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on Central Banking |
| By: | Dong He (Hong Kong Monetary Authority and Hong Kong Institute for Monetary Research); Honglin Wang (Hong Kong Institute for Monetary Research); Xiangrong Yu (Hong Kong Institute for Monetary Research) |
| Abstract: | How should we think about the determination of interest rates in China after interest rate liberalisation? Would effective deposit rates, lending rates and bond yields move higher or lower? We argue that interest rates in a liberalised environment would need to be anchored by the conduct of monetary policy. If monetary policy is to achieve the objective of price and output (or employment) stabilisation, the policy rate should be set close to China's equilibrium or natural rate. We sketch three preliminary approaches to estimation of the natural rate in China. Based on these we argue that interest rates on large deposits in the banking system and short-term money market rates would likely to move higher following interest rate liberalisation. The effect on effective lending rates is somewhat ambiguous as the contestability of the banking sector and the competition in bond markets are likely to increase after interest rate liberalisation. We leave the determination of the curvature of the yield curve to future research. |
| Keywords: | Interest Rate, Monetary Policy, Economic Reform, Chinese Economy, The People¡¦s Bank of China (PBC) |
| JEL: | E43 E52 O53 P24 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:042014&r=cba |
| By: | Giovanni Dosi (Scuola Superiore Sant'Anna, Pisa (Italy)); Giorgio Fagiolo (Scuola Superiore Sant'Anna, Pisa (Italy)); Mauro Napoletano (OFCE and SKEMA Business School, Sophia-Antipolis (France); Scuola Superiore Sant'Anna, Pisa (Italy)); Andrea Roventini (University of Verona (Italy); Scuola Superiore Sant'Anna, Pisa (Italy); OFCE and SKEMA Business School, Sophia-Antipolis (France)); Tania Treibich (Maastricht University (the Netherlands); GREDEG CNRS and University of Nice Sophia Antipolis (France)) |
| Abstract: | In this paper we explore the effects of alternative combinations of fiscal and monetary policies under different income distribution regimes. In particular, we aim at evaluating fiscal rules in economies subject to banking crises and deep recessions. We do so using an agent-based model populated by heterogeneous capital- and consumption-good firms, heterogeneous banks, workers/consumers, a Central Bank and a Government. We show that the model is able to reproduce a wide array of macro and micro empirical regularities, including stylised facts concerning financial dynamics and banking crises. Simulation results suggest that the most appropriate policy mix to stabilise the economy requires unconstrained counter-cyclical fiscal policies, where automatic stabilisers are free to dampen business cycles fluctuations, and a monetary policy targeting also employment. Instead, "discipline-guided" fiscal rules such as the Stability and Growth Pact or the Fiscal Compact in the Eurozone always depress the economy, without improving public finances, even when escape clauses in case of recessions are considered. Consequently, austerity policies appear to be in general self-defeating. Furthermore, we show that the negative effects of austere fiscal rules are magnified by conservative monetary policies focused on inflation stabilisation only. Finally, the effects of monetary and fiscal policies become sharper as the level of income inequality increases. |
| Keywords: | agent-based model, fiscal policy, monetary policy, banking crises, income inequality, austerity policies, disequilibrium dynamics |
| JEL: | C63 E32 E6 E52 G01 G21 O4 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:gre:wpaper:2014-07&r=cba |
| By: | Olivier Jeanne (Johns Hopkins University, Peterson Institute for International Economics, NBER and CEPR (E-mail: ojeanne@jhu.edu)) |
| Abstract: | This paper analyzes the case for the international coordination of macroprudential policies in the context of a simple theoretical framework. Both domestic macroprudential policies and prudential capital controls have international spillovers through their impact on capital flows. The uncoordinated use of macroprudential policies may lead to a "capital war" that depresses global interest rates. International coordination of macroprudential policies is not warranted, however, unless there is unemployment in some countries. There is scope for Pareto-improving international policy coordination when one part of the world is in a liquidity trap while the rest of the world accumulates reserves for prudential reasons. |
| Keywords: | Macroprudential Policy, Capital Flows, Capital Controls, International Reserves, International Coordination, Liquidity Trap |
| JEL: | F36 F41 F42 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:14-e-01&r=cba |
| By: | Lena Dräger (Universität Hamburg (University of Hamburg)); Michael J. Lamla (University of Essex and ETH Zurich); Damjan Pfajfar (EBC, CentER, University of Tilburg) |
| Abstract: | Using the microdata of the Michigan Survey of Consumers, we evaluate whether U.S. consumers form macroeconomic expectations consistent with different economic concepts, namely the Phillips curve, the Taylor rule and the Income Fisher equation. We observe that 50% of the surveyed population have expectations consistent with the Income Fisher equation, 46% consistent with the Taylor rule and 34% are in line with the Phillips curve. However, only 6% of consumers form theory-consistent expectations with respect to all three concepts. For the Taylor rule and the Phillips curve we observe a cyclical pattern. For all three concepts we find significant differences across demographic groups. Evaluating determinants of consistency, we provide evidence that consumers are less consistent with the Phillips curve and the Taylor rule during recessions and with inflation higher than 2%. Moreover, consistency with respect to all three concepts is affected by changes in the communication policy of the Fed, where the strongest positive effect on consistency comes from the introduction of the official inflation target. Finally, consumers with theory- consistent expectations have lower absolute inflation forecast errors and are closer to professionals' inflation forecasts. |
| Keywords: | Macroeconomic expectations, microdata, macroeconomic literacy, central bank communication, consumer forecast accuracy. |
| JEL: | C25 D84 E31 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:hep:macppr:201401&r=cba |
| By: | Matteo Smerlak; Brady Stoll; Agam Gupta; James S. Magdanz |
| Abstract: | The recent financial crisis illustrated the need for a thorough, functional understanding of systemic risk in strongly interconnected financial structures. Dynamic processes on complex networks being intrinsically difficult, most recent studies of this problem have relied on numerical simulations. In this paper, we report analytical results in a network model of interbank lending based on directly relevant financial parameters such as interest rates and leverage ratios. Using a mean-field approach, we obtain a closed-form formula for the "critical degree", viz. the number of creditors per bank below which an individual shock can cascade throughout the network. We relate the failures distribution (probability that a single shock induces $F$ failures) to the degree distribution (probability that a bank has $k$ creditors), showing in particular that the former is fat-tailed whenever the latter is. Remarkably, our criterion for the onset of contagion turns out to be isomorphic to a simple rule for the evolution of cooperation on graphs and social networks, supporting recent calls for a methodological rapprochement between finance and ecology. |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1402.4783&r=cba |
| By: | Joseph P. Byrne; Dimitris Korobilis; Pinho J. Ribeiro |
| Abstract: | An expanding literature articulates the view that Taylor rules are helpful in predicting exchange rates. In a changing world however, Taylor rule parameters may be subject to structural instabilities, for example during the Global Financial Crisis. This paper forecasts exchange rates using such Taylor rules with Time Varying Parameters (TVP) estimated by Bayesian methods. In core out-of-sample results, we improve upon a random walk benchmark for at least half, and for as many as eight out of ten, of the currencies considered. This contrasts with a constant parameter Taylor rule model that yields a more limited improvement upon the benchmark. In further results, Purchasing Power Parity and Uncovered Interest Rate Parity TVP models beat a random walk benchmark, implying our methods have some generality in exchange rate prediction. |
| Keywords: | Exchange Rate Forecasting; Taylor Rules; Time-Varying Parameters; Bayesian Methods. |
| JEL: | C53 E52 F31 F37 G17 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2014_03&r=cba |
| By: | Simón Sosvilla-Rivero (Department of Quantitative Economics, Universidad Complutense de Madrid); María del Carmen Ramos-Herrera (Department of Quantitative Economics, Universidad Complutense de Madrid) |
| Abstract: | Based on a dataset of 123 economies, this paper empirically investigates the relation between exchange-rate regimes and economic growth. We find that growth performance is best under intermediate exchange rate regimes, while the smallest growth rates are associated with flexible exchange rates. Nevertheless, this conclusion is tempered when we analyze the countries by income level: even though countries that adopt intermediate exchange-rate regimes are characterized by higher economic growth, the higher the level of income, less difference in growth performance across exchange rate regimes. |
| Keywords: | Exchange rate regime; economic growth |
| JEL: | E42 F31 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:aee:wpaper:1401&r=cba |
| By: | Vincent BODART (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)); Jean-François CARPANTIER (University of Luxembourg, CREA) |
| Abstract: | While most of the literature on the determination of real exchange rates is focused on the role of standard macroeconomic variables, there exists however a few papers that are more concerned by the impact of factors which are usually considered to play a key role in the process of economic development, like demography or inequality. In the present paper, we extend this small branch of the literature by exploring the relationship between labor skills and real exchange rates over the long-run. Using panel regressions covering 22 countries over the period 1950-2010, we find that labor skills are indeed a structural determinant of real exchange rates, with a permanent increase of the skilled-unskilled labor ratio leading to a long-run appreciation of the real exchange rate. This findings is robust to the inclusion of several control variables, like those used in traditional analyses of real exchange rates. |
| Keywords: | Real exchange rate, human capital, skills, Balassa-Samuelson effect |
| JEL: | C23 F31 F41 I25 |
| Date: | 2014–02–12 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvir:2014005&r=cba |
| By: | Valiante, Diego |
| Abstract: | Evidence shows that financial integration in the euro area is retrenching at a quicker pace than outside the union. Home bias persists: Governments compete on funding costs by supporting ‘their’ banks with massive state aids, which distorts the playing field and feeds the risk-aversion loop. This situation intensifies friction in credit markets, thus hampering the transmission of monetary policies and, potentially, economic growth. This paper discusses the theoretical foundations of a banking union in a common currency area and the legal and economic aspects of EU responses. As a result, two remedies are proposed to deal with moral hazard in a common currency area: a common (unlimited) financial backstop to a privately funded recapitalisation/resolution fund and a blanket prohibition on state aids. |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:eps:cepswp:8882&r=cba |
| By: | Christian R. Proaño (Department of Economics, The New School for Social Research); Christian Schoder (Department of Economics, Vienna University of Economics and Business); Willi Semmler (Department of Economics, The New School for Social Research) |
| Abstract: | We analyze how the impact of a change in the sovereign debt-to-GDP ratio on economic growth depends on the level of debt, the stress level on the financial market and the membership in a monetary union. A dynamic growth model is put forward demonstrating that debt affects macroeconomic activity in a non-linear manner due to amplifications from the financial sector. Employing dynamic country-specific and dynamic panel threshold regression methods, we study the non-linear relation between the growth rate and the debt-to-GDP ratio using quarterly data for sixteen industrialized countries for the period 1981Q1-2013Q2. We find that the debt-to-GDP ratio has impaired economic growth primarily during times of high financial stress and only for countries of the European Monetary Union and not for the stand-alone countries in our sample. A high debt-to-GDP ratio by itself does not seem to necessarily negatively affect growth if financial markets are calm. |
| Keywords: | financial stress, sovereign debt, economic growth, dynamic panel threshold regression |
| JEL: | E20 G15 H63 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwwuw:wuwp167&r=cba |
| By: | Lannoo, Karel |
| Abstract: | In his assessment of the EU proposal on banking structural reform, unveiled on January 29th, Karel Lannoo observes that the Commission must perform a delicate balancing act between preserving the single market and at the same time accommodating existing EU measures covering resolution and trading activities. |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:eps:cepswp:8914&r=cba |