nep-cba New Economics Papers
on Central Banking
Issue of 2013‒10‒25
sixteen papers chosen by
Maria Semenova
Higher School of Economics

  1. Macroprudential and Monetary Policies: Implications for Financial Stability and Welfare By José A Carrasco-Gallego; Margarita Rubio
  2. The Effects of Monetary Policy on Asset Prices Bubbles: Some Evidence By Jordi Galí; Luca Gambetti
  3. The Net Stable Funding Ratio and banks’ participation in monetary policy operations: some evidence for the euro area By Antonio Scalia; Sergio Longoni; Tiziana Rosolin
  4. Market-Based Bank Capital Regulation By Jeremy Bulow; Paul Klemperer
  5. Banks Exposure to Interest Rate Risk and The Transmission of Monetary Policy By Landier, Augustin; Sraer, David; Thesmar, David
  6. The fragility of two monetary regimes: The European Monetary System and the Eurozone By Paul De Grauwe; Yuemei Ji
  7. The Impact of Different Types of Foreign Exchange Intervention: An Event Study Approach By Juan José Echavarría; Luis Fernando Melo Velandia; Mauricio Villamizar
  8. Money Targeting, Heterogeneous Agents and Dynamic Instability By Giorgio Motta; Patrizio Tirelli
  9. Macroprudential Measures, Housing Markets and Monetary Policy By José A Carrasco-Gallego; Margarita Rubio
  10. The Federal Reserve in times of economic crisis: Paths and choices since 2007 By Rüdiger, Sina
  11. The likely impact of Basel III on a bank's appetite for renewable energy financing By Narbel, Patrick A.
  12. Evaluating unconventional monetary policies -why aren’t they more effective? By Yi Wen
  13. The impact of unconventional monetary policy on the Italian economy during the sovereign debt crisis By Marco Casiraghi; Eugenio Gaiotti; Lisa Rodano; Alessandro Secchi
  14. The capital structure of banks and practice of bank restructuring By Dübel, Achim
  15. The Level Effect of Bank Lending Standards on Business Lending By Koen van der Veer; Marco Hoeberichts
  16. Banking Deregulation and The Rise in House Price Comovement By Landier, Augustin; Sraer, David; Thesmar, David

  1. By: José A Carrasco-Gallego; Margarita Rubio
    Abstract: In this paper, we analyse the implications of macroprudential and monetary policies for business cycles, welfare, and .nancial stability. We consider a dynamic stochastic general equilibrium (DSGE) model with housing and collateral constraints. A macroprudential rule on the loan-to-value ratio (LTV), which responds to output and house price deviations, interacts with a traditional Taylor rule for monetary policy. From a positive perspective, introducing a macroprudential tool mitigates the effects of booms in the economy by restricting credit. However, monetary and macroprudential policies may enter in conflict when shocks come from the supply-side of the economy. From a normative point of view, results show that the introduction of this macroprudential measure is welfare improving. Then, we calculate the combination of policy parameters that maximizes welfare and find that the optimal LTV rule should respond relatively more aggressively to house prices than to output deviations. Finally, we study the efficiency of the policy mix. We propose a tool that includes not only the variability of output and inflation but also the variability of borrowing, to capture the effects of policies on financial stability: a three-dimensional policy frontier (3DPF). We find that both policies acting together unambiguously improve the stability of the system.
    Keywords: Macroprudential, monetary policy, welfare, financial stability, three-dimensional policy frontier, loan-to-value, Taylor curve
  2. By: Jordi Galí; Luca Gambetti
    Abstract: We estimate the response of stock prices to exogenous monetary policy shocks using vector-autoregressive models with time-varying parameters. Under our baseline identification scheme, the evidence cannot be easily reconciled with conventional views on the effects of interest rate changes on asset price bubbles.
    Keywords: leaning against the wind policies, financial stability, inflation targeting, asset price booms
    JEL: E52 G12
    Date: 2013–10
  3. By: Antonio Scalia (Bank of Italy); Sergio Longoni (Bank of Italy); Tiziana Rosolin (Bank of Italy)
    Abstract: Based on a review of the analytical underpinnings of the effects of the NSFR on banks’ choices, this paper attempts to relate banks’ strategies to developments in the value of the ratio in the euro area. In spite of a not-so-near implementation date, the evidence is that the NSFR already matters for banks’ choices, and it might be more relevant as a decision variable than alternative leverage indicators. As part of a convergence process towards the 100 per cent threshold, we estimate that the ECB’s 3-year LTROs have raised the available stable funding by €429 billion as of June 2012 for the sample banks with a shortfall and that the NSFR may affect loans to the economy. In view of the phasing-in of the Basel III liquidity standards, the evidence suggests that, when evaluating non-standard monetary policy measures, central banks should also take into account their impact on the fulfilment of the NSFR and the possible cliff effects related to their expiration.
    Keywords: Basel III, liquidity regulation, central bank operations
    JEL: E5 G2
    Date: 2013–09
  4. By: Jeremy Bulow (Standford University, USA); Paul Klemperer (Nuffield College, University of Oxford, UK)
    Abstract: Today’s regulatory rules, especially the easily-manipulated measures of regulatory capital, have led to costly bank failures. We design a robust regulatory system such that (i) bank losses are credibly borne by the private sector (ii) systemically important institutions cannot collapse suddenly; (iii) bank investment is counter-cyclical; and (iv) regulatory actions depend upon market signals (because the simplicity and clarity of such rules prevents gaming by firms, and forbearance by regulators, as well as because of the efficiency role of prices). One key innovation is “ERNs” (equity recourse notes--superficially similar to, but importantly distinct from, “cocos”) which gradually "bail in" equity when needed. Importantly, although our system uses market information, it does not rely on markets being “right”.
    Date: 2013–09–15
  5. By: Landier, Augustin; Sraer, David; Thesmar, David
    Abstract: We show empirically that banks' exposure to interest rate risk, or income gap, plays a crucial role in monetary policy transmission. In a first step, we show that banks typically retain a large exposure to interest rates that can be predicted with income gap. Secondly, we show that income gap also predicts the sensitivity of bank lending to interest rates. Quantitatively, a 100 basis point increase in the Fed funds rate leads a bank at the 75th percentile of the income gap distribution to increase lending by about 1.6 percentage points annually relative to a bank at the 25th percentile.
    Date: 2013–02
  6. By: Paul De Grauwe (LSE; CEPS); Yuemei Ji (University College London)
    Abstract: We analyze the similarities and the differences in the fragility of the European Monetary System (EMS) and the Eurozone. We test the hypothesis that in the EMS the fragility arose from the absence of a credible lender of last resort in the foreign exchange markets while in the Eurozone it was the absence of a lender of last resort in the long-term government bond markets that caused the fragility. We conclude that in the EMS the national central banks were weak and fragile, and the national governments were insulated from this weakness by the fact that they kept their own national currencies. In the Eurozone the roles were reversed. The national central banks that became part of the Eurosystem were strengthened.
    Keywords: government bond markets, interbank money market, interest rate spread, Eurozone, EMS, fragility
    JEL: E42 E52 E58 F33
    Date: 2013–10
  7. By: Juan José Echavarría; Luis Fernando Melo Velandia; Mauricio Villamizar
    Abstract: To date, there is still great controversy as to which exchange rate model should be used or which monetary channel should be considered, when measuring the effects of monetary policy. Since most of the literature relies on structural models to address identification problems, the validity of results largely turn on how accurate the assumptions are in describing the full extent of the economy. In this paper we compare the effect of different types of central bank interventions using an event study approach for the Colombian case during the period 2000-2012, without imposing restrictive parametric assumptions or without the need to adopt a structural model. We find that all types of interventions (international reserve accumulation options, volatility options and discretionary) have been successful according to the smoothing criterion. In particular, volatility options seemed to have the strongest effect. We find that results are robust when using different windows sizes and counterfactuals.
    Keywords: Central bank intervention, foreign exchange intervention mechanisms, event study. Classification JEL: E52, E58, F31.
    Date: 2013–10
  8. By: Giorgio Motta; Patrizio Tirelli
    Abstract: Following a seminal contribution by Bilbiie (2008), the Limited Asset Market Participation hypothesis has triggered a debate on DSGE models determinacy when the central bank implements a standard Taylor rule. We reconsider the issue here in the context of an exogenous money supply rule, documenting the role of nominal and real frictions in determining these results. A general conclusion is that frictions matter for stability insofar as they redistribute income between Ricardian and non-Ricardian households when shocks hit the economy. Finally, we extend the model to allow for the possibility that consumers who do not participate to the market for interest-bearing securities hold money. In this case endogenous monetary transfers between the two groups allow to smooth consumption differences and the model is determinate provided that the non-negativity constraint on individual money holdings is satisfied.
    Keywords: Rule of Thumb Consumers, DSGE, Determinacy, Limited Asset Market Participation, Money Targeting
    JEL: E52 E58
    Date: 2013–10
  9. By: José A Carrasco-Gallego; Margarita Rubio
    Abstract: The recent financial crisis has raised the discussion among policy makers and researchers on the need of macroprudential policies to avoid systemic risks in financial markets. However, these new measures need to be combined with the traditional ones, namely monetary policy. The aim of this paper is to study how the interaction of macroprudential and monetary policies affect the economy. We take as a baseline a dynamic stochastic general equilibrium (DSGE) model which features a housing market in order to evaluate the performance of a rule on the loan-to-value ratio (LTV) interacting with the traditional monetary policy conducted by central banks. We find that, introducing the macroprudential rule mitigates the effects of booms on the economy by restricting credit. From a normative perspective, results show that the combination of monetary policy and the macroprudential rule is unambiguously welfare enhancing, especially when monetary policy does not respond to output and house prices and only to inflation.
    Keywords: Macroprudential, monetary policy, collateral constraint, credit,loan-to-value
  10. By: Rüdiger, Sina
    Abstract: This paper studies the actions of the U.S. Federal Reserve Bank during the financial crisis from 2007-2012. Whereas the first two parts concentrate on asset bubble theory and the development of the housing bubble, the third part rates the performance of the Federal Reserve during the crisis. The chosen scoring model approach shows that the average performance of five specific measures taken by the Federal Reserve only ranks between fair and good. Comparing Stiglitz (2010) viewpoints with those of the Federal Reserve, this paper analyzes the federal funds rate, the bailout of AIG, the lending to Bear Stearns, the Term Auction Facility and the failure of Lehman Brothers. This paper argues that the resulting decisions were well intentioned but that the outcome was different from expectations because of missing regulations and restrictions. Furthermore, the structure of the Federal Reserve is examined and criticized. --
    Keywords: Federal Reserve,financial crisis,housing bubble,monetary policy
    JEL: E52 E58
    Date: 2013
  11. By: Narbel, Patrick A. (Dept. of Business and Management Science, Norwegian School of Economics)
    Abstract: The new Basel III regulations are likely to make long-term financing more expensive, which will affect the financing of capital-intensive renewable energy technologies, because they typically rely on long-term financing. In addition, the capital and liquidity requirements of Basel III are likely to limit the amount of capital available for renewable energy financing from banks in the future. Together, these are threats to renewable energy deployment because limited financing may prevent the financing of some projects and because more expensive loans are likely to make a number of projects uninteresting financially. A potential solution is proposed here, which requires financing capital-intensive energy projects, pooling these investments into a portfolio and selling down the portfolio in tranches to various types of investors. The benefit of this solution for banks is that it will allow them to maintain the financing of capital intensive renewable energy projects, while complying more easily with Basel III.
    Keywords: Renewable energy financing; Basel III; capital-intensive energy projects
    JEL: Q00 Q20 Q40
    Date: 2013–10–17
  12. By: Yi Wen
    Abstract: We use a general equilibrium finance model that features explicit government purchases of private debts to shed light on some of the principal working mechanisms of the Federal Reserve’s large-scale asset purchases (LSAP) and their macroeconomic effects. Our model predicts that unless private asset purchases are highly persistent and extremely large (on the order of more than 50% of annual GDP), money injections through LSAP cannot effectively boost aggregate output and employment even if inflation is fully anchored and the real interest rate significantly reduced. Our framework also sheds light on some long- standing financial puzzles and monetary policy questions facing central banks around the world, such as (i) the fight to liquidity under a credit crunch and debt crisis, (ii) the liquidity trap, (iii) the inverted yield curve, and (iv) the low inflation puzzle under quantitative easing.
    Keywords: Monetary policy ; Liquidity (Economics) ; Inflation (Finance)
    Date: 2013
  13. By: Marco Casiraghi (Bank of Italy); Eugenio Gaiotti (Bank of Italy); Lisa Rodano (Bank of Italy); Alessandro Secchi (Bank of Italy)
    Abstract: We assess the impact on the Italian economy of the main unconventional monetary policies adopted by the ECB in 2011-2012 (SMP, 3-year LTROs and OMTs) by following a two-step approach. We evaluate their effects on money market interest rates, government bond yields and credit availability and then map them onto macroeconomic implications using the Bank of Italy quarterly model of the Italian economy. We find that the SMP and the OMTs have been effective in counteracting increases in government bond yields and that the LTROs have had a beneficial impact on credit supply and money market conditions. From a macroeconomic perspective, we find that the unconventional policies have had a large positive effect on the Italian economy, mainly through the credit channel, with a cumulative impact on GDP growth of 2.7 percentage points over the period 2012-2013. To conclude, while the policies did not prevent the Italian economy from falling into recession, they did avoid a more intense credit crunch and a larger output fall than those actually observed.
    Keywords: monetary policy, unconventional monetary measures
    JEL: E52 E58 E44
    Date: 2013–09
  14. By: Dübel, Achim
    Abstract: This study presents an empirical analysis of capital and liability management in eight cases of bank restructurings and resolutions from eight different European countries. It can be read as a companion piece to an earlier study by the author covering the specific bank restructuring programs of Greece, Spain and Cyprus during 2012/13. The study portrays for each case the timelines between the initial credit event and the (last) restructuring. It proceeds to discuss the capital and liability management activity before restructuring and the restructuring itself, launches an attempt to calibrate the extent of creditor participation as well as expected loss by government, and engages in a counterfactual discussion of what could have been a least cost restructuring approach. Four of the eight cases are resolutions, i.e. the original bank is unwound (Anglo Irish Bank, Amagerbanken, Dexia, Laiki), while the four other banks have de-facto or de-jure become nationalized and are awaiting re-privatization after the restructuring (Deutsche Pfandbriefbank/Hypo Real Estate, Bankia, SNS Reaal, Alpha Bank). The case selection follows considerations of their model character for the European bank restructuring and resolution policy discussion while straddling both the U.S. (2007-2010) and the European (2010- ) legs of the financial crisis, which each saw very different policy responses. [...] --
    Date: 2013
  15. By: Koen van der Veer; Marco Hoeberichts
    Abstract: Do tightenings of bank lending standards permanently reduce bank lending? We construct a measure of a bank’s level of lending standards using micro-data from the sample of banks participating in the Eurosystem Bank Lending Survey in The Netherlands and show that this level measure affects business lending. The level effect is statistically robust and economically relevant; a one point tightening reduces a bank’s quarterly growth rate of business lending by about half a percentage point until bank lending standards are eased. This level effect of bank lending standards helps to explain low bank lending growth after a period of prolonged tightening as well as high bank lending growth in a period of prolonged easing. As such, the analysis provides another potential indicator for macroprudential policy.
    Keywords: bank lending standards; bank lending survey; bank lending; level effect; macroprudential policy
    JEL: E44 E51 G01 G21
    Date: 2013–10
  16. By: Landier, Augustin; Sraer, David; Thesmar, David
    Abstract: This paper documents a steady increase in the average correlation of house price growth across US states over the 1976-2006 period and shows that this phenomenon can be explained in large part by the geographic integration of the banking market over this period. We theoretically derive an appropriate measure of banking integration across state pairs and document that the cross section of state pair correlations is strongly related to this measure of nancial integration. We then use bilateral cross state banking deregulations to instrument banking integration of a state pair. Using our IV estimates, we nd that nancial integration of the US banking market explains about 25% of the rise of the average home price correlation over the period.
    Date: 2013–03

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