nep-cba New Economics Papers
on Central Banking
Issue of 2014‒01‒10
seventeen papers chosen by
Maria Semenova
Higher School of Economics

  1. Systemic Risk, International Regulation, and the Limits of Coordination By Kara, Gazi
  2. Supervisory transparency in the European banking union By Christopher Gandrud; Mark Hallerberg
  3. Rounding the Corners of the Policy Trilemma: Sources of Monetary Policy Autonomy By Michael W. Klein; Jay C. Shambaugh
  4. Asymmetric Effects of Monetary Policy in the U.S. and Brazil By Ioannis Pragidis; Periklis Gogas; Benjamin Miranda Tabak
  5. Inflation targeting, flexible exchange rates, and macroeconomic performance since the Great Revolution By Andersen, Thomas Barnebeck; Malchow-Møller, Nikolaj; Nordvig, Jens
  6. Monetary Policy in Korea through the lense of Taylor Rule in DSGE model By Tae Bong Kim
  7. Can taxes tame the banks? Evidence from European bank levies By Michael P. Devereux; Niels Johannesen; John Vella
  8. Asset Allocation and Monetary Policy: Evidence from the Eurozone By Harald Hau; Sandy Lai
  9. The stimulative effect of forward guidance By Gavin, William T.; Keen, Benjamin D.; Richter, Alexander; Throckmorton, Nathaniel
  10. Institutional quality, the cyclicality of monetary policy and macroeconomic volatility By Duncan, Roberto
  11. Mortgages and monetary policy By Garriga, Carlos; Kydland, Finn E.; Šustek, Roman
  12. When does the general public lose trust in banks? By David-Jan Jansen; Robert Mosch; Carin van der Cruijsen
  13. Sovereigns versus banks: credit, crises, and consequences By Jorda, Oscar; Schularick, Moritz; Taylor, Alan M.
  14. Transmitting Global Liquidity to East Asia: Policy Rates, Bond Yields, Currencies and Dollar Credit By Dong He; Robert N McCauley
  15. The Impacts of Financial Crisis on Sovereign Credit Risk Analysis in Asia and Europe By Min Zhang; Adam W. Kolkiewicz; Tony S. Wirjanto; Xindan Li
  16. Inflation, Credit, and Indexed Unit of Account By Hyung Sun Choi; Ohik Kwon; Manjong Lee
  17. Challenges for financial sector supervision By Paul Cavelaars; Jakob de Haan; Paul Hilbers; Bart Stellinga

  1. By: Kara, Gazi (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: This paper examines the incentives of national regulators to coordinate regulatory policies in the presence of systemic risk in global financial markets. In a two-country and three-period model, correlated asset fire sales by banks generate systemic risk across national financial markets. Relaxing regulatory standards in one country increases both the cost and the severity of crises for both countries in this framework. In the absence of coordination, independent regulators choose inefficiently low levels of macro-prudential regulation. A central regulator internalizes the systemic risk and thereby can improve the welfare of coordinating countries. Symmetric countries always benefit from coordination. Asymmetric countries choose different levels of macro-prudential regulation when they act independently. Common central regulation will voluntarily emerge only between sufficiently similar countries.
    Keywords: Systemic risk; macroprudential regulation; international policy coordination
    Date: 2013–09–16
  2. By: Christopher Gandrud; Mark Hallerberg
    Abstract: Bank supervisors should provide publicly accessible, timely and consistent data on the banks under their jurisdiction. Such transparency increases democratic accountability and leads to greater market efficiency. There is greater supervisory transparency in the United States compared to the member states of the European Union. The US supervisors publish data quarterly and update fairly detailed information on bank balance sheets within a week. By contrast, based on an attempt to locate similar data in every EU country, in only 11 member states is this data at least partially available from supervisors, and in no member state is the level of transparency as high as in the US. Current and planned European Union requirements on bank transparency are either insufficient or could be easily sidestepped by supervisors. A banking union in Europe needs to include requirements for greater supervisory transparency.
    Date: 2014–01
  3. By: Michael W. Klein (Fletcher School, Tufts University, and NBER (E-mail:; Jay C. Shambaugh (George Washington University and NBER (E-mail:
    Abstract: A central result in international macroeconomics is that a government cannot simultaneously opt for open financial markets, fixed exchange rates, and monetary autonomy; rather, it is constrained to choosing no more than two of these three. In the wake of the Great Recession, however, there has been an effort to address macroeconomic challenges through intermediate measures, such as narrowly targeted capital controls or limited exchange rate flexibility. This paper addresses the question of whether these intermediate policies, which round the corners of the triangle representing the policy trilemma, afford a full measure of monetary policy autonomy. Our results confirm that extensive capital controls or floating exchange rates enable a country to have monetary autonomy, as suggested by the trilemma. Partial capital controls, however, do not generally enable a country to have greater monetary control than is the case with open capital accounts unless they are quite extensive. In contrast, a moderate amount of exchange rate flexibility does allow for some degree of monetary autonomy, especially in emerging and developing economies.
    Keywords: Exchange Rate Regimes, Trilemma, Monetary Policy, Capital Controls
    JEL: F3 F33 F42 E42 E58
    Date: 2013–12
  4. By: Ioannis Pragidis; Periklis Gogas; Benjamin Miranda Tabak
    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
    Date: 2013–12
  5. By: Andersen, Thomas Barnebeck (Department of Business and Economics); Malchow-Møller, Nikolaj (Department of Business and Economics); Nordvig, Jens (Nomura Securities)
    Abstract: Has inflation targeting (IT) conferred benefits in terms of economic growth on countries that followed this particular monetary policy strategy during the crisis period 2007-12? Analyzing the sample of all OECD countries, we answer this question in the affirmative: Countries with an IT monetary regime with flexible exchange rates weathered the crisis much better than countries with other regimes. This includes in particular countries with fixed exchange rate regimes, but also countries with flexible exchange rates without IT. The result holds in the full sample; it holds when we exclude the so-called peripheral Eurozone countries (Greece, Italy, Ireland, Portugal, and Spain); and it holds when we exclude all Eurozone countries. It is, in other words, a robust empirical finding. We demonstrate that part of the explanation for this difference in growth performance is found in differences in export performance during the initial years of the crisis, which in turn is explained by real exchange rate depreciations. However, this cannot explain the entire difference in performance between countries with flexible and fixed exchange rates in the aftermath of the Great Recession. IT seems also to confer other benefits on the countries above and beyond the effect from currency depreciation.
    Keywords: Inflation targeting; flexible exchange rates; economic growth; OEDC; Great Recession
    JEL: E42 E58 O43
    Date: 2013–12–21
  6. By: Tae Bong Kim (Korea Development Institute)
    Abstract: This paper shows assessments on the monetary policy of Korea based on an estimated model. During the sample period of the in ation targeting scheme, the monetary policy discretion, which is the monetary policy shock after the historical decomposition of the model, has been mostly in ationary while it was reducing the volatility of output growth and thus countercyclical. 3% target rate could have been achieved when the monetary policy shock's standard deviation was approximately half of its posterior estimate. Various degree of monetary policy stance has been simulated with the sample period. An aggressive monetary policy towards in ation stabilization would have generally led to the average level of in ation rate closer to its target rate but at the cost of higher volatilities of the output growth.
    Date: 2013
  7. By: Michael P. Devereux (Oxford University Centre for Business Taxation); Niels Johannesen (University of Copenhagen); John Vella (Oxford University Centre for Business Taxation)
    Abstract: In the wake of the fi?nancial crisis, a number of countries have introduced levies on bank borrowing with the aim of reducing risk in the ?financial sector. This paper studies the behavioural responses to the bank levies and evaluates the policy. We find that the levies induced banks to borrow less but also to hold more risky assets. The reduction in funding risk clearly dominates for banks with high capital ratios but is exactly offset by the increase in portfolio risk for banks with low capital ratios. This suggests that while the levies have reduced the total risk of relatively safe banks, they have done nothing to curb the risk of relatively risky banks, which presumably pose the greatest threat to fi?nancial stability.
    JEL: H25
    Date: 2013
  8. By: Harald Hau (University of Geneva and Swiss Finance Institute and Hong Kong Institute for Monetary Research); Sandy Lai (The University of Hong Kong)
    Abstract: The eurozone has a single short-term nominal interest rate, but monetary policy conditions measured by either real short-term interest rates or Taylor rule residuals varied substantially across countries in the period between 2003-2010. We use this cross-country variation in the (local) tightness of monetary policy conditions to examine its influence on equity and money market flows. In line with a powerful risk-shifting channel, we find that fund investors in countries with lower real interest rates shift their portfolio investment out of the money market and into the riskier equity market. This produces the strongest equity price increase in countries where domestic institutional investors hold a large share of the countries' stock market capitalization.
    Keywords: Monetary Policy, Asset Price Inflation, Risk Seeking, Taylor Rule Residuals
    JEL: G11 G14 G23
    Date: 2013–11
  9. By: Gavin, William T. (Federal Reserve Bank of St. Louis); Keen, Benjamin D. (University of Oklahoma); Richter, Alexander (Auburn University); Throckmorton, Nathaniel (Indiana University)
    Abstract: This article quantifies the stimulative effect of central bank forward guidance—the public announcement of the intended path for monetary policy in the future—when the nominal interest rate is stuck at its zero lower bound (ZLB). We use a global solution to a conventional nonlinear New Keynesian model to show how the forward guidance horizon impacts the stimulative effect. Forward guidance enters our model as news shocks to the monetary policy rule, which commits the central bank to a lower policy rate than its policy rule suggests. The success of forward guidance depends on whether households expect the economy to recover. When households expect a recovery, forward guidance about a future expansionary monetary policy shock lowers the expected nominal interest rate and increases current consumption. A longer forward guidance horizon strengthens this effect, but at a decreasing rate.
    Keywords: Monetary Policy; Forward Guidance; Zero Lower Bound; Global Solution Method
    JEL: E31 E42 E58 E61
    Date: 2013–12–24
  10. By: Duncan, Roberto (Federal Reserve Bank of Dallas)
    Abstract: In contrast to industrialized countries, emerging market economies are characterized by proor acyclical monetary policies and high output volatility. This paper argues that those facts can be related to a long-run feature of the economy - namely, its institutional quality (IQL). The paper presents evidence that supports the link between an index of IQL (law and order, government stability, investment profile, etc.), and (i) the cyclicality of monetary policy, and (ii) the volatilities of output and the nominal interest rate. In a DSGE model, foreign investors that choose a portfolio of direct investment and lending to domestic agents, face a probability of partial confiscation which works as a proxy that captures IQL. The economy is hit by external shocks to demand for home goods and productivity shocks while its central bank seeks to stabilize inflation and output. In the long run, a lower IQL tends to discourage external liabilities. If there is a positive external demand shock, we observe an increase in output and real appreciation. The latter operates through two opposite channels. First, it directly increases the opportunity cost of leisure generating incentives to expand labor supply. Second, it reduces the real value of the debt denominated in foreign currency which stimulates consumption but contracts the labor supply. If the IQL is low, the economy attracts fewer loans for domestic consumers and shows a lower debt-to-consumption ratio in the steady state. This implies that the reduction of the real value of the debt caused by the real appreciation is smaller. Given this low wealth effect, the real appreciation leads to an expansion of the labor supply. Wages drop and inflation diminishes. The central bank reacts by cutting its policy rate to stabilize inflation and generates a negative comovement between output and the nominal interest rate (procyclical policy). As a corollary, negative correlations between policy rates and output are not necessarily an indicator of destabilizing polices even in the presence of demand shocks.
    JEL: E40 E50 E60 F30 F40
    Date: 2014–01–03
  11. By: Garriga, Carlos (Federal Reserve Bank of St. Louis); Kydland, Finn E. (University of California–Santa Barbara); Šustek, Roman (Queen Mary, University of London)
    Abstract: Mortgage loans are a striking example of a persistent nominal rigidity. As a result, under incomplete markets, monetary policy affects decisions through the cost of new mortgage borrowing and the value of payments on outstanding debt. Observed debt levels and payment to income ratios suggest the role of such loans in monetary transmission may be important. A general equilibrium model is developed to address this question. The transmission is found to be stronger under adjustable- than fixed-rate contracts. The source of impulse also matters: persistent inflation shocks have larger effects than cyclical fluctuations in inflation and nominal interest rates.
    Keywords: Mortgages; debt servicing costs; monetary policy; transmission mechanism; housing investment.
    JEL: E32 E52 G21 R21
    Date: 2013–12–05
  12. By: David-Jan Jansen; Robert Mosch; Carin van der Cruijsen
    Abstract: When does the general public lose trust in banks? We provide empirical evidence using responses by Dutch survey participants to eight hypothetical scenarios. We find that members of the general public care strongly about executive compensation. Negative media reports, falling stock prices, and opaque product information also affect trust in banks. Experiencing a bank bailout leads to less concern about government intervention, while experience of a bank failure leads to greater concern on bonuses.
    Keywords: trust; banks; general public; financial crisis; survey data
    JEL: D12 D14 D18 G01 G21
    Date: 2013–11
  13. By: Jorda, Oscar (Federal Reserve Bank of San Francisco); Schularick, Moritz (University of Bonn); Taylor, Alan M. (University of California, Davis)
    Abstract: Two separate narratives have emerged in the wake of the Global Financial Crisis. One speaks of private financial excess and the key role of the banking system in leveraging and deleveraging the economy. The other emphasizes the public sector balance sheet over the private and worries about the risks of lax fiscal policies. However, the two may interact in important and understudied ways. This paper studies the co-evolution of public and private sector debt in advanced countries since 1870. We find that in advanced economies financial stability risks have come from private sector credit booms and not from the expansion of public debt. However, we find evidence that high levels of public debt have tended to exacerbate the effects of private sector deleveraging after crises, leading to more prolonged periods of economic depression. Fiscal space appears to be a constraint in the aftermath of a crisis, then and now.
    Keywords: leverage; booms; recessions; financial crises; business cycles; local projections
    JEL: C14 C52 E51 F32 F42 N10 N20
    Date: 2013
  14. By: Dong He (Hong Kong Monetary Authority and Hong Kong Institute for Monetary Research); Robert N McCauley (Bank for International Settlements)
    Abstract: We review extant work on the transmission of monetary policy, both conventional and unconventional, of the major advanced economies to East Asia through monetary policy reactions, integrated bond markets and induced currency appreciation. We present new results on the growth of foreign currency credit, especially US dollar credit, as a transmission mechanism. Restrained growth of dollar credit in Korea contrasts with very rapid growth on the Chinese mainland and in Hong Kong SAR.
    Date: 2013–10
  15. By: Min Zhang (School of Management and Engineering, Nanjing University, China); Adam W. Kolkiewicz (Department of Statistics & Actuarial Science, University of Waterloo, Canada); Tony S. Wirjanto (Department of Statistics & Actuarial Science, School of Accounting & Finance, University of Waterloo, Canada); Xindan Li (School of Management and Engineering, Nanjing University, China)
    Abstract: We investigate the nature of sovereign credit risk for selected Asian and European countries based on a set of sovereign CDS data over an eight-year period that includes the episode of the 2008-2009 global financial crisis. The principal component analysis results indicate that there exists strong commonality in sovereign credit risk among the countries studied in this paper following the crisis. In addition, the regression results show that commonality is importantly associated with both local and global financial and economic variables. There are also important differences in the sovereign of credit risk behavior between Asian and European countries. Specifically, we find that foreign reserve, global stock market, and volatility risk premium, affect Asian and European sovereign credit risks in the opposite direction. Lastly, we model the arrival rates of credit events as a square-root diffusion process from which a pricing model is constructed and estimated over pre and post-crisis periods. The resulting model is used to decompose credit spreads into risk premium and credit-event components. For most countries in our study, credit-event components weight more than risk-premiums, suggesting that, in the long term, investors are perhaps more concerned with the prospect of sovereign-specific credit events than systemic sovereign credit risks.
    Date: 2013–12
  16. By: Hyung Sun Choi (Department of Economics, Kyung Hee University, Seoul, Republic of Korea); Ohik Kwon (Department of Economics, Korea University, Seoul, Republic of Korea); Manjong Lee (Department of Economics, Korea University, Seoul, Republic of Korea)
    Abstract: A simple monetary model is constructed to study the implications of an indexed unit of account (Indexed-UoA). In an economy with an Indexed-UoA, credit trade friction attributed to inflation is resolved and there is no redistributional effect from unexpected inflation between debtors and creditors. However, in an economy without an Indexed-UoA, credit trades occur only if inflation is not too high and unexpected inflation renders debtors better off but creditors worse off. Adopting a medium of exchange as a unit of account is most apposite for a low-inflation economy, whereas introducing an alternative Indexed-UoA enhances welfare in an economy where inflation undermines credit trades.
    Keywords: indexed unit of account, deferred payment, inflation, welfare
    JEL: E31 E42 E50
    Date: 2013
  17. By: Paul Cavelaars; Jakob de Haan; Paul Hilbers; Bart Stellinga
    Abstract: The financial crisis demonstrated severe shortcomings in existing global, European and national regulatory and supervisory frameworks for the financial system. Although most attention was paid to regulatory flaws, the failure to prevent a near collapse of the financial system also triggered a global rethinking of what constitutes good financial supervision. Several pre-crisis key principles underlying supervision – such as a high trust in market participants’ ability to manage risks combined with a widespread belief that safeguarding the health of individual firms would guarantee system stability – and a general tendency towards light touch supervision, were strongly criticised (cf. FSA 2009; De Larosière 2009; Commissie de Wit 2010).
    Date: 2013–12

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