nep-cba New Economics Papers
on Central Banking
Issue of 2014‒01‒24
24 papers chosen by
Maria Semenova
Higher School of Economics

  1. Reactions to Shocks and Monetary Policy Regimes: Inflation Targeting Versus Flexible Currency Board in Ghana, South Africa and the WAEMU By Fadia Al Hajj; Gilles Dufrénot,; Kimiko Sugimoto; Romain Wolf
  2. Comparing U.S. and European Market Volatility Responses to Interest Rate Policy Announcements By Krieger , Kevin; Mauck, Nathan; Vasquez, Joseph
  3. Recent developments in monetary policy implementation By Potter, Simon M.
  4. The perils of nominal targets By Armenter, Roc
  5. Sovereign Borrowing, Financial Assistance and Debt Repudiation By Florian Kirsch; Ronald Rühmkorf
  6. Understanding the gains from wage flexibility: The exchange rate connection By Jordi Galí; Tommaso Monacelli
  7. Welfare Reversals in a Monetary Union By Stéphane Auray; Aurélien Eyquem
  8. The Conservativeness of the Central Bank when Institutional Quality is Poor By Ferré Carracedo, Montserrat; García Fortuny, Judit; Manzano, Carolina
  9. "Financial Crisis Resolution and Federal Reserve Governance: Economic Thought and Political Realities" By Bernard Shull
  10. Debt Dynamics and Monetary Policy: A Note By Laséen, Stefan; Strid, Ingvar
  11. The Evolution of Bank Supervision: Evidence from U.S. States By Mitchener, Kris James
  12. Observations on the Centennial of the Federal Reserve System The Philadelphia Fed Policy Forum: "The History of Central Banking in the United States," December 6, 2013 By Plosser, Charles I.
  13. Inflation, structural change and conflict in post-disinflation Brazil: a structuralist appraisal By André Roncaglia de Carvalho
  14. Basel Norms and Analysis of Banking Risks; Performance and Future Prospects. By Bisht, Poonam
  15. A Note on Differential Asymmetric Effects of Money Supply and Policy Rate Shocks in India By Khundrakpam, Jeevan Kumar
  16. Contextualizing Systemic Risk By Lukas Scheffknecht
  17. Surplus-invariant capital adequacy tests and their risk measures By Pablo Koch-Medina; Santiago Moreno-Bromberg; Cosimo Munari
  18. Real Output and Prices Adjustments Under Different Exchange Rate Regimes By Rajmund Mirdala
  19. Does it Take Two to Tango? Improving Cooperation between the IMF and the World Bank: Theory and Empirical Evidence By Silvia Marchesi; Laura Sabani
  20. Financial sector policy in practice : benchmarking financial sector strategies around the world By Maimbo, Samuel Munzele; Melecky, Martin
  21. Recovery from Financial Crises: Evidence from 100 Episodes By Carmen M. Reinhart; Kenneth S. Rogoff
  22. Technological Change, Financial Innovation, and Diffusion in Banking By W. Scott Frame; Lawrence J. White
  23. Exchange Rates and Fundamentals:Closing a Two-country Model By Takashi Kano;
  24. The financial sector and economic growth in a panel of countries By Gründler, Klaus; Weitzel, Jan

  1. By: Fadia Al Hajj; Gilles Dufrénot,; Kimiko Sugimoto; Romain Wolf
    Abstract: The aim of this paper is to examine the monetary policy actions through which the central banks in the Sub-Saharan African countries have searched to eliminate the negative impacts of the shocks facing their economies. We compare two types of monetary policy regimes: a currency board regime (in the CFA zone countries) and an inflation targeting policy regime (in Ghana and South Africa). We compare the properties of both policies when the central banks respond to three negative shocks hitting the economies: a recessionary demand shock, a supply shock increasing inflation and a negative fiscal shock. We propose an FPAS model (forecasting and monetary policy analysis system) that extends the usual FPAS models used in the literature to evaluate the impact of several policies in response to different types of exogenous shocks. We find that both policies are inappropriate to help the economies exiting from the effects of negative demand shocks (the adjustment relies mainly on fiscal policy), both are essential when negative shocks to primary balance occur (fiscal policy aggravates the negative effects of the shocks), while inflation targeting dominates the currency board regime as a strategy to cope with positive shocks to inflation.
    Keywords: inflation target, currency board, African countries
    JEL: E52 F41 Q33
    Date: 2013–11–15
  2. By: Krieger , Kevin; Mauck, Nathan; Vasquez, Joseph
    Abstract: We examine the response of U.S. (VIX) and German (VDAX) implied volatility indices to the announcement of interest rate policy decisions by the Federal Open Market Committee (FOMC) and the European Central Bank (ECB). We confirm prior findings that VIX declines on FOMC meetings days. We present new findings that indicate that VDAX declines on FOMC meeting days, but is not related to ECB meeting days. VIX is unrelated to ECB meeting days. Taken collectively, our results indicate a prominent position for the FOMC in determining uncertainty levels both domestically and abroad relative to no relation between uncertainty levels and the ECB. JEL
    Keywords: FOMC, ECB, VIX, VDAX, Monetary policy, Volatility spillover
    JEL: E44 E52 E58 F3 G20 G21 G28
    Date: 2014–01–14
  3. By: Potter, Simon M. (Federal Reserve Bank of New York)
    Abstract: Remarks before the Money Marketeers of New York University, New York City
    Keywords: the Desk; dual mandate; primary dealers; counterparties; IOER; reverse repos; interest on excess reserves; System Open Market Account (SOMA)
    JEL: E44 E52 E58
    Date: 2013–12–02
  4. By: Armenter, Roc (Federal Reserve Bank of Philadelphia)
    Abstract: A monetary authority can be committed to pursuing an inflation, price-level, or nominal output target yet systematically fail to achieve the specified goals. Constrained by the zero lower bound on the policy rate, the monetary authority is unable to implement its objectives when private-sector expectations stray away from the target in the first place. Low-inflation expectations become self-fulfilling, leading to multiple Markov equilibria. Private-sector expectations are anchored on a unique Markov equilibrium if the monetary authority is given a strong stabilization goal for the policy rate. However, policy-rate stabilization may not improve welfare as the resulting policy is severely distorted.
    Keywords: Nominal targets; Monetary authority; Markov equilibria
    Date: 2013–12–10
  5. By: Florian Kirsch; Ronald Rühmkorf
    Abstract: Official lenders provide financial assistance to countries that face sovereign debt crisis. The availability of financial assistance has counteracting effects on the default incentives of governments. On the one hand, financial assistance can help to avoid defaults by bridging times of fundamental crises or resolving coordination failures among private investors. On the other hand, the insurance effect of financial assistance lowers borrowing costs which induces the sovereign to accumulate higher debt levels. To assess the overall effect of financial assistance on the probability of default we construct a quantitative model of endogenous credit structure and sovereign default that allows for self-fulfilling expectations of default. Calibrating the model to Argentinean data we find that the availability of financial assistance reduces the number of defaults that occur due to self-fulfilling runs by private investors. However, at the same time it raises average debt levels causing an overall increase of the probability of default.
    Keywords: Sovereign debt, Sovereign default, Self-fulfilling runs, Bailout
    JEL: F34 G15 O19
    Date: 2013–01
  6. By: Jordi Galí; Tommaso Monacelli
    Abstract: We study the gains from increased wage flexibility and their dependence on exchange rate policy, using a small open economy model with staggered price and wage setting. Two results stand out: (i) the impact of wage adjustments on employment is smaller the more the central bank seeks to stabilize the exchange rate, and (ii) an increase in wage flexibility often reduces welfare, and more likely so in economies under an exchange rate peg or an exchange rate-focused monetary policy. Our findings call into question the common view that wage flexibility is particularly desirable in a currency union.
    Keywords: sticky wages, nominal rigidities, New Keynesian model, stabilization policies, exchange rate policy, currency unions, monetary policy rules.
    JEL: E32 E52 F41
    Date: 2013–12
  7. By: Stéphane Auray (EQUIPPE - ECONOMIE QUANTITATIVE, INTEGRATION, POLITIQUES PUBLIQUES ET ECONOMETRIE - Université Lille I - Sciences et technologies, CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique); Aurélien Eyquem (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure (ENS) - Lyon - PRES Université de Lyon)
    Abstract: We show that welfare can be lower under complete financial markets than under autarky in a monetary union with home bias, sticky prices and asymmetric shocks. Such a monetary union is a second-best environment in which the structure of financial markets affects risk-sharing but also shapes the dynamics of inflation rates and the welfare costs from nominal rigidities. Welfare reversals arise for a variety of empirically plausible degrees of price stickiness when the Marshall-Lerner condition is met. These results carry over a model with active fiscal policies, and hold within a medium-scale model, although to a weaker extent.
    Keywords: Monetary Union; Financial Markets Incompleteness; Sticky Prices; Fiscal and Monetary Policy
    Date: 2014–01–08
  8. By: Ferré Carracedo, Montserrat; García Fortuny, Judit; Manzano, Carolina
    Abstract: We propose an extension of Alesina and Tabellini 's model (1987) to include corruption, which is understood as the presence of weak institutions collecting revenue through formal tax channels. This paper analyses how conservative should an independent central bank be when the institutional quality is poor. When there are no political distortions, we show that the central bank has to be more conservative than the government, except with complete corruption. In this particular case, the central bank should be as conservative as the government. Further, we obtain that the relationship between the optimal relative degree of conservativeness of the central bank and the degree of corruption is affected by supply shocks. Concretely, when these shocks are not important, the central bank should be less conservative if the degree of corruption increases. However, this result may not hold when the shocks are relevant. JEL classi fication: D6, D73, E52, E58, E62, E63. Keywords: Central Bank Conservativeness; Corruption; Fiscal Policy; Monetary Policy; Seigniorage.
    Keywords: Economia del benestar, Corrupció, Bancs centrals, Política monetària, Política fiscal, 336 - Finances. Banca. Moneda. Borsa,
    Date: 2013
  9. By: Bernard Shull
    Abstract: The Federal Reserve has been criticized for not forestalling the financial crisis of 2007-09, and for its unconventional monetary policies that have followed. Its critics have raised questions as to whom, if anyone, reins in the Federal Reserve if and when its policies are misguided or abusive. This paper traces the principal changes in governance of the Federal Reserve over its history. These changes have, for the most part, developed in the wake of economic upheavals, when Fed policy has been challenged. The aim is to identify relevant issues regarding governance and to establish a basis for change, if needed. It describes the governance mechanism established by the Federal Reserve Act in 1913, traces the passing of this mechanism in the 1920s and 1930s, and assays congressional efforts to expand oversight in the 1970s. It also considers the changes in Fed policies induced by the financial crisis of 2007-09 and the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. It concludes that the original internal governance mechanism, a system of checks and balances that aimed to protect all the important interest groups in the country, faded in the 1920s and was never adequately replaced. In light of the Federal Reserve's continued growth in power and influence, this deficiency constitutes a threat not only to "stakeholders" but also to the independence of the Federal Reserve itself.
    Keywords: Central Banks; Federal Reserve; Governance
    JEL: E58 N2
    Date: 2014–01
  10. By: Laséen, Stefan (Monetary Policy Department, Central Bank of Sweden); Strid, Ingvar (Monetary Policy Department, Central Bank of Sweden)
    Abstract: "Leaning against the wind" – a tighter monetary policy than necessary for stabilizing inflation around the inflation target and unemployment around a long-run sustainable rate – has been justified as a way of reducing household indebtedness. In a recent paper Lars Svensson claims that this policy is counterproductive, since a higher policy rate actually leads to an increase (and not a decrease) in real debt and the debt-to-GDP ratio. In this note we offer some comments and extensions to Svensson´s analysis. In particular, we take Svensson´s debt model to the data and show that it provides an incomplete account of short term debt dynamics. Further, the overall analysis of the effects of monetary policy on debt rests on the rather strong assumption that debt is independent of the policy rate, conditional on housing prices. The policy responses advocated by Svensson can therefore be questioned. More importantly, our exercises with a modified model of debt dynamics enables further understanding of how different assumptions affect the assessment of the effects of monetary policy on debt.
    Keywords: House prices; Mortgage Debt; Monetary policy; Bayesian Estimation; Structural VAR
    JEL: C32 E21 E31 E32 E44 E52 R21 R31
    Date: 2013–12–01
  11. By: Mitchener, Kris James (University of Warwick)
    Abstract: We use a novel data set spanning 1820-1910 to examine the origins of bank supervision and assess factors leading to the creation of formal bank supervisory institutions across U.S. states. We show that it took more than a century for the widespread adoption of independent supervisory institutions tasked with maintaining the safety and soundness of banks. State legislatures initially pursued cheaper regulatory alternatives, such as double liability laws; however, banking distress at the state level as well as the structural shift from note-issuing to deposit-taking commercial banks propelled policymakers to adopt costly and permanent supervisory institutions.
    Keywords: bank supervision, U.S. States
    Date: 2014
  12. By: Plosser, Charles I. (Federal Reserve Bank of Philadelphia)
    Abstract: Presented by Charles I. Plosser, President and Chief Executive Officer, Federal Reserve Bank of Philadelphia, The Philadelphia Fed Policy Forum, "The History of Central Banking in the United States," Philadelphia, PA
    Keywords: Centennial
    Date: 2013–12–06
  13. By: André Roncaglia de Carvalho
    Abstract: The paper analyzes some of the structural causes of inflationary persistence in Brazil in the post-Real plan period, in contrast to the Brazilian Central Bank’s view on the causes of inflation, particularly in what concerns its inertial component. It begins with a historical perspective on the convergence of stabilization theory to the so-called “macroeconomic consensus” and the understanding of inflation by this approach. We make the case that inflation can be better understood in its root causes only if the terms of distributional conflict and inter-sectoral dynamics are considered, which include the structural changes undergone by the Brazilian economy after the Real plan. Two primary pressures are therefore analyzed, namely: (i) the increase in the tertiary sector´s share of total value added in aggregate output combined with (ii) an intensive policy of income distribution. The interplay of supply and demand forces in a widely-indexed economic environment paints a more detailed picture of the current challenges faced by the ongoing monetary policy regime in Brazil than the one found in new Keynesian models.
    Keywords: inflation inertia; structural change; conflicting claims; Real plan; Brazil
    JEL: E02 E31 B50
    Date: 2013–12–20
  14. By: Bisht, Poonam
    Abstract: The aim of this paper is to analysis in detailed the major financial risks which are faced by the banking sector in general and Indian banks in particular. For the purpose a loss function is devised to estimate the various components of the credit risk which result in the net losses for the banks. The study is supported by empirical analysis conducted on financial data of a cross section of banks in Public Sector, Private Sector and Foreign Banks operating in India. Suggestions are also put forward mainly to minimize the credit risk.
    Keywords: Credit risks, Market risks, Operational risks, Basel II, Basel III
    JEL: G20
    Date: 2013–12–25
  15. By: Khundrakpam, Jeevan Kumar
    Abstract: The paper attempts to analyse the asymmetric effects of money supply and policy rate shocks in India using quarterly data from 1996-97Q1 to 2011-12Q4. It finds that both the shocks impact real output growth and inflation in the short-run, but have a differential impact among components of aggregate demand. An unanticipated hike/cut in policy rate has a symmetric impact of reducing/increasing GDP growth arising due to a corresponding symmetric impact on investment growth only. In contrast, an unanticipated increase/decrease in money supply has an asymmetric impact– only an unanticipated increase in money supply increases private consumption growth and GDP growth, while there is no impact on the other components aggregate demand. An unanticipated hike/reduction in policy rate leads to a symmetric decline/rise in inflation. An unanticipated change in money supply leads to higher inflation, but a similar decrease in it has no significant impact on inflation.
    Keywords: Monetary Policy, Asymmetry, Inflation, Policy Rate
    JEL: C32 C51 E31 E51
    Date: 2013–11
  16. By: Lukas Scheffknecht
    Abstract: I analyze the rapidly growing literature about systemic risk in financial markets and find an important commonality. Systemic risk is regarded to be an endogenous outcome of interactions by rational agents on imperfect markets. Market imperfections give rise to systemic externalities which cause an excessive level of systemic risk. This creates a scope for welfare-increasing government interventions. Current policy debates usually refer to them as ’macroprudential regulation’. I argue that efforts undertaken in this direction - most notably the incipient implementation of Basel III- are insufficient. The problem of endogenous financial instability and excessive systemic risk remains an unresolved issue which carries unpleasant implications for central bankers. In particular, monetary policy is in danger of persistently getting burdened with the difficult task to simultaneously ensure macroeconomic and financial stability.
    Keywords: Systemic Risk, Systemic Externalities, Macroprudential Regulation, Basel III
    JEL: E44 E52 G01 G18
    Date: 2013–12
  17. By: Pablo Koch-Medina; Santiago Moreno-Bromberg; Cosimo Munari
    Abstract: The theory of acceptance sets and their associated risk measures plays a key role in the design of capital adequacy tests. The objective of this paper is to investigate, in the context of bounded financial positions, the class of surplus-invariant acceptance sets. These are characterized by the fact that acceptability does not depend on the positive part, or surplus, of a capital position. We argue that surplus invariance is a reasonable requirement from a regulatory perspective, because it focuses on the interests of liability holders of a financial institution. We provide a dual characterization of surplus-invariant, convex acceptance sets, and show that the combination of surplus invariance and coherence leads to a narrow range of capital adequacy tests, essentially limited to scenario-based tests. Finally, we analyze the relationship between surplus-invariant acceptance sets and loss-based and excess-invariant risk measures, which have been recently studied by Cont, Deguest, and He, and by Staum.
    Date: 2014–01
  18. By: Rajmund Mirdala
    Abstract: Exchange rate regimes evolution in the European transition economies refers to one of the most crucial policy decision in the beginning of the 1990s employed during the initial stages of the transition process. During the period of last two decades we may identify some crucial milestones in the exchange rate regimes evolution in the European transition economies. due to existing diversity in exchange rate arrangements in the European transition economies in the pre-ERM2 period there seems to be two big groups of countries - “peggers” (Bulgaria, Estonia, Latvia, Lithuania) and “floaters” (Czech republic, Hungary, Poland, Romania, Slovak republic, Slovenia). Despite the fact, there seems to be no real prospective alternative to euro adoption for the European transition economies, we emphasize disputable effects of sacrificing monetary sovereignty in the view of positive effects of exchange rate volatility and exchange rate based adjustments in the country experiencing sudden shifts in the business cycle. In the paper we analyze effects of the real exchange rate volatility on real output and inflation in ten European transition economies. From estimated VAR model (recursive Cholesky decomposition is employed to identify structural shocks) we compute impulse-response functions to analyze responses of real output and inflation to negative real exchange rate shocks. Results of estimated model are discussed from a prospective of the fixed versus flexible exchange rate dilemma. To provide more rigorous insight into the problem of the exchange rate regime suitability we estimate the model for each particular country employing data for two subsequent periods 2000-2007 and 2000-2011.
    Keywords: exchange rate volatility, economic growth, economic crisis, vector autoregression, variance decomposition, impulse-response function
    JEL: C32 F32 F41
    Date: 2013–11–15
  19. By: Silvia Marchesi (University of Milan Bicocca and Centro Studi Luca d’Agliano); Laura Sabani (University of Florence)
    Abstract: This paper analyzes the impact of different governance structures on the degree of Bank-Fund cooperation, focusing on the quality of their information transmission. It compares the performance of a decentralized governance with that of a centralized one. A centralized structure better addresses the necessity of coordinating policy actions, but greater consistency in policy actions will be achieved at the expenses of a less satisfactory adaptation to \"local conditions.\" It is shown that when the need for coordination is relevant, a centralized governance allows to achieve a greater level of overall payoffs. In the real world the governance structure of the two institutions is certainly decentralized. A testable implication of the model would then be to see whether Bank-Fund’s coordination is really important for their impact on recipient countries. The empirical evidence shows that a Bank-Fund simultaneous intervention is beneficial to growth and that such beneficial effect is increasing with the willingness to coordinate of the two organizations. This evidence would then be in favor of a (more) centralized governance.
    Keywords: IMF and WB conditionality, coordination, communication
    JEL: D83 F33 N2
    Date: 2013–10–23
  20. By: Maimbo, Samuel Munzele; Melecky, Martin
    Abstract: Policy makers use financial sector strategies to formulate a holistic policy for their national financial sectors. This paper examines and rates financial sector strategies around the world based on how well they formulate development targets, arrangements for systemic risk management, and implementation plans. The strategies are also rated on whether they consider policy trade-offs between financial development and systemic risk management. The rated strategies are then benchmarked against a wide range of country characteristics. The analysis finds that the scope and quality of national strategies for the financial sector are influenced by the country's type of legal system, its level of income and macroeconomic stability, the existing financial depth and inclusion, the share of foreign ownership in the national financial sector, and the experience of past financial crises. Giving due consideration to policy trade-offs, particularly between financial development and systemic risk management, remains the weakest part of these strategies. Countries with civil- and religious-based law and those with a higher share of foreign ownership in their financial system address the policy trade-offs more often.
    Keywords: Emerging Markets,Banks&Banking Reform,Economic Theory&Research,Public Sector Corruption&Anticorruption Measures,Debt Markets
    Date: 2014–01–01
  21. By: Carmen M. Reinhart; Kenneth S. Rogoff
    Abstract: We examine the evolution of real per capita GDP around 100 systemic banking crises. Part of the costs of these crises owes to the protracted nature of recovery. On average, it takes about eight years to reach the pre-crisis level of income; the median is about 6 ½ years. Five to six years after the onset of crisis, only Germany and the US (out of 12 systemic cases) have reached their 2007-2008 peaks in real income. Forty-five percent of the episodes recorded double dips. Postwar business cycles are not the relevant comparator for the recent crises in advanced economies.
    JEL: E32 E44 F44 G01 N10 N20
    Date: 2014–01
  22. By: W. Scott Frame; Lawrence J. White
    Date: 2014
  23. By: Takashi Kano (Faculty of Economics, Hitotsubashi University);
    Abstract: In an influential paper, Engel and West (2005) claim that the near random-walk behavior of nom- inal exchange rates is an equilibrium outcome of a variant of present-value models when economic fundamentals follow exogenous first-order integrated processes and the discount factor approaches one. Subsequent empirical studies further confirm this proposition by estimating a discount factor that is close to one under distinct identification schemes. In this paper, I argue that the unit market discount factor implies the counterfactual joint equilibrium dynamics of random-walk ex- change rates and economic fundamentals within a canonical, two-country, incomplete market model. Bayesian posterior simulation exercises of a two-country model based on post-Bretton Woods data from Canada and the United States reveal difficulties in reconciling the equilibrium random-walk proposition within the two-country model; in particular, the market discount factor is identified as being much lower than one.
    Keywords: Exchange rates; Present-value model; Economic fundamentals; Random walk; Two- country model; Incomplete markets; Cointegrated TFPs; Debt elastic risk premium.
    JEL: E31 E37 F41
    Date: 2013–09
  24. By: Gründler, Klaus; Weitzel, Jan
    Abstract: Does the financial sector contribute to economic growth? While most of the studies carried out before the Financial crisis tend to answer the question with 'yes', recent empirical work provides evidence that the opposite is true. We study these new findings in detail, applying GMM and 3SLS estimations of simultaneous equation models that cover a comprehensive set of growth determinants proposed by theory and recent empirical work. It turns out that finance in general exerts a positive influence but this influence vanishes in the development process and eventually becomes negative. While finance still boosts growth in developing countries, a growing financial sector hinders the increase of incomes in rich economies. --
    Keywords: Economic Growth,Financial Sector
    JEL: O40 G20
    Date: 2013

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