nep-cba New Economics Papers
on Central Banking
Issue of 2014‒03‒15
forty-one papers chosen by
Maria Semenova
Higher School of Economics

  1. Inflation targeting and Quantitative Tightening: Effects of Reserve Requirements in Peru By Armas, Adrián; Castillo, Paul; Vega, Marco
  2. Managing Short-Term Capital Flows in New Central Banking: Unconventional Monetary Policy Framework in Turkey By Ahmet Faruk Aysan; Salih Fendoglu; Mustafa Kilinc
  3. Accommodative Monetary Policy and Macroprudential Safeguards By Evans, Charles L.
  4. Monetary Policy and Heterogeneous Inflation Expectations in South Africa By Alain Kabundi, Eric Schaling and Modeste Some
  5. Does Forecasts Transparency Affect Macroeconomic Volatility in Developing Countries ? Evidence From Quasi-Natural Experiments By Ummad Mazhar; Cheick Kader M'baye
  6. The determinants of inflation differentials in the euro area By Moretti, Laura
  7. European Central Bank accountability: how the monetary dialogue could be improved By Grégory Claeys; Mark Hallerberg; Olga Tschekassin
  8. A Post-Crisis Reading of the 'Role of Monetary Policy' By Stan Du Plessis
  9. Reserve requirements in the brave new macroprudential world By Cordella, Tito; Federico, Pablo; Vegh, Carlos; Vuletin, Guillermo
  10. Determinants of the Trilemma Policy Combination By Hiro Ito; Masahiro Kawai
  11. Anatomy of a Bail-In By Thomas Conlon; John Cotter
  12. Policy Duration Effects, Quantitative Monetary Easing Policy, and Economic Growth: Evidence from Japanese Time Series Data By Masafumi Kozuka
  13. Central bank independence, policies and reforms: addressing political and economic linkages By Marianne, Ojo
  14. Basel III, Clubs and Eurozone Asymmetries By Michele Fratianni; John Pattison
  15. Interest Rate Corridor, Liquidity Management and the Overnight Spread By Hande Kucuk; Pinar Ozlu; Anil Talasli; Deren Unalmis; Canan Yuksel
  16. Sovereign and bank CDS spreads: two sides of the same coin? By John Cotter; Davide Avino
  19. A Theory of the Intergenerational Dynamics of Inflation Beliefs and Monetary Institutions By Etienne Farvaque; Alexander Mihailov
  20. Capital controls as an instrument of monetary policy By Davis, Scott; Presno, Ignacio
  21. How do banking crises affect aggregate consumption? Evidence from international crisis episodes By Gerlach-Kristen, Petra; O'Connell, Brian; O'Toole, Conor
  22. Measuring the Impact of Exchange Rate Movements on Domestic Prices: A Cointegrated VAR Analysis By Nidhaleddine Ben Cheikh; Waël Louhichi
  23. Exchange Rate Predictability in a Changing World By Joseph P. Byrne; Dimitris Korobilis; Pinho J. Ribeiro
  24. The Evolution of Bank Supervision: Evidence from U.S. States By Mitchener, Kris James
  25. Predicting Exchange Rates Out of Sample: Can Economic Fundamentals Beat the Random Walk? By Jiahan Li; Ilias Tsiakas; Wei Wang
  26. A contribution to the empirics of convergence in real GDP growth: The role of financial crises and exchange-rate regimes By Amalia Morales-Zumaquero; Simón Sosvilla-Rivero
  27. Prudential Capital Controls or Bailouts? The Impact of Different Collateral Constraint Assumptions By Mitsuru Katagiri; Ryo Kato; Takayuki Tsuruga
  29. "Modern Money Theory and Interrelations between the Treasury and the Central Bank: The Case of the United States" By Eric Tymoigne
  30. Perspectives on the U.S. economy and monetary policy By Plosser, Charles I.
  31. How Financial Innovation Might Cancel Out Bank Regulation Along Financial Cycles. A Keynes’s State of Confidence Interpretation. By Konstantinos I. Loizos
  32. Managing Credit Bubbles By Alberto Martin; Jaume Ventura
  33. The Basics of "Too Big to Fail" By Lawrence J. White
  34. Macroprudential Policies as Buffer Against Volatile Cross-border Capital Flows By Ahmet Faruk Aysan; Salih Fendoglu; Mustafa Kilinc
  35. The theory of money supply: a case study By Taylor, Leon
  36. An Empirical Test of Money Demand in Thailand from 1993 to 2012 By Jiranyakul, Komain; Opiela, Timothy
  37. The role of the Central Bank in the Economic Slow-down in Russia. By BLINOV, Sergey
  38. The distribution of debt across euro area countries: The role of individual characteristics, institutions and credit conditions By Bover, Olympia; Casado, Jose Maria; Costa, Sonia; Du Caju, Philip; McCarthy, Yvonne; Sierminska, Eva; Tzamourani, Panagiota; Villanueva, Ernesto; Zavadil, Tibor
  39. Euro-Crisis and Spillover Effects on the Emerging Economies By Hamidreza Tabarraei

  1. By: Armas, Adrián (Banco Central de Reserva del Perú); Castillo, Paul (Banco Central de Reserva del Perú); Vega, Marco (Banco Central de Reserva del Perú)
    Abstract: This paper provides an overview of the Reserve Requirements measures undertaken by the Central Bank of Peru. We provide a rationale for the use of these instruments as well as empirical evidence on their effectiveness. In general, the results show that a reserve requirement tightening has the desired effects on interest rates and credit levels both at banks and smaller financial institutions (cajas municipales).
    Keywords: Non-conventional monetary policy, Inflation Targeting, Reserve requirements.
    JEL: E51 E52 E58 G21
    Date: 2014–02
  2. By: Ahmet Faruk Aysan; Salih Fendoglu; Mustafa Kilinc
    Abstract: During the global financial crisis of 2008-2009, both advanced and emerging countries have implemented significant easing policies on monetary and fiscal fronts. Yet, the recovery, especially in advanced countries, was not as quick or strong as expected. These quantitative easing policies, coupled with weak recovery and restricted fiscal positions, have created not only abundant but also excessively volatile global liquidity conditions, leading to short-term and excessively volatile capital flows to emerging markets. To contain potential risks due to such flows, emerging countries have augmented their existing policy frameworks. Central Bank of the Republic of Turkey (CBRT), for example, has introduced two new policy tools in its new monetary policy framework: the asymmetric interest rate corridor and the reserve option mechanism. From a capital flows perspective, the interest rate corridor helps smooth fluctuations in supply of foreign funds, whereas the reserve option mechanism helps contain movements in demand for foreign funds. Both policies have been actively used by the CBRT and appeared to be effective in containing financial stability risks stemming from excessively volatile capital flows.
    Keywords: Capital flows, macroprudential policies, central banking
    JEL: E44 E52 E58
    Date: 2014
  3. By: Evans, Charles L. (Federal Reserve Bank of Chicago)
    Abstract: A speech delivered on February 4, 2014, at the Detroit Economic Club in Detroit, MI.
    Keywords: Monetary policy; inflation; macroprudential
    Date: 2014–02–04
  4. By: Alain Kabundi, Eric Schaling and Modeste Some
    Abstract: This paper examines the relationship between in‡ation and in‡ation expectations of analysts, business, and trade unions in South Africa during the inflation targeting (IT) regime. We consider inflation expectations based on the Bureau of Economic Research (BER) quarterly survey observed from 2000Q1 to 2013Q1. We estimate in‡ation expectations of individual agents as the weighted average of lagged in‡ation and the inflation target. The results indicate that expectations are heterogeneous across agents. Expectations of price setters (business and unions) are closely related to each other and are higher than the upper bound of the official target band, while expectations of analysts are within the target band. In addition, expectations of price setters are somewhat related to lagged in‡ation and the opposite is true for analysts. The results reveal that the SARB has succesfully anchored expectations of analysts but that price setters have not sufficiently used the focal point implicit in the inflation targeting regime. The implication is that the SARB may be pushed to ccommodate private agents' expectations.
    Keywords: Monetary policy, Inflation Targeing, Heterogeneous Inflation Expectations, Expectations Trap
    JEL: C51 E52 E58
    Date: 2014
  5. By: Ummad Mazhar (Shaheed Zulkar Ali Bhutto Institute of Science and Technology, 90-100 Clifton, Block 5, Karachi, Pakistan); Cheick Kader M'baye (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France)
    Abstract: In this paper, we empirically investigate the link between forecasts transparency and macroeconomic volatility as measured by inflation and output growth volatility in developing economies. We adopt the quasi-random controlled experiments methodology that divides our sample of 49 developing countries into three categories on the basis of their forecasts transparency. The first category is composed of central banks that are completely opaque over our sample period. The second type of countries is constantly transparent about their forecasts over the period of study while the third category includes central banks that have recently started to disclose their forecasts. In contrast to the previous literature, we interestingly find that increasing forecasts transparency unambiguously leads to higher macroeconomic volatility in developing countries. Indeed, we find that both groups of countries that constantly disclose their forecasts and that have only recently started to disclose their forecasts experience an increase in their macroeconomic volatility compared to the remaining group of countries that are completely opaque. Our results however indicate that forecasts transparency may have some stabilizing effects if and only if it is practiced along with other forms of institutional transparency.
    Keywords: Forecasts transparency, monetary policy transparency, central banking, in flation volatility, output volatility
    JEL: E58 E63 C33 C36
    Date: 2014
  6. By: Moretti, Laura
    Abstract: Inflation differentials in the euro area have been persistent since the adoption of the single currency. This paper analyzes the impact of product and labor market regulation on inflation in a sample of 11 countries. The results show that, after the adoption of the euro, product market deregulation has a relevant and significant effect on the level of inflation, while higher labor market regulation increases the responsiveness of inflation to the output gap. --
    Keywords: Labor Market Deregulation,Product Market Deregulation,EMU,Inflation Rate
    JEL: E31 E58 E65 L51
    Date: 2014
  7. By: Grégory Claeys; Mark Hallerberg; Olga Tschekassin
    Abstract: According to the European Union Treaties, the European Central Bank (ECB) is accountable to the European Parliament. In practice, this accountability takes mainly the form of a quarterly Monetary Dialogue between the president of the ECB and the European Parliament Economic and Monetary Affairs committee. We assess the impact of the Monetary Dialogue. We describe the ECBâ??s accountability practices, compare them to those of other major central banks and provide an assessment of the dialogue in the last five years. The Monetary Dialogue could be improved and we make recommendations on this. We also consider what role the Monetary Dialogue could play in the current context of the ECBâ??s evolving role. We discuss in particular forward guidance and quantitative easing. We review the main features and the way in which those policies have been implemented by other central banks. We then suggest the appropriate role for the Monetary Dialogue in relation to each of those policies. We conclude with some observations on the function of the Monetary Dialogue after the establishment of a banking union in Europe
    Date: 2014–03
  8. By: Stan Du Plessis
    Abstract: In 1967 Milton Friedman delivered “The Role of Monetary Policy’ as his presidential address to the American Economic Association (AEA). In its published version – Friedman (1968) – it has become, arguably, the most influential paper in modern monetary economics and was recently included in the AEA’s list of the twenty most influential papers published in the first century of the American Economic Review. But the influence of Friedman’s address is based on an interpretation that seriously distorts the content of his main argument. His emphasis on (i) the inadequacy of interest rate policy and (ii) the primacy of financial stability among the positive goals of monetary policy have been ignored or neglected. While balance sheet policies have become ‘unconventional’ in the modern consensus, these policies held a central position in Friedman’s work. I support this argument with a textual analysis of Friedman’s address, read in the light of his preceding scholarship on monetary policy. This reinterpretation is relevant in a world where the balance sheets of central banks have returned to centre stage as has the priority for financial stability.
    Keywords: Milton Friedman, Monetary policy, interest rate policy, balance sheet policies, Financial Stability
    JEL: B22 E52 E58
    Date: 2014
  9. By: Cordella, Tito; Federico, Pablo; Vegh, Carlos; Vuletin, Guillermo
    Abstract: Using a new, large data set on quarterly reserve requirements for the period 1970-2011, this paper provides new evidence on the use of reserve requirements as a countercyclical macroprudential tool in developing countries. The appeal of reserve requirements lies in the pro-cyclical behavior of the exchange rate over the business cycle in developing countries. This enormously complicates the use of interest rates as a countercyclical instrument (because of its effect on the exchange rate) and calls for a second instrument. The paper suggests that conflicts may arise between the microprudential and macroprudential policy stances.
    Keywords: Debt Markets,Emerging Markets,Currencies and Exchange Rates,Economic Theory&Research,Banks&Banking Reform
    Date: 2014–02–01
  10. By: Hiro Ito (Asian Development Bank Institute (ADBI)); Masahiro Kawai
    Abstract: We present a theoretical framework for policy making based on the “impossible trinity†or the “trilemma†hypothesis. A simple optimization model shows that placing more weight in terms of preference for each of the three open macroeconomic policies—exchange rate stability, financial market openness, and monetary policy independence—contributes to a higher level of achievement in that particular policy. We then develop the first empirical framework in the literature to investigate the joint determination of the triad open macroeconomic policies based on the trilemma hypothesis. Specifically, we estimate the three policy indexes under the trilemma constraint that they must add up to a constant. By applying the seemingly unrelated regression (SUR) estimation method and employing other robustness checks, we demonstrate that simple economic and structural fundamentals determine the trilemma policy combinations. Last, we examine how deviations from the “optimal†trilemma policy combinations evolve around the time of a financial crisis. Policy combinations seem to violate the trilemma constraint when a currency, banking, or debt crisis breaks out. These findings suggest that deviations from the trilemma hypothesis would create policy stress, which would have to manifest itself in a crisis unless policy makers adjust the policy combination in a way consistent with the trilemma constraint.
    Keywords: impossible trinity, trilemma hypothesis, exchange rate stability, financial market openness, monetary policy independence, trilemma policy combination, trilemma constraint
    JEL: F15 F21 F31 F36 F41 O24
    Date: 2014–01
  11. By: Thomas Conlon (UCD School of Business, University College Dublin); John Cotter (UCD School of Business, University College Dublin)
    Abstract: To mitigate potential contagion from future banking crises, the European Commission recently proposed a framework which would provide for the bail-in of bank creditors in the event of failure. In this study, we examine this framework retrospectively in the context of failed European banks during the global nancial crisis. Empirical ndings suggest that equity and subordinated bond holders would have been the main losers from the e535 billion impairment losses realized by failed European banks. Losses attributed to senior debt holders would, on aggregate, have been proportionally small, while no losses would have been imposed on depositors. Cross-country analysis, incorporating stress-tests, reveals a divergence of outcomes with subordinated debt holders wiped out in a number of countries, while senior debt holders of Greek, Austrian and Irish banks would have required bail-in.
    Keywords: Bank Resolution, Bail-In, European Bank Failure, Global Financial Crisis, Impairment Charges.
    Date: 2014–02–21
  12. By: Masafumi Kozuka (Faculty of Policy Studies, University of Marketing and Distribution Sciences)
    Abstract: In this paper, we examine the influences of policy duration effects and quantitative monetary easing policy (QMEP) brought into effect by Bank of Japan from 2001-2006 on economic growth toward future periods. We employed a simple equation with the term spread explaining economic growth and obtained the following results. The positive effects of the term spread on economic growth over the subsequent 21 and 24 months decreased in 2001. And the estimated coefficients on term spread are negative and significant after the shift in both cases. Then, we conclude that the QMEP and policy duration effects in 2000s worked on economic growth in Japan to some extent.
    Keywords: term spread, zero interest rate policy, quantitative easing policy, policy duration effects, economic growth
    JEL: E44 E52 G10
    Date: 2014–03
  13. By: Marianne, Ojo
    Abstract: Whilst economic, political linkages and relationships constitute the theme of this paper, the paper also attempts to address why central bank independence still lacks certain vital attributes which embody adequate governance and accountability mechanisms - which are necessary if better results in relation to longer term economic and political objectives, in particular, are to be achieved. From this perspective, the growing importance of the shift to a focus on distinguishing between micro and macro prudential regulation is illustrated. The need for such distinction is not just evidenced through the creation of agencies responsible for such affairs within particular jurisdictions which are considered in this paper, but also through the increased realisation and need for greater focus on decision making responsibilities which are to be assigned to political and economic entities at supra national levels. Financial stability, it appears, has more to do with a mere focus on longer term objectives. Financial stability is also concerned with the ability to sustain long term policy objectives whilst being flexible enough to respond effectively to short term unpredictabilities.
    Keywords: inflation targeting; monetary policies; central banks; fiscal policies; accountability; governance arrangements; momentum effects
    JEL: E2 E5 G2 K2
    Date: 2014–03–07
  14. By: Michele Fratianni (Indiana University, Kelly School of Business, Bloomington US, Univ. Plitecnica Marche and MoFiR); John Pattison (retired banker)
    Abstract: Financial regulation has shifted from a system managed as an oligopoly dominated by the G2/G5 to expanded clubs like the Basel Committee for Banking Supervision. Expansive clubs have to agree to terms that are closer to the preferences of soft-regulation members. Yet, once a global agreement on minimum standards, such as Basel III, is reached, the transposition is left to national or regional regulators. Deviations from the Basel III standards are bound to occur; the complexity of the agreement will facilitate an asymmetric implementation of national regulation and supervision. On the high side, countries like the US, UK, Australia, some Scandinavian countries and Canada have chosen higher standards. On the low side, we should expect deviations to take place in those member countries of the Eurozone that are heterogeneous, have different preferences and tradeoffs between regulatory stringency and economic activity. The requirements of both global clubs and the EU regional club for transparency, monitoring and a level playing field will cause a collision between the interests of the clubs and their members.
    Keywords: Basel III clubs, Eurozone, asymmetries, financial regulation
    JEL: F33 F36 F42
    Date: 2014–03
  15. By: Hande Kucuk; Pinar Ozlu; Anil Talasli; Deren Unalmis; Canan Yuksel
    Abstract: Recently, massive global liquidity has compelled many emerging market economies to change their monetary policy frameworks in order to address the financial stability challenges posed by volatile capital flows. In this respect, as of the second half of 2010, the Central Bank of the Republic of Turkey (CBRT) has developed additional policy instruments to support the adoption of financial stability as a complementary objective to price stability. Liquidity management has actively been used in conjunction with a wide interest rate corridor to smooth excessive volatility in shortterm capital inflows. As a result, the spread between the Borsa Istanbul overnight repo interest rate and the CBRT average funding rate (overnight spread) has become wider and more volatile. We analyze the determinants of the overnight spread using data from both the traditional and the new monetary policy episodes and empirically document that this spread has recently been influenced by various factors which are directly or closely related to the liquidity policy of the CBRT.
    Keywords: Overnight interest rate; liquidity policy; monetary policy; operational framework
    JEL: E43 E52 C22
    Date: 2014
  16. By: John Cotter (UCD School of Business, University College Dublin); Davide Avino (UCD School of Business, University College Dublin)
    Abstract: This paper investigates the relationship between sovereign and bank CDS spreads with reference to their ability to convey timely signals on the default risk of European sovereign countries and their banking systems. By using a sample including six major European economies, we find that sovereign and bank CDS spreads are cointegrated variables at the country level. We then perform a more in-depth investigation of the underlying price discovery mechanisms, and find that both variables have an important price discovery role in the period preceding the financial crisis of 2007-2009. However, during the global financial crisis and the subsequent European sovereign debt crisis, sovereign CDS spreads dominate the price discovery process. Our findings suggest that, especially during crisis periods, sovereign CDS spreads incorporate more timely information on the default probability of European banks than their corresponding bank CDS spreads.
    Keywords: Credit default swap spreads; price discovery; information flow; financial crisis; banks; sovereign risk; bank capital
    JEL: G01 G12 G14 G20 D8
    Date: 2014–02–19
    Date: 2014
    Date: 2014
  19. By: Etienne Farvaque (Université du Havre, Faculté des A¤aires Internationales); Alexander Mihailov (Department of Economics, University of Reading)
    Abstract: We develop a stochastic overlapping-generations model with endogenously evolving heterogeneous beliefs on the degree of inflation protection to be provided by markets versus the monetary authority. It incorporates adaptive learning from inflation history and imperfect empathy in the cultural transmission of beliefs. Analytical results on endogenous inflation beliefs and socially-optimal inflation are derived first in a within-generation voting equilibrium that defines a particular degree of inflation aversion of a society's monetary institution. Then further theoretical and simulation analysis of the intergenerational dynamics of inflation and inflation beliefs provides insights into the long-run evolution of population types and social institutions, exploring the interactions of three central forces: the persistence of inflation, the degree of inflation aversion of the central bank and the recurrent irregular cycles of agent type proportions and subsequent majority switches. Our main contribution consists in showing how the endogenous transmission of inflation beliefs and monetary institutions in a stochastic economic environment can be understood as a process of intergenerational learning from history combined with a political economy mechanism that amends legislation and a socialization process that transmits experienced knowledge.
    Keywords: evolving beliefs, in?ation aversion, adaptive learning, voting equilibrium, cultural transmission, monetary institutions
    JEL: D72 D83 E31 E58 H41 J10
    Date: 2014–03–01
  20. By: Davis, Scott (Federal Reserve Bank of Dallas); Presno, Ignacio (Federal Reserve Bank of Dallas)
    Abstract: Large swings in capital flows into and out of emerging markets can potentially lead to excessive volatility in asset prices and credit supply. In order to lessen the impact of capital flows on financial instability, a number of researchers and policy markers have recently proposed the use of capital controls. This paper considers the benefit of adding capital controls as a potential instrument of monetary policy in a small open economy. In a DSGE framework, we find that when domestic agents are subject to collateral constraints and the value of collateral is subject to fluctuations driven by foreign capital inflows and outflows, the adoption of temporary capital controls can lead to a significant welfare improvement. The benefits of capital controls are present even when monetary policy is determined optimally, implying that there may be a role for capital controls to exist side-by-side with conventional monetary tools as an instrument of monetary policy.
    JEL: E32 E52 F32 F41
    Date: 2014–02–01
  21. By: Gerlach-Kristen, Petra; O'Connell, Brian; O'Toole, Conor
    Abstract: This paper considers the effect of systemic financial crises on aggregate consumption. Using a sample of 23 countries over 32 years, we find that consumption growth seems lower during banking crises, crises following credit booms and crises following house price booms. Moreover, the response to income growth seems to change, which may be due to credit constraints. In the long run, consumption appears to be linked to income, housing and other financial wealth.
    Keywords: Financial Crises/Consumption/Housing Wealth/Panel Error Correction Model/Weak Exogeneity
    Date: 2014–10
  22. By: Nidhaleddine Ben Cheikh; Waël Louhichi
    Abstract: This paper measures the pass-through of exchange rate changes into domestic inflation within a cointegrated VAR (CVAR) framework. This issue is of particular interest for the euro area (EA) as Member Sates cede their national currencies and no longer have options of using monetary policy to respond to local conditions. In fact, a common exchange rate shock, in the absence of a national monetary policy, may have differential impact on EA countries, leading notably to possible divergence in inflation levels. Using quarterly data for 12 EA covering 1980:1 to 2010:4, we report a large degree of heterogeneity in the rates of pass-through across our sample, especially, between "peripheral" and "core" EA economies. For instance, prices rise by 84% in Portugal following one percent depreciation of exchange rate, while for the German economy the extent of pass-through is not exceeding 0.20%. This outcome would have important implications for the general risk perceived by foreign firms and investors regarding the inflationary environment within each EA country.
    Keywords: Exchange Rate, Domestic prices, Cointegration, Euro area
    JEL: C32 E31 F31
    Date: 2014–03
  23. By: Joseph P. Byrne (Department of Economics, Heriot-Watt University, UK); Dimitris Korobilis (Department of Economics, Adam Smith Business School, University of Glasgow, UK); Pinho J. Ribeiro (Department of Economics, Adam Smith Business School, University of Glasgow, UK)
    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 arameters (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
  24. 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
  25. By: Jiahan Li (University of Notre Dame, USA); Ilias Tsiakas (University of Guelph, Canada); Wei Wang (Fifth Third Bank, USA)
    Abstract: This paper shows that economic fundamentals can generate reliable out-of-sample forecasts for exchange rates when prediction is based on a "kitchen-sink" regression that incorporates multiple predictors. The key to establishing predictability is estimating the kitchen-sink regression with the elastic-net shrinkage method, which improves performance by reducing the effect of less informative predictors in out-of-sample forecasting. Using statistical and economic measures of predictability, we show that our approach outperforms alternative models, including the random walk, individual exchange rate models, a kitchen-sink regression estimated with ordinary least squares, standard forecast combinations and popular ad-hoc strategies such as momentum and the 1/N strategy.
    Keywords: Exchange Rates; Out-of-Sample Forecasting; Elastic Net; Combined Forecasts
    JEL: F31 F37 G11 G15 G17
    Date: 2014–02
  26. By: Amalia Morales-Zumaquero (Departamento de Teoría e Historia Económica, Facultad de Ciencias Económicas y Empresariales, Universidad de Málaga); Simón Sosvilla-Rivero (Department of Quantitative Economics, Universidad Complutense de Madrid)
    Abstract: This paper investigates the convergence in real Gross Domestic Product (GDP) growth focusing on the impact of financial crises (i.e. banking crises, currency crises and debt crises) and nominal exchange rate regimes (i.e. fixed, intermediate and flexible) on convergence. To that end, we compute four convergence indicators (s-convergence, g- convergence, absolute b-convergence and conditional b-convergence), for 163 countries classified into four income groups during the 1970-2011 period. Results suggest that: (i) There is evidence in favor of -convergence and -convergence only for high income countries; (ii) absolute and conditional -convergence are presented in each of the four income groups of countries under study; (iii) exchange-rate regimes seem to play some role in upper-middle and lower-middle income countries; and (iv) financial crises have a negative and significant impact on GDP growth independently of the level of income of countries.
    Keywords: Convergence indicators, financial crises, nominal exchange-rate regimes
    JEL: O47 G15 F33
    Date: 2014–02
  27. By: Mitsuru Katagiri; Ryo Kato; Takayuki Tsuruga
    Abstract: A fast growing literature on small open economy models with pecuniary externalities has provided the theoretical grounds for the policy analysis of macro prudential regulations. Using the framework of Jeanne and Korinek (2010), we investigate whether a subsidy on debt during crises as a form of bailout can outperform prudential capital controls. We show that the result depends on the functional form of the collateral constraint faced by households. If households collateralize their assets that they purchase at the same time as their borrowing, subsidizing debt during crises is preferable. If, on the other hand, the maximum borrowing is constrained by the value of their assets that they have purchased before they borrow, a stronger case can be made for prudential capital controls.
    Keywords: Financial crises, Credit externalities, Bailouts, Macroprudential policies
    JEL: E32 G01 G18
    Date: 2014–03
    Date: 2014
  29. By: Eric Tymoigne
    Abstract: One of the main contributions of Modern Money Theory (MMT) has been to explain why monetarily sovereign governments have a very flexible policy space that is unconstrained by hard financial limits. Not only can they issue their own currency to pay public debt denominated in their own currency, but they can also easily bypass any self-imposed constraint on budgetary operations. Through a detailed analysis of the institutions and practices surrounding the fiscal and monetary operations of the treasury and central bank of the United States, the eurozone, and Australia, MMT has provided institutional and theoretical insights into the inner workings of economies with monetarily sovereign and nonsovereign governments. The paper shows that the previous theoretical conclusions of MMT can be illustrated by providing further evidence of the interconnectedness of the treasury and the central bank in the United States.
    Keywords: Modern Money Theory; Monetary Policy; Fiscal Policy
    JEL: E02 E42 E52 E62
    Date: 2014–03
  30. By: Plosser, Charles I. (Federal Reserve Bank of Philadelphia)
    Abstract: President Charles Plosser offers his views on growth, unemployment, and inflation expectations. He also discusses why the Fed faces a communications challenge with the economy so close to the unemployment threshold of 6.5 percent. He then explains why he favors the Fed providing more information to indicate how monetary policy will evolve as economic conditions change. Read the speech.
    Keywords: Monetary policy; Economy; Economic conditions;
    Date: 2014–03–06
  31. By: Konstantinos I. Loizos (University of Athens)
    Abstract: The question posed in this paper is how financial innovation may render conventional bank regulation ineffective. It is argued that the root cause as well as the essence of financial innovation is the predominance of trust in the financial markets, as it is confidence in the financial markets which makes the acceptance of financial innovation possible. In particular, mutual trust in the interbank market depends on the degree of confidence by which expectations are held, which, in turn, affects the relevant risk premia. Consequently, bank regulation may fail to accomplish its stabilization purpose if it cannot check overconfidence in the upswing or inspire and redress lack of confidence in the downturn.
    Keywords: Financial Innovation, Bank Regulation, State of Confidence, Financial Cycles
    JEL: G28 G01
    Date: 2014–02
  32. By: Alberto Martin; Jaume Ventura
    Abstract: We study a dynamic economy where credit is limited by insufficient collateral and, as a result, investment and output are too low. In this environment, changes in investor sentiment or market expectations can give rise to credit bubbles, that is, expansions in credit that are backed not by expectations of future profits (i.e. fundamental collateral), but instead by expectations of future credit (i.e. bubbly collateral). During a credit bubble, there is more credit available for entrepreneurs: this is the crowding-in effect. But entrepreneurs must also use some of this credit to cancel past credit: this is the crowding-out effect. There is an "optimal" bubble size that trades off these two effects and maximizes long-run output and consumption. The "equilibrium" bubble size depends on investor sentiment, however, and it typically does not coincide with the "optimal" bubble size. This provides a new rationale for macroprudential policy. A lender of last resort can replicate the "optimal" bubble by taxing credit when the "equilibrium" bubble is too high, and subsidizing credit when the "equilibrium" bubble is too low. This leaning-against-the-wind policy maximizes output and consumption. Moreover, the same conditions that make this policy desirable guarantee that a lender of last resort has the resources to implement it.
    JEL: E32 E44 O40
    Date: 2014–03
  33. By: Lawrence J. White
    Date: 2014
  34. By: Ahmet Faruk Aysan; Salih Fendoglu; Mustafa Kilinc
    Abstract: This paper investigates the effectiveness of macroprudential policies introduced by Turkey in late 2010. The unprecedented quantitative easing policies of advanced countries after the global financial crisis have presented serious financial stability concerns for most emerging countries including Turkey. To cope with these challenges, Turkey has devised new policy tools such as asymmetric interest rate corridor and reserve option mechanism. From the perspective of capital flows, the interest rate corridor works mainly through stabilizing supply of foreign funds, and the reserve option mechanism through decreasing the sensitivity of equilibrium exchange rate to shifts in the demand for foreign funds. Using a large panel of 46 countries and employing Bruno and Shin (2013a,b)’s methodology, we investigate whether the new policy framework in Turkey has been successful in cushioning the economy from volatile cross-border capital flows from a comparative perspective. The results show that, after controlling for a set of domestic and external variables and relative to a group of advanced and emerging countries, cross-border capital flows to Turkey have been less sensitive to global factors after the implementation of macroprudential policies.
    Keywords: Capital Flows, Macroprudential Policies
    JEL: E58 F32 F34
    Date: 2014
  35. By: Taylor, Leon
    Abstract: The theory of money supply is less developed than that of money demand, largely because 19th-century economists believed that money was unimportant and because they viewed the central bank as either an appendage to the economy or as a welfare-maximizing black box. The paper reviews each of these beliefs in turn.
    Keywords: money supply, history of economic thought, central bank
    JEL: B19 B22
    Date: 2014–03–06
  36. By: Jiranyakul, Komain; Opiela, Timothy
    Abstract: The present study uses the most recent time series data obtained from the Bank of Thailand during the first quarter of 1993 and the fourth quarter of 2012 to investigate the long-run relationship between M1, M2, and M3 money demands and the two determinants (real GDP and interest rate). We use the model specification of Stock and Watson (1993) and Ball (2001). Our estimation techniques include Johansen cointegration test and the dynamic ordinary least squares (DOLS). We find that the DOLS procedure is not applicable for our data set. However, our results from Johansen cointegration test reveal that there is only a long-run relationship between M1 money demand, real GDP and interest rate. In the short run, only a change in real GDP affects M1 money holding. The instability of M1 money demand function makes it difficult for monetary authority to pursuit meaningful conducts of monetary policy.
    Keywords: Money Demand, Real Income, Interest Rate, Cointegration, Dynamic OLS
    JEL: C2 C22 E41
    Date: 2014–03
  37. By: BLINOV, Sergey
    Abstract: This paper is looking into the causes of the GDP decline in Russia during 2008-2009 and the slow-down of the GDP growth during 2012-2013. The impact of the money supply on the GDP is discussed. Analogies are drawn with the crises in the USA: the Great Depression during 1929-1933 and the 2008-2009 crisis. Possible measures necessary for growth in Russia are investigated.
    Keywords: money supply, Great Depression, recession, central bank
    JEL: E41 E44 E51 E58 E65 G01 H12 N12 N14
    Date: 2014–03–04
  38. By: Bover, Olympia; Casado, Jose Maria; Costa, Sonia; Du Caju, Philip; McCarthy, Yvonne; Sierminska, Eva; Tzamourani, Panagiota; Villanueva, Ernesto; Zavadil, Tibor
    Abstract: The aim of this paper is twofold. First, we present an up-to-date assessment of the differences across euro area countries in the distributions of various measures of debt conditional on household characteristics. We consider three different outcomes: the probability of holding debt, the amount of debt held and, in the case of secured debt, the interest rate paid on the main mortgage. Second, we examine the role of legal and economic institutions in accounting for these differences. We use data from the first wave of a new survey of household finances, the Household Finance and Consumption Survey, to achieve these aims. We find that the patterns of secured and unsecured debt outcomes vary markedly across countries. Among all the institutions considered, the length of asset repossession periods best accounts for the features of the distribution of secured debt. In countries with longer repossession periods, the fraction of people who borrow is smaller, the youngest group of households borrow lower amounts (conditional on borrowing), and the mortgage interest rates paid by low-income households are higher. Regulatory loan-to-value ratios, the taxation of mortgages and the prevalence of interest-only or fixed-rate mortgages deliver less robust results. --
    Keywords: Household debt and interest rate distributions,Time to Foreclose,Taxation,Loanto-Value ratios,Fixed rate mortgages,Financial literacy
    JEL: D14 G21 G28 K35
    Date: 2014
  39. By: Hamidreza Tabarraei (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - École normale supérieure [ENS] - Paris - Institut national de la recherche agronomique (INRA), EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: I present some evidence showing that the advanced economies' banks were contributing in spreading the Euro-crisis to the emerging economies. For this purpose, I test the common lender channel among other channels of contagion, by using international banking flows data. Based on a constructed crisis-index for the Euro area, I find that countries with higher level of exposure to GIIPS, deleveraged more in riskier periods, i.e. during periods with high crisis index. Among all emerging economies in our sample, the Latin American countries were not affected as much as the emerging economies Asia and Europe, despite their high exposures to Spain. While the impact of the Euro-crisis stopped to show sign in Asia after 2011, it continued to affect the emerging Europe. The Euro-area banks were deleveraging more in the Emerging Europe than their peers in non-Euro advanced economies, whereas most of their deleveraging in Asia happened in 2010. Although the results present evidence in favour of local impacts of the Euro-crisis, they show the importance of spillover through multinational banks.
    Keywords: Sovereign risk ; Contagion ; euro crisis ; emerging economies
    Date: 2014–02
    Date: 2014
    Date: 2014

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