nep-cba New Economics Papers
on Central Banking
Issue of 2013‒11‒14
twenty-one papers chosen by
Maria Semenova
Higher School of Economics

  1. "Financial crisis, monetary policy reform and the monetary transmission mechanism in Turkey" By James L. Butkiewicz; Zeliha Ozdogan
  2. Does Inflation Targeting Matter ? An Experimental Investigation By Camille Cornand; Cheick Kader M’Baye
  3. Development of an explicit rule of monetary policy for the economy of Ukraine By Kozmenko, Serhiy; Savchenko, Taras
  4. Inflation Targeting and Financial Stability: A Perspective from the Developing World By Pierre-Richard Agénor; Luiz A. Pereira da Silva
  5. The global battle over central bank independence By James Bullard
  6. The Federal Reserve's framework for monetary policy - recent changes and new questions By William B. English; J. David López-Salido; Robert J. Tetlow
  7. Should full employment be a mandate for central banks? By Eric S. Rosengren
  8. Monetary policy and financial stability By Eric S. Rosengren
  9. Would it have paid to be in the eurozone? By Michal Brzoza-Brzezina; Krzysztof Makarski; Grzegorz Wesolowski
  10. Identifying Banking Crises Using Money Market Pressure: New Evidence For a Large Set of Countries By Zhongbo Jing; Jakob de Haan; Jan Jacobs; Haizhen Yang
  11. Monetary Policy and Bank Lending in China - Evidence from Loan-Level Data By Dong He; Honglin Wang
  12. Lessons from the financial crisis for unconventional monetary policy By John C. Williams
  13. Anatomy of international banking crises at the onset of the Great Recession By Stolbov, Mikhail
  14. The economic outlook and monetary policy: moving in the right direction By John C. Williams
  15. The economy and monetary policy in uncertain times By John C. Williams
  16. Modelling and measuring business risk and the resiliency of retail banks By Chaffai, Mohamed; Dietsch, Michel
  17. Are banks forward-looking in their loan loss provisioning? Evidence from the Senior Loan Officer Opinion Survey (SLOOS) By Lakshmi Balasubramanyan; James B Thomson; Saeed Zaman
  18. Inflation and Inflation Uncertainty: Evidence from Turkey, 1923–2012 By dogru, bulent
  19. Risk of financial runs: implications for financial stability By Eric S. Rosengren
  20. Credit Rating Agency Announcements and the Eurozone Sovereign Debt Crises By Christopher F. Baum; Margarita Karpava; Dorothea Schäfer; Andreas Stephan
  21. Does Banque de France control inflation and unemployment? By Ivan Kitov; Oleg Kitov

  1. By: James L. Butkiewicz (Department of Economics,University of Delaware); Zeliha Ozdogan (Research and Statistics,SBT ANALYSIS)
    Abstract: Turkey experienced a financial crisis in 2000-2001 that led to significant financial reforms. The reforms resulted in a switch to a floating exchange rate, granted greater central bank independence and pursuit of a more credible monetary policy. Investigation of the channels of monetary policy in both periods finds that monetary policy's output effects have been strengthened considerable by the reforms. In the pre-crisis period monetary policy was highly inflationary, while in the post-crisis period, monetary policy targets low inflation and has become a tool for output stabilization. These results support the importance of central bank independence and a credible policy.
    Keywords: Financial Crisis, monetary policy, monetary transmission, Turkey
    JEL: J16 J30 J31 J70 J71
    Date: 2013
  2. By: Camille Cornand (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France); Cheick Kader M’Baye (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France)
    Abstract: We use laboratory experiments with human subjects to test the relevance of different inflation targeting regimes. In particular and within the standard New Keynesian model, we evaluate to what extent communication of the inflation target is relevant to the success of inflation targeting. We find that if the central bank only cares about inflation stabilization, announcing the inflation target does not make a di-fference in terms of macroeconomic performances compared to a standard active monetary policy. However, if the central bank also cares about the stabilization of the economic activity, communicating the target helps to reduce the volatility of inflation, interest rate, and output gap although their average levels are not affected. This finding is consistent with those of the theoretical literature and provides a rationale for the adoption of a flexible inflation targeting regime.
    Keywords: Inflation targeting, inflation expectations, monetary policy, New Keynesian model, laboratory experiments
    JEL: D82 D83 E52 E58
    Date: 2013
  3. By: Kozmenko, Serhiy; Savchenko, Taras
    Abstract: The paper explains the expediency of developing an explicit rule of monetary policy for the economy of Ukraine. It studies the stages of its development, proving the expediency of formation of monetary rules for money aggregates, evaluates equilibrium values of the rule’s parameters based on the use of the modified Hodrick-Prescott filter, and determines the possible parameters of the monetary rule and their estimated coefficients by developing multivariate regression models.
    Keywords: monetary policy rule, central bank, monetary policy, the Hodrick-Prescott filter, inflation targeting.
    JEL: E50 E52 E58
    Date: 2013–03–01
  4. By: Pierre-Richard Agénor; Luiz A. Pereira da Silva
    Abstract: This paper discusses recent experiences with inflation targeting (IT), the challenges that it faces since the global financial crisis, and ways to address them. The discussion is conducted from the perspective of upper middle-income countries (MICs). As background for the analysis, the second part provides a review of financial systems in MICs (with a focus on the role of bank credit), the extent to which exposure to capital flows affect economic stability in these countries, and the link between excessive credit growth and financial crises. The third and fourth parts review the main features and evidence on the performance of IT regimes in MICs. The fifth part discusses a number of challenges that IT faces, including fiscal dominance, fear or floating, imperfect credibility, and with respect to an explicit financial stability objective assigned to monetary policy. The issue of complementarity between macroprudential regulation and monetary policy, in the context of an “integrated” IT (or IIT) regime, is taken up next. The nature of monetary policy rules in an IIT regime, and their practical implementation, is also discussed. Our analysis suggests that there are robust arguments to support the view that in an IIT regime monetary policy should react in a state contingent fashion to a credit gap measure – and possibly to the real exchange rate – to address the time-series dimension of systemic risk. However, monetary policy and macroprudential policy are largely complementary instruments. They must be calibrated jointly, in the context of macroeconomic models that account for the type of credit market imperfections observed in MICs and for the fact that macroprudential regimes may affect in substantial ways the monetary transmission mechanism.
    Date: 2013–09
  5. By: James Bullard
    Abstract: January 4, 2013. Presentation. "The Global Battle Over Central Bank Independence." NABE Panel Discussion: "Federal Reserve Independence in the Aftermath of the Financial Crisis: Should We Be Worried?" AEA/ASSA Annual Meeting, San Diego, California.
    Keywords: Banks and banking, Central ; Federal Reserve System - Independence ; Transparency
    Date: 2013
  6. By: William B. English; J. David López-Salido; Robert J. Tetlow
    Abstract: In recent years, the Federal Reserve has made substantial changes to its framework for monetary policymaking by providing greater clarity regarding its objectives, its intentions regarding the use of monetary policy--including nontraditional policy tools such as forward guidance and asset purchases--in the pursuit of those objectives, and its broader policy strategy. These changes reflected both a response to changes in economists' understanding of the most effective way to implement monetary policy and a response to specific challenges posed by the financial crisis and its aftermath, particularly the effective lower bound on nominal interest rates. We trace the recent evolution of the Federal Reserve's framework, and use a small-scale macro model and a simple static model to help illuminate the approaches taken with nontraditional monetary policy tools. A number of foreign central banks have made similar innovations in response to similar developments. On balance, the Federal Reserve has moved closer to "flexible inflation targeting," but the Federal Reserve's approach includes a balanced focus on two objectives and the use of a flexible horizon over which policy aims to foster those objectives. Going forward, further changes in central banks' frameworks may be needed to address issues raised by the financial crisis. For example, some have suggested that the sustained period at the effective lower bound points to the need for central banks to establish a different policy objective, such as a higher inflation target or a nominal income target. We use our small-scale model of the U.S. economy to examine the potential benefits and costs of such changes. We also discuss the broad issue of how central banks should integrate financial stability policy and monetary policy.
    Date: 2013
  7. By: Eric S. Rosengren
    Abstract: Remarks by Eric S. Rosengren, President and Chief Executive Officer, Federal Reserve Bank of Boston, at the Federal Reserve Bank of Boston's 57th economic conference, "Fulfilling the Full Employment Mandate - Monetary Policy and the Labor Market", Federal Reserve Bank of Boston, Boston, Massachusetts, April 12, 2013.
    Keywords: Employment (Economic theory) ; Monetary policy ; Banks and banking, Central
    Date: 2013
  8. By: Eric S. Rosengren
    Abstract: Remarks by Eric S. Rosengren, President and Chief Executive Officer, Federal Reserve Bank of Boston, to the Business and Industry Association of New Hampshire and the New Hampshire Bankers Association, Saint Anselm College, Manchester, New Hampshire, March 27, 2013.
    Keywords: Monetary policy ; Financial stability
    Date: 2013
  9. By: Michal Brzoza-Brzezina (National Bank of Poland, Warsaw School of Economics); Krzysztof Makarski (National Bank of Poland, Warsaw School of Economics); Grzegorz Wesolowski (National Bank of Poland, Warsaw School of Economics)
    Abstract: Giving up an independent monetary policy and a flexible exchange rate are the key sources of costs and benefits entailed to joining a monetary union. In this paper we analyze their ex post impact on the stability of the Polish economy during the recent financial crisis. To this end we construct a small open economy DSGE model and estimate it for Poland and the euro area. Then we run a counterfactual simulation, assuming Poland's euro area accession in 1q2007. The results are striking - volatilities of GDP and inflation increase substantially. In particular, had Poland adopted the euro, GDP growth would have oscillated between -6% and +9% (-9% to +11% under more extreme assumptions) instead of between 1% and 7%. We conclude that during the analyzed period independent monetary policy and, in particular, the flexible exchange rate played an important stabilizing role for the Polish economy.
    Keywords: optimum currency area, euro-area accession, emerging market
    JEL: E32 E58 E65
    Date: 2013–10–23
  10. By: Zhongbo Jing; Jakob de Haan; Jan Jacobs; Haizhen Yang
    Abstract: We construct a money market pressure index based on central bank reserves and the short-term nominal interest rate to identify banking crises, thereby extending the index proposed by Von Hagen and Ho (2007). We compare the crises identified by both indices with banking crises according to the benchmark of Laeven and Valencia (2010). Both indices identify more crises than these benchmarks. The crises identified by our index are more in line with the benchmark than the crises identified by the Von Hagen and Ho index, while our index also gives fewer false signals.
    Keywords: banking crises; money market pressure index
    JEL: C43 E44 G21
    Date: 2013–10
  11. By: Dong He (Hong Kong Monetary Authority and Hong Kong Institute for Monetary Research); Honglin Wang (Hong Kong Institute for Monetary Research)
    Abstract: We investigate how monetary policy in a mixed financial system such as that of China, which is characterized by a juxtaposition of quantity- and price-based policy instruments and the co-existence of regulated and market-determined interest rates, affects bank lending. Using a newly constructed loan-level dataset, we find that loan rates but not loan size are affected by both the regulated and the market-determined interest rates and that loan size is instead affected by an implicit quota that is imposed on aggregate bank lending through window guidance. We interpret this finding to be evidence of credit rationing.
    Keywords: Monetary Policy, Bank Lending, The People's Bank of China (PBC)
    JEL: E52 E58 G21 G34
    Date: 2013–10
  12. By: John C. Williams
    Abstract: Panel discussion at the NBER Conference, Boston, Massachusetts, October 18, 2013
    Keywords: Monetary policy
    Date: 2013
  13. By: Stolbov, Mikhail
    Abstract: The paper examines a wide range of potential predictors of 25 international banking crises that broke out in 2007–2011 on the basis of cross–sectional logit models and the BCT (binary classification tree) algorithm, a novel technique in assessing the causes of banking crises. The major determinants of the crises arise from excessive credit depth (measured as private credit to GDP ratio) and illiquidity of the banking sector (credits to deposits ratio). The implementation of explicit deposit insurance schemes is also a pro–crisis factor due to the moral hazard effect they tend to cause. On the contrary, higher values of remittance inflows to GDP decrease the susceptibility to banking crises. These findings are robust under both methodologies. Lower bank concentration, bigger values of cost to income ratios as well as a higher level of economic liberalization make countries more vulnerable to banking crises, as derived from the logit analysis.
    Keywords: banking crises, Great Recession, logit analysis, binary classification tree
    JEL: E44 G21
    Date: 2013–10–26
  14. By: John C. Williams
    Abstract: Presentation to the Portland Business Journal CFO of the Year Awards Luncheon, Portland, Oregon, May 16, 2013
    Keywords: Economic conditions ; Monetary policy
    Date: 2013
  15. By: John C. Williams
    Abstract: Presentation to the Semiconductor Materials and Equipment International (SEMI) 2013 Industry Strategy Symposium, Half Moon Bay, California, January 14, 2013
    Keywords: Economic conditions ; Monetary policy
    Date: 2013
  16. By: Chaffai, Mohamed; Dietsch, Michel
    Abstract: The recent banking crisis has revealed the existence of strong resiliency factors in the retail banking business model. On average, retail banks suffered less than other financial institutions from unexpected market changes. This paper proposes a new methodology to measure retail banks' business risk, which is defined as the risk of adverse and unexpected changes in banks' profits coming from sudden changes in the banks' activities. This methodology is based on the efficiency frontier methodology, and, more specifically, on the duality property between the directional distance function and the profitfunction. Using the distance function to compute banks' profitability, we take the distance to the frontier of best practices as a measure of profit inefficiency, ie of unexpected losses related to underperformance. In this approach, shifts in the efficiency frontier induced by adverse shocks to banks' volumes serve as a measure of business risk. This measure of profit volatility allows a measurement to be made of the impact of volume changes on banks' profits. This method is applied to a database containing halfyearly regulatory accounting reports over the 1993-2011 period for more than 90 French banks running a retail banking business model. Our results verify a low level of business risk in retail banking, thus confirming the resiliency of the retail banks' business model. --
    Keywords: Bank solvency,Retail Banking,Business Risk,Efficiency Analysis,Profit Frontier
    JEL: G21 D24
    Date: 2013
  17. By: Lakshmi Balasubramanyan; James B Thomson; Saeed Zaman
    Abstract: The purpose of this study is to empirically analyze if loan loss provisioning is forward-looking. Using a confidential dataset that directly helps us identify loan demand and loan supply at the bank level, we test if the banks’ provisioning behavior is different before and after the crisis. We find, for the entire sample of banks, loan loss provisioning is forward-looking and statistically significant in the post-crisis period. Our results show that the top quartiles of banks in our dataset exhibit a forward-looking approach to loan loss provisioning both in the pre- and post-crisis period. From a policy perspective, the top quartile of banks in our sample is engaged in forward-looking loan loss provisioning. From an accounting stance, this may be suggestive of the largest banks being more engaged in earnings management and income smoothing than the smallest banks in our sample. However, from the banking regulation perspective, implementing forwardlooking loan loss provisioning is economically intuitive and will help build a countercyclical buffer, thereby strengthening bank balance sheets.
    Keywords: Bank loans
    Date: 2013
  18. By: dogru, bulent
    Abstract: In this study, relationship between inflation and inflation uncertainty is analyzed using Granger causality tests with annual inflation series covering the time period 1923 to 2012 for Turkish Economy. Inflation uncertainty is measured by Exponential Generalized Autoregressive Conditional Heteroskedastic model. Econometric findings suggest that although in long run the Friedman's hypothesis that high inflation increases inflation uncertainty is strongly supported, in short run the Holland hypothesis proposing that the increase in the inflation uncertainty decreases inflation is also supported for Turkish Economy. We also make analysis for subsample periods selected due to the major policy changes in Turkish economic history. The causality between inflation and inflation uncertainty in these subsample periods is mixed and depends on time period analyzed.
    Keywords: Inflation Uncertainty, Conditional Variance, Granger Causality, Exponential Generalized Autoregressive Conditional Heteroskedastic Model
    JEL: C32 E31
    Date: 2013–06–14
  19. By: Eric S. Rosengren
    Abstract: Remarks by Eric S. Rosengren, President and Chief Executive Officer, Federal Reserve Bank of Boston, at “Building a Financial Structure for a More Stable and Equitable Economy,” the 22nd Annual Hyman P. Minsky Conference on the State of the U.S. and World Economies, The Levy Economics Institute of Bard College and the Ford Foundation, New York, New York, April 17, 2013.
    Keywords: Financial stability ; Global Financial Crisis, 2008-2009 ; Investment banking
    Date: 2013
  20. By: Christopher F. Baum (Boston College; DIW Berlin); Margarita Karpava (MediaCom London); Dorothea Schäfer (DIW Berlin; Jönköping International Business School); Andreas Stephan (Jönköping International Business School; DIW Berlin)
    Abstract: This paper studies the impact of credit rating agency (CRA) announcements on the value of the Euro and the yields of French, Italian, German and Spanish long-term sovereign bonds during the culmination of the Eurozone debt crisis in 2011-2012. The employed GARCH models show that CRA downgrade announcements negatively affected the value of the Euro currency and also increased its volatility. Downgrading increased the yields of French, Italian and Spanish bonds but lowered the German bond's yields, although Germany's rating status was never touched by CRA. There is no evidence for Granger causality from bond yields to rating announcements. We infer from these findings that CRA announcements significantly influenced crisis-time capital allocation in the Eurozone. Their downgradings caused investors to rebalance their portfolios across member countries, out of ailing states' debt into more stable borrowers' securities.
    Keywords: Credit Rating Agencies, Euro Crisis, Sovereign Debt, Euro Exchange Rate
    JEL: G24 G01 G12 G14 E42 E43 E44 F31 F42
    Date: 2013–11–01
  21. By: Ivan Kitov; Oleg Kitov
    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. 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 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. 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.
    Date: 2013–11

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