nep-cba New Economics Papers
on Central Banking
Issue of 2014‒03‒30
seventeen papers chosen by
Maria Semenova
Higher School of Economics

  1. Monetary and macroprudential policy in an estimated DSGE model of the Euro Area By Quint, Dominic; Rabanal, Pau
  2. The role of the "Maximizing Output Growth Inflation Rate" in monetary policy By Dominique Pepin
  3. Heterogeneous bank lending responses to monetary policy: new evidence from a real-time identification By Bluedorn, John C.; Bowdler, Christopher; Koch, Christoffer
  4. Is Bank Debt Special for the Transmission of Monetary Policy? Evidence from the Stock Market By Ander Perez; Ali Ozdagli; Filippo Ippolito
  5. Financial market regulation in Germany under the special focus of capital requirements of financial institutions By Detzer, Daniel
  6. Self-Monitoring or Reliance on Newswire Services: How Do Financial Market Participants Process Central Bank News? By Bernd Hayo; Matthias Neuenkirch
  7. Inflation expectation dynamics: the role of past present and forward looking information By Paul Hubert; Mirza Harun
  8. Lending Standards and Countercyclical Capital Requirements under Imperfect Information By Gete, Pedro; Tiernan, Natalie
  9. Liquidity Trap and Excessive Leverage By Anton Korinek; Alp Simsek
  10. Monetary policy and growth with trend inflation and financial frictions By Olmos, Lorena; Sanso Frago, Marcos
  11. Why Do Banks Practice Regulatory Arbitrage? Evidence from Usage of Trust Preferred Securities By Nicole M. Boyson; Rüdiger Fahlenbrach; René M. Stulz
  12. A Model of Monetary Exchange in Over-the-Counter Markets By Shengxing Zhang; Ricardo Lagos
  13. Exit Strategies and Their Impact on the Euro Area - A Model Based View By Ansgar Belke
  14. Currency Crisis Early Warning Systems: Why They should be Dynamic By Bertrand Candelon; Christophe Hurlin; Elena Dumitnescu
  15. High versus Low Inflation: Implications for Price-Level Convergence By M. Ege Yazgan; Hakan Yilmazkuday
  16. OECD Forecasts During and After the Financial Crisis: A Post Mortem By Nigel Pain; Christine Lewis; Thai-Thanh Dang; Yosuke Jin; Pete Richardson
  17. The crisis of the sovereign debts in the Eurozone: an overview By Frederic Teulon; Zied Ftiti; Khaled Guesmi

  1. By: Quint, Dominic; Rabanal, Pau
    Abstract: In this paper, we study the optimal mix of monetary and macroprudential policies in an estimated two-country model of the euro area. The model includes real, nominal and ?nancial frictions, and hence both monetary and macroprudential policy can play a role. We ?nd that the introduction of a macroprudential rule would help in reducing macroeconomic volatility, improve welfare, and partially substitute for the lack of national monetary policies. Macroprudential policy would always increase the welfare of savers, but their e¤ects on borrowers depend on the shock that hits the economy. In particular, macroprudential policy may entail welfare costs for borrowers under technology shocks, by increasing the countercyclical behavior of lending spreads. --
    Keywords: Monetary Policy,EMU,Basel III,Financial Frictions
    JEL: C51 E44 E52
    Date: 2014
  2. By: Dominique Pepin (CRIEF)
    Abstract: The paper discusses the role of monetary policy when potential output depends on the inflation rate. If the intention of the central bank is to maximize actual output growth, then it has to be credibly committed to a strict inflation targeting rule, and to take the MOGIR (the Maximizing Output Growth Inflation Rate) as the target.
    Date: 2014–03
  3. By: Bluedorn, John C.; Bowdler, Christopher; Koch, Christoffer (Federal Reserve Bank of Dallas)
    Abstract: We present new evidence on how heterogeneity in banks interacts with monetary policy changes to impact bank lending, at both the bank and U.S. state levels. Using an exogenous policy measure identified from narratives on FOMC intentions and real-time economic forecasts, we find much stronger dynamic effects and greater heterogeneity in U.S. bank lending responses than that found in previous research based on realized federal funds rate changes. Our findings suggest that studies using realized monetary policy changes confound monetary policy’s effects with those of changes in expected macrofundamentals. In fact, estimates from identified monetary policy changes lead to a reversal of U.S. states’ ranking by credit’s sensitivity to policy. We also extend Romer and Romer (2004)’s identification scheme, and expand the time and balance sheet coverage of the U.S. banking sample.
    Keywords: Monetary Transmission; Lending Channel; Monetary Policy Identification; Banking
    JEL: E44 E50 G21
    Date: 2014–03–01
  4. By: Ander Perez (Universitat Pompeu Fabra); Ali Ozdagli (Federal Reserve Bank of Boston); Filippo Ippolito (Universitat Pompeu Fabra)
    Abstract: This paper studies the importance of bank lending to firms for the transmission of monetary policy to the real economy. We employ a novel dataset that enables us to measure bank-dependence of firms accurately, and show that the stock prices of bank-dependent firms are significantly more responsive to monetary policy shocks, controlling for firm leverage and financial constraints. We explore the channels through which this effect occurs, and find that bank dependent firms that borrow from financially distressed banks display a much stronger sensitivity to monetary policy shocks. This finding is consistent with an active bank lending channel, according to which the strength of a bank's balance sheets matters for monetary policy transmission. We also show that bank dependent firms that hedge against interest rate risk display a much lower sensitivity to monetary policy shocks, consistent with an interest rate channel that operates via the pass-through of interest rates, associated with the widespread use of floating-rates in bank loans and credit line agreements. Taken together, these results suggest that bank lending to firms plays an important role in the transmission of monetary policy, but that there is significant heterogeneity across bank dependent firms in their reaction to monetary policy shocks.
    Date: 2013
  5. By: Detzer, Daniel
    Abstract: This paper examines capital adequacy regulation in Germany. After a short overview about financial regulation in Germany in general, the paper focuses on the most important development in the area of capital adequacy regulation from the 1930s up to the financial crisis. Two main trends are identified: a gradual softening of the eligibility criteria for regulatory equity and the increasing reliance on banks' internal risk models for the determination of risk weights. The first trend has been reversed with the regulatory reforms following the financial crisis. Internal risk models will still play a central role. The rest of the paper focuses on the problems with the use of internal risk models for regulatory purposes. The discussion includes the moral hazard problem, the technical problems with the models, the difference between economically and socially optimal capital requirements, the pro-cyclicality of the models and the problem occurring due to the existence of fundamental uncertainty. The regulatory reforms due to Basel 2.5 and Basel III and their potential to alleviate the identified problems are then examined. It is concluded that those cannot solve the most relevant problems and that currently the use of models for financial regulation is problematic. Finally, some suggestions of how the problems could be addressed are given. --
    Keywords: Banking Regulation,Financial Regulation,Capital Requirements,Capital Adequacy,Bank Capital,Basel Accord,Risk Management,Risk Models,Germany
    JEL: G18 G28 N24 N44
    Date: 2014
  6. By: Bernd Hayo; Matthias Neuenkirch
    Abstract: We study how financial market participants process news from four major central banks—the Bank of England (BoE), the Bank of Japan (BoJ), the European Central Bank (ECB), and the Federal Reserve (Fed), using a novel survey of 450 financial market participants from around the world. Our results indicate that, first, respondents rely more on newswire services to learn about central bank events than on self-monitoring. In general, the Fed is watched most closely, followed by the ECB, the BoE, and the BoJ. Second, we estimate ordered probit models to relate the two different types of central bank watching to the perceived importance of central bank events and the reliability of media coverage. Our results indicate that financial agents have to rely on newswire services to appropriately cope with a globalised market environment and digest news. However, when respondents consider an event particularly important, they tend to self-monitor it, especially when the event is taking place in their home region.
    Keywords: Central Bank Communication, Financial Market Participants, Information Processing, Interest Rate Decisions, Newswire Services, Reliability, Survey
    JEL: D83 E52 E58
    Date: 2014
  7. By: Paul Hubert; Mirza Harun
    Abstract: Assuming that private agents need to learn inflation dynamics to form their inflation expectations and that they believe a hybrid New-Keynesian Phillips Curve (NKPC) is the true data generating process of inflation, we aim at establishing the role of forward-looking information in inflation expectation dynamics. We find that longer term expectations are crucial in shaping shorter-horizon expectations. Professional forecasters put a greater weight on forward-looking information presumably capturing beliefs about the central bank inflation target or trend inflation while lagged inflation remains significant. Finally,the NKPC-based inflation expectations model fits well for professional forecasts in contrast to consumers.
    Keywords: survey expectations; inflation; new keynesian; Philipps curve
    JEL: E31
    Date: 2014–03
  8. By: Gete, Pedro; Tiernan, Natalie
    Abstract: We propose a quantitative model of lending standards with two reasons for inefficient credit: lenders' moral hazard from deposit insurance or government guarantees, and imperfect information about the persistence of asset price growth, which generates incorrect but rational beliefs in the lenders. We calibrate the model to match recent credit boom-bust episodes. Then we study which patterns of real estate price growth and banks' beliefs could serve as early warning indicators of a crisis. Finally, we propose a Value-at-Risk (VaR) rule to implement the capital requirements. The VaR framework ensures that the probability of banks not having enough equity to cover their losses is maintained at a certain level. Capital requirements should be state-contingent and lean against lenders' beliefs by tightening after periods of asset price growth. However, the relationship between asset price growth and financial risk is not monotone and this should be integrated in the setting of the capital requirements and early warning indicators.
    Keywords: Lending Standards, Capital Requirements, Leverage Rules, VaR, Basel III
    JEL: E44 G2 G21 G28
    Date: 2014–03
  9. By: Anton Korinek (John Hopkins University and NBER); Alp Simsek (MIT and NBER)
    Abstract: We investigate the role of macroprudential policies in mitigating liquidity traps driven by deleveraging, using a simple Keynesian model. When constrained agents engage in deleveraging, the interest rate needs to fall to induce unconstrained agents to pick up the decline in aggregate demand. However, if the fall in the interest rate is limited by the zero lower bound, aggregate demand is insufficient and the economy enters a liquidity trap. In such an environment, agents ex-ante leverage and insurance decisions are associated with aggregate demand externalities. The competitive equilibrium allocation is constrained inefficient. Welfare can be improved by ex-ante macroprudential policies such as debt limits and mandatory insurance requirements. The size of the required intervention depends on the differences in marginal propensity to consume between borrowers and lenders during the deleveraging episode. In our model, contractionary monetary policy is inferior to macroprudential policy in addressing excessive leverage, and it can even have the unintended consequence of increasing leverage.
    Keywords: Leverage, liquidity trap.
    JEL: E32 E44
    Date: 2014–03
  10. By: Olmos, Lorena; Sanso Frago, Marcos
    Abstract: This paper studies the effects that conventional and unconventional monetary policies generate when endogenous growth, trend inflation and financial frictions are considered in a New Keynesian macroeconomic model. Financial variables play a key role in the determination of the steady state growth rate, given the value of the trend inflation. Calibrating the model following Gertler and Karadi (2011), long-run growth rate, welfare, normalized investment and financial wealth are maximized when trend inflation is 1.7% while leverage, external finance premium and marginal gain of the financial intermediaries are minimized. Finally, unconventional policies could extend their impact to the long run.
    Keywords: New Keynesian DSGE models, endogenous growth, financial frictions, trend inflation, unconventional monetary policy
    JEL: E31 E44 E58 O42
    Date: 2014
  11. By: Nicole M. Boyson; Rüdiger Fahlenbrach; René M. Stulz
    Abstract: We propose a theory of regulatory arbitrage by banks and test it using trust preferred securities (TPS) issuance. From 1996 to 2007, U.S. banks in the aggregate increased their regulatory capital through issuance of TPS while their net issuance of common stock was negative due to repurchases. We assume that, in the absence of capital requirements, a bank has an optimal capital structure that depends on its business model. Capital requirements can impose constraints on bank decisions. If a bank’s optimal capital structure also meets regulatory capital requirements with a sufficient buffer, the bank is unconstrained by these requirements. We expect that unconstrained banks will not issue TPS, that constrained banks will issue TPS and engage in other forms of regulatory arbitrage, and that banks with TPS will be riskier than other banks with the same amount of regulatory capital, and therefore, more adversely affected by the credit crisis. Our empirical evidence supports these predictions.
    JEL: G01 G21
    Date: 2014–03
  12. By: Shengxing Zhang (New York University); Ricardo Lagos (New York University)
    Abstract: We develop a model of monetary exchange in over-the-counter (OTC) markets and use it to study the effects of inflation on asset prices, as well as on standard measures of financial liquidity, such as the size of bid-ask spreads, trade volume, and the incentives of dealers to supply immediacy, both by choosing to participate in the market-making activity, and by holding asset inventories on their own account.
    Date: 2013
  13. By: Ansgar Belke
    Abstract: This paper comments on the pros and cons of exit strategies. The focus is on the impact on the Euro area economy of the exit from unconventional monetary policies (UMP) by the Fed, which appears to be the first central bank to lay out an exiting path. In this context, it discusses the issue of policy coordination between central banks in the light of the substantial potential spillover effects via capital flows and exchange rate adjustments of unconventional monetary policies. The risks of a premature versus a delayed exit are assessed. In particular, the paper looks at the risk associated to spillover effects from UMP exit and the different shapes of exit paths. It also analyses exit strategies in a wider context and the associated financial stability risks, with a specific focus on the role of uncertainty. The paper presents estimates of the impact of the Fed’s exit from UMP in 2014 on the Euro area economy using new and innovative global IMF models. Finally, specific policy options to minimize exit risks are discussed and compared.
    Keywords: Federal funds rate; exit strategies; global spillovers; international policy coordination; sudden stop
    JEL: G01 G12 E58 H12
    Date: 2014–01
  14. By: Bertrand Candelon; Christophe Hurlin; Elena Dumitnescu
    Abstract: Traditionally, nancial crisis Early Warning Systems (EWSs) rely on macroeconomic leading indicators to forecast the occurrence of such events. This paper extends such discrete-choice EWSs by taking into account the persistence of the crisis phenomenon. The dynamic logit EWS is estimated using an exact maximum likelihood estimation method both in a time series and panel form. This model's forecasting abilities are then scrutinized by using an evaluation methodology recently designed specically for EWSs. When applied for predict- ing currency crises for 16 countries, this new EWS turns out to exhibit signicantly better predictive abilities than the existing static one, both in- and out-of -sample, thus supporting the use of dynamic specications for EWSs for nancial crises.
    Keywords: dynamic models, currency crisis, Early Warning System.
    JEL: C33 F37
    Date: 2014–02–25
  15. By: M. Ege Yazgan (Istanbul Bilgi University); Hakan Yilmazkuday (Department of Economics, Florida International University)
    Abstract: This paper investigates the relationship between the level of inflation and regional price-level convergence utilizing micro-level price data from Turkey during two clearly distinguishable periods of high and low inflation. The results indicate that higher persistence and slower convergence of price levels are evident during the low-inflation period, which corresponds to the inflation targeting (IT) regime. During the low-inflation IT regime, inflation convergence across regions appears to occur more quickly and may be responsible for the slower pace of convergence in price levels. Overall, IT in Turkey, which was successful in lowering and maintaining inflation at acceptable levels, also appears to be associated with faster convergence in inflation rates at the expense of slower convergence in price levels.
    Keywords: Price Convergence, Inflation Convergence, Micro-level Prices, Turkey.
    JEL: E31 F41
    Date: 2014–03
  16. By: Nigel Pain; Christine Lewis; Thai-Thanh Dang; Yosuke Jin; Pete Richardson
    Abstract: This paper assesses the OECD’s projections for GDP growth and inflation during the global financial crisis and recovery, focussing on lessons that can be learned. The projections repeatedly over-estimated growth, failing to anticipate the extent of the slowdown and later the weak pace of the recovery – errors made by many other forecasters. At the same time, inflation was stronger than expected on average. Analysis of the growth errors shows that the OECD projections in the crisis years were larger in countries with more international trade openness and greater presence of foreign banks. In the recovery, there is little evidence that an underestimate of the impact of fiscal consolidation contributed significantly to forecast errors. Instead, the repeated conditioning assumption that the euro area crisis would stabilise or ease played an important role, with growth weaker than projected in European countries where bond spreads were higher than had been assumed. But placing these errors in a historical context illustrates that the errors were not without precedent: similar-sized errors were made in the first oil price shock of the 1970s. In response to the challenges encountered in forecasting in recent years and the lessons learnt, the OECD and other international organisations have sought to improve their forecasting techniques and procedures, to improve their ability to monitor near-term developments and to better account for international linkages and financial market developments. Prévisions de l'OCDE pendant et après la crise financière : Post mortem Ce document évalue les projections de l'OCDE relatives à la croissance du PIB et à l'inflation durant la crise financière mondiale et lors de la reprise, tout en mettant l'accent sur les leçons qui peuvent être tirées. Les projections ont surestimé la croissance de façon répétée, à défaut d'anticiper l'ampleur du ralentissement puis, plus tard, le faible rythme de la reprise — des erreurs commises par de nombreux autres prévisionnistes. Simultanément, l'inflation a été, en moyenne, plus forte que prévu. L'analyse des erreurs relatives à la croissance montre que les prévisions de l'OCDE durant les années de crise économiques ont été plus importantes dans les pays dotés d'une plus grande ouverture au commerce international et d'une plus grande présence de banques étrangères. Durant la reprise, il y a peu d'évidences qu'une sous-estimation de l'impact de la consolidation budgétaire ait conduit de manière significative aux erreurs. Au lieu de cela, l'hypothèse de conditionnement répétée que la crise de la zone euro devrait se stabiliser ou a joué un rôle important, avec une croissance plus faible que prévu dans les pays européens où les écarts de rendement des obligations étaient plus élevés que ce qui avait été supposé. Mais placer ces erreurs dans un contexte historique montre que les erreurs ne sont pas sans précédent: des erreurs de taille similaire ont été faites lors du premier choc des prix du pétrole dans les années 70. En réponse aux difficultés rencontrées dans les prévisions au cours des dernières années et les leçons apprises, l'OCDE et d'autres organisations internationales ont cherché à améliorer leurs techniques et procédures de prévision, afin d'améliorer leur capacité à surveiller l'évolution à court terme et à mieux appréhender les liens internationaux et l'évolution du marché financier
    Keywords: fiscal policy, inflation, forecasting, economic fluctuations, economic outlook, performance économique, prévisions, fluctuations économiques, inflation, politique budgétaire
    JEL: E17 E27 E31 E32 E37 E62 E66 F47 G01
    Date: 2014–03–17
  17. By: Frederic Teulon; Zied Ftiti; Khaled Guesmi
    Abstract: The public debt crisis threatening the survival of the euro area. This crisis could appear as a byproduct of the global financial crisis. In fact, it refers to structural problems specific to Europe and the question of optimal currency area which has been in place since 1999. The sovereign debt crisis highlights a number of inconsistencies and difficulties faced by the rescue measures in European countries "devices". This crisis has its roots in the European construction itself, a Stability Pact that guaranteed nothing in the debt sustainability in the absence of political solutions and with enlargements precipitates. It opens the way to several options: issuing eurobonds, fiscal federalism or separation of the euro area.
    Keywords: Public debt; Fiscal deficit; Default risk; EMU.
    JEL: H5 H6 E6
    Date: 2014–02–25

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