nep-cba New Economics Papers
on Central Banking
Issue of 2013‒12‒15
thirty papers chosen by
Maria Semenova
Higher School of Economics

  1. Asymmetric Effects of Monetary Policy in the U.S. and Brazil By Pragidis, Ioannis; Gogas, Periklis; Tabak, Benjamin
  2. Interest Rate Policy and Financial Regulation: How to Control Excessive Risk Taking? By Malik Shukayev; Alexander Ueberfeldt; Simona Cociuba
  3. Reputational Constraints on Monetary Policy By K. Brunner; A. Meltzer
  4. The New European Framework for Managing Bank Crises By Micossi, Stefano; Bruzzone, Ginevra; Carmassi, Jacopo
  5. Operational risk: A Basel II++ step before Basel III. By Dominique Guegan; Bertrand K. Hassani
  6. Systemic Risk Score: A Suggestion By Hurlin , Christophe; Perignon, Christophe
  7. What lies behind the (Too-Small-To-Survive) banks? By Theoharry Grammatikos,; Nikolaos I. Papanikolaou
  8. Euro Area monetary policy transmission in Estonia By Gertrud Errit; Lenno Uusküla
  9. Rethinking Pro-Growth Monetary Policy in Africa: Monetarist versus Keynesian Approach By NGUENA, CHRISTIAN LAMBERT
  10. Essays on financial fragility and regulation. By Ma, K.
  11. On Graduation from Default, Inflation and Banking Crises: Elusive or Illusion? By Rong Qian; Carmen M. Reinhart; Kenneth Rogoff
  12. Optimal Time-Consistent Macroprudential Policy By Javier Bianchi; Enrique G. Mendoza
  13. Why Does Monetary Policy Respond to the Real Exchange Rate in Small Open Economies? A Bayesian Perspective By Carlos Garcia
  14. Identifying monetary policy shocks via heteroskedasticity: a Bayesian approach By Dmitry Kulikov; Aleksei Netšunajev
  15. Bank Deregulation, Competition and Economic Growth: The US Free Banking Experience By Ager, Philipp; Spargoli, Fabrizio
  16. Political Connections, Bank Deposits, and Formal Deposit Insurance: Evidence from an Emerging Economy By Emmanuelle Nys; Amine Tarazi; Irwan Trinugroho
  17. Market Perceptions of US and European Policy Actions Around the Subprime Crisis By Yoichi Otsubo; Theoharry Grammatikos; Thorsten Lehnert
  18. Bank Capital and Dividend Externalities By Viral V. Acharya; Hanh Le; Hyun Song Shin
  19. Electoral cycles in international reserves: Evidence from Latin America and the OECD By Jorge M. Streb; Daniel Lema; Pablo Garofalo
  20. Dilemma not Trilemma? Capital Controls and Exchange Rates with Volatile Capital Flows By Emmanuel Farhi; Ivan Werning
  21. Euro at Risk: The Impact of Member Countries Credit Risk on the Stability of the Common Currency By Thorsten Lehnert; Lamia Bekkour; Xisong Jin; Fanou Rasmouki; Christian Wolff
  22. Bank performance and economic growth: evidence from Granger panel causality estimations By Cândida Ferreira
  23. Fiscal Policy, Sovereign Default, and Bailouts By Falko Juessen; Andreas Schabert
  24. Financial stability in open economies By Ippei Fujiwara, Yuki Teranishi
  25. A Sovereign Risk Index for the Eurozone Based on Stochastic Dominance By Elettra Agliardi; Mehmet Pinar; Thanasis Stengos
  26. Demand for Liquidity and Welfare Cost of Inflation by Cohort and Age of Households By Yaz Terajima; Jose-Victor Rios-Rull; Césaire Meh; Shutao Cao
  27. The Implications for the EU and National Budgets of the Use of EU Instruments for Macro-Financial Stability By Casale, Alessandra; Giovannini, Alessandro; Gros, Daniel; Ivan, Paul; Núñez Ferrer, Jorge; Peirce, Fabrizia
  28. Bank Income Smoothing, Ownership Concentration and the Regulatory Environment By Vincent Bouvatier; Laetitia Lepetit; Frank Strobel
  29. Expanding Beyond Borders: The Yen and the Yuan By Subacchi, Paola
  30. Can Non-Interest Rate Policies Stabilize Housing Markets? Evidence from a Panel of 57 Economies By Kenneth N. Kuttner; Ilhyock Shim

  1. By: Pragidis, Ioannis (Democritus University of Thrace, Department of Economics); Gogas, Periklis (Democritus University of Thrace, Department of Economics); Tabak, Benjamin (Bank of Brazil)
    Abstract: We empirically test the effects of anticipated and unanticipated monetary policy shocks on the growth rate of real industrial production and explicitly test for different types of asymmetries in monetary policy implementation for two major international economies, the U.S. and Brazil. We depart from the conventional method of VAR analysis to estimate unanticipated monetary shocks and instead we use a combination of other methods. We first identify the Taylor rule that best describes the reaction of both central banks and then we test both forward looking linear and nonlinear models concluding that a Logistic Smooth Transition Autoregressive (LSTAR) forward looking model of the Taylor rule best describes the US FED Funds rate while a linear Taylor rule with the inclusion of a dummy variable best describes the reaction of the Central Bank of Brazil (BCB). We then use in-sample forecast errors in order to derive or identify the unexpected monetary shocks for both countries. In line with Cover (1992), we use these shocks to explore any asymmetries in the conduct of monetary policy on the growth rate of real industrial production. We also find asymmetries between anticipated and unanticipated monetary shocks as well as between effects of positive and negative shocks.
    Keywords: Taylor rule; monetary policy; nonlinear effects; LSTAR
    JEL: E40 E52 E58
    Date: 2013–12–07
  2. By: Malik Shukayev (Bank of Canada); Alexander Ueberfeldt (Bank of Canada); Simona Cociuba (University of Western Ontario)
    Abstract: This paper characterizes the optimal combination of monetary policy and financial regulation in a quantitative infinite horizon model with a risk taking channel of monetary policy. The model economy is rich enough to match main characteristics of the U.S. economy and its financial sector, yet tractable enough to deliver clear prescriptions regarding the optimal policy mix. The optimal policy mix has a simple state contingent leverage regulation and a small financial contribution tax on profits of financial intermediaries. Revenue derived from this tax helps to secure equity financing to solvent financial institutions during economic downturns. Leverage regulation and monetary policy act as complements when policy deviates from the optimum. Standard capital-adequacy regulation is welfare decreasing though effective at reducing risk taking.
    Date: 2013
  3. By: K. Brunner; A. Meltzer
  4. By: Micossi, Stefano; Bruzzone, Ginevra; Carmassi, Jacopo
    Abstract: This Policy Brief describes and discusses the proposals for a European Single Resolution Mechanism (SRM) for banks and for a Directive on Bank Recovery and Resolution (BRR). The authors find that the proposals are generally well designed and present a consistent approach, yet there is room for improvement, including the streamlining of procedures for the start of resolution, which now entail much overlap in the powers attributed to the various institutions involved (the Commission, the Single Resolution Board and the European Central Bank). The paper makes a number of key recommendations to facilitate discussions for stakeholders and regulators.
    Date: 2013–11
  5. By: Dominique Guegan (Centre d'Economie de la Sorbonne); Bertrand K. Hassani (BPCE et Centre d'Economie de la Sorbonne)
    Abstract: Following Banking Committee on Banking Supervision, operational risk quantification is based on the Basel matrix which enables sorting incidents. In this paper, we deeply analyze these incidents and propose strategies for carrying out the supervisory guidelines proposed by the regulators. The objectives are as follows. On the first hand, banks need to provide a univariate capital charge for each cell of the Basel matrix. On the other hand, banks need also to provide a global capital charge corresponding to the whole matrix taking into account dependences. This paper proposes several solutions and attracts the regulators and managers attention on two crucial points: the granularity and the risk measures.
    Keywords: Operational risks, Loos Distribution Function, risk measures, EVT, Vine Copula.
    JEL: C18
    Date: 2011–09
  6. By: Hurlin , Christophe; Perignon, Christophe
    Abstract: We identify a potential bias in the methodology disclosed in July 2013 by the Basel Committee on Banking Supervision (BCBS) for identifying systemically important financial banks. Contrary to the original objective, the relative importance of the five categories of risk importance (size, cross-jurisdictional activity, interconnectedness, substitutability/financial institution infrastructure, and complexity) may not be equal and the resulting systemic risk scores are mechanically dominated by the most volatile categories. In practice, this bias proved to be serious enough that the substitutability category had to be capped by the BCBS. We show that the bias can be removed by simply standardizing each input prior to computing the systemic risk scores.
    Keywords: G-SIFI; regulatory capital; Basel Committee
    JEL: G21
    Date: 2013–10–09
  7. By: Theoharry Grammatikos,; Nikolaos I. Papanikolaou (LSF)
    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
    Date: 2013
  8. By: Gertrud Errit; Lenno Uusküla
    Abstract: This paper studies the effect of a monetary policy shock in the euro area on the main Estonian economic and financial variables between 2000 and 2012. Using a standard structural vector autoregression (SVAR) model we find strong and persistent effects on Estonian GDP, private consumption, corporate investment and imports. A monetary policy shock has also strong and sluggish effects on the housing loan and consumer credit interest rates. The estimated reaction of Estonian GDP and the GDP deflator-based inflation rate is about four times stronger than the reaction of euro area-wide aggregates. The Estonian money market interest rate (the 3-month Talibor) reacts about twice as strongly as the euro area money market interest rate (the 3-month Euribor). We also show that this finding is sensitive to the inclusion of the data from the years of the recent financial and economic crisis. We conjecture that household interest rates can play an important role in propagating monetary policy shocks in Estonia.
    Keywords: monetary policy, SVAR, Estonia, euro area
    JEL: E32 E52 C32
    Date: 2013–12–09
    Abstract: The relative positive economic growth experienced by most African countries in the recent decade has come with insufficient demand stimulation. The concern of poverty at the forefront of economic policy, the need for inclusive growth and sustainable development, inter alia, brings forward the inevitable question of the monetary policy responsibility. Accordingly, the monetarist theory that focuses on price stability inherently neglects the demand stimulation aspect of economic prosperity. Since the mid 1980s, the monetarist school driven by its central aim of fighting inflation and maintaining credibility in markets and economic agents has been priority for monetary authorities (especially in Africa). To this effect, while good results in terms of inflation targeting has been achieved in many African countries; economic growth has sometimes been low. Hence, in light of the above, using a statistical and theoretical debate method, the Credible Monetary Policy (CMP) paradox is traceable to Africa. Accordingly, with the promising economic environment in Africa, we recommend the promotion of a monetary policy oriented toward improving economic growth under the constraint of price stability. In light of the above view, there are some note worthy signs such the recent decision by the two CFA zone central banks to either maintain interest rates at a low level or reduce it despite tightening measures of monetary policy taken by the European Central Bank (ECB) earlier in the year. In the same vein, the central bank of South Africa has maintained its policy of low interest rates with an objective of economic expansion. Since, the 2008 financial crisis, the consolidation of the Federal Reserve’s declared final objective of lowering interest rates and making emergency loans is an eloquent example to reassure African central banks in the choice of the pro-growth monetary policy option.
    Keywords: Pro growth monetary policy; CMP paradox; Financing enterprises; African central bank.
    JEL: B40 E52
    Date: 2010–12–08
  10. By: Ma, K. (Tilburg University)
    Abstract: Abstract: This thesis investigates various issues in regulation, with three chapters on financial fragility and banking regulation, and one chapter on competition policy. Chapter 2 studies banks’ herding driven by their need for market liquidity, highlighting a trade-off between systemic risk and liquidity creation. The model also suggests that systemic risk and leverage are mutually reinforcing, offering an explanation of why banks collectively exposed themselves to mortgage-backed securities prior to the crisis, and why the exposure grew when banks were increasingly leveraged using wholesale short-term funding. Chapter 3 examines the possible trade-off between banking competition and financial stability by highlighting banks' endogenous leverage. Competition is shown to affect portfolio risk, insolvency risk, liquidity risk and systemic risk differently. The model leads us to revisit the existing empirical literature using a more precise taxonomy of risk and take into account endogenous leverage, thus clarifying a number of apparently contradictory empirical results. Chapter 4 presents a model where fire-sales and bank runs are self-fulfilling and mutually reinforcing. With endogenous fire sale prices, the model delivers two new policy insights: First Bank capital can have unintended consequences on illiquidity and contagion, and therefore is not a panacea for financial stability. Second, as acknowledging a crisis aggravates financial contagion, full commitment to regulatory transparency can be suboptimal from a social welfare point-of-view. Chapter 5 is devoted to antitrust policy. It studies how cost asymmetry affects the effectiveness of corporate leniency programs. The analysis shows that using leniency programs involves a trade-off between ex-ante deterrence and ex-post efficiency. For traditional antitrust investigation can both deter cartels and improve allocation, leniency programs should be viewed as a second best solution for budget-constrained antitrust authorities.
    Date: 2013
  11. By: Rong Qian; Carmen M. Reinhart; Kenneth Rogoff
    Abstract: This paper uses a data set of over two hundred years of sovereign debt, banking and inflation crises to explore the question of how long it takes a country to “graduate†from the typical pattern of serial crisis that most emerging markets experience. We find that for default and inflation crises, twenty years is a significant market, but the distribution of recidivism has extremely fat tails. In the case of banking crises, it is unclear whether countries ever graduate. We also examine the more recent phenomenon of IMF programs, which sometimes result in “near misses†but sometimes end in default even after a program is instituted. The paper raises the important theoretical question of why countries experience serial default, and how they might graduate.
  12. By: Javier Bianchi; Enrique G. Mendoza
    Abstract: Collateral constraints widely used in models of financial crises feature a pecuniary externality, because agents do not internalize how collateral prices respond to collective borrowing decisions, particularly when binding collateral constraints trigger a crisis. We show that agents in a competitive equilibrium borrow "too much" during credit expansions compared with a financial regulator who internalizes this externality. Under commitment, however, this regulator faces a time inconsistency problem: It promises low future consumption to prop up current asset prices when collateral constraints bind, but this is not optimal ex post. Instead, we study the optimal, time-consistent policy of a regulator who cannot commit to future policies. Quantitative analysis shows that this policy reduces the incidence and magnitude of crises, removes fat tails from the distribution of returns and reduces risk premia. A key element of this policy is a state-contingent macro-prudential debt tax (i.e. a tax imposed in normal times when a financial crisis has positive probability next period) of about 1 percent on average. Constant debt taxes also reduce the frequency of crises but are less effective at reducing their severity and reduce welfare when credit constraints bind.
    JEL: E0 F0 G0
    Date: 2013–12
  13. By: Carlos Garcia (Facultad de Economía y Negocios, Universidad Alberto Hurtado)
    Abstract: To estimate how monetary policy works in small open economies, we build a dynamic stochastic general equilibrium model that incorporates the basic features of these economies. We conclude that the monetary policy in a group of small open economies (including Australia, Chile, Colombia, Peru, and New Zealand) is rather similar to that observed in closed economies. Our results also indicate, however, that there are strong differences due to shocks from the international financial markets (mainly risk premium shocks). These differences explain most of the variability of the real exchange rate, which has important reallocation effects in the short run. Our results are consistent with an old idea from the Mundell-Fleming model: namely, a real depreciation to confront a risk premium shock is expansive or procyclical, in contradiction to the predictions of the balance sheet effect, the J curve effect, and the introduction of working capital into RBC models. In line with this last result, we have strong evidence that only in one of the five countries analyzed in this study does not intervene the real exchange rate, the case of New Zealand.
    Keywords: small open economy models; monetary policy rules; exchange rates; Bayesian econometrics
    JEL: F33 E52 F41
    Date: 2012–11
  14. By: Dmitry Kulikov; Aleksei Netšunajev
    Abstract: In this paper we contribute to the literature on the identification of macroeconomic shocks by proposing a Bayesian SVAR with timevarying volatility of innovations that depend on a hidden Markov process, referred to as an MS-SVAR. With sufficient statistical information in the data, the distinct volatility regimes of the errors allow all the structural SVAR matrices and impulse response functions to be identified without the need for conventional a priori parameter restrictions. We give mathematical identification conditions and propose a flexible Gibbs sampling approach for the posterior inference on MS-SVAR parameters. The new methodology is applied to the US, euro area and Estonian macroeconomic series, where the effects of monetary policy and other shocks are examined.
    Keywords: Markov switching model, volatility regimes, Bayesian inference, monetary policy shocks, SVAR analysis
    JEL: C11 C32 C54
    Date: 2013–12–09
  15. By: Ager, Philipp; Spargoli, Fabrizio
    Abstract: We exploit the introduction of free banking laws in US states during the 1837-1863 period to examine the impact of removing barriers to bank entry on bank competition and economic growth. As governments were not concerned about systemic stability in this period, we are able to isolate the effects of bank competition from those of state implicit guarantees. We find that the introduction of free banking laws stimulated the creation of new banks and led to more bank failures. Our empirical evidence indicates that states adopting free banking laws experienced an increase in output per capita compared to the states that retained state bank chartering policies. We argue that the fiercer bank competition following the introduction of free banking laws might have spurred economic growth by (1) increasing the money stock and the availability of credit; (2) leading to efficiency gains in the banking market. Our findings suggest that the more frequent bank failures occurring in a competitive banking market do not harm long-run economic growth in a system without public safety nets.
    Keywords: Bank Deregulation, Bank Competition, Economic Growth, Financial Development, Dynamic Efficiency, Free Banking
    JEL: G18 G21 G28 N21
    Date: 2013–11–25
  16. By: Emmanuelle Nys (LAPE - Laboratoire d'Analyse et de Prospective Economique - Université de Limoges : EA1088 - Institut Sciences de l'Homme et de la Société); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - Université de Limoges : EA1088 - Institut Sciences de l'Homme et de la Société); Irwan Trinugroho (LAPE - Laboratoire d'Analyse et de Prospective Economique - Université de Limoges : EA1088 - Institut Sciences de l'Homme et de la Société)
    Abstract: This paper investigates the impact of banks' political connections on their ability to collect deposits under two different deposit insurance regimes (blanket guarantee and limited guarantee). We estimate a simultaneous equations model of supply and demand for funds using quarterly data for Indonesian banks from 2002 to 2008. We find that, regardless of their type (state-owned or private entities), politically connected banks are able to attract deposits more easily than their non-connected counterparts. We also show that this effect is more pronounced after the implementation of formal deposit insurance with limited coverage. Our findings have various policy implications. Formal deposit insurance might have improved market discipline, as highlighted by earlier studies, but it has also exacerbated the issue of political connections in the banking sector.
    Date: 2013
  17. By: Yoichi Otsubo; Theoharry Grammatikos; Thorsten Lehnert (LSF)
    Abstract: This paper explores the impacts of key policy actions by US and European authorities on stock returns of systemically important banks in Europe and US around the subprime crisis. We find that the US policy announcements had a stronger impact on the European and US banking industry than the European policy announcements. In particular, the announcements of monetary policies and financial sector policies by the US authorities were accompanied by higher abnormal returns compared to related announcements of European authorities while the announcements of the US liability guarantees had the most favorable impact on the banking stock returns during the crisis. The lead role of US policies compared to European policies was strengthened after the collapse of Lehman brothers. We also find that the policy announcements, regardless of which side of the Atlantic the news arrived from, has increased the return volatility during the crisis. Our results lend additional support to the literature documenting eventinduced volatility increases.
    Keywords: "Event study; Policy Announcement; Subprime crisis;"
    JEL: G01 G14 G18 G21 G28
    Date: 2012
  18. By: Viral V. Acharya; Hanh Le; Hyun Song Shin
    Abstract: In spite of mounting losses banks continued to pay dividends during the crisis. We present a model that addresses this behavior. By paying out dividends, a bank transfers value to its shareholders away from creditors, among whom are other banks. This way, one bank's dividend payout policy affects the equity value and risk of default of other banks. When such negative externalities are strong and bank franchise values are not too low, the private equilibrium can feature excess dividends relative to a coordinated policy that maximizes the combined equity value of banks.
    JEL: G01 G21 G24 G28 G32 G35 G38
    Date: 2013–12
  19. By: Jorge M. Streb; Daniel Lema; Pablo Garofalo
    Abstract: In Latin America there is ample evidence of exchange rate depreciations after elections. Hence, we turn to the behavior of international reserves over the 1980–2005 period to investigate if exchange rates are temporarily stabilized before elections. Using annual, quarterly, and monthly data to define the election year, we find that international reserves fall significantly before elections, which indeed suggests a policy of stabilizing exchange rates. The patterns observed in the region are not replicated in OECD countries. However, once we control for legislative checks and balances on executive discretion in countries with strong compliance with the law, the behavior of both regions becomes remarkably similar. We find that lower effective checks and balances can explain why reserves fall before elections in Latin America. The electoral cycles in reserves and exchange rates in Latin America can be interpreted in terms of the fiscal dominance of monetary policy.
    Keywords: monetary policy, checks and balances, fiscal dominance, political budget cycles, temporal aggregation
    JEL: D72 D78 H60
    Date: 2013–10
  20. By: Emmanuel Farhi; Ivan Werning
    Abstract: We consider a standard New Keynesian model of a small open economy with nominal rigidities and study optimal capital controls. Consistent with the Mundellian view, we find that the exchange rate regime is key. However, in contrast with the Mundellian view, we find that capital controls are desirable even when the exchange rate is flexible. Optimal capital controls lean against the wind and help smooth out capital flows.
    Date: 2013–01
  21. By: Thorsten Lehnert; Lamia Bekkour; Xisong Jin; Fanou Rasmouki; Christian Wolff (LSF)
    Abstract: In this paper, we empirically investigate the impact of the credit risk of Eurozone member countries on the stability of the Euro. In practice, in the absence of eurobonds, euro-area credit risk is induced though the credit default swaps of the member countries. The stability of the euro is examined by decomposing dollareuro exchange rate options into the moments of the risk-neutral distribution. We document that during the sovereign debt crisis changes in the creditworthiness of member countries have significant impact on the stability of the euro. In particular, an increase in member countries credit risk results in an increase of volatility of the dollar-euro exchange rate along with soaring tail risk induced through the riskneutral kurtosis. We find that member countries credit risk is a major determinant of the euro crash risk as measured by the risk-neutral skewness. We propose a new indicator for currency stability by combining the risk-neutral moments into an aggregated risk measure and show that our results are robust to this change in measure. Noticeable is the fact that during the sovereign debt crisis, the creditworthiness of countries with vulnerable fiscal positions is the main riskendangering factor of the euro-stability.
    Keywords: European sovereign debt crisis, currency options, credit default swaps, currency stability, risk-neutral distribution, crash risk, tail risk.
    JEL: G13 F31
    Date: 2012
  22. By: Cândida Ferreira
    Abstract: This paper provides empirical evidence on the causality relations between bank performance and economic growth in a panel including 27 European Union member-states from 1996 through to the onset of the 2008 financial crisis. Bank performance is represented not only by the Return on Assets (ROA) and Return on Equity (ROE) ratios but also by bank cost efficiency, measured through Data Envelopment Analysis (DEA). For economic growth, we consider not only the GDP per capita but also the gross fixed capital formation growth. Deploying a panel Granger causality approach, we confirm positive causality running from bank performance to economic growth. However, as regards the opposite causality, running from growth to bank performance, we conclude that economic growth positively contributes to the bank ROA and ROE ratios but not so certainly in the case of the DEA bank cost efficiency.
    Keywords: Bank performance, Economic growth, DEA, Panel Granger causality, European Union.
    JEL: G21 G31 E44 F43 F36
    Date: 2013–12
  23. By: Falko Juessen; Andreas Schabert
    Abstract: This paper examines fiscal policy without commitment and the effects of conditional bailout loans. The government relies on distortionary taxation and decides between full debt repayment and costly default. It tends to overborrow due to myopia, which induces default to be a relevant policy option and provides a rationale to constrain sovereign borrowing. We consider a lump-sum financed fund that offers loans at a favorable price and conditional upon minimum primary surpluses. While the government prefers defaulting in the most adverse states, we find that it is willing to accept conditional loans in close-to-default states. These bailouts can lead to an increase in the mean debt price and a lower default probability that are associated with enhanced household welfare. Yet, these outcomes can be reversed when bailouts are too generous, while public debt never decreases in the long-run when bailout loans are available.
    Keywords: Discretionary fiscal policy, overborrowing, sovereign default, bailout loans, conditionality
    JEL: E32 H21 H63
    Date: 2013–12–10
  24. By: Ippei Fujiwara, Yuki Teranishi
    Abstract: Do financial frictions call for policy cooperation? This paper investigates the implications of financial frictions for monetary policy in the open economy. Welfare analysis shows that there are long-run gains which result from cooperation, but, dynamically, financial frictions per se do not require policy cooperation to improve global welfare over business cycles. In addition, inward-looking financial stability, namely eliminating inefficient fluctuations of loan premiums in the home country, is the optimal monetary policy in the open economy, irrespective of the existence of policy coordination.Length: 42 pages
    Keywords: Optimal monetary policy in open economy; financial market imperfectionsd estimator; Grid-t Confidence Interval
    JEL: E50 F41
    Date: 2013
  25. By: Elettra Agliardi (Department of Economics, University of Bologna, Italy); Mehmet Pinar (Business School, Edge Hill University, UK); Thanasis Stengos (Department of Economics, University of Guelph, Canada)
    Abstract: We propose a new method to assess sovereign risk index in Eurozone countries using an approach that relies on consistent tests for stochastic dominance efficiency. The test statistics and the estimators are computed using mixed integer programming methods. The ranking of countries is performed together with an analysis of fiscal and external trade risk.
    Keywords: Nonparametric Stochastic Dominance, Mixed Integer Programming; Sovereign Risk; Eurozone
    JEL: C12 C13 C14 C15 G01
    Date: 2013–10
  26. By: Yaz Terajima (Bank of Canada); Jose-Victor Rios-Rull (University of Minnesota); Césaire Meh (Bank of Canada); Shutao Cao (Bank of Canada)
    Abstract: Cross-sectional data show that money holding differs significantly over household consumption and age. Liquidity demand for money (i.e., money holding per dollar of consumption) decreases as household consumption increases. It also increases with household age conditional on the level of consumption. Observed age differences in money holdings contain not only age-specific information but also cohort-specific one. Using a life-cycle model, this paper disentangles these two effects on money demand and quantifies welfare gains of reducing the long-run inflation rate. We dynamically calibrate the model to micro data and macroeconomic conditions over time. We find that, although a large part of the observed cross-sectional age differences in money demand can be accounted for by some age effects, cohort effects play a non-negligible part, supporting a presence of financial innovation. In addition, changing inflation has significantly different impacts across household groups due to their heterogeneity in money holding. When inflation increases from the 2009 level to 10%, we find the aggregate welfare loss in consumption to be 1.34%. These losses are accrued mostly by generations that are currently alive and less by future cohorts. Finally, poorer households lose more than their rich peers.
    Date: 2013
  27. By: Casale, Alessandra; Giovannini, Alessandro; Gros, Daniel; Ivan, Paul; Núñez Ferrer, Jorge; Peirce, Fabrizia
    Abstract: The euro crisis has forced member states and the EU institutions to create a series of new instruments to safeguard macro-financial stability of the Union. This study describes the status of existing instruments, the role of the European Parliament and how the use of the instruments impinges on the EU budget also through their effects on national budgets. In addition, it presents a survey of other possible instruments that have been proposed in recent years (e.g. E-bonds and eurobonds), in order to provide an assessment of how EU macro-financial stability assistance could evolve in the future and what could be its impact on EU public finances.
    Date: 2012–09
  28. By: Vincent Bouvatier (EconomiX - CNRS : UMR7166 - Université Paris X - Paris Ouest Nanterre La Défense); Laetitia Lepetit (LAPE - Laboratoire d'Analyse et de Prospective Economique - Université de Limoges : EA1088 - Institut Sciences de l'Homme et de la Société); Frank Strobel (university of birmingham - Department of Economics)
    Abstract: Abstract We empirically examine whether the way a bank might use loan loss provisions to smooth its income is in‡uenced by its ownership concentration and the regulatory environment. Using a panel of European commercial banks, we find evidence that banks with more concentrated ownership use discretionary loan loss provisions to smooth their income. This behavior is less pronounced in countries with stronger supervisory regimes or higher external audit quality. Banks with low levels of ownership concentration do not display such discretionary income smoothing behavior. This suggests the need to improve existing or implement new corporate governance mechanisms.
    Date: 2013
  29. By: Subacchi, Paola (Asian Development Bank Institute)
    Abstract: As all eyes are on the strategy and policy measures of the People’s Republic of China (PRC) to push the international use of the yuan, this paper turns to the internationalization of the Japanese yen and compares it with what the PRC is doing. There are some fundamental differences in the regional context and in the pattern of regional integration, and these distinguish the PRC’s current strategy from the Japanese experience in the 1980s. The yen’s development as an international currency, and the comparison with the PRC’s strategy, highlight the importance of regional integration as a way to overcome network externalities and market inertia. Using an analytical framework that assesses both the range of different roles (the scope) and geographical scale (the domain) of a currency in the global market, the paper suggests that economic fundamentals alone, albeit essential, are not sufficient to warrant a fully fledged scope and global domain of the currency. The paper concludes by suggesting that in the next decade the PRC yuan will become Asia’s leading currency due to the PRC’s deep economic integration in the region, and that the Japanese yen’s function as an international asset and store of value can be further enhanced if Tokyo’s competitiveness as a leading international financial center is improved.
    Keywords: yuan; japanese yen; internationalization; network externalities; regional integration
    JEL: E42 E44 F33
    Date: 2013–12–05
  30. By: Kenneth N. Kuttner; Ilhyock Shim
    Abstract: Using data from 57 countries spanning more than three decades, this paper investigates the effectiveness of nine non-interest rate policy tools, including macroprudential measures, in stabilizing house prices and housing credit. In conventional panel regressions, housing credit growth is significantly affected by changes in the maximum debt-service-to-income (DSTI) ratio, the maximum loan-to-value ratio, limits on exposure to the housing sector and housing-related taxes. But only the DSTI ratio limit has a significant effect on housing credit growth when we use mean group and panel event study methods. Among the policies considered, a change in housing-related taxes is the only policy tool with a discernible impact on house price appreciation.
    JEL: G21 G28 R31
    Date: 2013–12

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