nep-cba New Economics Papers
on Central Banking
Issue of 2014‒01‒17
thirty-one papers chosen by
Maria Semenova
Higher School of Economics

  1. Central Bank Communication in the Financial Crisis: Evidence from a Survey of Financial Market Participants By Bernd Hayo; Matthias Neuenkirch
  2. Challenges for monetary policy By Issing, Otmar
  3. Modeling the impact of forecast-based regime switches on macroeconomic time series By Bel, K.; Paap, R.
  4. Bank and sovereign debt risk By Paries, Matthieu Darraq; Faia, Ester; Palenzuela, Diego Rodriguez
  5. Optimal policy and taylor rule cross-checking under parameter uncertainty By Bursian, Dirk; Roth, Markus
  6. Identifying and dating systemic banking crises using incidence and size of bank failures By Raymond Chaudron; Jakob de Haan
  7. Monetary policy and risk taking By Angeloni, Ignazio; Faia, Ester; Lo Duca, Marco
  8. Monetary Policy when the NAIRI is unknown: The Fed and the Great Deviation By Ronny Mazzocchi
  9. Basel III and CEO compensation in banks: Pay structures as a regulatory signal By Eufinger, Christian; Gill, Andrej
  10. Financial Soundness Indicators and Banking Crises By Matias Costa Navajas; Aaron Thegeya
  11. Stabilization policy, rational expectations and price-level versus inflation targeting: a survey By Hatcher, Michael C.; Minford, Patrick
  12. Intertemporal Coordination Failure and Monetary Policy By Ronny Mazzocchi
  13. Systemic risk and sovereign debt in the Euro area By Radev, Deyan
  14. The Benefits of International Policy Coordination Revisited By Jaromir Benes; Michael Kumhof; Douglas Laxton; Dirk Muir; Susanna Mursula
  15. Measuring capital adequacy supervisory stress tests in a Basel world By Wall, Larry D.
  16. Does Financial Connectedness Predict Crises? By Camelia Minoiu; Chanhyun Kang; V.S. Subrahmanian; Anamaria Berea
  17. The single supervisory mechanism - Panacea of quack banking regulation? Preliminary assessment of the evolving regime for the prudential supervision of banks with ECB involvement By Tröger, Tobias H.
  18. The Redistributive Effects of Financial Deregulation By Anton Korinek; Jonathan Kreamer
  19. Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten By Carmen Reinhart; Kenneth Rogoff
  20. Taxes, banks and financial stability By Gropp, Reint
  21. Bank rescues and bailout expectations: The erosion of market discipline during the financial crisis By Hett, Florian; Schmidt, Alexander
  22. Monetary Transmission in Brazil: Has the Credit Channel Changed? By Mercedes Garcia-Escribano
  23. Resilience in Latin America: Lessons from Macroeconomic Management and Financial Policies By Jose De Gregorio
  24. Does Monetary Policy cause Randomness or Chaos? A Case Study from the European Central Bank By Sanderson, Rohnn
  25. The European Central Bank's outright monetary transactions and the Federal Constitutional Court of Germany By Siekmann, Helmut; Wieland, Volker
  26. Trust me! I am a European Central Banker By Bursian, Dirk; Fürth, Sven
  27. Procyclicality and the Search for Early Warning Indicators By Hyun Song Shin
  28. Trust in the monetary authority By Bursian, Dirk; Faia, Ester
  29. Macro-prudential assessment of Colombian financial institutions’ systemic importance By Carlos León; Clara Machado; Andrés Murcia
  30. A Capital Adequacy Buffer Model By Allen, D.E.; Powell, R.J.; Singh, A.K.
  31. An extended model of currency options applicable as policy tool for central banks with inflation targeting and dollarized economies By Arizmendi, Luis-Felipe

  1. By: Bernd Hayo (University of Marburg); Matthias Neuenkirch (University of Trier)
    Abstract: In this paper, we study whether central bank communication has a positive effect on market participants’ perception of central banks’ (i) credibility, (ii) unorthodox measures, and (iii) independence. We utilise a survey of more than 500 financial market participants from around the world who answered questions in reference to the Bank of England (BoE), the Bank of Japan (BoJ), the European Central Bank (ECB), and the Federal Reserve (Fed). We find that market participants believe that the Fed communicates best, followed by the BoE, ECB, and BoJ. Similar rankings are found on the issues of credibility, satisfaction with unconventional monetary policy, and possible deterioration in independence. Using ordered probit models, we show that central bank communication has a positive effect on how central banks are perceived and understood, as it enhances credibility, increases satisfaction with unorthodox measures, and fosters perceived independence of central banks.
    Keywords: Central Bank, Communication, Credibility, Financial Crisis, Financial Market Participants, Independence, Survey, Unconventional Monetary Policy
    JEL: E52 E58
    Date: 2014
  2. By: Issing, Otmar
    Abstract: The financial crisis which started in 2007 has caused a tremendous challenge for monetary policy. The simple concept of inflation targeting has lost its position as state of the art. There is a debate on whether the mandate of a central bank should not be widened. And, indeed, monetary policy has been very accommodative in the last couple of years and central banks have modified their communication strategies by introducing forward guidance as a new policy tool. This paper addresses the consequences of these developments for the credibility, the reputation and the independence of central banks. It also comments on the recent debate among economists concerning the question whether the ECB's OMT program is compatible with its mandate. --
    Keywords: ECB,OMT,central banking
    Date: 2013
  3. By: Bel, K.; Paap, R.
    Abstract: Forecasts of key macroeconomic variables may lead to policy changes of governments, central banks and other economic agents. Policy changes in turn lead to structural changes in macroeconomic time series models. To describe this phenomenon we introduce a logistic smooth transition autoregressive model where the regime switches depend on the forecast of the time series of interest. This forecast can either be an exogenous expert forecast or an endogenous forecast generated by the model. Results of an application of the model to US inflation shows that (i) forecasts lead to regime changes and have an impact on the level of inflation; (ii) a relatively large forecast results in actions which in the end lower the inflation rate; (iii) a counterfactual scenario where forecasts during the oil crises in the 1970s are assumed to be correct leads to lower inflation than observed.
    Keywords: forecasting, inflation, nonlinear time series, regime switching
    Date: 2013–08–08
  4. By: Paries, Matthieu Darraq; Faia, Ester; Palenzuela, Diego Rodriguez
    Abstract: Euro area data show a positive connection between sovereign and bank risk, which increases with banks' and sovereign long run fragility. We build a macro model with banks subject to incentive problems and liquidity risk (in the form of liquidity based banks' runs) which provides a link between endogenous bank capital and macro and policy risk. Our banks also invest in risky government bonds used as capital buffer to self-insure against liquidity risk. The model can replicate the positive connection between sovereign and bank risk observed in the data. Central bank liquidity policy, through full allotment policy, is successful in stabilizing the spiraling feedback loops between bank and sovereign risk. --
    Keywords: liquidity risk,sovereign risk,capital regulations
    JEL: E5 G2
    Date: 2013
  5. By: Bursian, Dirk; Roth, Markus
    Abstract: We examine whether the robustifying nature of Taylor rule cross-checking under model uncertainty carries over to the case of parameter uncertainty. Adjusting monetary policy based on this kind of cross-checking can improve the outcome for the monetary authority. This, however, crucially depends on the relative welfare weight that is attached to the output gap and also the degree of monetary policy commitment. We find that Taylor rule cross-checking is on average able to improve losses when the monetary authority only moderately cares about output stabilization and when policy is set in a discretionary way. --
    Keywords: Optimal monetary policy,parameter uncertainty,Taylor rule
    JEL: E47 E52 E58
    Date: 2013
  6. By: Raymond Chaudron; Jakob de Haan
    Abstract: We analyse three databases of banking crises and investigate their consistency in the identification and timing of crises. We find that there are large and statistically significant discrepancies between the three datasets. We also compare the dating of banking crises according to these databases using information on the number and size of bank failures for four crises for which the timing strongly differs across these databases. We conclude that information on these variables allows determining the timing of banking crises more precisely. On the basis of our findings, we consider the database compiled by Laeven and Valencia to be the most accurate.
    Keywords: systemic banking crises; dating of crises; bank failures; monetary statistics; financial accounts
    JEL: G01 G21 N20
    Date: 2014–01
  7. By: Angeloni, Ignazio; Faia, Ester; Lo Duca, Marco
    Abstract: We assess the effects of monetary policy on bank risk to verify the existence of a risk-taking channel - monetary expansions inducing banks to assume more risk. We first present VAR evidence confirming that this channel exists and tends to concentrate on the bank funding side. Then, to rationalize this evidence we build a macro model where banks subject to runs endogenously choose their funding structure (deposits vs. capital) and risk level. A monetary expansion increases bank leverage and risk. In turn, higher bank risk in steady state increases asset price volatility and reduces equilibrium output. --
    Keywords: bank runs,risk taking,monetary policy
    JEL: E5 G2
    Date: 2013
  8. By: Ronny Mazzocchi
    Abstract: The outbreak of the financial crisis of 2007 has generated a lively debate on the real or alleged faults of the Federal Reserve (Fed). Some economists argue that in the period 2002-2005 the U.S. central bank has taken its target interest rate below the level implied by monetary pricinciples that had been followed for the previous 20 years. One can characterize this decision as a deviation from a policy rule such as a Taylor rule. This behavior determined the end of the Great Moderation and gave birth to the Great Recession. In this paper I challenge this view. I show how the deviations from the Taylor-ruleÕs hypothetical interest rate can be explained by the ambiguity on inflation indicators to use. I also explain how the Great Deviation was instead caused by an error in the estimate of one of the fundamental components of the Taylor rule, i.e. the natural rate of interest. Too expansionary mone- tary policy of the Fed was therefore not due to discretionary choices, but to a structural problem of the Taylor rule. Finally, I show how an adaptive rule based only on observable variables would have avoided the huge gap between short-term rates and natural rates
    JEL: E52 E58 G01 G28
    Date: 2013
  9. By: Eufinger, Christian; Gill, Andrej
    Abstract: This paper proposes a new regulatory approach that implements capital requirements contingent on managerial compensation. We argue that excessive risk taking in the financial sector originates from the shareholder moral hazard created by government guarantees rather than from corporate governance failures within banks. The idea of the proposed regulation is to utilize the compensation scheme to drive a wedge between the interests of top management and shareholders to counteract shareholder risk-shifting incentives. The decisive advantage of this approach compared to existing regulation is that the regulator does not need to be able to properly measure the bank investment risk, which has been shown to be a difficult task during the 2008-2009 financial crisis. --
    Keywords: Basel III,capital regulation,compensation,leverage,risk
    JEL: G21 G28 G30 G32 G38
    Date: 2013
  10. By: Matias Costa Navajas; Aaron Thegeya
    Abstract: The paper tests the effectiveness of financial soundness indicators (FSIs) as harbingers of banking crises, using multivariate logit models to see whether FSIs, broad macroeconomic indicators, and institutional indicators can indeed predict crisis occurrences. The analysis draws upon a data set of homogeneous indicators comparable across countries over the period 2005 to 2012, leveraging the IMF’s FSI database. Results indicate significant correlation between some FSIs and the occurrence of systemic banking crises, and suggest that some indicators are precursors to the occurrence of banking crises.
    Keywords: Financial soundness indicators;Banking sector;Banking crisis;External shocks;Financial soundness indicators; banking crises; macroprudential analysis
    Date: 2013–12–23
  11. By: Hatcher, Michael C. (Cardiff Business School); Minford, Patrick (Cardiff Business School)
    Abstract: We survey recent literature comparing inflation targeting (IT) and price-level targeting (PT) as macroeconomic stabilization policies. Our focus is on New Keynesian models and areas which have seen significant developments since Ambler’s (2009) survey: the zero lower bound on nominal interest rates; financial frictions; and optimal monetary policy. Ambler’s main conclusion that PT improves the inflation-output volatility trade-off in New Keynesian models is reasonably robust to these extensions, several of which are attempts to address issues raised by the recent financial crisis. The beneficial effects of PT therefore appear to hang on the joint assumption that agents are rational and the economy New Keynesian. Accordingly, we discuss recent experimental and survey evidence on whether expectations are rational, as well as the applied macro literature on the empirical performance of New Keynesian models. In addition, we discuss a more recent strand of applied literature that has formally tested New Keynesian models with rational expectations. Overall the evidence is not conclusive, but we note that New Keynesian models are able to match a number of dynamic features in the data and that behavioural models of the macroeconomy are outperformed by those with rational expectations in formal statistical tests. Accordingly, we argue that policymakers should continue to pay attention to PT.
    JEL: E52
    Date: 2013–12
  12. By: Ronny Mazzocchi
    Abstract: The turn of century long period of sustained growth with low and stable inflation let the economic profession and the public opinion to think that the right theoretical foundation for macroeconomic policy had been found. However the Great Crisis of 2008 indicates a spectac- ular failure of this framework in dealing with sources of macroeconomic instability and providing policy advise. Financial instability is the new challenge for monetary policy. Most of the recent research indicates that financial crises follow prolonged unwinding of investment-saving imbalances which are not contemplated by the standard theoretical framework. This paper draws a dynamic model where investment- saving imbalances are allowed to develop. It introduces different types of feedback interest-rate rules in order to provide some preliminary indications for the conduct of monetary policy.
    JEL: E21 E22 E31 E32 E52
    Date: 2013
  13. By: Radev, Deyan
    Abstract: We introduce a new measure of systemic risk, the change in the conditional joint probability of default, which assesses the effects of the interdependence in the financial system on the general default risk of sovereign debtors. We apply our measure to examine the fragility of the European financial system during the ongoing sovereign debt crisis. Our analysis documents an increase in systemic risk contributions in the euro area during the post-Lehman global recession and especially after the beginning of the euro area sovereign debt crisis. We also find a considerable potential for cascade effects from small to large euro area sovereigns. When we investigate the effect of sovereign default on the European Union banking system, we find that bigger banks, banks with riskier activities, with poor asset quality, and funding and liquidity constraints tend to be more vulnerable to a sovereign default. Surprisingly, an increase in leverage does not seem to influence systemic vulnerability. --
    Keywords: Sovereign debt,Sovereign default,Financial distress,Systemic risk,Contagion,Banking stability,Tail risk
    JEL: C16 C61 G01 G21
    Date: 2013
  14. By: Jaromir Benes; Michael Kumhof; Douglas Laxton; Dirk Muir; Susanna Mursula
    Abstract: This paper uses two of the IMF’s DSGE models to simulate the benefits of international fiscal and macroprudential policy coordination. The key argument is that these two policies are similar in that, unlike monetary policy, they have long-run effects on the level of GDP that need to be traded off with short-run effects on the volatility of GDP. Furthermore, the short-run effects are potentially much larger than those of conventional monetary policy, especially in the presence of nonlinearities such as the zero interest rate floor, minimum capital adequacy regulations, and lending risk that depends in a convex fashion on loan-to-value ratios. As a consequence we find that coordinated fiscal and/or macroprudential policy measures can have much larger stimulus and spillover effects than what has traditionally been found in the literature on conventional monetary policy.
    Keywords: Fiscal policy;Macroprudential Policy;Monetary policy;Stabilization measures;International cooperation;Economic models;Monetary Policy, Fiscal Policy, Macroprudential Policy, International Policy Coordination, International Spillovers, Nonlinearities, Fiscal Multipliers, Macrofinancial Linkages, Prudential Regulation
    Date: 2013–12–23
  15. By: Wall, Larry D. (Federal Reserve Bank of Atlanta)
    Abstract: The United States is now committed to using two relatively sophisticated approaches to measuring capital adequacy: Basel III and stress tests. This paper shows how stress testing could mitigate weaknesses in the way Basel III measures credit and interest rate risk, the way it measures bank capital, and the way it creates countercyclical capital buffers. However, this paper also emphasizes the extent to which stress tests add value will depend upon the exercise of supervisor discretion in the design of stress scenarios. Whether supervisors will use this discretion more effectively than they have used other tools in the past remains to be seen.
    Keywords: capital adequacy; Basel capital ratios; stress test
    JEL: E50 G01 G21 G28
    Date: 2013–12–01
  16. By: Camelia Minoiu; Chanhyun Kang; V.S. Subrahmanian; Anamaria Berea
    Abstract: The global financial crisis has reignited interest in models of crisis prediction. It has also raised the question whether financial connectedness - a possible source of systemic risk - can serve as an early warning indicator of crises. In this paper we examine the ability of connectedness in the global network of financial linkages to predict systemic banking crises. Our results indicate that increases in a country's financial interconnectedness and decreases in its neighbors' connectedness are associated with a higher probability of banking crises after controlling for macroeconomic fundamentals.
    Keywords: Global Financial Crisis 2008-2009;Financial crisis;Banking crisis;Financial risk;Economic integration;early warning systems, systemic risk, financial networks, banking crises
    Date: 2013–12–24
  17. By: Tröger, Tobias H.
    Abstract: This paper analyzes the evolving architecture for the prudential supervision of banks in the euro area. It is primarily concerned with the likely effectiveness of the SSM as a regime that intends to bolster financial stability in the steady state. By using insights from the political economy of bureaucracy it finds that the SSM is overly focused on sharp tools to discipline captured national supervisors and thus underincentives their top-level personnel to voluntarily contribute to rigid supervision. The success of the SSM in this regard will hinge on establishing a common supervisory culture that provides positive incentives for national supervisors. In this regard, the internal decision making structure of the ECB in supervisory matters provides some integrative elements. Yet, the complex procedures also impede swift decision making and do not solve the problem adequately. Ultimately, a careful design and animation of the ECB-defined supervisory framework and the development of inter-agency career opportunities will be critical. The ECB will become a de facto standard setter that competes with the EBA. A likely standoff in the EBA's Board of Supervisors will lead to a growing gap in regulatory integration between SSM-participants and other EU Member States. Joining the SSM as a non-euro area Member State is unattractive because the current legal framework grants no voting rights in the ECB's ultimate decision making body. It also does not supply a credible commitment opportunity for Member States who seek to bond to high quality supervision. --
    Keywords: prudential supervision,banking union,regulatory capture,political economy of bureaucracy,Single Supervisory Mechanism (SSM),European Central Bank (ECB),European Banking Authority (EBA)
    JEL: G21 G28 H77 K22 K23 L22
    Date: 2013
  18. By: Anton Korinek; Jonathan Kreamer
    Abstract: Financial regulation is often framed as a question of economic efficiency. This paper, by contrast, puts the distributive implications of financial regulation center stage. We develop a model in which the financial sector benefits from risk-taking by earning greater expected returns. However, risktaking also increases the incidence of large losses that lead to credit crunches and impose negative externalities on the real economy. We describe a Pareto frontier along which different levels of risktaking map into different levels of welfare for the two parties. A regulator has to trade off efficiency in the financial sector, which is aided by deregulation, against efficiency in the real economy, which is aided by tighter regulation and a more stable supply of credit. We also show that financial innovation, asymmetric compensation schemes, concentration in the banking system, and bailout expectations enable or encourage greater risk-taking and allocate greater surplus to the financial sector at the expense of the rest of the economy.
    Keywords: Financial sector;Banks;Capital;Economic models;Financial Regulation, Distributive Conflict, Rent Extraction, Growth of the Financial Sector
    Date: 2013–12–17
  19. By: Carmen Reinhart; Kenneth Rogoff
    Abstract: Even after one of the most severe multi-year crises on record in the advanced economies, the received wisdom in policy circles clings to the notion that high-income countries are completely different from their emerging market counterparts. The current phase of the official policy approach is predicated on the assumption that debt sustainability can be achieved through a mix of austerity, forbearance and growth. The claim is that advanced countries do not need to resort to the standard toolkit of emerging markets, including debt restructurings and conversions, higher inflation, capital controls and other forms of financial repression. As we document, this claim is at odds with the historical track record of most advanced economies, where debt restructuring or conversions, financial Repression, and a tolerance for higher inflation, or a combination of these were an integral part of the resolution of significant past debt overhangs.
    Keywords: Financial crisis;Sovereign debt;Debt conversion;Debt restructuring;External debt;Public debt;Inflation;Economic growth;Developed countries;Emerging markets;Financial crises, sovereign debt crises, deleveraging, credit cycles, financial repression, debt restructuring
    Date: 2013–12–24
  20. By: Gropp, Reint
    Abstract: In this note, a new concept for a European deposit guarantee scheme is proposed, which takes account of the strong political reservations against a mutualization of the liability for bank deposits. The three-stage model for deposit insurance outlined in the text builds on existing national deposit guarantee schemes, offering loss compensation on a European level and at the same time preventing excessive risk and moral hazard taking by individual banks. --
    Keywords: bank risk,banking union,deposit insurance
    Date: 2013
  21. By: Hett, Florian; Schmidt, Alexander
    Abstract: We show that market discipline, defined as the extent to which firm specific risk characteristics are re ected in market prices, eroded during the recent financial crisis in 2008. We design a novel test of changes in market discipline based on the relation between firm specific risk characteristics and debt-to-equity hedge ratios. We find that market discipline already weakened after the rescue of Bear Stearns before disappearing almost entirely after the failure of Lehman Brothers. The effect is stronger for investment banks and large financial institutions, while there is no comparable effect for non-financial firms. --
    Keywords: Bailout,Implicit Guarantees,Too-Big-To-Fail,Market Discipline
    JEL: G14 G21 G28 H81
    Date: 2013
  22. By: Mercedes Garcia-Escribano
    Abstract: This paper investigates the transmission of monetary policy by private banks in Brazil during the recent easing cycle. The analysis presented uses a panel dataset with information on lending by private banks in Brazil and concludes that monetary transmission through lending volumes was not impaired. Instead, the observed diminished lending appears to be related to supply and demand factors, as well as to the rapid expansion of public banks’ lending.
    Keywords: Monetary transmission mechanism;Brazil;Monetary policy;Business cycles;Credit expansion;Banks;Private sector;Loans;monetary transmission, monetary policy, credit growth
    Date: 2013–12–17
  23. By: Jose De Gregorio
    Abstract: This paper analyzes the unprecedented resilience of Latin American countries to the global financial crisis. It argues that sound macroeconomic conditions, which allowed an unusual monetary and fiscal expansion, exchange rate flexibility, a strong and well--regulated financial system, high level of reserves, and a bit of luck coming from very high terms of trade, were central to good economic performance. Persevering along the road of strong macroeconomic and financial policies is necessary, but not sufficient, to go from recovery to sustained growth.
    Keywords: Economic recovery;Latin America;Emerging markets;Economic growth;Monetary policy;Reserves accumulation;Fiscal policy;Financial systems;Global Financial Crisis 2008-2009;Latin America, macroeconomic management, financial policies, resilience
    Date: 2013–12–20
  24. By: Sanderson, Rohnn
    Abstract: Using the HICP (Harmonized Index of Consumer Prices) the author tests the series for the makeup of its dynamic components both before and after the start of stage three of the European Central Bank’s (ECB) monetary policy directive. While it appears ECB is meeting its stated objective, it is perhaps more important to address the composition of the lag and volatility of monetary policy to see how a policy change alters the fundamental dynamic structure of an economic system. The HICP data provides a good natural experiment for assessing structural change. This is important because while a policy may achieve its goal(s), in doing so it may alter the fundamental nature of how that system behaves, potentially causing the system to be more volatile or more sensitive to exogenous shocks in the future. Changes to the fundamental nature of a dynamic system can mean that future policies, that are similar to the present policies, could have very different impacts on that very same system in terms of both long run and short run effects. The paper finds that while the ECB may be meeting its stated objectives, it may be potentially increasing the degree and severity of future short run deflationary/inflationary cycles from similar policies in the future due to the type of random and deterministic components in the system. More data and further study is needed to determine the long-term affects of monetary policy in economic systems as many economic cycles are indeed very long.
    Keywords: dynamic systems, Hurst exponent, chaos, long-term memory, monetary policy
    JEL: C50 E40 G18
    Date: 2013–12–18
  25. By: Siekmann, Helmut; Wieland, Volker
    Abstract: This note reviews the legal issues and concerns that are likely to play an important role in the ongoing deliberations of the Federal Constitutional Court of Germany concerning the legality of ECB government bond purchases such as those conducted in the context of its earlier Securities Market Programme or potential future Outright Monetary Transactions. --
    Keywords: ECB,OMT,fiscal policy,monetary policy
    Date: 2013
  26. By: Bursian, Dirk; Fürth, Sven
    Abstract: In the aftermath of the financial crisis, the ECB has experienced an unprecedented deterioration in the level of trust. This raises the question as to what factors determine trust in central banking. We use a unique cross-country dataset which includes a rich set of socio-economic characteristics and supplement it with variables meant to reflect a country's macroeconomic condition. We find that besides individual socio-economic characteristics, macroeconomic conditions play a crucial role in the trust-building process. Our results suggest that agents are boundedly rational in the trust-building process and that current ECB market operations may even be beneficial for trust in the ECB in the long-run. --
    Keywords: Central Banking,European Central Bank,Financial Crisis,Fiscal Crisis,Trust
    JEL: D1 E5 G21 H6
    Date: 2013
  27. By: Hyun Song Shin
    Abstract: This paper compares three types of early warning indicators of financial instability – those based on financial market prices, those based on normalized measures of total credit and those based on liabilities of financial intermediaries. Prices perform well as concurrent indicators of market conditions but are not suitable as early warning indicators. Total credit and liabilities convey similar information and perform better as early warning indicators, but liabilities are more transparent and the decomposition between core and non-core liabilities convey additional useful information.
    Keywords: Business cycles;Capital markets;Credit;Demand for money;China;Banks;Monetary aggregates;Non-core liabilities, credit cycles, financial stability
    Date: 2013–12–20
  28. By: Bursian, Dirk; Faia, Ester
    Abstract: Trust in policy makers uctuates signi…cantly over the cycle and a¤ects the transmission mechanism. Despite this it is absent from the literature. We build a monetary model embedding trust cycles; the latter emerge as an equilibrium phenomenon of a game-theoretic interaction between atomistic agents and the monetary authority. Trust a¤ects agentsstochastic discount factors, namely the price of future risk, and through this it interacts with the monetary trans- mission mechanism. Using data from the Eurobarometer surveys we analyze the link between trust and the transmission mechanism of macro and monetary shocks: empirical results are in line with theoretical ones. --
    Keywords: trust evolutionary games,trust driven expectations,monetary transmission mechanism
    JEL: E0 E5
    Date: 2013
  29. By: Carlos León; Clara Machado; Andrés Murcia
    Abstract: This document presents an enhanced and condensed version of preceding proposals for identifying systemically important financial institutions in Colombia. Three systemic importance metrics are implemented: (i) money market net exposures network hub centrality; (ii) large-value payment system network hub centrality; and (iii) an adjusted assets measure. Two complementary aggregation methods for those metrics are implemented: fuzzy logic and principal component analysis. The two resulting indexes concur in several features: (i) the ranking and remoteness of the top-two most systemically important financial institutions; (ii) the preeminence of credit institutions in the indexes; (iii) the appearance of a brokerage firm in the top-six; (iv) the skewed nature of the indexes, which match the skewed (i.e. inhomogeneous) nature of the three metrics and their approximate scale-free distribution. The indexes are non-redundant and provide a comprehensive relative assessment of each financial institution’s systemic importance, in which the choice of metrics pursues the macro-prudential perspective of financial stability. The indexes may serve financial authorities as quantitative tools for focusing their attention and resources where the severity resulting from an institution failing or near-failing is estimated to be the greatest. They may also serve them for enhanced policy and decision-making.
    Keywords: Systemic Importance, Systemic Risk, Fuzzy Logic, Principal Component Analysis, Financial Stability, Macro-prudential. Classification JEL: D85, C63, E58, G28
    Date: 2013–12
  30. By: Allen, D.E.; Powell, R.J.; Singh, A.K.
    Abstract: __Abstract__ In this paper, we develop a new capital adequacy buffer model (CABM) which is sensitive to dynamic economic circumstances. The model, which measures additional bank capital required to compensate for fluctuating credit risk, is a novel combination of the Merton structural model which measures distance to default and the timeless capital asset pricing model (CAPM) which measures additional returns to compensate for additional share price risk.
    Keywords: credit risk, capital buffer, distance to default, conditional value at risk, Capital adequacy buffer model
    JEL: G01 G21 G28
    Date: 2013–10–01
  31. By: Arizmendi, Luis-Felipe
    Abstract: The purpose of this paper is to provide a new set of tools for policy makers at central banks. Based on the Garman-Kohlhagen formula for currency options, this research extends it with the Taylor-rule expression used for inflation targeting, thus obtaining the corresponding Call and Put options and higher-degree partial derivatives known as "Greeks" for key variables such as the policy target domestic interest rate and the output gap.
    Keywords: Inflation Targeting, Central bank policies, Exchange rates, Currency options.
    JEL: E4 E44 E58 F31 G13
    Date: 2013–03–05

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