nep-cba New Economics Papers
on Central Banking
Issue of 2013‒12‒20
twelve papers chosen by
Maria Semenova
Higher School of Economics

  1. Do Central Banks Respond to Exchange Rate Movements? A Markow-Switching Structural Investigation By Ragna Alstadheim; Hilde C. Bjørnland; Junior Maih
  2. Microprudential Regulation in a Dynamic Model of Banking By : Gianni De Nicolo; : Andrea Gamba; : Marcella Lucchetta
  3. Macroprudential Regulation and Macroeconomic Activity By Karmakar, Sudipto
  4. Do Capital Buffers Matter? A Study on the Profitability and Funding Costs Determinants of the Brazilian Banking System By Benjamin Miranda Tabak; Denise Leyi Li; João V. L. de Vasconcelos; Daniel O. Cajueiro
  5. Loan/Loss Provisioning in Emerging Europe: Precautionary or Pro-Cyclical? By John Bonin; Marko Kosak
  6. Current account adjustment in EU countries: Does euro-area membership make a difference? By Herrmann, Sabine; Jochem, Axel
  7. Money Targeting in a Modern Forecasting and Policy Analysis System: an Application to Kenya By Michal Andrle; Andrew Berg; Enrico Berkes; Rafael A Portillo; Jan Vlcek; R. Armando Morales
  8. Foreign Exchange Interventions in Peru By Rossini, Renzo; Quispe, Zenón; Serrano, Enrique
  9. Measuring Inflation Persistence in Brazil Using a Multivariate Model By Vicente da Gama Machado; Marcelo Savino Portugal
  10. Sovereign risk, monetary policy and fiscal multipliers: a structural model-based assessment By Alberto Locarno; Alessandro Notarpietro; Massimiliano Pisani
  11. Supply tightening or lack of demand? An analysis of credit developments during the Lehman Brothers and the sovereign debt crises By Paolo Del Giovane; Andrea Nobili; Federico Maria Signoretti
  12. Shadow banks and macroeconomic instability By Roland Meeks; Benjamin Nelson; Piergiorgio Alessandri

  1. By: Ragna Alstadheim; Hilde C. Bjørnland; Junior Maih
    Abstract: Do central banks respond to exchange rate movements? According to Lubik and Schorfheide (2007) who estimate structural general equilibrium models with monetary policy rules, the answer is "Yes, some do". However, their analysis is based on a sample with multiple regime changes, which may bias the results. We revisit their original question using a Markov switching set up which explicitly al- lows for parameter changes. Fitting the data from four small open economies to the model, we find that the size of policy responses, and the volatility of struc- tural shocks, have not stayed constant during the sample period (1982-2011). In particular, central banks in Sweden and the UK switched from a high response to the exchange rate in the 1980s and early 1990s, to a low response some time after in flation targeting was implemented. Canada also observed a regime change, but the decline in the exchange rate response was small relative to the increase in the response to in flation and output. Norway, on the other hand, did not observe a shift in the policy response over time, as the central bank has stayed in a regime of high exchange rate response prior and post implementing in flation targeting.
    Keywords: Monetary policy, exchange rates, inflation targeting, markov switching, small open economy
    JEL: C68 E52 F41
    Date: 2013–12
  2. By: : Gianni De Nicolo; : Andrea Gamba; : Marcella Lucchetta
    Date: 2013
  3. By: Karmakar, Sudipto
    Abstract: This paper develops a dynamic stochastic general equilibrium model to examine the impact of macroprudential regulation on bank’s financial decisions and the implications for the real sector. I explicitly incorporate costs and benefits of capital requirements. I model an occasionally binding capital constraint and approximate it using an asymmetric non linear penalty function. This friction means that the banks refrain from valuable lending. At the same time, countercyclical buffers provide structural stability to the financial system. I show that higher capital requirements can dampen the business cycle fluctuations. I also show that stronger regulation can induce banks to hold buffers and hence mitigate an economic downturn as well. Increasing the capital requirements do not seem to have an adverse effect on the welfare. Lastly, I also show that switching to a countercyclical capital requirement regime can help reduce fluctuations and raise welfare.
    Keywords: Capital Buffers, Prudential Regulation, Basel Core Banking Principles
    JEL: G01 G21 G28
    Date: 2013–05–31
  4. By: Benjamin Miranda Tabak; Denise Leyi Li; João V. L. de Vasconcelos; Daniel O. Cajueiro
    Abstract: This paper consists of an empirical investigation of Brazilian banks' profitability determinants. The panel data is composed of quarterly information for 71 banks between the first quarter of 2002 and the second quarter of 2012. Using data from the Brazilian banking system, we study the traditional determinants of bank profitability - controlling for macroeconomic environment, bank-specific characteristics and industrial structure of the banking sector - and contribute by analyzing the effects of capital buffers on bank profitability. We find that capital buffers have a positive impact on Brazilian banks' profitability. This result reinforces the hypothesis that buffers signalize stability and safety, reducing costs of fund raising. Other findings include a negative effect of high default rates on profitability; the positive effect of higher liquid assets ratios and, finally, the higher profitability of smaller, domestic private banks. The results are important to comprehend Brazilian banking institutions and can also help formulating and conducting monetary and regulatory policies
    Date: 2013–11
  5. By: John Bonin (Department of Economics, Wesleyan University); Marko Kosak (Faculty of Economics, University of Ljubljana, Ljubljana, Slovenia)
    Abstract: The recent global financial crisis has generated considerable interest in reviewing the regulatory environment surrounding the banking sectors in most countries and proposals for changes designed to avoid such a severe outcome in the future. In this paper, we consider a particular aspect relevant to bank regulation, namely, the cyclicality of loan loss provisioning, in a region of emerging market economies. All eleven of the countries in our sample are currently new members of the European Union, the first group entering 2004 and the last country joining in 2013. Our time period from 1997 to 2010 covers roughly one and a half business cycles, starting with the impact of the Russian financial crisis and followed by a rapid growth of bank credit prior to the included global financial crisis. We find that the determinants of loan loss provisioning by banks in the region are similar to those found in the literature for other countries both developed and developing ones. We find evidence on income smoothing through provisioning and capital management by substitution. Unlike the results in much of the literature, we do not find statistically significant evidence of bank-specific pro-cyclicality, i.e., a strong positive relationship between provisioning and individual bank loan growth. However, we do find strong and robust evidence of macroeconomic pro-cyclicality, i.e., a strong positive relationship between provisioning and country GDP growth. Based on the innovative policy of dynamic (statistical) provisioning instrument adopted by Spanish regulators in 2000 to smooth provisioning over the business cycle, we draw implications for regulatory design specific to this region in which financial sectors are bank-centric and financial deepening is occurring.
    Date: 2013–12
  6. By: Herrmann, Sabine; Jochem, Axel
    Abstract: The paper evaluates current account dynamics in countries with different exchange rate regimes within the EU. In this, the empirical analysis explicitly differentiates between countries with a flexible and a fixed exchange rate regime and members of a monetary union. In addition, we model the adjustment process of external disequilibria by referring to the flexibility of exchange rates and interest rates. The sample covers annual data for 27 EU countries from 1994 to 2011. The estimation is based on a simple autoregressive model and comes to the conclusion that current account adjustment is significantly hampered in countries that are members of a monetary union. This holds particularly in comparison with floating exchange rate regimes owing to lower exchange rate flexibility. However, the persistence of current account balances in member countries of a monetary union is also more pronounced than in fixed-rate regimes due to less flexible interest rates as a result of the single monetary policy. --
    Keywords: Balance of Payments,European Monetary Union,Exchange Rate Regime,Current Account Adjustment,Financial Crisis
    JEL: E52 F32 F33 F34
    Date: 2013
  7. By: Michal Andrle; Andrew Berg; Enrico Berkes; Rafael A Portillo; Jan Vlcek; R. Armando Morales
    Abstract: We extend the framework in Andrle and others (2013) to incorporate an explicit role for money targets and target misses in the analysis of monetary policy in low-income countries (LICs), with an application to Kenya. We provide a general specification that can nest various types of money targeting (ranging from targets based on optimal money demand forecasts to those derived from simple money growth rules), interest-rate based frameworks, and intermediate cases. Our framework acknowledges that ex-post adherence to targets is in itself an objective of policy in LICs; here we provide a novel interpretation of target misses in terms of structural shocks (aggregate demand, policy, shocks to money demand, etc). In the case of Kenya, we find that: (i) the setting of money targets is consistent with money demand forecasting, (ii) targets have not played a systematic role in monetary policy, and (iii) target misses mainly reflect shocks to money demand. Simulations of the model under alternative policy specifications show that the stronger the ex-post target adherence, the greater the macroeconomic volatility. Our findings highlight the benefits of a model-based approach to monetary policy analysis in LICs, including in countries with money-targeting frameworks.
    Keywords: Monetary policy;Kenya;Interest rates;Inflation targeting;Monetary aggregates;Demand for money;Low-income developing countries;Economic models;Monetary Policy, Money Targeting, Forecasting, Kenya, Low-Income Countries
    Date: 2013–11–25
  8. By: Rossini, Renzo (Banco Central de Reserva del Perú); Quispe, Zenón (Banco Central de Reserva del Perú); Serrano, Enrique (Banco Central de Reserva del Perú)
    Abstract: The unprecedented monetary expansion implemented by central banks in developed economies during recent years has induced an extraordinary flow of funds to emerging economies and supported high commodity prices. This has created upward pressures on the value of local currencies and a further expansion of available funds and lending. This situation gave rise to concerns about a posible misalignment of the real exchange rate relative to its equilibrium level, especially because it can be deemed a temporary response to the current phase of the cycle in developed economies, but with a potentially lasting negative impact on the tradable sector of the economy. In Peru, the response to this situation has been an intensification of sterilized intervention in the foreign exchange market and the use of reserve requirements on local banks foreign currency liabilities, reinforcing macro-financial stability in an economy with a partially dollarized financial system. Both instruments have contributed significantly to reducing excessive exchange rate volatility, building up an international reserve buffer, and ensuring a normal flow of bank credit.
    Keywords: Monetary policy, central banking, foreign exchange intervention, reserve requirements
    JEL: E52 E58 F31
    Date: 2013–12
  9. By: Vicente da Gama Machado; Marcelo Savino Portugal
    Abstract: We estimate inflation persistence in Brazil in a multivariate framework of unobserved components, accounting for the following sources affecting inflation persistence: Deviations of expectations from the actual policy target; persistence of the factors driving inflation; and the usual intrinsic measure of persistence, evaluated through lagged inflation terms. Data on inflation, output and interest rates are decomposed into unobserved components. To simplify the estimation of a great number of unknown variables, we employ Bayesian analysis. Our results indicate that expectations-based persistence matters considerably for inflation persistence in Brazil
    Date: 2013–11
  10. By: Alberto Locarno (Banca d’Italia); Alessandro Notarpietro; Massimiliano Pisani (Bank of Italy)
    Abstract: This paper briefly reviews the literature on fiscal multipliers and then presents results for the Italian economy obtained by simulating a dynamic general equilibrium model that allows for the possibility (a) that the zero lower bound may be binding and (b) that the initial public debt-to-GDP ratio may affect the financing conditions of the public and private sectors (sovereign risk channel). The results are the following. First, the public consumption multiplier is in general less than 1. Second, it goes above 1 only under extremely strong assumptions, namely the constancy of the monetary policy rate for an exceptionally long period (at least five years) and there is full time-coincidence between the fiscal and the monetary stimuli. Third, when the sovereign risk channel is active the government spending multiplier is much lower. Finally, in all cases tax multipliers are lower than government consumption multipliers.
    Keywords: Fiscal multiplier, monetary policy, zero lower bound, sovereign risk.
    JEL: E32 E52 E62
    Date: 2013–11
  11. By: Paolo Del Giovane (Bank of Italy); Andrea Nobili (Bank of Italy); Federico Maria Signoretti (Bank of Italy)
    Abstract: We estimate a structural econometric model for the credit market in Italy, using bank-level information and the responses of Italian banks to the euro-area Bank Lending Survey to identify demand and supply, focusing on the recent financial crisis. The main results are the following. First, while in normal circumstances the functioning of the Italian credit market is consistent with a standard imperfect-competition model, during phases of high tension there are credit-rationing phenomena. Second, supply restrictions have a relevant impact on lending, both when they are due to banks’ balance-sheet constraints and when they are the effect of greater perceived borrower riskiness. Third, to a large extent the tightening during the sovereign debt crisis reflected the common shock of the widening sovereign spread, not idiosyncratic bank funding problems. Fourth, the role of supply was stronger during the sovereign than the global financial crisis, mainly due to greater banks’ funding difficulties. In a counterfactual exercise we estimate that in the second quarter of 2012 interest rates were more than 2 percentage points higher and the stock of loans more than 8 percent lower than would have been the case without the tightening of lending standards in the course of the entire crisis.
    Keywords: credit rationing, supply tightening, financial crisis, sovereign debt crisis
    JEL: E30 E32 E51
    Date: 2013–11
  12. By: Roland Meeks (Essex University); Benjamin Nelson (Bank of England); Piergiorgio Alessandri (Bank of Italy)
    Abstract: We develop a macroeconomic model in which commercial banks can offload risky loans onto a ‘shadow’ banking sector and financial intermediaries trade in securitized assets. We analyze the responses of aggregate activity, credit supply and credit spreads to business cycle and financial shocks. We find that interactions and spillover effects between financial institutions affect credit dynamics, that high leverage in the shadow banking system heightens the economy’s vulnerability to aggregate disturbances, and that following a financial shock, a stabilization policy aimed solely at the securitization markets is relatively ineffective.
    Keywords: shadow banks, securitization, financial accelerator
    JEL: E32 E44 E58 G23
    Date: 2013–11

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