nep-cba New Economics Papers
on Central Banking
Issue of 2013‒11‒29
35 papers chosen by
Maria Semenova
Higher School of Economics

  1. Central Bank Communications Before, During and After the Crisis: From Open-Market Operations to Open-Mouth Policy By Ianthi Vayid
  2. Monetary policy and stock market volatility By Bleich, Dirk; Fendel, Ralf; Rülke, Jan-Christoph
  3. Making Monetary Policy More Effective: The Case of the Democratic Republic of the Congo By Felix Fischer; Charlotte J. Lundgren; Samir Jahjah
  4. Liquidity, Quantitative Easing and Optimal Monetary Policy By Engin Kara; Jasmin Sin
  5. The International Monetary System: Where Are We and Where Do We Need to Go? By Rakesh Mohan; Michael Debabrata Patra; Muneesh Kapur
  6. Excess Reserves, Monetary Policy and Financial Volatility By Primus, Keyra
  7. Monetary Union and Macroeconomic Stabilization By Dominik Groll
  8. Bailouts and Systemic Insurance By Giovanni Dell'Ariccia; Lev Ratnovski
  9. Central banks need a new plan for 2014 By John H. Makin
  10. Identifying and tracking global, EU and Eurozone systemically important banks with public data By Sergio Masciantonio
  11. Evolution of Monetary Policy Transmission Mechanism in Malawi: A TVP-VAR with Stochastic Volatility Approach By Chance Mwabutwa, Manoel Bittencourt and Nicola Viegi
  12. Procyclicality and Bank Portfolio Risk Level under a Constant Leverage Ratio By Olivier Bruno; Alexandra Girod
  13. Central Bank Independence and the Price-Output-Variability Trade-off By Landström, Mats
  14. Nominal GDP Targeting and the Monetary Policy Framework By Shakill Hassan and Chris Loewald
  15. Thinking ahead of the next big Crash By Bitros, George C.
  16. Rules of Thumb for Bank Solvency Stress Testing By Daniel C. Hardy; Christian Schmieder
  17. The Impact of the Regulation of Centrally Cleared Credit Risk Transfer and Capital Requirements on Banks’ Lending Discipline By Arnold, Marc
  18. On the Impact of the Global Financial Crisis on the Euro Area By He, Xiaoli; Jacobs, Jan P.A.M.; Kuper, Gerard H.; Ligthart, Jenny E.
  19. Modeling Banking, Sovereign, and Macro Risk in a CCA Global VAR By Dale F. Gray
  20. The Curious Case of the Yen as a Safe Haven Currency: A Forensic Analysis By Dennis P. J. Botman; Irineu E. Carvalho Filho; Raphael W. Lam
  21. Measuring and Testing Complementarity and Co-evolution in Financial Systems By Adeline Saillard; Thomas Url
  22. Sovereign Risk and Belief-Driven Fluctuations in the Euro Area By Giancarlo Corsetti; Keith Kuester; André Meier; Gernot J. Mueller
  23. Sovereign Default and State-Contingent Debt By Martin Brooke; Rhys R. Mendes; Alex Pienkowski; Eric Santor
  24. Are Capital Controls Prudential? An Empirical Investigation By Andrés Fernández; Alessandro Rebucci; Martín Uribe
  25. Repo Market – A Tool to Manage Liquidity in Financial Institutions By Nath, Golaka
  26. Currency Union with and without Banking Union By Bignon, Vincent; Breton, Régis; Rojas Breu, Mariana
  27. Proposal for a Stabilisation Fund for the EMU By Delbecque, Bernard
  28. Switching Costs, Deposit Insurance and Deposit Withdrawals from Distressed Banks By Brown, Martin; Guin, Benjamin; Morkoetter, Stefan
  29. Subprime and euro crisis: Should we blame the economists? By Spahn, Peter
  30. How Did the Global Financial Crisis Misalign East Asian Currencies? By OGAWA Eiji; Zhiqian WANG
  31. Forecasting the NOK/USD Exchange Rate with Machine Learning Techniques By Theophilos Papadimitriou; Periklis Gogas; Vasilios Plakandaras
  32. Shipping Market Financing: Special Features and the Impact of Basel III By Sambracos, Evangelos; Maniati, Marina
  33. Global and regional financial safety nets: lessons from Europe and Asia By Changyong Rhee; Lea Sumulong; Shahin Vallée
  34. What happens when the Kiwi flies? The sectoral effects of the exchange rate shocks By Ozer Karagedikli; Michael Ryan; Daan Steenkamp; Tugrul Vehbi
  35. Bank competition and financial (in)stability in Europe: A sensitivity analysis By Samantas, Ioannis

  1. By: Ianthi Vayid
    Abstract: The days when secrecy and opacity were the bywords of central banking are gone. The advent of inflation targeting in the early 1990s acted as the catalyst for enhanced transparency and communications in the conduct of monetary policy. In the wake of the 2007-09 global financial crisis, this trend accelerated, resulting in further striking advances in monetary policy and financial stability communications, including markedly the emergence of extraordinary forward guidance as a distinct policy tool under unconventional monetary policies. Drawing on the record to-date at major central banks, as well as on a growing body of related academic literature, this paper reviews the history and effectiveness of central bank communications before and especially since the crisis. It also highlights some of the challenges facing central banks, particularly those that have engaged heavily in unconventional monetary policies to support their economies since the crisis. Steering deftly a course back to normality will depend crucially on their ability to communicate effectively a credible strategy for an orderly exit from such policies. In this context, clear, deliberate, coordinated messages that are anchored in their mandate are of the essence.
    Keywords: Central bank research; Credibility; Financial stability; Inflation targets; Monetary policy framework; Monetary policy implementation
    JEL: E52 E58
    Date: 2013
  2. By: Bleich, Dirk; Fendel, Ralf; Rülke, Jan-Christoph
    Abstract: We estimate forward-looking interest rate reaction functions in the spirit of Taylor (1993) for four major central banks augmented by implicit volatilities of stock market indices to proxy financial market stress. Our results suggest that the Bank of England, the Federal Reserve Bank and the European Central Bank systematically respond to an increase of the implicit volatility by a decrease in the interest rate. We take our results as strong evidence that central banks use interest rates to stabilize financial markets in periods of financial market stress. --
    Keywords: Monetary policy,Taylor rule,Asset prices
    JEL: E43 E58 G12
    Date: 2013
  3. By: Felix Fischer; Charlotte J. Lundgren; Samir Jahjah
    Abstract: The paper looks at the challenges of conducting monetary policy in a context of high dollarization of the banking system and weak institutions in the Democratic Republic of the Congo. The empirical analysis confirms the limited effectiveness of the Central Bank of Congo in controlling inflation, despite a rapid policy response to inflation shocks. Options available to enhance the effectiveness of monetary policy are limited. After exploring the pros and cons of different exchange regimes we conclude that strengthening the current monetary policy framework remains the first-best option, given the country’s exposure to frequent terms-of-trade shocks.
    Keywords: Monetary policy;Republic of Congo;Central bank autonomy;Dollarization;Exchange rate regimes;dollarization, monetary policy, inflation, exchange rate regime, dedollarization, financial deepening.
    Date: 2013–11–05
  4. By: Engin Kara; Jasmin Sin
    Abstract: We investigate optimal monetary policy design using a New Keynesian model that accommodates liquidity frictions. In this model, unlike the standard New Keynesian model, the central bank faces a trade-off between inflation and output stabilisation. Optimal policy requires a temporary deviation from price stability in response to a negative shock to the liquidity of private financial assets. We find that quantitative easing improves the trade-off between inflation and output by improving liquidity conditions in the economy.
    Keywords: DSGE Models, Optimal Monetary Policy, liquidity, quantitative easing
    JEL: E44 E52 E58
    Date: 2013–09
  5. By: Rakesh Mohan; Michael Debabrata Patra; Muneesh Kapur
    Abstract: The North Atlantic financial crisis of 2008-2009 has spurred renewed interest in reforming the international monetary system, which has been malfunctioning in many aspects. Large and volatile capital flows have promoted greater volatility in financial markets, leading to recurrent financial crises. The renewed focus on the broader role of the central banks, away from narrow price stability monetary policy frameworks, is necessary to ensure domestic macroeconomic and financial stability. Since international monetary cooperation might be difficult, though desirable, central banks in major advanced economies, going forward, need to internalize the implications of their monetary policies for the rest of the global economy to reduce the incidence of financial crises.
    Keywords: International monetary system;Monetary policy;Capital flows;Reserves accumulation;Surveillance;Central bank role;Developed countries;Emerging markets;Developing countries;Financial stability;Capital flows, central banks, currency internationalization, international monetary system, financial stability
    Date: 2013–11–05
  6. By: Primus, Keyra
    Abstract: This paper examines the financial and real effects of excess reserves in a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model with monopoly banking, credit market imperfections and a cost channel. The model explicitly accounts for the fact that banks hold excess reserves and they incur costs in holding these assets. Simulations of a shock to required reserves show that although raising reserve require- ments is successful in sterilizing excess reserves, it creates a procyclical e¤ect for real economic activity. This result implies that financial stability may come at a cost of macroeconomic stability. The findings also indicate that using an augmented Taylor rule in which the policy interest rate is adjusted in response to changes in excess re- serves reduces volatility in output and inflation but increases fluctuations in financial variables. To the contrary, using a countercyclical reserve requirement rule helps to mitigate fluctuations in excess reserves, but increases volatility in real variables.
    Keywords: Excess Reserves, Reserve Requirements, Countercyclical Rule
    JEL: E4 E5 E52 E58
    Date: 2013–10
  7. By: Dominik Groll
    Abstract: It is conventionally held that countries are worse off by forming a monetary union when it comes to macroeconomic stabilization. However, this conventional view relies on assuming that monetary policy is conducted optimally. Relaxing the assumption of optimal monetary policy not only uncovers that countries do benefit from forming a monetary union under fairly general conditions. More importantly, it also reveals that a monetary union entails the inherent benefit of stabilizing private-sector expectations about future inflation. As a result, inflation rates are more stable in a monetary union
    Keywords: Monetary union, macroeconomic stabilization, welfare analysis, history dependence, inflation expectations
    JEL: F33 F41 E52
    Date: 2013–11
  8. By: Giovanni Dell'Ariccia; Lev Ratnovski
    Abstract: We revisit the link between bailouts and bank risk taking. The expectation of government support to failing banks creates moral hazard—increases bank risk taking. However, when a bank’s success depends on both its effort and the overall stability of the banking system, a government’s commitment to shield banks from contagion may increase their incentives to invest prudently and so reduce bank risk taking. This systemic insurance effect will be relatively more important when bailout rents are low and the risk of contagion (upon a bank failure) is high. The optimal policy may then be not to try to avoid bailouts, but to make them “effectiveâ€: associated with lower rents.
    Keywords: Banking crisis;Financial intermediation;Moral hazard;Banking systems;Risk management;Economic models;Bailouts, banking crises, moral hazard, systemic risk, contagion, bank resolution
    Date: 2013–11–12
  9. By: John H. Makin (American Enterprise Institute)
    Abstract: Many major world economies are at risk of slipping from a period of falling inflation (disinflation) into outright negative inflation (deflation), and the eurozone is leading the trend. The European Central Bank and Fed in particular must strive to avoid this outcome by striking a balance between continuing quantitative easing and tightening monetary policy.
    Keywords: the Fed,quantitative easing,eurozone,European Central Bank,Economic outlook,deflation
    JEL: A E
    Date: 2013–11
  10. By: Sergio Masciantonio (Bank of Italy)
    Abstract: This paper develops a methodology for identifying systemically important financial institutions based on that developed by the Basel Committee on Banking Supervision (2011) and used by the Financial Stability Board in its yearly G-SIBs identification. The methodology uses publicly available data to provide fully transparent results with a G-SIBs list that helps to bridge the gap between market knowledge and supervisory decisions. Moreover, the results include a complete ranking of the banks in the sample, according to their systemic importance scores. The methodology is then applied to EU and Eurozone samples of banks to obtain their systemic importance ranking and SIFI lists. This is one of the first methodologies capable of identifying systemically relevant banks at the European level. A statistical analysis and some geographical and historical evidence provide further insight into the notion of systemic importance, its policy implications and the future applications of this methodology.
    Keywords: banks, balance sheets, systemic risk, SIFIs, financial stability, regulation
    JEL: G01 G10 G18 G20 G21 G28
    Date: 2013–10
  11. By: Chance Mwabutwa, Manoel Bittencourt and Nicola Viegi
    Abstract: This paper investigates the evolution of monetary transmission mechanism in Malawi between 1981 and 2010 using a time varying parameter vector autoregressive (TVP-VAR) model with stochastic volatility. We evaluate how the responses of real output and general price level to bank rate, exchange rate and credit shocks have changed over time since Malawi adopted financial reforms in 1980s. The paper finds that inflation, real output and exchange rate responses to monetary policy shocks changed over the period under review. Importantly, beginning mid-2000, the monetary policy transmission performed consistently with predictions of economic theory and there is no evidence of a price puzzle as found in the previous literature on Malawi. However, the statistical significance of the private credit supply remains weak and this calls for more financial reforms targeting the credit market which can contribute to monetary transmission and promote further economic growth in Malawi.
    Keywords: Transmission Mechanism, price puzzle, Financial Reforms, Bayesian TVP-VAR
    JEL: C49 D12 D91 E21 E44
    Date: 2013
  12. By: Olivier Bruno (GREDEG CNRS; University of Nice Sophia Antipolis, France); Alexandra Girod (GREDEG CNRS)
    Abstract: We investigate the impact the risk sensitive regulatory ratio may have on banks' risk taking behaviours during the business cycle. We show that the risk sensitivity of capital requirements introduce by Basel II adds either an "equity surplus" or an "equity deficit" on a bank that owns a fixed capital endowment and a constant leverage ratio. Depending on the magnitude of cyclical variations into requirements, the "surplus" may be exploited by the bank to increase its value toward the selection of a riskier asset or the "deficit" may restrict the bank to opt for a less risky asset. Whether the optimal asset risk level swings among classes of risk through the cycle, the risk level of bank's portfolio may increase during economic upturns, or decrease in downturns, leading to a rise in financial fragility or a "fly to quality" phenomenon.
    Keywords: Bank capital, Basel capital accord, risk incentive
    JEL: G11 G28
    Date: 2013–10
  13. By: Landström, Mats (School of Technology and Business Studies)
    Abstract: Data on central bank independence (CBI) and implementation dates of CBI-reforms were used to investigate the relationship between CBI and a possible trade-off between inflation variability and output variability. No such trade-off was found, but there might still be stabilization gains from CBI-reform.
    Keywords: price stability; output stability; monetary policy; Taylor curve; inflation
    JEL: E52 E58
    Date: 2013–11–19
  14. By: Shakill Hassan and Chris Loewald
    Abstract: A nominal income target may provide credibility to a commitment to keep real interest rates exceptionally low, until a target output level is reached -–even if expected inflation rises in the interim–- in economies where nominal interest rates are effectively at the zero lower bound, which is not the South African case. There are practical difficulties with adopting nominal income targeting as the monetary policy framework. These include issues on the choice of a target level, risk of unanchored in‡ation expectations, and increased likelihood of error due to data uncertainty and revisions. Responsiveness to output growth and supply shocks -–two important attractions of nominal income targeting - can be largely accommodated within flexible inflation targeting. Neither regime will automatically resolve the challenges posed to monetary policy by volatile capital flows and exchange rates, and asset price bubbles. The case for abandoning flexible in‡ation targeting, to adopt nominal income targeting, in South Africa and other emerging economies, is not compelling.
    Keywords: Monetary policy, nominal income targeting, Inflation targeting, Growth
    JEL: E52 E58
    Date: 2013
  15. By: Bitros, George C.
    Abstract: The real estate bubble which burst in 2008 in the USA was not exclusively the result of “animal spirits”, “crowed madness” or “irrational exuberance”. It resulted primarily because of the specific policies that the government, the Federal Reserve Board, and the regulators pursued. Actually, on account of these policies, the surprise is not what happened. The surprise would have been if it had not happened. The reason for this assessment is that such central bank notions as “commitment” and “credibility” are pious pronouncements that do not amount to much when the push by organised interest groups comes to shove by politicians. In the face of this development, the urgent question is how to forestall the Federal Reserve Board from creating or coalescing to the creation of the next asset bubble, the crash of which may bring down the international monetary system. According to this paper, the solutions range from introducing an extended list of far-reaching institutional reforms to the monetary system in place, to upgrading the constitutional status of the Federal Reserve Board by transforming it into a fourth power of government, much like the judicial, to replacing it by a market based system of money provision and circulation. Which of these solutions is appropriate depends crucially on whether the Federal Reserve Board has control or not of either the money supply or the policy interest rate. But what is utterly inappropriate is not to do anything and wait until the next big crash.
    Keywords: Asset bubbles, monetary policy, monetary rules, central bank credibility, central bank constitutional status, free money
    JEL: E4 E42 E52 E58
    Date: 2013–11–15
  16. By: Daniel C. Hardy; Christian Schmieder
    Abstract: Rules of thumb can be useful in undertaking quick, robust, and readily interpretable bank stress tests. Such rules of thumb are proposed for the behavior of banks’ capital ratios and key drivers thereof—primarily credit losses, income, credit growth, and risk weights—in advanced and emerging economies, under more or less severe stress conditions. The proposed rules imply disproportionate responses to large shocks, and can be used to quantify the cyclical behaviour of capital ratios under various regulatory approaches.
    Keywords: Banks;Banking crisis;Stress testing;Economic models;Stress testing, rules of thumb, bank stability, bank capitalization
    Date: 2013–11–11
  17. By: Arnold, Marc
    Abstract: This article analyzes the impact of the regulatory design of centrally cleared credit risk transfer and capital requirements on a loan originating bank's lending discipline in the primary loan market. Under Basel III, a bank can transfer credit risk via central clearing at favorable regulatory conditions. Credit risk transfer, however, reduces the lending discipline because it allows the bank to profitably grant and hedge a low quality loan. Stricter capital requirements only mitigate this problem if they are combined with a credit risk retention rule for the loan originator. It is shown how the retention rule, the disclosure requirements on the centrally cleared credit risk transfer market, and the capital requirements for hedged and unhedged loan exposures jointly affect a bank's lending discipline.
    JEL: G18 G28
    Date: 2013–05
  18. By: He, Xiaoli (University of Groningen); Jacobs, Jan P.A.M. (School of Economics and Finance, University of Tasmania); Kuper, Gerard H. (University of Groningen); Ligthart, Jenny E. (Tilburg University)
    Abstract: This paper analyses the impact of the Global Financial Crisis on the Euro area utilizing a simple dynamic macroeconomic model with interaction between monetary policy and fiscal policy. The model consists of an IS curve, a Phillips curve, a term structure relation, a debt accumulation equation and a Taylor monetary policy rule supplemented with a Zero Lower Bound, and a fiscal policy rule. The model is calibrated/estimated for EU-16 countries for the period 1980Q1{2009Q4. The impact of the Global Financial Crisis is studied by means of impulse responses following a combined, prolonged aggregate demand and public debt shock. The simulation mimicking the GFC turns out to work fairly well. However, the required size of the shock is quite large.
    Keywords: Global Financial Crisis; euro area; monetary policy; fiscal policy; New Neoclassical Synthesis model; Zero Lower Bound
    JEL: C51 C52 E63
    Date: 2013–10–16
  19. By: Dale F. Gray
    Abstract: The purpose of this paper is to develop a model framework for the analysis of interactions between banking sector risk, sovereign risk, corporate sector risk, real economic activity, and credit growth for 15 European countries and the United States. It is an integrated macroeconomic systemic risk model framework that draws on the advantages of forward-looking contingent claims analysis (CCA) risk indicators for the banking systems in each country, forward-looking CCA risk indicators for sovereigns, and a GVAR model to combine the banking, the sovereign, and the macro sphere. The CCA indicators capture the nonlinearity of changes in bank assets, equity capital, credit spreads, and default probabilities. They capture the expected losses, spreads and default probability for sovereigns. Key to the framework is that sovereign credit spreads, banking system credit risk, corporate sector credit risk, economic growth, and credit variables are combined in a fully endogenous setting. Upon estimation and calibration of the global model, we simulate various negative and positive shock scenarios, particularly to bank and sovereign risk. The goal is to use this framework to analyze the impact and spillover of shocks and to help identify policies that would mitigate banking system, sovereign credit risk and recession risk—policies including bank capital increases, purchase of sovereign debt, and guarantees.
    Keywords: Banking sector;Credit expansion;Sovereign debt;Credit risk;Cross country analysis;Economic models;contingent claims analysis (CCA), global vector autoregression (GVAR).
    Date: 2013–10–23
  20. By: Dennis P. J. Botman; Irineu E. Carvalho Filho; Raphael W. Lam
    Abstract: During risk-off episodes, the yen is a safe haven currency and on average appreciates against the U.S. dollar. We investigate the proximate causes of yen risk-off appreciations. We find that neither capital inflows nor expectations of the future monetary policy stance can explain the yen’s safe haven behavior. In contrast, we find evidence that changes in market participants’ risk perceptions trigger derivatives trading, which in turn lead to changes in the spot exchange rate without capital flows. Specifically, we find that risk-off episodes coincide with forward hedging and reduced net short positions or a buildup of net long positions in yen. These empirical findings suggest that offshore and complex financial transactions should be part of spillover analyses and that the effectiveness of capital flow management measures or monetary policy coordination to address excessive exchange rate volatility might be limited in certain cases.
    Keywords: Currencies;Japan;Exchange rate appreciation;Capital flows;Monetary policy;Risk management;Safe Haven, Yen Volatility, Capital Flows, Derivatives
    Date: 2013–11–06
  21. By: Adeline Saillard; Thomas Url (WIFO)
    Abstract: The distinction between bank- and market-based economies has a long tradition in applied macroeconomics. The two types of financial architecture differ not only with respect to the amount of funds channelled through private banking versus the capital market but with respect to several other characteristics, suggesting a competitive rather than a complementary relation between bank- and market-based institutions. Following the idea of Song and Thakor (2010) we test for the hypothesis that the efficiency of financial systems increases for more balanced financial systems, featuring both kinds of institutions in equal measure. We compute an index of complementarity and relate this index and other variables representing various feedback channels of co-evolution to measures for the efficiency of credit and capital markets in a panel of industrial countries.
    Date: 2013–11–25
  22. By: Giancarlo Corsetti; Keith Kuester; André Meier; Gernot J. Mueller
    Abstract: Sovereign risk premia in several euro area countries have risen markedly since 2008, driving up credit spreads in the private sector as well. We propose a New Keynesian model of a two-region monetary union that accounts for this “sovereign risk channel.†The model is calibrated to the euro area as of mid-2012. We show that a combination of sovereign risk in one region and strongly procyclical fiscal policy at the aggregate level exacerbates the risk of belief-driven deflationary downturns. The model provides an argument in favor of coordinated, asymmetric fiscal stances as a way to prevent selffulfilling debt crises.
    Keywords: Sovereign debt;Euro Area;Fiscal risk;Risk premium;Fiscal policy;Monetary policy;Economic models;Sovereign risk channel, monetary union, euro area, zero lower bound, risk premium, pooling of sovereign risk
    Date: 2013–11–06
  23. By: Martin Brooke; Rhys R. Mendes; Alex Pienkowski; Eric Santor
    Abstract: The Latin American debt crises in the 1980s and the Asian crisis in the late 1990s both provided impetus for reforming the framework for restructuring sovereign debt. In the late 1980s, the Brady plan established the importance of substantive debt relief in addressing some crises. A decade later, as the Asian crisis faded, the G10 and major emerging market economies worked together to increase the flexibility of IMF lending and promoted the wider use of collective action clauses in foreign law bonds. More recently, the banking crisis of 2008-09 has led to the implementation of an ambitious financial sector reform agenda to reduce the risk of such a crisis occurring again. But reforms to reduce the incidence and cost of sovereign debt crises, such as those experienced in the euro area, have proceeded more slowly. The international community has a role to play in addressing this gap. In that regard, this paper is intended to stimulate debate on the problems in the current practices for sovereign debt restructuring and puts forward some proposals to improve the functioning of sovereign debt markets. The Bank of Canada and the Bank of England have collaborated on these issues in the past. For example, in 2001, Andy Haldane and Mark Kruger authored a joint paper on how to resolve sovereign debt crises in a more orderly and transparent manner. This current work builds on those ideas by exploring how state-contingent debt could further improve the system. Charlie Bean/John Murray London/Ottawa November 2013
    Keywords: International financial markets; International topics
    JEL: F34
    Date: 2013
  24. By: Andrés Fernández; Alessandro Rebucci; Martín Uribe
    Abstract: A growing recent theoretical literature advocates the use of prudential capital control policy, that is, the tightening of restrictions on cross-border capital flows during booms and the relaxation thereof during recessions. We examine the behavior of capital controls in a large number of countries over the period 1995-2011. We find that capital controls are remarkably acyclical. Boom-bust episodes in output, the current account, or the real exchange rate are associated with virtually no movements in capital controls. These results are robust to decomposing boom-bust episodes along a number of dimensions, including the level of development, the level of external indebtedness, or the exchange-rate regime. We also document a near complete acyclicality of capital controls during the Great Contraction of 2007-2009.
    JEL: E6 F3 F4 F5 G0 G1
    Date: 2013–11
  25. By: Nath, Golaka
    Abstract: Repo is used in India as an instrument for monetary policy by institutionalizing daily Liquidity Adjustment Facility (LAF) which allows banks and Primary Dealers to manage their liquidity needs. Liquidity stress in the market has an impact on the short term interest rate. Entities not having adequate securities balances borrow funds from inter-bank uncollateralized call market and the call rates are prone to liquidity shocks in the system. The spread between Call and Repo rates is likely to widen when there is liquidity stress in the market. The study tried to find the determinant of the spread. It found that LAF window activity as well as total money market activity has an impact on the spread. In order to understand if the spread behaves in a different manner when the system has excess liquidity vis-à-vis shortage of liquidity, a Regime Switching model using Goldfeld and Quandt’s D-method for switching regression was used. The tests found that the monetary policy is stable in both the regimes and the effectiveness of monetary policy in both the regimes are not statistically different.
    Keywords: Repo, CBLO, Call, India, RBI, liquidity, financial crisis, central bank refinancing, spread, interbank market
    JEL: C30 E52 G11 G12 G18 G20
    Date: 2013–11–19
  26. By: Bignon, Vincent; Breton, Régis; Rojas Breu, Mariana
    Abstract: This paper analyzes a two-country model of currency, banks and endogenous default to study whether impediments to credit market integration across jurisdictions impact the desirability of a currency union. We show that when those impediments induce a higher cost for banks to manage cross-border credit compared to domestic credit, welfare may not be maximal under a regime of currency union. But a banking union that would suppress hurdles to banking integration restores the optimality of that currency arrangement. The empirical and policy implications in terms of banking union are discussed.
    Keywords: E42; E50; F3; G21;
    Date: 2013
  27. By: Delbecque, Bernard
    Abstract: This paper argues that it should be possible to complement Europe’s Economic and Monetary Union with an insurance-type shock absorption mechanism to increase the resilience of member countries to economic shocks and reduce output volatility. Such a mechanism would neither require the establishment of a central authority, nor would it lead to permanent transfers between countries. For this mechanism to become a reality, however, it would be necessary to overcome certain technical problems linked to the difficulty of anticipating correctly the position of an economy in the business cycle.
    Date: 2013–10
  28. By: Brown, Martin; Guin, Benjamin; Morkoetter, Stefan
    Abstract: We study deposit withdrawals by retail customers of two large Swiss banks after these banks incurred substantial investment losses in the wake of the U.S. subprime crisis. Our analysis is based on survey data providing information on all bank relations of 1,475 households and documenting their reallocation of deposits in 2008-2009. We find that households are 16 percentage points more likely to withdraw deposits from a distressed bank than from a nondistressed bank. The propensity to withdraw deposits from a distressed bank is substantially reduced by household-level switching costs: Households which rely on a single deposit account, which do not live close to a non-distressed bank, or which maintain a credit relationship with the distressed bank, are significantly less likely to withdraw deposits. By contrast, we find that the withdrawal of deposits from distressed banks is unrelated to household coverage by deposit insurance. Our findings provide empirical support to the Basel III liquidity regulations which emphasize the role of well-established client relationships for the stability of bank funding.
    Keywords: Liquidity Risk, Bank Run, Market Discipline, Deposit Insurance, Switching Costs
    JEL: D14 G21 G28
    Date: 2013–11
  29. By: Spahn, Peter
    Abstract: Economists in the public are accused of propagating highly professional, but unrealistic theories that mislead market agents and policy makers to place too much confidence in rational behaviour and market equilibrium. The paper analyses to what extent the US banking crisis and the euro crisis can be ascribed to fallacious assessments and recommendations on the part of economic theory. In the first case, myopic financial market theory and practice had neglected systemic repercussions of micro bank trading patterns. The euro crisis emerged from the neglect of undergraduate economic wisdom of necessary adjustment mechanisms in a currency union. Economists hopefully misinterpreted current account deficits as a sign of structural change. --
    Keywords: Efficient Market Hypothesis,rational behaviour,banking crisis,New Keynesian model,intertemporal optimisation,euro crisis
    JEL: F33 G20 N10 N20
    Date: 2013
  30. By: OGAWA Eiji; Zhiqian WANG
    Abstract: The global financial crisis affected the exchange rates of the U.S. dollar, the euro, and the Japanese yen, as well as some East Asian currencies. This paper investigates how the East Asian currencies were affected by the global financial crisis. We employ methodologies involving β-convergence and σ-convergence to examine the misalignments or divergence of East Asian currencies. Our empirical results show that East Asian currencies did diverge during most of the sample periods, especially after late 2005, and active international capital flows such as yen carry trades also affected their movements. We conclude that it is necessary to establish a surveillance system within the East Asian area for the purposes of early detection and prevention of intra-regional exchange rate misalignments.
    Date: 2013–11
  31. By: Theophilos Papadimitriou (Department of Economics, University Campus Komotini, Democritus University of Thrace, Greece); Periklis Gogas (Department of Economics, University Campus Komotini, Democritus University of Thrace, Greece); Vasilios Plakandaras (Department of Economics, University Campus Komotini, Democritus University of Thrace, Greece)
    Abstract: In this paper, we approximate the empirical findings of Papadamou and Markopoulos (2012) on the NOK/USD exchange rate under a Machine Learning (ML) framework. By applying Support Vector Regression (SVR) on a general monetary exchange rate model and a Dynamic Evolving Neuro-Fuzzy Inference System (DENFIS) to extract model structure, we test for the validity of popular monetary exchange rate models. We reach to mixed results since the coefficient sign of interest rate differential is in favor only with the model proposed by Bilson (1978), while the inflation rate differential coefficient sign is approximated by the model of Frankel (1979). By adopting various inflation expectation estimates, our SVR model fits actual data with a small Mean Absolute Percentage Error when an autoregressive approach excluding energy prices is adopted for inflation expectation. Overall, our empirical findings conclude that for a small open petroleum producing country such as Norway, fundamentals possess significant forecasting ability when used in exchange rate forecasting.
    Keywords: International Financial Markets, Foreign Exchange, Support Vector Regression, Monetary exchange rate models
    JEL: G15 F30 F31
    Date: 2013–11
  32. By: Sambracos, Evangelos; Maniati, Marina
    Abstract: Shipping sector constitutes a sector with special characteristics that considerably differentiate it from the other sub-sectors of international transport. The maximisation of benefits for each one of the special market characteristics form a highly dynamic environment, with high risk of loss of invested capital. Within this framework, commercial banks, being the main source of financing shipping market, which is characterised by high capital and operating costs, have to take into account various variables in order to minimise the risk and maximise the return. The last is of particular importance considering the recent regulatory framework for banks applied by the Basel III, which has been elaborated on the grounds of inappropriateness of Basel II.
    Keywords: Finance, Shipping Market, Basel, Risks
    JEL: E32 G15 G32 R40
    Date: 2013–10–01
  33. By: Changyong Rhee; Lea Sumulong; Shahin Vallée
    Abstract: The Asian financial crisis (1997) and the European crisis (2009) have both contributed to the development and deepening of regional safety net arrangements. This paper analyses the relationships between global and regional financial safety nets, and uncovers the potential tensions and operational challenges associated with the involvement of several institutional players with potentially different interests, analytical biases and governance. The G20 has acknowledged the importance of these new players for the international monetary system, but the principles for cooperation between the IMF and regional financing arrangements are far too broad and ad hocto contribute to a coherent and effective architecture. This paper tries to establish some lessons learned from the Asian financial crisis in 1997 and the current European crisis in order to enhance the effectiveness, efficiency, equity and governance of these arrangements. In particular, it proposes changes to the IMF articles of agreement to allow for lending or guarantees to regional arrangements directly and it establishes some key desirable features and practices of regional mechanisms that should be adopted everywhere to ensure some global consistency, particularly in the field of macroeconomic surveillance, programme design and conditionality.
    Date: 2013–11
  34. By: Ozer Karagedikli; Michael Ryan; Daan Steenkamp; Tugrul Vehbi
    Abstract: We estimate a Factor Augmented Vector autoregression (FAVAR) to identify idiosyncratic exchange rate shocks and examine the effects of these shocks on different sectors of the economy. We find that an unexpected shock to the exchange rate has significant effects on the tradable sector of the economy. While this is expected, the nontradable sectors of the economy are also influenced by shocks to exchange rate. We argue that one important channel for this influence is the endogenous/cyclical nature of the population dynamics due to permanent and long term migration.
    JEL: C22 C32 E21
    Date: 2013–11
  35. By: Samantas, Ioannis
    Abstract: This study examines the effect of market structure variables on stability subject to regulation and supervision variables. The Extreme Bound Analysis (EBA) is employed over a sample of banks operating within the enlarged European Union during the period 2002-2010. The results show an inverse U-shaped association between market power and bank soundness and stabilizing tendency in markets of less concentration, where policies lean towards limited restrictions on non-interest bearing activities, official intervention to bank management and book transparency. However, in markets with higher share of foreign owned assets, the pattern is inverted. The significant impact of regulatory variables contributes to the ongoing reform as a stability channel of bank competition.
    Keywords: Market power; financial stability; regulation; extreme bound analysis
    JEL: D24 D4 G21 L11 L51
    Date: 2013–11

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