking stability, Macroprudential policy, monetary policy
    Date: 2013–07
  2. By: Daunfeldt, Sve-Olov (The Swedish Retail Institute (HUI)); Landström, Mats (Department of Economics, University of Gävle); Rudholm, Niklas (Department of Economics)
    Abstract: Using data on the occurrence of central bank independence (CBI) reforms in 131 countries during 1980-2005, we test whether they were important in reducing inflation and maintaining price stability. CBI reforms are found to have reduced inflation on average 3.31% when countries with historically high inflation rates are included. But countries with lower inflation have reduced it without institutional reforms granting central banks more independence, undermining the theoretical time-inconsistency case for CBI. There is furthermore no evidence that CBI reforms have helped reduce inflation variability.
    Keywords: inflation; institutional reform; monetary policy; time-inconsistency
    JEL: E52 E58 P48
    Date: 2013–08–13
  3. By: De Santis, Roberto A.; Surico, Paolo
    Abstract: To what extent does the availability of credit depend on monetary policy? And, does this relationship vary with bank characteristics? Based on a common source of balance sheet data for the four largest economies of the euro area over the period 1999-2011, we uncover three main regularities. First, the effect of monetary policy on bank lending is significant and heterogeneous in Germany and Italy, which are characterised by a large number of banks; but it is very weak in Spain and more homogeneous in France, where the banking industry has a higher degree of market concentration. Second, there is some evidence that monetary policy exerts larger effects on cooperative and savings banks with lower liquidity and less capital in Germany and savings banks with smaller size in Italy. Third, heterogeneity across groups of banks belonging to the same category in any particular country is found to be less pronounced. JEL Classification: C33, E44, E52, G21
    Keywords: commercial, cooperative, credit availability, heterogeneous effects, monetary policy, savings banks
    Date: 2013–07
  4. By: Bindseil, Ulrich; Jabłecki, Juliusz
    Abstract: After the Lehman default, but also during the euro area sovereign debt crisis, central banks have tended to extend the ability of banks to take recourse to central bank credit operations through changes of the collateral framework (e.g. CGFS, 2008 - in consistence with previous narratives, such as Bagehot, 1873). We provide a simple four sector model of the economy in which we illustrate the relevant trade-offs, derive optimal central bank collateral policies, and show why in a financial crisis, in which liquidity shocks become more erratic and the total costs of defaults increase, central banks may want to allow for greater potential recourse of banks to central bank credit. The model also illustrates that the credit riskiness of counterparties and issuers is endogenous to the central bank's credit policies and related risk control framework. Finally, the model allows identifying the circumstances under which the counterintuitive case arises in which a relaxation of the central bank collateral policy may reduce its expected losses. JEL Classification: E58, G32
    Keywords: Central Bank, collateral policy, economic efficiency, Risk-taking
    Date: 2013–05
  5. By: Ciccarelli, Matteo; Maddaloni, Angela; Peydró, José-Luis
    Abstract: The Euro area economic activity and banking sector have shown substantial fragility over the last years with remarkable country heterogeneity. Using detailed data on lending conditions and standards, we analyse how financial fragility has affected the transmission mechanism of the single Euro area monetary policy during the crisis until the end of 2011. The analysis shows that the monetary transmission mechanism has been time-varying and influenced by the financial fragility of the sovereigns, banks, firms and households. The impact of monetary policy on aggregate output is stronger during the financial crisis, especially in countries facing increased sovereign financial distress. This amplification mechanism, moreover, operates mainly through the credit channel, both the bank lending and the non-financial borrower balance-sheet channel. Our results suggest that the bank-lending channel has been partly mitigated by the ECB nonstandard monetary policy interventions. At the same time, when looking at the transmission through banks of different sizes, it seems that, until the end of 2011, the impact of credit frictions of borrowers have not been significantly reduced, especially in distressed countries. Since small banks tend to lend primarily to SME, we infer that the policies adopted until the end of 2011 might have fall short of reducing credit availability problems stemming from deteriorated firm net worth and risk conditions, especially for small firms in countries under stress. JEL Classification: E44, E52, E58, G01, G21, G28
    Keywords: credit channel, financial crisis, heterogeneity, monetary policy, non-standard measures
    Date: 2013–03
  6. By: Carpenter, Seth; Demiralp, Selva; Eisenschmidt, Jens
    Abstract: A growing number of studies have sought to measure the effects of non-standard policy on bank funding markets. The purpose of this paper is to carry those estimates a step further by looking at the effects of bank funding market stress on the volume of bank lending, using a simultaneous equation approach. By separately modeling loan supply and demand, we determine how nonstandard central bank measures affected bank lending by reducing stress in bank funding markets. We focus on the Federal Reserve and the European Central Bank. Our results suggest that non-standard policy measures lowered bank funding volatility. Lower bank funding volatility in turn increased loan supply in both regions, contributing to sustain lending activity. We consider this as strong evidence for a “bank liquidity risk channel”, operative in crisis environments, which complements the usual channels of transmission of monetary policy. JEL Classification: E58, G32, G21
    Keywords: bank funding volatility, bank lending, non-standard policy
    Date: 2013–07
  7. By: Matthias Neuenkirch; Pierre L. Siklos
    Abstract: One way of evaluating how well monetary authorities perform is to provide the public with a regular and independent second opinion. The European Central Bank (ECB) and the Bank of England (BoE) are shadowed by professional and academic economists who provide a separate policy rate recommendation in advance of the central bank announcement. In this paper, we systematically evaluate this second opinion and find that, first, the shadow committee of the ECB tends to be relatively less inflation averse than the ECB. In contrast, the shadow committee of the BoE proposes a more hawkish monetary policy stance than the BoE. Second, consensus within a shadow committee is far easier to reach when there is no pressure to change the policy rate. Third, the ECB’s shadow committee is more activist than the ECB’s Governing Council and a larger degree of consensus within the former brings about a greater likelihood that the two committees will agree.
    Keywords: Committee Behavior, Monetary Policy Committees, Shadow Councils, Taylor Rules
    JEL: E43 E52 E58 E61
    Date: 2013–07
  8. By: Martin Feldkircher (Oesterreichische Nationalbank); Roman Horvath; Marek Rusnak
    Abstract: In this paper, we examine whether pre-crisis leading indicators help explain pressures on the exchange rate (and its volatility) during the globalfinancial 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-inflation 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: 2013–07
  9. By: Ko Munakata; Koji Nakamura; Yuki Teranishi
    Abstract: We introduce financial market friction through search and matching in the loan market into a standard New Keynesian model. We reveal that the second order approximation of social welfare includes the terms related to credit, such as credit market tightness, the volume of credit, and the loan separation rate, in addition to the inflation rate and consumption under financial market friction. Our analytical result justifies why optimal policy should take credit variation into account. We introduce monetary policy and macroprudential policy measures for financial stability into the model. The optimal outcome is achieved through monetary and macroprudential policies by taking into account not only price stability but also financial stability.
    Keywords: Optimal macroprudential policy; optimal monetary policy; financial market friction
    JEL: E44 E52 E61
    Date: 2013–08
  10. By: Angelopoulou, Eleni; Balfoussia, Hiona; Gibson, Heather
    Abstract: In this paper we construct Financial Conditions Indices (FCIs) for the euro area, for the period 2003 to 2011, using a wide range of prices, quantities, spreads and survey data, grounded in the theoretical literature. One FCI includes monetary policy variables, while two versions without monetary policy are also constructed, enabling us to study the impact of monetary policy on financial conditions. The FCIs constructed fit in well with a narrative of financial conditions since the creation of the monetary union. FCIs for individual euro area countries are also provided, with a view to comparing financial conditions in core and periphery countries. There is evidence of significant divergence both before and during the crisis, which becomes less pronounced when monetary policy variables are included in the FCI. However, the impact of monetary policy on financial conditions appears not to be entirely symmetric across the euro area. JEL Classification: E52, E51, E61, E63, E65
    Keywords: financial conditions, financial crisis, monetary policy
    Date: 2013–05
  11. By: Bekaert, Geert; Hoerova, Marie; Lo Duca, Marco
    Abstract: The VIX, the stock market option-based implied volatility, strongly co-moves with measures of the monetary policy stance. When decomposing the VIX into two components, a proxy for risk aversion and expected stock market volatility (“uncertainty”), we find that a lax monetary policy decreases both risk aversion and uncertainty, with the former effect being stronger. The result holds in a structural vector autoregressive framework, controlling for business cycle movements and using a variety of identification schemes for the vector autoregression in general and monetary policy shocks in particular. The effect of monetary policy on risk aversion is also apparent in regressions using high frequency data. JEL Classification: E44, E52, G12, G20, E32
    Keywords: business cycle, monetary policy, option implied volatility, risk aversion, uncertainty
    Date: 2013–07
  12. By: Degryse, Hans; Elahi, Muhammad Ather; Penas, María Fabiana
    Abstract: We study the role of regional banking system characteristics for regional banking system fragility in Asia, Europe, Latin America and the US. We find that regional banking system fragility reduces when banks in the region jointly hold more liquid assets, are better capitalized, and when regional banking systems are more competitive. For Asia and Latin-America, a greater presence of foreign banks and more wholesale funded banks also reduces regional banking fragility. In contrast, regional banking fragility increases in foreign bank presence and wholesale funding in the US. We further investigate the possibility of contagion across regions. We find that the contagion effects of Europe and the US on Asia and Latin America are significantly higher compared to the effect of Asia and Latin America among themselves. Finally, the impact of cross-regional contagion is attenuated when the host region has a more liquid and more capitalized banking sector. JEL Classification: G15, G20, G29
    Keywords: Banking system stability, cross-regional contagion, financial integration
    Date: 2013–07
  13. By: Cour-Thimann, Philippine; Winkler, Bernhard
    Abstract: This paper aims to make two contributions: to review the ECB’s non-standard monetary policy measures in response to the financial and sovereign debt crisis against the background of the institutional framework and financial structure of the euro area; and to interpret this response from a flow-of-funds perspective. The paper highlights how the rationale behind the ECB’s nonstandard measures differs from that underlying quantitative easing policies. As a complement to rather than a substitute for standard interest rate decisions, the non-standard measures are aimed at supporting the effective transmission of monetary policy to the economy rather than at delivering additional direct monetary stimulus. The flow-of-funds analysis proposes an interpretation of central banks’ crisis responses as fulfilling their traditional role as lender of last resort to the banking system and, more broadly, reflecting their capacity to act as the “ultimate sector” that can take on leverage when other sectors are under pressure to deleverage. It also provides examples that trace the impact of non-standard measures across different sectors and markets. JEL Classification: E02, E40, E50, E58
    Keywords: asset purchases, Economic and Monetary Union, financial structure, flow of funds, monetary policy, sovereign debt crisis
    Date: 2013–04
  14. By: Hałaj, Grzegorz
    Abstract: The aim of the paper is to propose a model of banks' asset portfolios to account for the strategic and optimising behavior of banks under adverse economic conditions. In the proposed modelling framework, banks are assumed to respond in an optimising manner to changes in their economic environment (e.g. interest rate and credit risk shocks, funding disruptions, etc.). The modelling approach is based on the risk-return optimal program in which banks aim at a particular composition of their assets to maximise risk-adjusted returns while taking into account regulatory capital and liquidity constraints. The approach is designed for applications in banks' stress testing context, as an alternative to the typical static balance sheet assumption. The stress testing applications are illustrated for a large sample of European banks. JEL Classification:
    Keywords: banking, Portfolio optimisation, stress-testing
    Date: 2013–04
  15. By: Darracq Pariès, Matthieu; De Santis, Roberto A.
    Abstract: The identification of non-standard monetary policy shocks is a key challenge for econometricians, not least as these measures are somewhat unprecedented in modern central banking history and as the instruments vary widely across the various non-standard measures. This paper focuses on the 3-year long-term re-financing operations (LTROs), implemented by the ECB in December 2011 and February 2012. The macroeconomic impact of this measure is identified using the April 2012 Bank Lending Survey (BLS) as well as the special ad-hoc questions on the LTROs conducted in mid-February 2012. We estimate a panel-VAR for the euro area countries, which include relevant BLS variables, and identify credit supply shocks both recursively and with sign restriction methods. The macroeconomic effects of the 3-year LTROs are associated with the favorable credit supply shocks extracted through BLS information for the first half of 2012. Compared with the most likely developments one could have expected at the end of 2011 when financial tensions culminated, our counterfactual exercises suggest that the 3-year LTROs significantly lifted prospects for real GDP and loan provision to non-financial corporations over the next two-to-three years. JEL Classification: C23, E52
    Keywords: Non-standard monetary policy measures, Panel VAR
    Date: 2013–01
  16. By: Boissay, Frederic; Collard, Fabrice; Smets, Frank
    Abstract: The empirical literature on systemic banking crises (SBCs) has shown that SBCs are rare events that break out in the midst of credit intensive booms and bring about particularly deep and long-lasting recessions. We attempt to explain these phenomena within a dynamic general equilibrium model featuring a non-trivial banking sector. In the model, banks are heterogeneous with respect to their intermediation skills, which gives rise to an interbank market. Moral hazard and asymmetric information on this market may generate sudden interbank market freezes, SBCs, credit crunches and, ultimately, severe recessions. Simulations of a calibrated version of the model indicate that typical SBCs break out in the midst of a credit boom generated by a sequence of positive supply shocks rather than being the outcome of a big negative wealth shock. We also show that the model can account for the relative severity of recessions with SBCs and their longer duration. JEL Classification: E32, E44, G01, G21
    Keywords: Asymmetric information, credit crunch, lending boom, Moral Hazard, systemic banking crisis
    Date: 2013–02
  17. By: Moro, Alessio; Nuño, Galo; Tedde, Pedro
    Abstract: We document the twin crisis that affected Spain in the mid-1860s. First, we trace back its origins to the international crisis of 1864-66. Next, we describe the particular banking sector of Spain, characterized by the coexistence of the Bank of Spain with multiple local banks of issue. We analyze the microeconomic behavior of each bank in response to the crisis and find that, overall, the banks of issue performed well during the crisis. The Bank of Spain resulted as the most destabilizing institute due to its involvement with a Government on the brink of default. JEL Classification: N13, N23, E31, E5
    Keywords: financial crisis, Gurney and Co, Lender of Last Resort, Overend, sudden stop
    Date: 2013–07
  18. By: Mathias Drehmann; Mikael Juselius
    Abstract: Early warning indicators (EWIs) of banking crises should ideally be evaluated on the basis of their performance relative to the macroprudential policy maker's decision problem. We translate several practical aspects of this problem - such as difficulties in assessing the costs and benefits of various policy measures as well as requirements for the timing and stability of EWIs - into statistical evaluation criteria. Applying the criteria to a set of potential EWIs, we find that the credit-to-GDP gap and a new indicator, the debt service ratio (DSR), consistently outperform other measures. The credit-to-GDP gap is the best indicator at longer horizons, whereas the DSR dominates at shorter horizons.
    Keywords: EWIs, ROC, area under the curve, macroprudential policy
    Date: 2013–08
  19. By: Smets, Frank; Warne, Anders; Wouters, Raf
    Abstract: This paper analyses the real-time forecasting performance of the New Keynesian DSGE model of Galí, Smets, and Wouters (2012) estimated on euro area data. It investigates to what extent forecasts of inflation, GDP growth and unemployment by professional forecasters improve the forecasting performance. We consider two approaches for conditioning on such information. Under the “noise” approach, the mean professional forecasts are assumed to be noisy indicators of the rational expectations forecasts implied by the DSGE model. Under the “news” approach, it is assumed that the forecasts reveal the presence of expected future structural shocks in line with those estimated over the past. The forecasts of the DSGE model are compared with those from a Bayesian VAR model and a random walk. JEL Classification: E24, E31, E32
    Keywords: Bayesian methods, DSGE model, estimated New Keynesian model, macroeconomic forecasting, real-time data, survey data
    Date: 2013–08
  20. By: Patricia McGrath
    Abstract: The three countries took different stances in regards to economic policy; the Czech Republic pursued a shock therapy regime which aimed to stabilise the economy, Hungary’s policy was more relaxed whilst Poland had an aggressive reform programme. Regarding monetary policy the Czech Republic used the discount rate as a tool for monetary policy, Hungary used indirect monetary policy and Poland had strict monetary policies which raised interest rates and devalued the zloty. After financial deregulation the impact of economic and monetary policy led to positive economic growth in the Czech Republic year on year. Hungary had a similar experience whilst Poland had an initial high increase in economic growth. This reduced over time but they still recorded positive economic growth over the period studied.
    Keywords: Transition Economies, Financial Deregulation, Economic Growth, Eastern Europe.
    JEL: E E2 E4 E5 G G15 G21
    Date: 2013–05–15
  21. By: Louzis, Dimitrios; Vouldis, Angelos
    Abstract: The paper develops a financial systemic stress index (FSSI) for Greece. We present a methodology for constructing and evaluating a systemic stress index which: i) adopts the suggestion of Hollo et al. (2012) [Hollo, Kremer, and Lo Duca (2012) “CISS – A Composite Indicator of Systemic Stress in the Financial System” ECB Working Paper 1426] to incorporate time-varying correlations between different market segments, and uses a multivariate GARCH approach which is able to capture abrupt changes in correlations; ii) utilizes both market and balance sheet data; and iii) evaluates the FSSI utilizing the results of a survey, conducted among financial experts, in order to construct a benchmark chronology of financial crises for Greece, which in turn is used to investigate whether changes in the FSSI are good indicators for financial crises. The results show that the FSSI is able to provide a precise periodization of crises. JEL Classification: G01, G10, G20, E44
    Keywords: financial crisis, multivariate GARCH, stress index, systemic stress
    Date: 2013–07
  22. By: Alter, Adrian; Beyer, Andreas
    Abstract: In this paper we develop empirical measures for the strength of spillover effects. Modifying and extending the framework by Diebold and Yilmaz (2011), we quantify spillovers between sovereign credit markets and banks in the euro area. Spillovers are estimated recursively from a vector autoregressive model of daily CDS spread changes, with exogenous common factors. We account for interdependencies between sovereign and bank CDS spreads and we derive generalised impulse response functions. Specifically, we assess the systemic effect of an unexpected shock to the creditworthiness of a particular sovereign or country-specific bank index to other sovereign or bank CDSs between October 2009 and July 2012. Channels of transmission from or to sovereigns and banks are aggregated as a Contagion index (CI). This index is disentangled into four components, the average potential spillover: i) amongst sovereigns, ii) amongst banks, iii) from sovereigns to banks, and iv) vice-versa. We highlight the impact of policy-related events along the different components of the contagion index. The systemic contribution of each sovereign or banking group is quantified as the net spillover weight in the total net-spillover measure. Finally, the captured time-varying interdependence between banks and sovereigns emphasises the evolution of their strong nexus. JEL Classification: C58, G01, G18, G21
    Keywords: CDS, Contagion, Impulse responses, sovereign debt, systemic risk
    Date: 2013–06
  23. By: Sarlin, Peter
    Abstract: This paper introduces a new loss function and Usefulness measure for evaluating early warning systems (EWSs) that incorporate policymakers' preferences between issuing false alarms and missing crises, as well as individual observations. The novelty derives from three enhancements: i) accounting for unconditional probabilities of the classes, ii) computing the proportion of available Usefulness that the model captures, and iii) weighting observations by their importance for the policymaker. The proposed measures are model free such that they can be used to assess signals issued by any type of EWS, such as logit and probit analysis and the signaling approach, and flexible for any type of crisis EWSs, such as banking, debt and currency crises. Applications to two renowned EWSs, and comparisons to two commonly used evaluation measures, illustrate three key implications of the new measures: i) further highlights the importance of an objective criterion for choosing a final specification and threshold value, and for models to be useful ii) the need to be more concerned about the rare class and iii) the importance of correctly classifying observations of the most relevant entities. Beyond financial stability surveillance, this paper also opens the door for cost-sensitive evaluations of predictive models in other tasks. JEL Classification: E44, E58, F01, F37, G01
    Keywords: Early warning systems, misclassification costs, policymakers' preferences
    Date: 2013–02
  24. By: Sarkisyan, Anna; Casu, Barbara
    Abstract: Using US bank holding company data for the period 2001 to 2007, this paper examines the relationship between banks' retained interests in securitisations and insolvency risk. We find that the provision of credit enhancements and guarantees significantly increases bank insolvency risk, albeit this varies for different levels of securitisation outstanding. Specifically, retained interests increase insolvency risk for “large-scale” securitisers while having a risk-reducing effect for “small-scale” and/or first-time securitisers. In addition, we find that the type of facility provided has implications for bank risk, with those with the most subordinated (first-loss) position having the greater impact on banks' default risk. Finally, we find that engagement in third-party securitisations has no significant effect on bank risk. JEL Classification: G21; G32
    Keywords: insolvency risk, retained interests, securitisation
    Date: 2013–04
  25. By: Derviz, Alexis
    Abstract: We explore the ability of a macroprudential policy instrument to dampen the consequences of equity mispricing (a bubble) and the correction thereof (the bubble bursting), as well as the consequences for real activity in a production economy. In our model, producers are financed by both bank debt and equity, and face a mix of systematic and idiosyncratic uncertainty. Positive/negative bubbles arise when prior public beliefs about the aggregate productivity of producers (business sentiment) become biased upwards/downwards. Economic activity in equilibrium is influenced by the bubble size. The presence of macroprudential policy is represented by a convex dependence of bank capital requirements on the quantity of uncollateralized credit. We find that this kind of policy is more successful in suppressing equity price swings than moderating output fluctuations. Economic activity declines with the introduction of a macroprudential instrument in this model, so that the ultimate welfare contribution of the latter would depend on the aggregate default costs. JEL Classification: G01, G21, G12, E22, D82
    Keywords: asset price, bank, bubble, credit, Macroprudential policy
    Date: 2013–06
  26. By: Josef Schroth (Bank of Canada)
    Abstract: The paper studies the design of optimal fiscal rules for members of a monetary union when there are privately observed shocks to countries’ social cost of domestic taxation. First, I show that optimal fiscal rules prescribe policy coordination in the sense of domestic taxation efforts that are positively correlated across member countries. In particular, coordination achieves higher ex-ante joint welfare than any fixed upper bound on domestic deficits. Second, I show that a history of asymmetric domestic taxation efforts leads to tighter policy coordination in the sense of an emergence of retaliatory fiscal policies. As a result, past disagreement leads to an increase in expected domestic deficits across the monetary union.
    Date: 2013
  27. By: Ca' Zorzi, Michele; Muck, Jakub; Rubaszek, Michał
    Abstract: This paper brings three new insights into the Purchasing Power Parity (PPP) debate. First, we show that a half-life PPP model is able to forecast real exchange rates (RER) better than the random walk (RW) model at both short and long-term horizons. Secondly, we find that this result holds only if the speed of adjustment to the sample mean is calibrated at reasonable values rather than estimated. Finally, we find that it is also preferable to calibrate, rather than to elicit as a prior, the parameter determining the speed of adjustment to PPP. JEL Classification: C32, F31, F37
    Keywords: Exchange rate forecasting, half-life, purchasing power parity
    Date: 2013–08
  28. By: de la Torre, Augusto; Ize, Alain
    Abstract: This paper explores the conceptual foundations of macroprudential policy. It does so within a framework that gradually incorporates and interacts two types of frictions (principal-agent and collective action) with two forms of rationality (full and bounded), all in the context of aggregate volatility. Four largely orthogonal rationales for macroprudential policy are identified. The first (time consistency macroprudential) arises even in the absence of externalities, not to prevent financial crises but to offset the moral hazard implications of (efficient but time inconsistent) post-crisis policy interventions. The second (dynamic alignment macroprudential) protects the less sophisticated (boundedly rational) market participants by maintaining principal-agent incentives continuously aligned along the cycle and in the face of aggregate shocks. The third (collective action macroprudential) responds to the socially inefficient yet rational instability resulting from uninternalized externalities. The fourth (collective cognition macroprudential) aims at tempering non-rational mood swings where credit-constrained rational arbitrageurs fail. Finding the right policy balance is complicated by the fact that the four dimensions face policy trade-offs and their relative importance is state-dependent, hence shifts over time.
    Keywords: Debt Markets,Labor Policies,Banks&Banking Reform,Emerging Markets,Economic Theory&Research
    Date: 2013–08–01
  29. By: Vespignani, Joaquin L.; Ratti, Ronald A.
    Abstract: There are marked differences in the effect of increases in monetary aggregates in China, Japan and the U.S. on Euro area economic and financial variables over 1999-2012. Increases in monetary aggregates in China are associated with significant increases in the world price of commodities and with increases in Euro area inflation, industrial production and exports. Results are consistent with shocks to China’s M2 facilitating domestic growth with expansionary consequences for the Euro area economy. In contrast, increases in monetary aggregates in Japan are associated with significant appreciation of the Euro and decreases in Euro area industrial production and exports. Production of goods highly competitive with European goods in Japan and expenditure switching in Japan are consistent with the results. U.S. monetary expansion has relatively small effects on the Euro area over this period compared to results reported in the literature for earlier sample periods.
    Keywords: International monetary transmission, China’s monetary aggregates, Euro area Commodity prices
    JEL: E52 E58 F31 F42
    Date: 2013–06–15
  30. By: Vespignani, Joaquin L. (School of Economics and Finance, University of Tasmania)
    Abstract: In this article we analyse the industrial impact of monetary shocks since inflation targeting has been introduced in Australia (1990). These impacts are quantified by constructing a structural vector autoregressive (SVAR) model for a small open economy. Our results show that construction and manufacturing industries exhibit a significant reduction in gross value added (GVA) after an unanticipated rise in the official cash rate. However, the finance and insurance industry, and the mining industry, seem to be unaffected by these shocks.
    Keywords: Monetary shocks, Industrial response, Industrial composition and VAR model
    JEL: E50 E58 C32
    Date: 2013–01–17
  31. By: Ehrmann, Michael; Osbat, Chiara; Stráský, Jan; Uusküla, Lenno
    Abstract: This paper studies the determinants of the euro exchange rate during the European sovereign debt crisis, allowing a role for macroeconomic fundamentals, policy actions and the public debate by policy makers. It finds that the euro exchange rate mainly danced to its own tune, with a particularly low explanatory power for macroeconomic fundamentals. Among the few factors that are found to have affected changes in exchanges rate levels are policy actions at the EU level and by the ECB. The findings of the paper also suggest that financial markets might have been less reactive to the public debate by policy makers than previously feared. Still, there are instances where exchange rate volatility was increasing in response to news, such as on days when several politicians from AAA-rated countries went public with negative statements, suggesting that communication by policy makers at times of crisis should be cautious about triggering undesirable financial market reactions. JEL Classification: E52, E62, F31, F42, G14
    Keywords: announcements, Exchange Rates, fundamentals, sovereign debt crisis
    Date: 2013–04
  32. By: Michael T. Belongia (University of Mississippi); Peter N. Ireland (Boston College)
    Abstract: Fifty years ago, Friedman and Schwartz presented evidence of pro-cyclical movements in the money stock, exhibiting a lead over corresponding movements in output, found in historical monetary statistics for the United States. Very similar relationships appear in more recent data. To see them clearly, however, one must use Divisia monetary aggregates in place of the Federal Reserve’s official, simple-sum measures. One must also split the data sample to focus, separately, on episodes before and after 1984 and on a new episode of instability beginning in 2000. A structural VAR draws tight links between Divisia money and output during each of these three periods.
    Keywords: money, output, Divisia aggregates, structural VAR
    JEL: E31 E32 E51 E52
    Date: 2013–08–01
  33. By: Fulli-Lemaire, Nicolas
    Abstract: The admission by the Greek government on October 18, 2009, of large-scale accounting fraud in its national accounts sparked an unprecedented sovereign debt crisis that rapidly spread to the Eurozone’s weakest member states. As the crisis increasingly drove a wedge between a seemingly resilient Eurozone core and its faltering periphery, its first collateral victims were the private banks of the hardest-hit sovereigns. They were rapidly followed by the rest of the Eurozone’s banks as a result of their large exposure to not only their home country’s sovereign debt, but also to the debt securities of other member states. Measuring each bank’s precise exposure to every sovereign issuer became a key issue for credit analysis in the attempt to assess the potential impact of a selective sovereign default if worse came to worst. Yet finding that information in a timely manner is hardly an easy task, as banks are not required to disclose it. Building on the efficient market hypothesis in the presence of informed traders, we tested the sensitivity of each of the largest Eurozone private banks’ CDSs to sovereign CDSs using a simple autoregressive model estimated by time-series regressions and panel regressions, comparing the results to news releases to assess its reliability. Eventually, we used the Oaxaca Blinder decomposition to measure whether the unconventional monetary policies, namely the LTRO and the OMT, that the ECB has implemented to stem the crisis have helped banks directly or whether banks were actually helped by the reduction in sovereign CDS spreads.
    Keywords: Private Banks, Central Banks, Sovereign Debt Risk, OMT, LTRO, Non-Conventional Monetary Policies, Eurozone’s Sovereign Debt Crisis, Oaxaca-Blinder Decomposition.
    JEL: C58 D82 E52 G01 G14 G15 G21 G24 N14
    Date: 2013–08–01
  34. By: Łukasz Rawdanowicz; Romain Bouis; Shingo Watanabe
    Abstract: How far to go – and to remain – in the direction of highly expansionary monetary policy hinges on the balance of marginal benefits and costs of additional monetary easing and its expected evolution over time. This paper sketches a framework for assessing this balance and applies it to four OECD economic areas: the euro area, Japan, the United Kingdom and the United States. The effectiveness of further stimulus via quantitative easing or forward guidance in affecting asset prices, interest rates and credit flows will depend on the state of the economy and the functioning of financial markets. Marginal costs could rise due to excessive risk-taking; higher inflation expectations; higher likelihood of ever-greening; and higher risks of financial instability in the exit phase, especially when exit from monetary accommodation is close in time and signs of negative effects are already apparent. The balance of marginal benefits and costs is found to be different across the main OECD areas. In the United States, the case for additional stimulus is weakening, while the opposite is true for the euro area and Japan. In the United Kingdom, the assessment is less clear cut.<P>Les avantages et coûts d'une politique monétaire très expansionniste<BR>Jusqu’où aller – et demeurer – dans la direction d’une politique monétaire hautement expansionniste dépend du solde entre les avantages et coûts de l’assouplissement monétaire additionnel et de son évolution attendue dans le temps. Ce document propose une ébauche d’un cadre d’analyse pour évaluer ce solde et l’applique à quatre principales régions économiques de l’OCDE : les États-Unis, la zone euro, le Japon et le Royaume-Uni. L’efficacité d’un stimulus additionnel via l’assouplissement quantitatif ou des indications prospectives pour affecter les prix d’actifs, les taux d’intérêt et les flux de crédit dépendra de l’état de l’économie et du fonctionnement des marchés financiers. Les coûts marginaux pourraient croître en raison d’une prise de risques excessive ; d’anticipations d’inflation plus élevées ; d’une plus grande probabilité de régénération des créances douteuses ; et de risques accrus d’instabilité financière dans la phase de sortie, surtout lorsque la sortie de la politique monétaire accommodante est proche dans le temps et que les signes d’effets négatifs sont déjà apparents. Le solde entre les avantages et coûts est estimé être différent au sein des principales régions de l’OCDE. Aux États-Unis, l’argument en faveur d’un stimulus additionnel s’est affaibli, tandis que l’opposé est vrai pour la zone euro et le Japon. Au Royaume-Uni, le diagnostic est moins clair.
    Keywords: monetary policy, spillovers, quantitative easing, forward guidance, asset price booms, ever-greening, politique monétaire, assouplissement quantitatif, indications prospectives, boom de prix d’actifs, régénération, retombées
    JEL: E31 E43 E44 E5 F31 F32 G12 G21
    Date: 2013–08–12
  35. By: Rustam Jamilov; Balázs Égert
    Abstract: This paper analyses the interest rate pass-through for five economies of the Caucasus – Armenia, Azerbaijan, Georgia, Kazakhstan, and Russia. Employing an autoregressive distributed lag (ARDL) specification to monthly data, we find that the interest rate pass-through is systematically incomplete and sluggish, probably due to macroeconomic instability and low banking sector competition. It is not clear whether pass-through has improved over time and asymmetric adjustment is found to characterize the pass-through only occasionally. Overall, our results show a considerable degree of cross-country heterogeneity in the size and speed of the pass-through.
    Keywords: Interest Rate Pass-Through; Asymmetric Adjustment; Caucasus
    JEL: E43 E52 N25
    Date: 2013–01–02
  36. By: Romain Bouis; Łukasz Rawdanowicz; Jean-Paul Renne; Shingo Watanabe; Ane Kathrine Christensen
    Abstract: In the wake of the Great Recession, a massive monetary policy stimulus was provided in the main OECD economies. It helped to stabilise financial markets and avoid deflation. Nonetheless, GDP growth has been sluggish and in some countries lower than expected given the measures taken, and estimated economic slack remains large. In this context, this paper assesses the effectiveness of monetary policy in recent years. It finds that notwithstanding an almost full transmission of policy interest rate cuts and unconventional policy measures to higher asset prices and lower cost of credit in and outside the banking sector in most countries, with the exception of vulnerable euro area economies, monetary policy stimulus did not show up in stronger growth due to a combination of three factors. First, lower policy interest rates may not have provided as much stimulus as expected given the evidence of a decrease in natural interest rates, resulting from the estimated decline in potential GDP growth in the wake of the crisis. Second, balance sheet adjustments of non-financial companies and households, large uncertainty as well as simultaneous and considerable fiscal consolidation in many OECD countries constituted important headwinds. Third, the bank lending channel of monetary policy transmission appears to have been impaired, mainly due to considerable balance sheet adjustments and prevailing uncertainty, which together limited banks’ capacity and willingness to supply credit. The paper also stresses that the monetary accommodation risks having unintended negative consequences which are likely to increase with its duration.<P>L'efficacité de la politique monétaire depuis le début de la crise financière<BR>Dans le sillage de la Grande Récession, un important stimulus monétaire a été fourni dans les principales économies de l’OCDE. Il a permis de stabiliser les marchés financiers et d’éviter la déflation. Toutefois, la croissance du PIB a été lente et dans certains pays plus faible qu’attendue compte tenu des mesures prises, et le ralentissement économique estimé demeure important. Dans ce contexte, ce papier évalue l’efficacité de la politique monétaire au cours des années récentes. Il trouve qu’en dépit d’une transmission presque complète des baisses de taux d’intérêt et des mesures non conventionnelles de politique monétaire à des prix d’actifs plus élevés et un coût du crédit plus faible à l’intérieur et à l’extérieur du secteur bancaire dans la plupart des pays, à l’exception des économies vulnérables de la zone euro, le stimulus de la politique monétaire ne s’est pas traduit par une croissance plus forte en raison de la combinaison de trois facteurs. Premièrement, des taux plus faibles de politique monétaire pourraient ne pas avoir fourni autant de stimulus qu’attendu étant donné la baisse des taux d’intérêt naturels résultant d’une diminution estimée de la croissance potentielle du PIB dans le sillage de la crise. Deuxièmement, les ajustements des bilans des entreprises non financières et des ménages, une grande incertitude ainsi qu’une consolidation budgétaire simultanée et considérable dans de nombreux pays de l’OCDE ont constitué d’importants vents contraires. Troisièmement, le canal du crédit bancaire de transmission de la politique monétaire semble avoir été réduit, principalement en raison des ajustements considérables des bilans et de l'incertitude qui règne, limitant à la fois la capacité et la volonté des banques à proposer des crédits. Le papier souligne également que l’assouplissement monétaire risque d’avoir des conséquences négatives non souhaitées susceptibles d’augmenter avec la durée.
    Keywords: financial markets, monetary policy, credit, financial crisis, natural interest rates, marchés financiers, politique monétaire, crédit, crise financière, taux d’intérêt naturels
    JEL: E32 E43 E44 E5 G01 G28 H12
    Date: 2013–08–12
  37. By: Stracca, Livio
    Abstract: This paper is an event study focusing on the global effects of the euro debt crisis in 2010-2013. After identifying 18 key exogenous crisis events, I analyse the impact on equity returns, exchange rates and government bond yields in 12 advanced and 13 emerging countries. The main effect of euro debt crisis events is a rise in global risk aversion accompanied by fall in equity returns, in particular in the …financial sector, in advanced countries (but not in emerging countries). The effect on bond yields is not statistically significant for the whole set of countries, but is significant and negative for key advanced countries such as the US and the UK. The paper also analyse the transmission channels by looking at how pre-crisis country characteristics influence the strength and direction of the spill-over, concluding that the transmission hinges more on trade than on fi…nance. JEL Classification: F3
    Keywords: Contagion, Euro debt crisis, global risk aversion, spill-over
    Date: 2013–08

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