nep-cba New Economics Papers
on Central Banking
Issue of 2013‒10‒02
twenty-six papers chosen by
Maria Semenova
Higher School of Economics

  1. Effects of US Monetary Policy Shocks During Financial Crises - A Threshold Vector Autoregression Approach By Jasmine Zheng
  2. Monetary Policy Drivers of Bond and Equity Risks By John Y. Campbell; Carolin Pflueger; Luis M. Viceira
  3. Banking crises, sudden stops, and the effectiveness of short-term lending By Chang, Chia-Ying
  4. Optimal rules for central bank interest rates subject to zero lower bound By Singh, Ajay Pratap; Nikolaou, Michael
  5. How would monetary policy matter in the proposed African monetary unions? Evidence from output and prices By Asongu Simplice
  6. Does Money Matter in Africa? New Empirics on Long- and Short-run Effects of Monetary Policy on Output and Prices By Asongu Simplice
  7. The impact of the sovereign debt crisis on bank lending rates in the euro area By Stefano Neri
  8. The role of banks in the transmission of monetary policy By Joe Peek; Eric S. Rosengren
  9. A single composite financial stress indicator and its real impact in the euro area By Islami, Mevlud; Kurz-Kim, Jeong-Ryeol
  10. The Connection between Wall Street and Main Street: Measurement and Implications for Monetary Policy By Alessandro Barattieri; Maya Eden; Dalibor Stevanovic
  11. New Empirics of monetary policy dynamics: evidence from the CFA franc zones By Asongu Simplice
  12. Shock from Graying: Is the Demographic Shift Weakening Monetary Policy Effectiveness By Patrick A. Imam
  13. Risk-taking and monetary policy before the crisis: The case of Germany By Iris Biefang-Frisancho Mariscal
  14. An Early Warning System for Inflation in the Philippines Using Markov-Switching and Logistic Regression Models By Cruz , Christopher John; Mapa, Dennis
  16. The Effects of Monetary Policy Shocks on a Panel of Stock Market Volatilities: A Factor-Augmented Bayesian VAR Approach By Fady Barsoum
  17. Cryptography and the economics of supervisory information: balancing transparency and confidentiality By Mark Flood; Jonathan Katz; Stephen J Ong; Adam Smith
  18. International Reserves versus External Debts : Can International reserves avoid future Financial Crisis in indebted Countries ? By Layal Mansour
  19. The Mechanism of Monetary Transmissions in Russia By Elena Leontyeva
  20. Puzzling over the Anatomy of Crises: Liquidity and the Veil of Finance By Guillermo Calvo
  21. Testing for the Systemically Important Financial Institutions: a Conditional Approach By Sessi Tokpavi
  22. Monetary-Fiscal Policy Interactions: Interdependent Policy Rule Coefficients By Gonzalez-Astudillo, Manuel
  23. Regulating Consumer Financial Products: Evidence from Credit Cards By Sumit Agarwal; Souphala Chomsisengphet; Neale Mahoney; Johannes Stroebel
  24. Banks and Development: Jewish Communities in the Italian Renaissance and Current Economic Performance By Pascali, Luigi
  25. Inflation and Output Comovement in the Euro Area: Love at Second Sight? By Michal Andrle; Jan Bruha; Serhat Solmaz
  26. Does Banque de France control inflation and unemployment? By Kitov, Ivan; KItov, Oleg

  1. By: Jasmine Zheng
    Abstract: This paper analyzes the impact and effectiveness of conventional monetary policy during periods of low and high financial stress in the US economy. Using data from 1973Q1 to 2008Q4, the analysis is conducted by estimating a Threshold Vector Autoregression (TVAR) model to capture switching between the low and high financial stress regimes implied by the theoretical literature. The empirical findings support regime-dependent effects of conventional US monetary policy. In particular, the output response to monetary policy shocks is larger during periods of high financial stress than in periods of low financial stress. The existence of a cost channel effect during periods of high financial stress imply a worsening of the short run output-inflation trade off during financial crises. When the sample period is extended to 2012Q4, there is evidence that expansionary monetary policy continues to be effective during periods of high financial stress when the prevailing interest rate is at the zero lower bound. By keeping interest rates and credit spreads low, expansionary monetary policy helps shift the US economy from high to low financial stress regimes. Large expansionary monetary policy shocks also increase the likelihood of moving the economy out of a high financial stress regime.
    Keywords: Monetary policy, uncertainty, threshold vector autoregression models
    JEL: F44 E44 E52
    Date: 2013–09
  2. By: John Y. Campbell (Harvard University); Carolin Pflueger (University of British Columbia); Luis M. Viceira (Harvard Business School, Finance Unit)
    Abstract: The exposure of US Treasury bonds to the stock market has moved considerably over time. While it was slightly positive on average in the period 1960-2011, it was unusually high in the 1980s and negative in the 2000s, a period during which Treasury bonds enabled investors to hedge macroeconomic risks. This paper explores the effects of monetary policy parameters and macroeconomic shocks on nominal bond risks, using a New Keynesian model with habit formation and discrete regime shifts in 1979 and 1997. The increase in bond risks after 1979 is attributed primarily to a shift in monetary policy towards a more anti-inflationary stance, while the more recent decrease in bond risks after 1997 is attributed primarily to an increase in the persistence of monetary policy interacting with continued shocks to the central bank's inflation target. Endogenous responses of bond risk premia amplify these effects of monetary policy on bond risks.
    Date: 2013–09
  3. By: Chang, Chia-Ying
    Abstract: This paper sheds light on the linkages between banking crises and sudden stops and discusses the effectiveness of short-run lending in their prevention. It develops an overlapping generations framework and incorporates the possibilities of bank runs and moral hazard of financial intermediaries. Consequently, I find that the strategy to overcome liquidity problems could worsen banks’ positions and cause bank runs and sudden stops. A small liquidity shock may still lead to a banking crisis through the depositors’ expectation. A large shock would require short-run lending to prevent an immediate bank run, but the repayment obligation may worsen moral hazard problems.
    Keywords: Banking crises, Sudden stops, Moral hazard, Short-run lending, Capital flows,
    Date: 2013
  4. By: Singh, Ajay Pratap; Nikolaou, Michael
    Abstract: The celebrated Taylor rule provides a simple formula that aims to capture how the central bank interest rate is adjusted as a linear function of inflation and output gap. However, the rule does not take explicitly into account the zero lower bound on the interest rate. Prior studies on interest rate selection subject to the zero lower bound have not produced rigorous derivations of explicit rules. In this work, Taylor-like rules for central bank interest rates bounded below by zero are derived rigorously using a multi-parametric model predictive control (mpMPC) framework. Rules with or without inertia are included in the derivation. The proposed approach is illustrated through simulations on US economy data. A number of issues for future study are proposed. --
    Keywords: Taylor rule,zero lower bound,liquidity trap,model predictive control,multiparametric programming
    JEL: E52 C61
    Date: 2013
  5. By: Asongu Simplice (Yaoundé/Cameroun)
    Abstract: We analyze the effects of monetary policy on economic activity in the proposed African monetary unions. Findings broadly show that: (1) but for financial efficiency in the EAMZ, monetary policy variables affect output neither in the short-run nor in the long-term and; (2) with the exception of financial size that impacts inflation in the EAMZ in the short-term, monetary policy variables generally have no effect on prices in the short-run. The WAMZ may not use policy instruments to offset adverse shocks to output by pursuing either an expansionary or a contractionary policy, while the EAMZ can do with the ‘financial allocation efficiency’ instrument. Policy implications are discussed.
    Keywords: Monetary Policy; Banking; Inflation; Output effects; Africa
    JEL: E51 E52 E58 E59 O55
    Date: 2013–01–14
  6. By: Asongu Simplice (Yaoundé/Cameroun)
    Abstract: Purpose – While in developed economies, changes in monetary policy affect real economic activity in the short-run but only prices in the long-run, the question of whether these tendencies apply to developing countries remains open to debate. In this paper, we examine the effects of monetary policy on economic activity using a plethora of hitherto unemployed financial dynamics in inflation-chaotic African countries for the period 1987-2010. Design/methodology/approach – VARs within the frameworks of VECMs and simple Granger causality models are used to estimate the long-run and short-run effects respectively. A battery of robustness checks are also employed to ensure consistency in the specifications and results. Findings – But for slight exceptions, the tested hypotheses are valid under monetary policy independence and dependence. Hypothesis 1: Monetary policy variables affect prices in the long-run but not in the short-run. For the first-half (long-run dimension) of the hypothesis, permanent changes in monetary policy variables (depth, efficiency, activity and size) affect permanent variations in prices in the long-term. But in cases of disequilibriums only financial dynamic fundamentals of depth and size significantly adjust inflation to the cointegration relations. With respect to the second-half (short-run view) of the hypothesis, monetary policy does not overwhelmingly affect prices in the short-term. Hence, but for a thin exception Hypothesis 1 is valid. Hypothesis 2: Monetary policy variables influence output in the short-term but not in the long-term. With regard to the short-term dimension of the hypothesis, only financial dynamics of depth and size affect real GDP output in the short-run. As concerns the long-run dimension, the neutrality of monetary policy has been confirmed. Hence, the hypothesis is also broadly valid. Practical Implications – A wide range of policy implications are discussed. Inter alia: the long-run neutrality of money and business cycles, credit expansions and inflationary tendencies, inflation targeting and monetary policy independence implications. Country/regional specific implications, the manner in which the findings reconcile the ongoing debate, measures for fighting surplus liquidity, caveats and future research directions are also discussed. Originality/value – By using a plethora of hitherto unemployed financial dynamics (that broadly reflect monetary policy), we provide significant contributions to the empirics of money. The conclusion of the analysis is a valuable contribution to the scholarly and policy debate on how money matters as an instrument of economic activity in developing countries.
    Keywords: Monetary Policy; Banking; Inflation; Output effects; Africa
    JEL: E51 E52 E58 E59 O55
    Date: 2013–01–14
  7. By: Stefano Neri (Banca d'Italia)
    Abstract: Since the early part of 2010 tensions in the sovereign debt markets of some euro-area countries have progressively distorted monetary and credit conditions, hindering the ECB monetary policy transmission mechanism and raising the cost of loans to non-financial corporations and households. This paper makes an empirical assessment of the impact of the tensions on bank lending rates in the main euro-area countries, concluding that they have had a significant impact on the cost of credit in the peripheral countries. A counterfactual exercise indicates that if the spreads had remained constant at the average levels recorded in April 2010, the interest rates on new loans to non-financial corporations and on residential mortgage loans to households in the peripheral countries would have been, on average, lower by 130 and 60 basis points, respectively, at the end of 2011. These results are robust to alternative measures of the cost of credit and econometric techniques.
    Keywords: sovereign debt crisis, bank lending rates, seemingly unrelated regression
    JEL: C32 E43 G21
    Date: 2013–06
  8. By: Joe Peek; Eric S. Rosengren
    Abstract: The transmission of monetary policy, especially in light of recent events, has received increased attention, especially with respect to the efficacy of the bank lending channel. This paper summarizes the issues associated with isolating the bank lending channel and determining the extent to which it is operational. Evidence on the effectiveness of the bank lending channel is presented, both in the United States and abroad. The paper then provides observations about the likely consequences for the effectiveness of the lending channel of the changes in the financial environment associated with the recent financial crisis.
    Keywords: Monetary policy ; Global financial crisis ; Banks and banking - Regulations
    Date: 2013
  9. By: Islami, Mevlud; Kurz-Kim, Jeong-Ryeol
    Abstract: In this paper, we construct a single composite financial stress indicator (FSI) which aims to predict developments in the real economy in the euro area. Our FSI was shown to perform better than the Euro STOXX 50 volatility index for the recent banking crisis and the euro-area sovereign debt crisis and to be able to serve as an early warning indicator for negative impacts of financial stress on the real economy. --
    Keywords: financial stress indicator,predictability,financial crisis,real economy
    JEL: C12 G01
    Date: 2013
  10. By: Alessandro Barattieri; Maya Eden; Dalibor Stevanovic
    Abstract: We propose a measure of the extent to which a financial sector is connected to the real economy. The Measure of Connectedness is the share of credit market instruments represented by claims whose direct counterpart belongs to the non-financial sectors. The aggregate U.S. Measure of Connectedness declines by about 27% in the period 1952-2009. We suggest that this increase in disconnectedness between the financial sector and the real economy may have dampened the sensitivity of the real economy to monetary shocks. We present a stylized model that illustrates how interbank trading can reduce the sensitivity of lending to the entrepreneur’s net worth, thereby dampening the credit channel transmission of monetary policy. Finally, we interact our measure with both a SVAR and a FAVAR for the U.S. economy, and establish that the impulse responses to monetary policy shocks are dampened as the level of connection declines.
    Keywords: Connection, financial sector, real economy, monetary policy transmission mechanism
    JEL: G20 E44 E52
    Date: 2013
  11. By: Asongu Simplice (Yaoundé/Cameroun)
    Abstract: Purpose – A major lesson of the EMU crisis is that serious disequilibria in a monetary union result from arrangements not designed to be robust to a variety of shocks. With the specter of this crisis looming substantially and scarring existing monetary zones, the present study has complemented existing literature by analyzing the effects of monetary policy on economic activity (output and prices) in the CEMAC and UEMOA CFA franc zones. Design/methodology/approach – VARs within the frameworks of VECMs and Granger causality models are used to estimate the long-run and short-run effects respectively. Impulse response functions are further used to assess the tendencies of significant Granger causality findings. A battery of robustness checks are also employed to ensure consistency in the specifications and results. Findings – Hypothesis 1: Monetary policy variables affect prices in the long-run but not in the short-run in the CFA zones (Broadly untrue). This invalidity is more pronounced in CEMAC (relative to all monetary policy variables) than in UEMOA (with regard to financial dynamics of activity and size). Hypothesis 2: Monetary policy variables influence output in the short-term but not in the long-run in the CFA zones. Firstly, the absence of co-integration among real output and the monetary policy variables in both zones confirm the long-term dimension of the hypothesis on the neutrality of money. The validity of its short-run dimension is more relevant in the UEMOA zone (with the exception of overall money supply) than in the CEMAC zone (in which only financial dynamics of ‘financial system efficiency’ and financial activity support the hypothesis). Practical Implications – (1) Compared to the CEMAC region, the UEMOA zone’s monetary authority has more policy instruments for offsetting output shocks but fewer instruments for the management of short-run inflation. (2) The CEMAC region is more inclined to non-traditional policy regimes while the UEMOA zone dances more to the tune of traditional discretionary monetary policy arrangements. A wide range of policy implications are discussed. Inter alia: implications for the long-run neutrality of money and business cycles; implications for credit expansions and inflationary tendencies; implications of the findings to the ongoing debate; country-specific implications and measures of fighting surplus liquidity. Originality/value – By using a plethora of hitherto unemployed financial dynamics (that broadly reflect money supply), we have provided a significant contribution to the empirics of monetary policy. The conclusion of the analysis is a valuable contribution to the scholarly and policy debate on how money matters as an instrument of economic activity in developing countries and monetary unions.
    Keywords: Monetary Policy; Banking; Inflation; Output effects; Africa
    JEL: E51 E52 E58 E59 O55
    Date: 2013–01–14
  12. By: Patrick A. Imam
    Abstract: Abstract Empirical evidence is mounting that, in advanced economies, changes in monetary policy have a more benign impact on the economy—given better anchored inflation expectations and inflation being less responsive to variation in unemployment—compared to the past. We examine another aspect that could explain this empirical finding, namely the demographic shift to an older society. The paper first clarifies potential transmission channels that could explain why monetary policy effectiveness may moderate in graying societies. It then uses Bayesian estimation techniques for the U.S., Canada, Japan, U.K., and Germany to confirm a weakening of monetary policy effectiveness over time with regards to unemployment and inflation. After proving the existence of a panel co-integration relationship between ageing and a weakening of monetary policy, the study uses dynamic panel OLS techniques to attribute this weakening of monetary policy effectiveness to demographic changes. The paper concludes with policy implications.
    Keywords: Monetary policy;United States;Canada;Japan;United Kingdom;Germany;Developed countries;Aging;Population;Economic models;Cross country analysis;Demographic shift, monetary transmission mechanism, life-cycle model
    Date: 2013–09–06
  13. By: Iris Biefang-Frisancho Mariscal (University of the West of England, Bristol)
    Abstract: We use impulse response functions to test for the effect of monetary policy on investors’ risk aversion in Germany. The latter is proxied by a variety of option based implied volatility indices. We estimate twenty-four models and find in all models that risk aversion responds to monetary policy. Furthermore, the business cycle varies mostly through changes in risk aversion and there is feedback from the business cycle to risk aversion, in that a fall in the price of risk has a positive effect on the business cycle. These responses indicate that accommodating monetary policy before the crisis may have increased risk appetite, which in turn has strengthened the business cycle with the latter feeding back into a further reduction in the price of risk.
  14. By: Cruz , Christopher John; Mapa, Dennis
    Abstract: With the adoption of the Bangko Sentral ng Pilipinas (BSP) of the Inflation Targeting (IT) framework in 2002, average inflation went down in the past decade from historical average. However, the BSP’s inflation targets were breached several times since 2002. Against this backdrop, this paper develops an early warning system (EWS) model for predicting the occurrence of high inflation in the Philippines. Episodes of high and low inflation were identified using Markov-switching models. Using the outcomes of regime classification, logistic regression models are then estimated with the objective of quantifying the possibility of the occurrence of high inflation episodes. Empirical results show that the proposed EWS model has some potential as a complementary tool in the BSP’s monetary policy formulation based on the in-sample and out-of sample forecasting performance.
    Keywords: Inflation Targeting, Markov Switching Models, Early Warning System
    JEL: C5 C52 E37
    Date: 2013
  15. By: Yuzo Honda (Kansai University)
    Abstract: The effectiveness of nontraditional monetary policy is controversial at least in Japan. Making use of data from the quantitative easing monetary policy period, this paper presents statistical evidence on the effectiveness of nontraditional monetary policy. We empirically demonstrate that quantitative easing monetary policy, adopted by the Bank of Japan for the period from March 2001 to March 2006, had a stimulating effect on investment and production at least through Tobin's q channel. We also provide a simple and operational model in which an injection of base money lowers the interest rate on bonds, reduces the required rate of returns from capital stocks, and depreciates the value of domestic currency.
    Keywords: V Quantitative Easing, Vector Autoregressions, Stocks, Tobin's q, Asset Markets JEL Classification Number: E51
    JEL: E51
    Date: 2013–09
  16. By: Fady Barsoum (Department of Economics, University of Konstanz, Germany)
    Abstract: This paper investigates the response of stock market volatility to a monetary policy shock using a structural factor-augmented Bayesian vector autoregressive (FAVAR) model. We construct a monthly dataset of realized volatilities of the constituents of the S&P500 index and extract volatility factors from this dataset using a suitable dynamic factor model (DFM). The volatility factors are included in a structural FAVAR model where the dynamic response of stock market volatility to a monetary policy shock is analyzed. This approach does not only allow us to study the response of the aggregate market volatility but also the responses of all the volatilities of the single stocks and the different sectors included in the dataset. In general, the results show that the stock market returns decrease and the stock market volatility increases following a monetary policy tightening. Although the magnitude of the volatility response to monetary policy shocks varies between the different stocks and sectors, the dynamics of the response does not differ widely. Both the magnitude and dynamics of the volatility response depend on the sample period examined.
    Keywords: dynamic factor model, Bayesian estimation, factor-augmented vector autoregression, monetary policy, stock market volatility, long memory
    JEL: C32 C38 C58 E52
    Date: 2013–02–15
  17. By: Mark Flood; Jonathan Katz; Stephen J Ong; Adam Smith
    Abstract: We elucidate the tradeoffs between transparency and confidentiality in the context of financial regulation. The structure of information in financial contexts creates incentives with a pervasive effect on financial institutions and their relationships. This includes supervisory institutions, which must balance the opposing forces of confidentiality and transparency that arise from their examination and disclosure duties. Prudential supervision can expose confidential information to examiners who have a duty to protect it. Disclosure policies work to reduce information asymmetries, empowering investors and fostering market discipline. The resulting confidentiality/transparency dichotomy tends to push supervisory information policies to one extreme or the other. We argue that there are important intermediate cases in which limited information sharing would be welfare-improving, and that this can be achieved with careful use of new techniques from the fields of secure computation and statistical data privacy. We provide a broad overview of these new technologies. We also describe three specific usage scenarios where such beneficial solutions might be implemented.
    Date: 2013
  18. By: Layal Mansour (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure - Lyon)
    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
    Date: 2013–09–23
  19. By: Elena Leontyeva (Russian Presidential Academy of National Economy and Public Administration)
    Abstract: Monetary policy measures are widely used in various countries the world to influence economic conditions. However, the efficiency of the impact of monetary policy on macroeconomic performance varies in different countries. Understanding the characteristics of the transmission mechanism of monetary policy, that is, the process of the impact of policy on the behavior of economic agents, the end result of which is the change of the main macroeconomic indicators will consider the impact of actions of monetary authorities to the individual agents. In this work analyzed in detail the mechanism of monetary transmission. Look at specifics of the main transmission channels and identified factors that influence their effectiveness. This chapter is analyzes the characteristics of the channels of transmission mechanism in Russia in the first decade of the XXI century.
    Keywords: monetary transmission
    Date: 2013–05
  20. By: Guillermo Calvo (Columbia University and NBER (E-mail:
    Abstract: The paper claims that conventional monetary theory obliterates the central role played by media of exchange in the workings and instability of capitalist economies; and that a significant part of the financial system depends on the resiliency of paper currency and liquid assets that have been built on top of it. The resilience of the resulting financial tree is questionable if regulators are not there to adequately trim its branches to keep it from toppling by its own weight or minor wind gusts. The issues raised in the paper are not entirely new but have been ignored in conventional theory. This is very strange because disregard for these key issues has lasted for more than half a century. Are we destined to keep on making the same mistake? The paper argues that a way to prevent that is to understand its roots, and traces them to the Keynes/Hicks tradition. In addition, the paper presents a narrative and some empirical evidence suggesting a key channel from Liquidity Crunch to Sudden Stop, which supports the view that liquidity/credit shocks have been a central factor in recent crises. In addition, the paper claims that liquidity considerations help to explain (a) why a credit boom may precede financial crisis, (b) why capital inflows grow in the run-up of balance-of-payments crises, and (c) why gross flows are pro-cyclical.
    Keywords: Financial Crises, Bubbles, Sudden Stop
    JEL: E32 E65 F32
    Date: 2013–09
  21. By: Sessi Tokpavi
    Abstract: We introduce in this paper a testing approach that allows checking whether two financial institutions are systemically equivalent, with systemic risk measured by CoVaR (Adrian and Brunnermeier, 2011). The test compares the difference in CoVaR forecasts for two financial institutions via a suitable loss function that has an economic content. Our testing approach differs from those in the literature in the sense that it is conditional, and helps evaluating in a forward-looking manner, the extent to which statistically significant differences in CoVaR forecasts can be attributed to lag values of market state variables. Moreover, the test can be used to identify systemically important financial institutions (SIFIs). Extensive Monte Carlo simulations show that the test has desirable small sample properties. With an application on a sample including 70 large U.S. financial institutions, our conditional test using market state variables such as VIX and various yield spreads, reveals more (resp. less) heterogeneity in the systemic profiles of these institutions compared to its unconditional version, in crisis (resp. non-crisis) period. It also emerges that the systemic ranking provided by our testing approach is a good forecast of a financial institution's sensitivity to a crisis. This is in contrast to the ranking obtained directly using CoVaR forecasts which has less predictive power because of estimation uncertainty.
    Keywords: Systemic Risk, SIFIs, CoVaR, Estimation Uncertainty, Conditional Predictive Ability Test.
    JEL: G32 C53 C58
    Date: 2013
  22. By: Gonzalez-Astudillo, Manuel
    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.
    Keywords: Time-varying policy rule coefficients, monetary and fiscal policy interactions, nonlinear state-space models
    JEL: C11 C32 E63
    Date: 2013–07–16
  23. By: Sumit Agarwal; Souphala Chomsisengphet; Neale Mahoney; Johannes Stroebel
    Abstract: We analyze the effectiveness of consumer financial regulation by considering the 2009 Credit Card Accountability Responsibility and Disclosure (CARD) Act in the United States. Using a unique panel data set covering over 150 million credit card accounts, we find that regulatory limits on credit card fees reduced overall borrowing costs to consumers by an annualized 2.8% of average daily balances, with a decline of more than 10% for consumers with the lowest FICO scores. Consistent with a model of low fee salience and limited market competition, we find no evidence of an offsetting increase in interest charges or a reduction in access to credit. Taken together, we estimate that the CARD Act fee reductions have saved U.S. consumers $20.8 billion per year. We also analyze the CARD Act requirement to disclose the interest savings from paying off balances in 36 months rather than only making minimum payments. We find that this "nudge" increased the number of account holders making the 36-month payment value by 0.5 percentage points, with a similarly sized decrease in the number of account holders paying less than this amount.
    JEL: D0 D14 G0 G02 G21 G28 L0 L13 L15
    Date: 2013–09
  24. By: Pascali, Luigi (Department of Economics, University of Warwick)
    Abstract: Are differences in local banking development long-lasting? Do they affect long-term economic performance? I answer these questions by relying on an historical development that occurred in Italian cities during the 15th century. A sudden change in the Catholic doctrine had driven the Jews toward money lending. Cities that were hosting Jewish communities developed complex banking institutions for two reasons: first, the Jews were the only people in Italy who were allowed to lend for a profit and, second, the Franciscan reaction to Jewish usury led to the creation of charity lending institutions, the Monti di Pietà, that have survived until today and have become the basis of the Italian banking system. Using Jewish demography in 1500 as an instrument, I provide evidence of (1) an extraordinary persistence in the level of banking development across Italian cities (2) large effects of current local banking development on per-capita income. Additional firm-level analyses suggest that well-functioning local banks exert large effects on aggregate productivity by reallocating resources toward more efficient firms. I exploit the expulsion of the Jews from the Spanish territories in Italy in 1541 to argue that my results are not driven by omitted institutional, cultural and geographical characteristics. In particular, I show that, in Central Italy, the difference in current income between cities that hosted Jewish communities and cities that did not exists only in those regions that were not Spanish territories in the 16th century. JEL classification: Banks ; Economic development ; Persistence ; Jewish demography JEL codes: O43 ; G21 ; O10
    Date: 2013
  25. By: Michal Andrle; Jan Bruha; Serhat Solmaz
    Abstract: This paper discusses comovement between inflation and output in the euro area. The strength of the comovement may not be apparent at first sight, but is clear at business cycle frequencies. Our results suggest that at business cycle frequency, the output and core inflation comovement is high and stable, and that inflation lags the cycle in output with roughly half of its variance. The strong relationship of output and inflation hints at the importance of demand shocks for the euro area business cycle.
    Date: 2013–09–11
  26. By: Kitov, Ivan; KItov, Oleg
    Abstract: We re-estimate statistical properties and predictive power of a set of Phillips curves, which are expressed as linear and lagged relationships between the rates of inflation, unemployment, and change in labour force. For France, several relationships were estimated eight years ago. The change rate of labour force was used as a driving force of inflation and unemployment within the Phillips curve framework. Following the original problem formulation by Fisher and Phillips, the set of nested models starts with a simplistic version without autoregressive terms and one lagged term of explanatory variable. The lag is determined empirically together with all coefficients. The model is estimated using the Boundary Element Method (BEM) with the least squares method applied to the integral solutions of the differential equations. All models include one structural break might be associated with revisions to definitions and measurement procedures in the 1980s and 1990s as well as with the change in monetary policy in 1994-1995. For the GDP deflator, our original model provided a root mean squared forecast error (RMSFE) of 1.0% per year at a four-year horizon for the period between 1971 and 2004. The same RMSFE is estimated with eight new readings obtained since 2004. The rate of CPI inflation is predicted with RMSFE=1.5% per year. For the naive (no change) forecast, RMSFE at the same time horizon is 2.95% and 3.3% per year, respectively. Our model outperforms the naive one by a factor of 2 to 3. The relationships for inflation were successfully tested for cointegration. We have formally estimated several vector error correction (VEC) models for two measures of inflation. In the VAR representation, these VECMs are similar to the Phillips curves. At a four year horizon, the estimated VECMs provide significant statistical improvements on the results obtained by the BEM: RMSFE=0.8% per year for the GDP deflator and ~1.2% per year for CPI. For a two year horizon, the VECMs improve RMSFEs by a factor of 2, with the smallest RMSFE=0.5% per year for the GDP deflator. This study has validated the reliability and accuracy of the linear and lagged relationships between inflation, unemployment, and the change in labour force between 1970 and 2012.
    Keywords: monetary policy, inflation, unemployment, labour force, Phillips curve, measurement error, forecasting, cointegration, France
    JEL: C32 E31 E6 J21 J64
    Date: 2013–09–27

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