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on Central Banking |
| By: | Luis Brandao-Marques; Ricardo Correa; Horacio Sapriza |
| Abstract: | Government support to banks through the provision of explicit or implicit guarantees affects the willingness of banks to take on risk by reducing market discipline or by increasing charter value. We use an international sample of rated banks and find that government support is associated with more risk taking by banks, especially prior and during the 2008-2009 financial crisis. We also find that restricting banks’ range of activities ameliorates the link between government support and bank risk taking. We conclude that strengthening market discipline by reducing bank complexity is needed to address this moral hazard problem |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1086&r=cba |
| By: | Layal Mansour (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France) |
| Abstract: | The aim of this paper is to evaluate the economic consequences on the countries that on one hand protect themselves from future financial crises by accumulating international reserves (IR) while on the other hand expose themselves to severe financial crisis due to their excessive internal and/or external public debt. Using the Financial Stress Indicator (FSI) proposed by Balakrishnan et al (2009) and IMF -which cover several aspects of financial crisis- and by applying the Markov switching model with time varying, we estimated the probability whether an indebted country is vulnerable to crises despite its accumulation of IR -acting as a buffer stock and self-insurance-. We studied the case of five emerging countries in Asia and Latin America that had increased both of their IR and public debts, and found that debt had increased the likelihood for a country to suffer from financial crisis, however IR did not necessarily provide “Peace” in the indebted countries except of some exceptions. We conclude that although debt and international reserves have theoretically opposite economic concerns for a country, the deleterious effects of debts might outweigh in most cases the beneficial effects of IR |
| Keywords: | Monetary policy, International Reserves, External Debts, Financial Crisis, Financial Stress Indicator |
| JEL: | C22 E52 F31 G01 H63 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:1329&r=cba |
| By: | William Dupor; Rong Li |
| Abstract: | There exist sticky price models in which the output response to a government spending change can be large if the central bank is nonresponsive to inflation. According to this “expected inflation channel," government spending drives up expected inflation, which in turn, reduces the real interest rate and leads to an increase in private consumption. This paper examines whether the channel was important during the 2009 Recovery Act period. Examining U.S. expected inflation measures based on professional surveys and a cross-country comparison of bond yields, we conclude that the Recovery Act had a much smaller expected inflation effect than suggested by an appropriately calibrated large output multiplier" sticky price model. Moreover, we show that the channel is inconsistent quantitatively with vector autoregression evidence from the Federal Reserve's passive policy period. Taking the evidence as a whole, we conclude that if the Act had exhibited a large output multiplier, it was not likely due to the expected inflation channel as formulated in existing research. |
| Keywords: | Monetary policy ; Fiscal policy ; American Recovery and Reinvestment Act of 2009 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2013-026&r=cba |
| By: | James M. Nason; Gregor W. Smith |
| 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: | Inflation (Finance) - United States ; Forecasting |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:13-34&r=cba |
| By: | Francisco B. Covas; Ben Rump; Egon Zakrajsek |
| Abstract: | We propose an econometric framework for estimating capital shortfalls of bank holding companies (BHCs) under pre-specified macroeconomic scenarios. To capture the nonlinear dynamics of bank losses and revenues during periods of financial stress, we use a fixed effects quantile autoregressive (FE-QAR) model with exogenous macroeconomic covariates, an approach that delivers a superior out-of-sample forecasting performance compared with the standard linear framework. According to the out-of-sample forecasts, the realized net charge-offs during the 2007-09 crisis are within the multi-step-ahead density forecasts implied by the FE-QAR model, but they are frequently outside the density forecasts generated using the corresponding linear model. This difference reflects the fact that the linear specification substantially underestimates loan losses, especially for real estate loan portfolios. Employing the macroeconomic stress scenario used in CCAR 2012, we use the density forecasts generated by the FE-QAR model to simulate capital shortfalls for a panel of large BHCs. For almost all institutions in the sample, the FE-QAR model generates capital shortfalls that are considerably higher than those implied by its linear counterpart, which suggests that our approach has the potential for detecting emerging vulnerabilities in the financial system. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2013-55&r=cba |
| By: | Manuel Gonzalez-Astudillo |
| Abstract: | In this paper, we formulate and solve a New Keynesian model with monetary and fiscal policy rules whose coefficients are time-varying and interdependent. We implement time variation in the policy rules by specifying coefficients that are logistic functions of correlated latent factors and propose a solution method that allows for these characteristics. The paper uses Bayesian methods to estimate the policy rules with time-varying coefficients, endogeneity, and stochastic volatility in a limited-information framework. Results show that monetary policy switches regime more frequently than fiscal policy, and that there is a non-negligible degree of interdependence between policies. Policy experiments reveal that contractionary monetary policy lowers inflation in the short run and increases it in the long run. Also, lump-sum taxes affect output and inflation, as the literature on the fiscal theory of the price level suggests, but the effects are attenuated with respect to a pure fiscal regime. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2013-58&r=cba |
| By: | Greene, William H.; Gillman, Max; Harris, Mark N. |
| Abstract: | We propose a Tempered Ordered Probit (TOP) model. Our contribution lies not only in explicitly accounting for an excessive number of observations in a given choice category - as is the case in the standard literature on inflated models; rather, we introduce a new econometric model which nests the recently developed Middle Inflated Ordered Probit (MIOP) models of Bagozzi and Mukherjee (2012) and Brooks, Harris, and Spencer (2012) as a special case, and further, can be used as a specification test of the MIOP, where the implicit test is described as being one of symmetry versus asymmetry. In our application, which exploits a panel data-set containing the votes of Bank of England Monetary Policy Committee (MPC) members, we show that the TOP model affords the econometrician considerable flexibility with respect to modeling the impact of different forms of uncertainty on interest rate decisions. Our findings, we argue, reveal MPC members. asymmetric attitudes towards uncertainty and the changeability of interest rates. |
| Keywords: | Monetary policy committee, voting, discrete data, uncertainty, tempered equations |
| JEL: | C3 E50 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:hit:hitcei:2013-05&r=cba |
| By: | Marcelle Chauvet; Zeynep Senyuz; Emre Yoldas |
| Abstract: | This paper provides an extensive analysis of the predictive ability of financial volatility measures for economic activity. We construct monthly measures of stock and bond market volatility from daily returns and model volatility as composed of a long-run component that is common across all series, and a set of idiosyncratic short-run components. Based on powerful in-sample predictive ability tests, we find that the stock volatility measures and the common factor significantly improve short-term forecasts of conventional financial indicators. A real-time out of sample assessment yields a similar conclusion under the assumption of noisy revisions in macroeconomic data. In a non-linear extension of the dynamic factor model for volatility series, we identify three regimes that describe the joint volatility dynamics: low, intermediate and high-volatility. We also find that the non-linear model performs remarkably well in tracking the Great Recession of 2007-2009 in real-time. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2013-61&r=cba |
| By: | Eric Dor (IESEG School of Management (LEM-CNRS)) |
| Abstract: | The structural heterogeneity of the Euro Zone is well described by the net external financial positions of the different countries. The countries with the highest external debts are those who were particular ly affected when the sovereign debt crisis started. The announcement by the ECB of the possibility to conduct Outright Monetary Transactions has triggered a sharp decrease of the sovereign spreads of the European distressed countries. However the announcement of the possibility of OMT was not successful to significantly reduce the fragmentation of the financial market of the Euro Zone. There remain large differences between the interest rates at which the companies of the different countries can borrow |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:ies:wpaper:e201318&r=cba |
| By: | Michael Dotsey; Robert G. King; Alexander L. Wolman |
| Abstract: | In the last ten years there has been an explosion of empirical work examining price setting behavior at the micro level. The work has in turn challenged existing macro models that attempt to explain monetary nonneutrality, because these models are generally at odds with much of the micro price data. In response, economists have developed a second generation of sticky-price models that are state dependent and that include both fixed costs of price adjustment and idiosyncratic shocks. Nonetheless, some ambiguity remains about the extent of monetary nonneutrality that can be attributed to costly price adjustment. Our paper takes a step toward eliminating that ambiguity. |
| Keywords: | Pricing ; Pricing - Mathematical models |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:13-35&r=cba |
| By: | Ozge Akinci |
| Abstract: | This paper uses a panel structural vector autoregressive (VAR) model to investigate the extent to which global financial conditions, i.e., a global risk-free interest rate and global financial risk, and country spreads contribute to macroeconomic fluctuations in emerging countries. The main findings are: (1) Global financial risk shocks explain about 20 percent of movements both in the country spread and in the aggregate activity in emerging economies. (2) The contribution of global risk-free interest rate shocks to macroeconomic fluctuations in emerging economies is negligible. Its role, which was emphasized in the literature, is taken up by global financial risk shocks. (3) Country spread shocks explain about 15 percent of the business cycles in emerging economies. (4) Interdependence between economic activity and the country spread is a key mechanism through which global financial shocks are transmitted to emerging economies. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1085&r=cba |
| By: | Benjamin Keddad (AMSE - Aix-Marseille School of Economics - Aix-Marseille Univ. - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales [EHESS] - Ecole Centrale Marseille (ECM)) |
| Abstract: | In this paper, I examine the extent to which the Asian exchange rates are coordinated around a synthetic Asian Currency Unit (ACU) defined as a basket of the Asian currencies. Using a VAR model, the results provide some evidence of stabilization among the Asian exchange rates around the ACU. Although the US dollar remains the dominant anchor within the region, these countries have allowed for more exchange rate flexibility against the US dollar since 2006, with the aim to adopt a basket peg where the Asian currencies have gained an increasing role. The empirical results also suggest that the official adoption of an undisclosed currency basket by Chinese authorities in July 2005 has been an important factor in the decision of Asian countries to shift toward a de facto currency basket system. |
| Keywords: | Asian Currency Unit; monetary integration; currency basket peg; nominal exchange rate coordination |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00862254&r=cba |
| By: | Simon Gilchrist; Egon Zakrajsek |
| Abstract: | Estimating the effect of Federal Reserve's announcements of Large-Scale Asset Purchase (LSAP) programs on corporate credit risk is complicated by the simultaneity of policy decisions and movements in prices of risky financial assets, as well as by the fact that both interest rates of assets targeted by the programs and indicators of credit risk reacted to other common shocks during the recent financial crisis. This paper employs a heteroskedasticity-based approach to estimate the structural coefficient measuring the sensitivity of market-based indicators of corporate credit risk to declines in the benchmark market interest rates prompted by the LSAP announcements. The results indicate that the LSAP announcements led to a significant reduction in the cost of insuring against default risk--as measured by the CDX indexes--for both investment- and speculative-grade corporate credits. While the unconventional policy measures employed by the Federal Reserve to stimulate the economy have substantially lowered the overall level of credit risk in the economy, the LSAP announcements appear to have had no measurable effect on credit risk in the financial intermediary sector. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2013-56&r=cba |
| By: | Jiranyakul, Komain |
| Abstract: | This paper explored the degree of inflation persistence in Thailand using both headline and sectoral CPI indices during the 1985-2012 period. The results showed that the degree of persistence was low across the fixed and floating exchange rate regimes. The mean shifts appeared to be mostly negative by the impact of switching from fixed to floating exchange rate regime. Furthermore, there seemed to be monetary accommodation of inflation persistence in both regimes. However, some negative mean shifts in the inflation process might be resulted from the impact of inflation targeting implemented in May 2000. |
| Keywords: | Inflation persistence, exchange rate regimes, monetary accommodation. |
| JEL: | C22 E31 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:50109&r=cba |
| By: | Thilo A. Schmitt; Desislava Chetalova; Rudi Sch\"afer; Thomas Guhr |
| Abstract: | The instability of the financial system as experienced in recent years and in previous periods is often linked to credit defaults, i.e., to the failure of obligors to make promised payments. Given the large number of credit contracts, this problem is amenable to be treated with approaches developed in statistical physics. We introduce the idea of ensemble averaging and thereby uncover generic features of credit risk. We then show that the often advertised concept of diversification, i.e., reducing the risk by distributing it, is deeply flawed when it comes to credit risk. The risk of extreme losses remain due to the ever present correlations, implying a substantial and persistent intrinsic danger to the financial system. |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1309.5245&r=cba |