nep-cba New Economics Papers
on Central Banking
Issue of 2013‒09‒06
eighteen papers chosen by
Maria Semenova
Higher School of Economics

  1. Transatlantic systemic risk By Trapp, Monika; Wewel, Claudio
  2. Impact of a Low Interest Rate Environment - Global Liquidity Spillovers and the Search-for-yield By Ansgar Belke
  3. Evolution of Monetary Policy in the US: The Role of Asset Prices By Beatrice D. Simo-Kengne; Stephen M. Miller; Rangan Gupta
  4. Unemployment fluctuations, and optimal monetary policy in a small open economy By Hyuk Jae Rhee; Jeongseok Song
  5. International financial integration, credit frictions and exchange rate regimes By Pirovano, Mara
  6. Monetary Policy and Balance Sheets By Deniz Igan, Alain Kabundi, Francisco Nadal De Simone, Natalia Tamirisa
  7. Reverse Kalman Filtering US Inflation with Sticky Professional Forecasts By James M. Nason; Gregor W. Smith
  8. The Central Bank and bank credits in the Philippines : a survey on effectiveness of monetary policy and its measures By Kashiwabara, Chie
  9. Co-movements in real effective exchange rates: evidence from the dynamic hierarchical factor model By Jun Nagayasu
  10. Supervisory Board Qualification of German Banks - Legal Standards and Survey Evidence By Tobias Körner; Oliver Müller; Stephan Paus; Christoph M. Schmidt
  11. Finance Access of SMEs: What Role for the ECB? By Ansgar Belke
  12. Financial Regulation Policy Uncertainty and Credit Spreads in the U.S. By Gabriela Nodari
  13. 'Midas, transmuting all, into paper': the Bank of England and the Banque de France during the Napoleonic Wars By Jagjit S.Chadha; Elisa Newby
  14. From Sovereigns to Banks: Evidence on Cross-border Contagion (2006-2011) By Alesia Kalbaska
  15. Contagion among Central and Eastern European stock markets during the financial crisis By Jozef Barunik; Lukas Vacha
  16. The non-negative constraint on the nominal interest rate and the effects of monetary policy By Hasui, Kohei
  17. Abolishing Public Guarantees in the Absence of Market Discipline By Tobias Körner; Isabel Schnabel
  18. Financial Crisis and Sticky Expectations By Saten Kumar; Barrett Owen

  1. By: Trapp, Monika; Wewel, Claudio
    Abstract: In this paper we study systemic risk for the US and Europe. We show that banks' exposures to common risk factors are crucial for systemic risk. We come to this conclusion by first showing that relations between US and European banks are smaller than within each region. We then show that European banks react more strongly to the onset of the financial crisis than US ones. Regarding the consequences of systemic risk, we show that dependence between the banking sector and a wide range of real sectors is limited. Our results imply that regulators and supervisors should address international bank dependencies arising from common risk factors, while recessions in real sectors due to bank defaults should be a secondary concern. --
    Keywords: systemic risk,banking sector,real sectors,regulation,copula
    JEL: G01 G15 G18 G21 G28
    Date: 2013
  2. By: Ansgar Belke
    Abstract: On 10 January 2013 the ECB Governing Council decided “to keep the key ECB interest rates unchanged” based on an assessment of a ‚contained‘ inflationary pressure and a weak economic activity, a contraction of real GDP in second and third quarter of 2012. Similar decisions have been taken by other leading central banks around the globe. This paper assesses and comments on several aspects of the implied low interest rate environment. It contains some general considerations with respect to the current low interest rate environment in advanced economies. It then deals with potential conflicts between monetary policy and financial stability in a low interest rate environment. Moreover, more practical implications for the necessity of supervision of pension funds and the insurance sector are derived. The paper also assesses the investment opportunities for retail investors in such an environment. Finally, we single out examples of main beneficiaries and losers from a low interest rate environment.
    Keywords: Global liquidity; central banks and their policies; financial repression; low interest rates; insurance companies; pension funds
    JEL: E58 F33 G22 G23
    Date: 2013–07
  3. By: Beatrice D. Simo-Kengne (University of Pretoria); Stephen M. Miller (University of Nevada, Las Vegas and University of Connecticut); Rangan Gupta (University of Pretoria)
    Abstract: This paper investigates whether changes in monetary transmission mechanism respond to variations in asset prices. We distinguish between bull and bear markets and employ a TVP-VAR approach with stochastic volatility to assess the evolution of the monetary policy in relation to housing and stock prices. We measure the relative importance of housing and stock prices in the conduct of monetary policy and their possible feedback effects over both time and horizon and across regimes. Empirical results from annual data on the US spanning the period from 1890 to 2012 indicate that monetary policy responds more strongly to asset prices during bull regimes. While the bigger monetary effect of stock price shocks occurs prior to the 1970s, monetary policy appears to respond more strongly to housing price than stock price shocks after the 1970s. Similarly, contractionary monetary policy exerts a larger effect on both asset categories during bull markets. Particularly, larger negative responses of house prices to monetary policy shocks occur after the 1980s, corresponding to the bull regime in the housing market. Conversely, the stock-price effect of monetary policy shocks dominates before the 1980s, where stock-market booms achieved more importance.
    Keywords: Monetary policy, house prices, stock prices, TVP-VAR
    JEL: C32 E52 G10
    Date: 2013–08
  4. By: Hyuk Jae Rhee (Department of Economics, University of Windsor); Jeongseok Song (Department of Economics,Chung-Ang University)
    Abstract: In this paper, we incorporate key ingredients of a small open economy into the New Keynesian model with unemployment of Gali (2011a,b) to discuss the design of the monetary policy. The main findings regarding the issue of monetary policy design can be summarized as threefold. First, the optimal policy is to seek to minimize variance of domestic price inflation, wage inflation, and the output gap if both domestic price and wage are sticky. Second, stabilizing unemployment rate is important to reduce the welfare loss incurred by both technology and labor supply shocks. Therefore, introducing the unemployment rate as an another argument into the Taylor-rule type interest rate rule will be welfare-enhancing. Last, controlling CPI inflation is the best when the policy is not allowed to respond to unemployment rate.
    Keywords: Unemployment; Monetary policy; Small open economy.
    JEL: E31 E58 F41
    Date: 2013–08–28
  5. By: Pirovano, Mara
    Abstract: This paper studies the stabilisation properties of different exchange rate policies in a small open economy with cross-border balance sheet interdependence. The model features price and wage rigidities, credit frictions à la Bernanke, Gertler and Gilchrist (1999) both between households and banks and between banks and entrepreneurs, as well as international fi?nancial linkages à la Ueda (2012). I fi?nd that, overall, the argument in favor of ?flexible exchange rates holds irrespectively of the degree of fi?nancial integration. In fact, for all shocks considered, a fi?xed exchange rate policy delivers larger output losses and higher volatility of real and fi?nancial variables. Furthermore, my results reveal that the cost of pegging the exchange rate is inversely related to the degree of fi?nancial integration. Finally, I fi?nd that the presence of fi?nancial linkages increases the trade-off between infl?ation and output volatility faced by the central bank of a small open economy.
    Date: 2013–08
  6. By: Deniz Igan, Alain Kabundi, Francisco Nadal De Simone, Natalia Tamirisa
    Abstract: This paper evaluates the strength of the balance sheet channel in the U.S. monetary policy transmission mechanism over the past three decades. Using a Factor-Augmented Vector Autoregression model on an expanded data set, including sectoral balance sheet variables, we show that the balance sheets of various economic agents act as important links in the monetary policy transmission mechanism. Balance sheets of financial intermediaries, such as commercial banks, asset-backed-security issuers and, to a lesser extent, security brokers and dealers, shrink in response to monetary tightening, while money market fund assets grow. The balance sheet effects are comparable in magnitude to the traditional interest rate channel. However, their economic significance in the run-up to the recent financial crisis was small. Large increases in interest rates would have been needed to avert a rapid rise of house prices and an unsustainable expansion of mortgage credit, suggesting an important role for macroprudential policies.
    Keywords: monetary policy transmission, balance sheets, FAVAR, generalized dynamic factor models
    JEL: E44 E52 G20
    Date: 2013
  7. By: James M. Nason (Federal Reserve Bank of Philadelphia); Gregor W. Smith (Queen's University)
    Abstract: We provide a new way to filter US inflation into trend and cycle components, based on extracting long-run forecasts from the Survey of Professional Forecasters. We operate the Kalman filter in reverse, beginning with observed forecasts, then estimating parameters, and then extracting the stochastic trend in inflation. The trend-cycle model with unobserved components is consistent with numerous studies of US inflation history and is of interest partly because the trend may be viewed as the Fed’s evolving inflation target or long-horizon expected inflation. The sluggish reporting attributed to forecasters is consistent with evidence on mean forecast errors. We find considerable evidence of inflation-gap persistence and some evidence of implicit sticky information. But statistical tests show we cannot reconcile these two widely used perspectives on US inflation forecasts, the unobserved-components model and the sticky-information model.
    Keywords: US inflation, professional forecasts, sticky information, Beveridge-Nelson
    JEL: E31 E37
    Date: 2013–09
  8. By: Kashiwabara, Chie
    Abstract: In the post-Asian crisis period, bank loans to the manufacturing sector have shown a slow recovery in the affected countries, unexceptionally in the Philippines. This paper provides a literacy survey on the effectiveness of the Central Bank’s monetary policy and the responsiveness of the financial market, and discusses on the future works necessary to better understand the monetary policy effectiveness in the Philippines. As the survey shows, most previous works focus on the correlation between the short-term policy rates and during the period of monetary tightening and relatively less interest in quantitative effectiveness. Future tasks would shed lights on (1) the asset side – other than loan outstanding – of banks to analyze their behavior/preference in structuring portfolios, and (2) the quantitative impacts during the monetary easing period.
    Keywords: Philippines, Monetary policy, Loans, Credit, Monetary policy measure, Credit channel, Bank loan
    JEL: E42 E52 G38
    Date: 2013–03
  9. By: Jun Nagayasu (Faculty of engineering, Information & Systems, University of Tsukuba, Japan)
    Abstract: We analyze and quantify co-movements in real effective exchange rates while considering the regional location of countries. More specifically, using the dynamic hierarchical factor model (Moench et al 2011), we decompose exchange rate movements into several latent components; worldwide and two regional factors as well as country-specific elements. Then, we provide evidence that the worldwide common factor is closely related to monetary policies in large advanced countries while regional common factors tend to be captured by those in the rest of the countries in a region. However, a substantial proportion of the variation in the real exchange rates is reported to be country-specific; even in Europe country-specific movements exceed worldwide and regional common factors.
    Keywords: real effective exchange rates, dynamic hierarchical factor model, variance decomposition, bayesian model averaging
    JEL: F31
    Date: 2013–08
  10. By: Tobias Körner; Oliver Müller; Stephan Paus; Christoph M. Schmidt
    Abstract: Improving the regulation of banks has been at the centre of economic policy actions since the outbreak of the global financial crisis. One of the many and conceptually very different measures proposed is to improve the corporate governance of banks by setting qualification standards for banks’ non-executive directors. To explore the rationale of such a regulation implemented in Germany, we conducted a detailed survey among supervisory board members of German banks covering their educational background, professional status and experience, as well as non-occupation-related activities. We document that general education among supervisory board members is high, but very few board members can rely on a professional background in banking and finance. Surprisingly, we find that this is especially true for chairpersons and that a higher share of professionals among board members primarily reflects the presence of employee representatives. However, as regards competencies and skills required to enforce changes against the management, chairpersons more often report leadership experience than ordinary members. Furthermore, some of these findings strongly depend on the bank’s legal form, its size and business model, suggesting that both market forces and institutional characteristics of banking markets are important determinants of the qualification level of non-executive directors.
    Keywords: Non-executive directors; qualification; survey data; banking regulation; German banking system
    JEL: G21 G28 G34
    Date: 2013–08
  11. By: Ansgar Belke
    Abstract: Small and medium size enterprises (SMEs) of southern euro area economies (e.g. Italy, Spain) pay significantly higher borrowing rates than their peers of the core (e.g. Germany, France) and this divergence is widening. It is argued that severe market failures prevent SMEs in southern euro area countries from access to key inputs, in particular access to finance. This paper makes an assessment of feasible options to improve finance access of SMEs, available to EU institutions as well as to the ECB in the context of its price stability mandate. Because of nonnegligible moral hazard issues, the paper is sceptical about a stronger involvement of the ECB in the (indirect) financing of SMEs through the securitisation of banks`loans or their use as collateral for monetary policy operations. The paper concludes with some proposals for extending finance access of SMEs, including through mutual guarantee institutions along the lines recently pursued by the European Investment Bank.
    Keywords: ECB; financial crisis; bank-firm relationships; credit guarantee schemes; monetary policy transmission; small business finance
    JEL: E23 E51 G21 O16
    Date: 2013–07
  12. By: Gabriela Nodari (University of Verona)
    Abstract: This paper quantifies the macroeconomic effects of surprise movements in uncertainty about financial regulation policies in the U.S. economy. Within the context of a Structural VAR model, exogenous variations in financial regulation policy uncertainty lead to a widening in corporate credit spreads, and can potentially trigger flight to quality and flight to liquidity episodes. Financial regulation policy uncertainty shocks also induce a strong and persistent reduction of industrial production, an increase in unemployment and a deflationary phase, acting as negative demand shocks. A variance decomposition analysis underlines the contribution of the shock for the dynamics of the macro observables. These findings are supported by a variety of robustness checks.
    Date: 2013–08
  13. By: Jagjit S.Chadha; Elisa Newby
    Abstract: This paper assesses Revolutionary and Napoleonic wartime economic policy. Suspension of gold convertibility in 1797 allowed the Bank of England to nurture British monetary orthodoxy. The Order of the Privy Council suspended gold payments on Bank of England notes and afforded simultaneous protection to the government and the Bank in pursuit of the conflicting goals of price stability and war finance. The government, the Bank of England and the commercial banks formed a loose alliance drawing on due political and legal processes and also paid close attention to public opinion. We suggest that the ongoing solvency of the Bank of England was facilitated by suspension and allowed the Bank to continue to make substantial profits throughout the Wars. It became acceptable for merchants to continue to trade with non-convertible Bank of England notes and for the government to finance the war effort, even with significant recourse to unfunded debt. These aspects combined to create a suspension of convertibility that did not undermine the currency. By contrast, the Assignats debacle had cost the French monetary system its reputation in the last decade of the 18th century and so Napoleonic finance had to evolve within a more rigid and limiting framework.
    Keywords: Monetary Orthodoxy; Suspension of Convertibility; War Finance
    JEL: C61 E31 E4 E5 N13
    Date: 2013–09
  14. By: Alesia Kalbaska
    Abstract: This paper analyzes the evolution of the banking system sensitivity to cross-border contagion over the period of 2006-2011. The study is performed on the basis of the BIS data on crossborder exposures and the Bankscope data on Tier 1 capital of 20 banking systems (Australia, Austria, Belgium, Canada, Finland, France, Germany, Greece, India, Ireland, Italy, Japan, the Netherlands, Portugal, Spain, Sweden, Switzerland, Turkey, the UK and the US). Since the European sovereign debt crisis took a decisive turn at the end of 2009, markets started looking at its main protagonists - so called PIIGS (Portugal, Ireland, Italy, Greece and Spain) - with a lot of anxiety. However, unexpectedly, the analysis of the data shows that a single failure among PIIGS could be absorbed by the network in 2011. Nevertheless, multiple initial failures (especially combinations including Italy and/or Spain) could be more dangerous. The simulation results reveal that the resilience of banking systems to contagion risks tends to improve over the years. The most systemically important countries are those of the US, the UK, France and Germany. Besides, a shock to the US is capable of destroying the UK banking system already in the ?rst round, whereas the UK would not lead to the failure of the US banking system even after all rounds of contagion. The results also show that the banking systems of the US, Turkey and Finland are completely immune to contagion effects. At the same time, there exist considerable risks for Switzerland and Ireland as their banking systems default also with high recovery rates.
    Keywords: contagion, Furfine algorithm, stress testing, PIIGS
    JEL: F34 F37 G01 G15 G21
    Date: 2013–08
  15. By: Jozef Barunik; Lukas Vacha
    Abstract: This paper contributes to the literature on international stock market comovements and contagion. The novelty of our approach lies in application of wavelet tools to high-frequency financial market data, which allows us to understand the relationship between stock markets in a time-frequency domain. While major part of economic time series analysis is done in time or frequency domain separately, wavelet analysis combines these two fundamental approaches. Wavelet techniques uncover interesting dynamics of correlations between the Central and Eastern European (CEE) stock markets and the German DAX at various investment horizons. The results indicate that connection of the CEE markets to the leading market of the region is significantly lower at higher frequencies in comparison to the lower frequencies. Contrary to previous literature, we document significantly lower contagion between the CEE markets and the German DAX after the crisis.
    Date: 2013–09
  16. By: Hasui, Kohei
    Abstract: This paper analyzes the effects of monetary policy shock when there is a non-negative constraint on the nominal interest rate. I employ two algorithms: the piecewise linear solution and Holden and Paetz's (2012) algolithm (the HP algorithm). I apply these methods to a dynamic stochastic general equilibrium (DSGE) model which has sticky prices, sticky wages, and adjustment costs of investment. The main findings are as follows. First, the impulse responses obtained with the HP algorithm do not differ much from those obtained with the piecewise linear solution. Second, the non-negative constraint influences the effects of monetary policy shocks under the Taylor rule under some parameters. In contrast, the constraint has little effects on the response to money growth shocks. Third, wage stickiness contributes to the effects of the non-negative constraint through the marginal cost of the product. The result of money growth shock suggests that it is important to analyze the effects of the zero lower bound (ZLB) in a model which generates a significant liquidity effect.
    Keywords: Zero lower bound; Monetary policy shock; Wage stickiness; Liquidity effect
    JEL: E47 E49 E52
    Date: 2013–08–30
  17. By: Tobias Körner; Isabel Schnabel
    Abstract: This paper shows that the abolition of state guarantees to publicly owned banks in Germany resulted in an increase in funding costs at German savings banks. Rather than being the result of increased market discipline, the increase in funding costs is shown to be driven by spillover effects from German Landesbanken who themselves had suffered from the abolition of guarantees and who spread their own cost increase through the public banking network. Higher funding costs and the resulting drop in bank charter values translated into higher risk-taking at German savings bank.
    Keywords: Public bail-out guarantees; savings banks; Landesbanken; market discipline; bank risk-taking; banking networks
    JEL: G21 G28 H11 L32
    Date: 2013–08
  18. By: Saten Kumar (Department of Economics, Faculty of Business and Law, Auckland University of Technology); Barrett Owen
    Abstract: We utilize the Kalman filter and instrumental variable methods to estimate consumption growth persistence for the U.S. Results show that prior to the financial crisis, the stickiness parameter beta was around 0.7. However, when the sample is extended until 2009.Q1, the estimates of beta declined to around 0.5. Extending the sample beyond 2009.Q1 show mild increase in beta. Our findings imply that during the crisis consumers' attentiveness to aggregate information has slightly increased, thereby reducing the persistence of aggregate consumption growth.
    Keywords: financial crisis, Kalman filter, sticky expectations
    JEL: C5 E2
    Date: 2013–05

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