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on Central Banking |
| By: | Emmanuel Carré (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris XIII - Paris Nord - CNRS : UMR7234); Jézabel Couppey-Soubeyran (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne); Dominique Plihon (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris XIII - Paris Nord - CNRS : UMR7234); Marc Pourroy (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne) |
| Abstract: | This paper provides a snapshot of the current state of central banking doctrine in the aftermath of the crisis, using data from a questionnaire produced in 2011 and sent to central bankers (from 13 countries plus the euro zone) and economists (31) for a report by the French Council of Economic Analysis to the Prime Minister. The results of our analysis of the replies to the questionnaire are twofold. First, we show that the financial crisis has led to some amendments of pre-crisis central banking. We highlight that respondents to the questionnaire agree on the general principle of a 'broader' view of central banking extended to financial stability. Nevertheless, central bankers and economists diverge or give inconsistent answers about the details of implementation of this 'broader' view. Therefore, the devil is once again in the details. We point out that because of central bankers' conservatism, a return to the status quo cannot be excluded. |
| Keywords: | Central banking; macroprudential policy; financial stability |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00881344&r=cba |
| By: | Kurmas Akdogan |
| Abstract: | We explore the asymmetric behaviour of inflation around the target level for inflation-targeting emerging markets. The first rationale behind this asymmetry is the asymmetric policy response of the central bank around the target. Central banks could have a stronger bias towards overshooting rather than undershooting the inflation target. Consequently, the policy response would be stronger once the inflation jumps above the target, compared to a negative deviation. Second rationale is the asymmetric inflation persistence. We suggest that recently developed Asymmetric Exponential Smooth Transition Autoregressive (AESTAR) model provides a convenient framework to capture the asymmetric behaviour of inflation driven by these two effects. We further conduct an out-of-sample forecasting exercise and show that the predictive power of AESTAR model for inflation is high, especially at long-horizons. |
| Keywords: | Inflation, forecasting, nonlinear adjustment |
| JEL: | C32 E37 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1342&r=cba |
| By: | Pelin Ilbas (National Bank of Belgium, Research Department); Øistein Røisland (Norges Bank); Tommy Sveen (BI Norwegian Business School) |
| Abstract: | There are two main approaches to modelling monetary policy; simple instrument rules and optimal policy. We propose an alternative that combines the two by extending the loss function with a term penalizing deviations from a simple rule. We analyze the properties of the modified loss function by considering three different models for the US economy. The choice of the weight on the simple rule determines the trade-off between optimality and robustness. We show that placing some weight on a simple Taylor-type rule in the loss function, one can prevent disastrous outcomes if the model is not a correct representation of the underlying economy. |
| Keywords: | Model uncertainty, Optimal control, Simple rules |
| JEL: | E52 E58 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:201311-245&r=cba |
| By: | Marc Pourroy (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne) |
| Abstract: | Are emerging economies implementing inflation targeting (IT) with a perfectly flexible exchange-rate arrangement, as developed economies do, or have these countries developed their own IT framework? This paper offers a new method for assessing exchange-rate policies that combines the use of "indicator countries", providing an empirical definition of exchange-rate flexibility or rigidity, and clustering through Gaussian mixture estimates in order to identify countries' de facto regimes. By applying this method to 19 inflation-targeting emerging economies, I find that the probability of those countries having a perfectly flexible arrangement as developed economies do is 52%, while the probability of having a managed float system, obtained through foreign exchange market intervention, is 28%, and that of having a rigid exchange-rate system (similar to those of pegged currencies) is 20%. The results also provide evidence of two different monetary regimes under inflation targeting: flexible IT when the monetary authorities handle only one tool, the interest rate, prevailing in ten economies, and hybrid IT when the monetary authorities add foreign exchange interventions to their toolbox, prevailing in the remaining nine economies. |
| Keywords: | Inflation-targeting; foreign exchange interventions; Gaussian mixture model |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00881359&r=cba |
| By: | Joseph E. Gagnon (Peterson Institute for International Economics) |
| Abstract: | Inflation targeting countries with flexible exchange rates performed better during the global financial crisis and its aftermath than countries with a fixed exchange rate. Countries that maintained a hard fixed exchange rate throughout the past six years performed somewhat better than those that abandoned it. But, abandoning a hard fix during a crisis is itself evidence of the economic costs of fixed rates. It is particularly telling that no inflation targeting country with a flexible exchange rate abandoned its regime during the crisis. Policymakers in many countries are averse to volatile exchange rates—they have a "fear of floating." Gagnon's results strongly suggest that flexible exchange rates enable countries to weather crises better than fixed rates and that the benefits of flexible rates are not limited to large countries. Policymakers should replace their fear of floating with a fear of fixing. |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:iie:pbrief:pb13-28&r=cba |
| By: | Coenen, Günter; Warne, Anders |
| Abstract: | This paper employs stochastic simulations of the New Area-Wide Model - microfounded open-economy model developed at the ECB - to investigate the consequences of the zero lower bound on nominal interest rates for the evolution of risks to price stability in the euro area during the recent financial crisis. Using a formal measure of the balance of risks, which is derived from policy-makers' preferences about inflation outcomes, we first show that downside risks to price stability were considerably greater than upside risks during the first half of 2009, followed by a gradual rebalancing of these risks until mid-2011 and a renewed deterioration thereafter. We find that the lower bound has induced a noticeable downward bias in the risk balance throughout our evaluation period because of the implied amplification of deflation risks. We then illustrate that, with nominal interest rates close to zero, forward guidance in the form of a time-based conditional commitment to keep interest rates low for longer can be successful in mitigating downside risks to price stability. However, we find that the provision of time-based forward guidance may give rise to upside risks over the medium term if extended too far into the future. By contrast, time-based forward guidance complemented with a threshold condition concerning tolerable future inflation can provide insurance against the materialisation of such upside risks. -- |
| Keywords: | monetary policy,deflation,zero lower bound,forward guidance,DSGE modelling,euro area |
| JEL: | E31 E37 E52 E58 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:201306&r=cba |
| By: | Grammatikos, Theoharry; Papanikolaou, Nikolaos I. |
| Abstract: | It is a common place that during financial crises, like the one started in 2007, authorities provide substantial financial support to some problem banks, whilst at the same time let several others to go bankrupt. Is this happening because some particular banks are considered important and big enough to save, whereas some others are perceived as being ‘Too-Small-To-Survive’? Is the size of banks the fundamental factor that makes authorities to treat them differently, or it is also that some banks perform poorly and are not capable of withstanding some considerable shocks whatsoever? Our study provides concrete answers to these questions thus filling part of the void in the existing literature. A short- and a long-run positive relationship between size and performance is documented regardless of the level of bank soundness (healthy vs. failed and assisted banks) under scrutiny. Importantly, we pose and lend support to the ‘Too-Small-To-Survive’ hypothesis according to which the impact of bank performance on failure probability strongly depends on size. Evidence shows that authorities tend not to save banks whose size is below some specific threshold. |
| Keywords: | CAMEL ratings; financial crisis; bank size; ‘Too-Small-To-Survive’ banks |
| JEL: | C23 D02 G01 G21 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:51431&r=cba |
| By: | Peter Conti-Brown (Stanford Law School's Rock Center for Corporate Governance); Simon Johnson (Peterson Institute for International Economics) |
| Abstract: | The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act increased the powers of the Board of Governors of the Federal Reserve System along almost all dimensions pertaining to the supervision and operation of systemically important financial institutions. The authors argue that in light of these changes, the process of considering and choosing governors should also be changed. In nominating and confirming new governors, the president and Congress should make greater efforts to appoint only highly qualified people familiar with both regulatory and monetary matters. They should ensure that governors can work effectively with staff and engage on an equal basis with the chair. This is a pressing matter given that within the next 12 months there may be as many as four appointments to the Board, reflecting an unusually high degree of turnover at a critical moment for the development of regulatory policy, including rules on equity capital funding for banks, the ratio of debt-to-equity (leverage) they are permitted, the funding structure of bank holding companies, and whether and how much banks should be allowed to engage in commodity-related activities. |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:iie:pbrief:pb13-25&r=cba |
| By: | Angel Ubide (Peterson Institute for International Economics) |
| Abstract: | The evolving plan for a European banking union falls short of the ideal of an "ever closer union." In fact, the plan's focus on national resolution authorities and funds for insolvent financial institutions, a minimal euro area financing backstop, and costs imposed on creditors of failed banks, could lead to a looser, weaker, and more fragmented banking system. Some aspects of the plan of European leaders will improve the system's soundness, but other aspects could dampen lending in the near term and reduce economic growth. Ubide urges policymakers to focus on making the banking union stronger and more coherent. Troubled banks supervised by the European Central Bank should be covered by a European resolution authority and a European resolution fund to oversee bankruptcy, restructuring, and other reforms. To produce a more united, solid, and stable euro area, the European plan has to lower national barriers to banking, not raise them. |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:iie:pbrief:pb13-23&r=cba |
| By: | Silva Buston, C.F. (Tilburg University) |
| Abstract: | Abstract: Through the creation of the Financial Stability Board (FSB), G20 members have committed to regulate the financial sector across the globe in order to enhance the resilience of the system. Two important points in this agenda are the regulation of OTC derivatives, such as Credit Default Swaps (CDS) and the regulation of Systemically Important Financial Institutions (SIFIs). The first two chapters of this thesis relate to the first point. These papers study the effects of the use of CDS at banks on banks' behavior and stability. The last chapter of the thesis addresses the second point. This chapter discusses the proper assessment of systemic risk, and the characteristics and performance of systemically important banks based on this assessment. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:ner:tilbur:urn:nbn:nl:ui:12-5928388&r=cba |
| By: | Nicholas Dimsdale |
| Abstract: | The paper examines the behavior of the British economy 1890-1913 by using a newly assembled quarterly data set.� This provides a basis for estimating a small macroeconomic model, which can be used to explore the relationship between the policy responses of the Bank of England and the course of the economy.� It is one of the few papers to make use of UK quarterly data and seeks to extend the earlier work of Goodhart (1972).� The paper goes on to look into the determinants of external and internal gold flows and relates these to an extensive historical literature.� The outcome is compared with the traditional representation of the working of the gold standard, as set out in the well-known Interim Report of the Cunliffe Committee (1918).� It is found that operation of the model accords in general with the views of the Committee.� The views of the Committee were applicable to the pre 1914 gold standard, but less so to the restored interwar gold standard. The next question to be considered is how far the Bank observed 'The Rules of the Game' in the sense of relating the reserves of the commercial banks to the gold reserves held at the Bank.� It is shown that the relationship between the Bank's reserves and the reserves of the commercial banks was severely distorted by the massive gold movements of 1895-6.� These flows were associated with US political conflicts over the monetization of silver.� With the exception of this episode, the Bank is shown to have had a limited measure of discretion in operating the gold standard.� The final question to be considered is whether a similar model can be estimated from US data and related to the views of Friedman and Schwartz. |
| Date: | 2013–10–24 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:number-123&r=cba |
| By: | Abhijnan Rej |
| Abstract: | We survey systemic risks to financial markets and present a high-level description of an algorithm that measures systemic risk in terms of coupled networks. |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1311.3764&r=cba |
| By: | Tierney, Heather L.R. |
| Abstract: | The purpose of this paper is to examine the forecasting ability of sixty-two vintages of revised real-time PCE and core PCE using nonparametric methodologies. The combined fields of real-time data and nonparametric forecasting have not been previously explored with rigor, which this paper remedies. The contributions of this paper are on the three fronts of (i.) analysis of real-time data; (ii.) the additional benefits of using nonparametric econometrics to examine real-time data; and (iii.) nonparametric forecasting with real-time data. Regarding the analysis of real-time data revisions, this paper finds that the third quarter releases of real-time data have the largest number of data revisions. Secondly, nonparametric regressions are beneficial in utilizing the information provided by data revisions, which typically are just a few tenths in magnitude but are significant enough to statistically affect regression results. The deviations in window widths can be useful in identifying potential problematic time periods such as a large spike in oil prices. The third and final front of this paper regards nonparametric forecasting and the best performing real-time data release with the three local nonparametric forecasting methods outperforming the parametric benchmark forecasts. Lastly, this paper shows that the best performing quarterly-release of real-time data is dependent on the benchmark revision periods. For vintages 1996:Q1 to 2003:Q3, the second quarter real-time data releases produce the smaller RMSE 58% of the time and for vintages 2003:Q4 to 2011:Q2, the third quarter real-time data releases produce forecasts with smaller RMSE approximately 60% of the time. |
| Keywords: | Nonparametric Forecasting, Real-Time Data, Monetary Policy, Inflation Persistence |
| JEL: | C14 C53 E52 |
| Date: | 2013–11–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:51398&r=cba |