nep-cba New Economics Papers
on Central Banking
Issue of 2014‒04‒11
eighteen papers chosen by
Maria Semenova
Higher School of Economics

  1. Macroprudential Regulation and the Role of Monetary Policy By Tayler, William; Zilberman, Roy
  2. Assessing the Interest Rate and Bank Lending Channels of ECB Monetary Policies By Jérôme Creel; Mathilde Viennot; Paul Hubert
  3. Monetary policy implementation in an interbank network: Effects on systemic risk By Bluhm, Marcel; Faia, Ester; Krahnen, Jan Pieter
  4. Inflation Targeting and Inflation Expectations: Evidence for Brazil and Turkey By Sumru Altug; Cem Cakmakli
  5. Self-Monitoring or Reliance on Newswire Services: How Do Financial Market Participants Process Central Bank News? By Bernd Hayo; Matthias Neuenkirch
  6. Source of Underestimation of Monetary Policy Effect: Re-examination of the Policy Effectiveness in Japan's 1990s By Masahiko Shibamoto
  8. Inflation expectation dynamics: the role of past present and forward looking information By Paul Hubert; Mirza Harun
  9. Monetary Policy Switching in the Euro Area and Multiple Equilibria: An Empirical Investigation By Gilles Dufrénot; Anwar Khayat
  10. Fiscal policy, institutional quality and central bank transparency. By Meixing Dai; Moïse Sidiropoulos; Eleftherios Spyromitros
  11. EMU: The Sustainability Issue By Frederic Teulon
  12. Unconventional monetary policy normalization in high-income countries : implications for emerging market capital flows and crisis risks By Burns, Andrew; Kida, Mizuho; Lim, Jamus Jerome; Mohapatra, Sanket; Stocker, Marc
  13. Cyclical components and dual long memory in the foreign exchange rate dynamics: the Tunisian case By Rania Jammazi; Chaker Aloui
  14. Fiscal Policy and the Inflation Target By Peter Tulip
  15. Exchange Rate Adjustment, Monetary Policy and Fiscal Stimulus in Japan's Escape from the Great Depression By Masahiko Shibamoto; Masato Shizume
  16. Crisis Mismanagement in The United States And Europe: Impact On Developing Countries And Longer-Term Consequences By Yýlmaz Akyüz
  17. Effects of Unconventional Monetary Policy on Financial Institutions By Gabriel Chodorow-Reich
  18. The Prudential Regulation of Financial Institutions: Why Regulatory Responses to the Crisis Might Not Prove Sufficient By William R. White

  1. By: Tayler, William; Zilberman, Roy
    Abstract: This paper examines the macroprudential roles of bank capital regulation and monetary policy in a Dynamic Stochastic General Equilibrium model with endogenous financial frictions and a borrowing cost channel. We identify various transmission channels through which credit risk, commercial bank losses, monetary policy and bank capital requirements affect the real economy. These mechanisms generate significant financial accelerator effects, thus providing a rationale for a macroprudential toolkit. Following credit shocks, countercyclical bank capital regulation is more effective than monetary policy in promoting financial, price and overall macroeconomic stability. For supply shocks, macroprudential regulation combined with a strong response to inflation in the central bank policy rule yield the lowest welfare losses. The findings emphasize the importance of the Basel III regulatory accords and cast doubt on the desirability of conventional Taylor rules during periods of financial distress. --
    Keywords: Bank Capital Regulation.,Macroprudential Policy,Basel III,Monetary Policy,Cost Channel
    JEL: E32 E44 E52 E58 G28
    Date: 2014–03–31
  2. By: Jérôme Creel (OFCE); Mathilde Viennot; Paul Hubert
    Abstract: This paper assesses the transmission of ECB monetary policies, conventional and unconventional, to both interest rates and lending volumes for the money market, sovereign bonds at 6-month, 5-year and 10-year horizons, loans inferior and superior to 1M€ to non-financial corporations, cash and housing loans to households, and deposits, during the financial crisis and in the four largest economies of the Euro Area. We first identify two series of ECB policy shocks at the euro area aggregated level and then include them in country-specific structural VAR. The main result is that only the pass-through from the ECB rate to interest rates has been really effective, consistently with the existing literature, while the transmission mechanism of the ECB rate to volumes and of quantitative easing (QE) operations to interest rates and volumes has been null or uneven over this sample. One argument to explain the differentiated pass-through of ECB monetary policies is that the successful pass-through from the ECB rate to interest rates, which materialized as a huge decrease in interest rates during the sample period, had a negative effect on the supply side of loans, and offset itself its potential positive effects on lending volumes.
    Keywords: transmission channels; unconventional monetary policy; pass-through
    JEL: E51 E58
    Date: 2013–12
  3. By: Bluhm, Marcel; Faia, Ester; Krahnen, Jan Pieter
    Abstract: This paper makes a conceptual contribution to the e ffect of monetary policy on financial stability. We develop a microfounded network model with endogenous network formation to analyze the impact of central banks' monetary policy interventions on systemic risk. Banks choose their portfolio, including their borrowing and lending decisions on the interbank market, to maximize profit subject to regulatory constraints in an asset-liability framework. Systemic risk arises in the form of multiple bank defaults driven by common shock exposure on asset markets, direct contagion via the interbank market, and firesale spirals. The central bank injects or withdraws liquidity on the interbank markets to achieve its desired interest rate target. A tension arises between the bene ficial effects of stabilized interest rates and increased loan volume and the detrimental effects of higher risk taking incentives.We fi nd that central bank supply of liquidity quite generally increases systemic risk. --
    Keywords: network formation,contagion,central banks' interventions
    JEL: C63 D85 G01 G28
    Date: 2014
  4. By: Sumru Altug (Department of Economics, Koc University, CEPR); Cem Cakmakli (Department of Economics, Koc University, Department of Quantitative Economics, University of Amsterdam)
    Abstract: In this paper, we study the evolution of inflation expectations for two key emerging economies, Brazil and Turkey, using a reduced form model in a state-space framework, where the level of inflation is modeled explicitly. We match the survey-based inflation expectations and inflation targets set by the central banks of Brazil and Turkey with the predictions implied by the model in a statistically coherent way. Confronting these expectations with inflation targets leads to a statistical measure of the discrepancy between inflation expectations and the target inflation. The results indicate that inflation expectations are anchored more closely the inflation target set by the Central Bank for Brazil. By contrast, there is more evidence that inflation expectations deviate significantly from the target inflation set by the Central Bank for Turkey.
    Keywords: Inflation targeting, survey-based inflation expectations, forecasting, state space model.
    JEL: E31 E37 C32 C51
    Date: 2014–04
  5. By: Bernd Hayo (University of Marburg); Matthias Neuenkirch (University of Trier)
    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-
    Keywords: Central Bank Communication, Financial Market Participants, Information Processing, Interest Rate Decisions, Newswire Services, Reliability, Survey.
    JEL: D83 E52 E58
    Date: 2014
  6. By: Masahiko Shibamoto (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)
    Abstract: This paper re-examines the empirical evidence on the potency of Japanese monetary policy in the 1990s by comparing the estimated impacts of various proxies of monetary policy shocks on the macro economy. My empirical results demonstrate that the surprise target changes as a proxy of monetary policy shocks had impacts on real output and financial variables over the period 1990–2001. I also show that the estimated effects of identified monetary policy shocks depend on whether the shocks are anticipated or not; The monetary policy effects on the economy are underestimated when the empirical models fail to control for the market expectation for monetary policy stance.
    Keywords: Monetary policy, Surprise target changes, Vector autoregression model, Japan
    JEL: E52 E58
    Date: 2014–03
  7. By: M. Neuenkirch, P. Siklos (LCERPA)
    Abstract: Monetary policy decisions are typically taken after a committee has deliberated and voted on a proposal. However, there are well-known risks associated with committee-based decisions. In this paper we examine the record of the shadow Monetary Policy Council in Canada. Given the structure of the committee, how decision-making takes place, as well as the voting arrangements, the MPC does not face the same information cascades and group polarization risks faced by actual decision-makers in central bank monetary policy councils. We find a considerable diversity of opinion about the recommended future path of interest rates inside the MPC. Beginning with the explicit forward guidance provided by the Bank of Canada market determined forward rates diverge considerably from the recommendations implied by the MPC. There is little evidence that the Bank and the MPC coordinate their future views about the interest rate path. However, it is difficult to explain the basis on which median voter inside the MPC, as well as doves and hawks on the committee, change their views about future changes in policy rates. This implies that there remain challenges in understanding the evolution of future interest rate paths over time.
    Keywords: Bank of Canada, central bank communication, committee behaviour, monetary policy committees, shadow councils, Taylor rules
    JEL: E43 E52 E58 E61 E69
    Date: 2014–03–01
  8. 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
  9. By: Gilles Dufrénot (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS, CEPII, Banque de France, Aix-Marseille School of Economics); Anwar Khayat (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS)
    Abstract: This paper provides evidence that the European Central Bank (ECB) has adjusted its interest rate since 1999 nonlinearly according to the macroeconomic and financial environment in the euro zone. Its policy function is described by a Taylor rule with regime shifts implying that the stance of reaction to the inflation-gap and output-gap has varied according to the credit risk in the private and sovereign bond markets, the monetary base and past levels of inflation, output and the shocks affecting the European economies. We provide evidence of regimes corresponding to low to high levels of inflation with the possibility of a situation near a zero low bound (ZLB) for the interest rate. We study the implications of such a rule for the economy in a simple new-Keynesian framework and show that it is consistent with several stable long-run steady states equilibria among which one that is consistent with the recent situation of a near liquidity trap in the euro area. We also find that around this liquidity trap steady state the equilibrium is locally determinate for most plausible parameter values. We discuss the issue of moving from a situation of low nominal interest rate to a policy that have been more typically implemented in the past by relying on an analysis of the impact of shocks (supply and demand) to the economy.
    Keywords: Nonlinear Taylor rules; multiple steady state equilibria; Euro area.
    JEL: C54 E52 E58
    Date: 2014–03
  10. By: Meixing Dai; Moïse Sidiropoulos; Eleftherios Spyromitros
    Abstract: This paper examines monetary and fiscal interactions in a framework where the government worries about political costs of low institutional quality and central bank opacity acts as a disciplinary device leading the government to reduce distortionary taxes and public expenditures. Greater opacity could thus lower the reactions of inflation expectations and inflation but increase those of the output gap to supply shocks and the target of public expenditures, and would be beneficial in terms of less macroeconomic volatility. Under the least favourable assumptions on the effect of corruption, i.e. ‘sanding-the-wheels’ effect or weak ‘greasing-the-wheels’ effect, we have shown that there is a fiscal disciplining effect of central bank opacity in a game framework where the government is a Stackelberg leader. Imperfect transparency could increase corruption only if the ‘greasing-the-wheels’ effect is relatively large. These results could be reinforced by the presence of grand corruption.
    Keywords: Central bank opacity, fiscal disciplining effect, distortions, institutional quality, corruption.
    JEL: D73 E52 E58 E61 E63 H50
    Date: 2014
  11. By: Frederic Teulon
    Abstract: The euro area is experiencing a sovereign debt crisis; as a result, the foundations of its monetary union have been shattered. This crisis, which is an extension of an international financial crisis, shows that the European Union is not an optimum currency area. Robert Mundell’s work remains an indispensable reference on this subject: a monetary union among greatly different countries and propelled by considerably weak solidarity is problematic. In the present context, the possibilities are limited for permanently improving the situation, for transforming sovereign debts into sustainable ones, and for regaining a higher level of growth. Experience seems to show that a single currency cannot accommodate national budgetary policies and that national policies are hindered by the existence of a single currency in a context of asymmetries. Eventually, a scenario where the euro area would collapse becomes highly probable. This paper puts forward a model of debt sustainability and discusses eight related proposals.
    Keywords: European Monetary Union; European Central Bank (EBC); Eurozone; Stability growth pact; Financial crisis; Fiscal policy and debt sustainability; Optimal currency area; Sovereign debt
    JEL: E42 E44 G38
    Date: 2014–03–28
  12. By: Burns, Andrew; Kida, Mizuho; Lim, Jamus Jerome; Mohapatra, Sanket; Stocker, Marc
    Abstract: As the recovery in high-income countries firms amid a gradual withdrawal of extraordinary monetary stimulus, developing countries can expect stronger demand for their exports as global trade regains momentum, but also rising interest rates and potentially weaker capital inflows. This paper assesses the implications of a normalization of policy and activity in high-income countries for financial flows and crisis risks in developing countries. In the most likely scenario, a relatively orderly process of normalization would imply a slowdown in capital inflows amounting to 0.6 percent of developing-country GDP between 2013 and 2016, driven in particular by weaker portfolio investments. However, the risk of more abrupt adjustments remains significant, especially if increased market volatility accompanies the unwinding of unprecedented central bank interventions. According to simulations, abrupt changes in market expectations, resulting in global bond yields increasing by 100 to 200 basis points within a couple of quarters, could lead to a sharp reduction in capital inflows to developing countries by between 50 and 80 percent for several months. Evidence from past banking crises suggests that countries having seen a substantial expansion of domestic credit over the past five years, deteriorating current account balances, high levels of foreign and short-term debt, and over-valued exchange rates could be more at risk in current circumstances. Countries with adequate policy buffers and investor confidence may be able to rely on market mechanisms and countercyclical macroeconomic and prudential policies to deal with a retrenchment of foreign capital. In other cases, where the scope for maneuver is more limited, countries may be forced to tighten fiscal and monetary policy to reduce financing needs and attract additional inflows.
    Keywords: Debt Markets,Emerging Markets,Currencies and Exchange Rates,Banks&Banking Reform,Economic Theory&Research
    Date: 2014–04–01
  13. By: Rania Jammazi; Chaker Aloui
    Abstract: The purpose of this paper is to question the traditional conventional view on the exchange rate targeting that real shocks have
    Keywords: exchange rates; time series decomposition; HML test; dual long memory.
    JEL: E30 F31
    Date: 2014–03–28
  14. By: Peter Tulip (Reserve Bank of Australia)
    Abstract: Low interest rates in the United States have recently been accompanied by large fiscal stimulus. However, discussions of monetary policy have neglected this fiscal activism, leading to over-estimates of the costs of the zero lower bound and, hence, of the appropriate inflation target. To rectify this, I include countercyclical fiscal policy within a large-scale model of the US economy. I find that fiscal activism can substitute for a high inflation target. An increase in the inflation target is not warranted, despite increased volatility of macroeconomic shocks, so long as fiscal policy behaves as it has recently.
    Keywords: fiscal policy; zero bound; inflation target
    JEL: E52 E62
    Date: 2014–03
  15. By: Masahiko Shibamoto (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan); Masato Shizume (Institute for Monetary and Economic Studies, Bank of Japan)
    Abstract: A veteran finance minister, Takahashi Korekiyo, brought an early recovery for Japan from the Great Depression of the 1930s by prescribing a combination of expansionary fiscal, exchange rate, and monetary policies. To explore the comprehensive transmission mechanism of Takahashi's macroeconomic policy package, including the expectation channel, we construct a structural vector auto-regression (S-VAR) model with three state variables (output, price, and the inflation expectations) and three policy variables (fiscal balance, exchange rate, and money stock). Our analysis reveals that the exchange rate adjustment undertaken as an independent policy tool had the strongest effect, and that changes in people's expectations played a significant role for escaping from the Great Depression. During the second half of 1931, in particular, speculation on Japan's departure from the gold standard and the inflation that was likely to follow reversed the existing expectations: instead of expecting deflation, people began to expect inflation, months ahead of the actual departure from the gold standard. As a whole, the choice of the level of the exchange rate was crucial for changing people's expectations as well as promoting exports.
    Keywords: Great depression, Japanese economy, Macroeconomic policy, Expectation, Vector auto-regressive model, Commodity futures
    JEL: E52 E63 N15
    Date: 2014–03
  16. By: Yýlmaz Akyüz (South Centre)
    Abstract: The ultra-easy monetary policy has not been very effective in easing the debt overhang and stimulating spending – hence, the crisis is taking too long to resolve, entailing unnecessary losses of income and jobs and aggravating inequality. But it has generated financial fragility at home and abroad, exposing developing countries to a new boom-bust cycle. Tapering does not yet signal a return to monetary tightening and normalization of the Fed’s balance sheet. Besides, the policy rates are pledged to remain at historical lows for some time to come. Thus, ultra-easy money is still with us. But the markets have already started pricing-in the normalization of monetary policy and this is the main reason for the rise in long-term rates and the turbulence in emerging economies. The crisis has in effect demolished the myth that South has decoupled from the economic vagaries of the North and major emerging economies have become new global engines. Policy response to a deepening of the current financial turbulence in the South should depart from past practices. Emerging economies should avoid using their reserves to finance large and persistent outflows of capital and seek, instead, to involve private lenders and investors in crisis resolution. This may call for exchange restrictions and temporary debt standstills.
    Keywords: Monetary policy, quantitative easing, tapering, emerging markets
    Date: 2014
  17. By: Gabriel Chodorow-Reich
    Abstract: Unconventional monetary policy affects financial institutions through their exposure to real project risk, the value of their legacy assets, their temptation to reach for yield, and their choice of leverage. I use high frequency event studies to show the introduction of unconventional policy in the winter of 2008-09 had a strong, beneficial impact on banks and especially on life insurance companies, consistent with the positive effect on legacy asset prices dominating any impulse for additional risk taking. Subsequent policy announcements had minor effects on these institutions. The interaction of low nominal interest rates and administrative costs led money market funds to waive fees, producing a possible incentive to reach for higher returns to reduce waivers. I find some evidence of high cost money market funds reaching for yield in 2009-11, but little thereafter. Private defined benefit pension funds with worse funding status or shorter liability duration also seem to have reached for higher returns beginning in 2009, but again the evidence suggests such behavior dissipated by 2012. Overall, in the present environment there does not seem to be a trade-off between expansionary policy and the health or stability of the financial institutions studied.
    Date: 2014–01
  18. By: William R. White
    Abstract: It is now six years since a devastating financial and economic crisis rocked the global economy. Supported strongly by the G20 process, international regulators led by the Financial Stability Board have been working hard ever since to develop new regulatory standards designed to prevent a recurrence of these events. These international standards are intended to provide guidance for the drawing up of national legislation and regulation, and have already had a pervasive influence around the world. This paper surveys recent international developments concerning the prudential regulation of financial institutions: banks, the shadow banking system and insurance companies. It concludes that, while substantial progress has been made, the global economy nevertheless remains vulnerable to possible future financial instability. This possibility reflects three sets of concerns. First, measures taken to manage the crisis to date have actually made the prevention of future crises more difficult. Second, the continuing active debate over virtually every aspect of the new regulatory guidelines indicates that the analytical foundations of what is being proposed remain highly contestable. Third, implementation of the new proposals could suffer from different practices across regions. Looking forward, the financial sector will undoubtedly continue to innovate in response to competitive pressures and in an attempt to circumvent whatever regulations do come into effect. If we view the financial sector as a complex adaptive system, continuous innovation would only be expected. This perspective also provides a number of insights as to how regulators should respond in turn. Not least, it suggests that attempts to reduce complexity would not be misguided and that complex behavior need not necessarily be accompanied by still more complex regulation. Removing impediments to more effective self-discipline and market discipline in the financial sector would also seem recommended. Réglementation prudentielle des institutions financières : Pourquoi les réponses réglementaires à la crise pourraient ne pas suffire Cela fait maintenant six ans que l’économie mondiale a été mise à mal par une terrible crise économique et financière. Avec le soutien appuyé du G20, les instances de réglementation internationales, sous la houlette du Conseil de stabilité financière, s’efforcent depuis lors de mettre au point de nouvelles normes réglementaires destinées à empêcher que de tels événements se reproduisent. L’influence de ces normes internationales, conçues pour guider la conception de législations et de réglementations nationales, se fait déjà sentir partout dans le monde. La présente étude s’intéresse aux évolutions récemment intervenues dans la réglementation prudentielle des institutions financières : banques, système bancaire parallèle et compagnies d’assurances. Ses auteurs concluent que si des progrès considérables ont été accomplis, l’économie mondiale reste néanmoins vulnérable en cas d’éventuelle instabilité financière future. Cette éventualité repose sur trois sources de préoccupation : d’abord, les mesures prises à ce jour pour gérer la crise rendent plus difficile la prévention des crises futures. Ensuite, le débat très vif que continuent à susciter quasiment chacun des aspects des nouveaux principes réglementaires montre que les fondements analytiques sur lesquels reposent les propositions sont loin de faire l’unanimité. Enfin, la diversité des pratiques d’une région à l’autre pourrait nuire à la mise en oeuvre des nouvelles normes proposées. À n’en pas douter, le secteur financier continuera d’innover à l’avenir, en réponse aux pressions concurrentielles et pour tenter de se soustraire à toutes les réglementations entrant en vigueur, quelle qu’en soit la nature. Si l’on considère que le secteur financier est un système évolutif complexe, il s’ensuit qu’il ne peut qu’innover en permanence, et ce point de vue apporte un certain nombre d’éclairages sur la manière dont les instances de réglementation devraient réagir. Surtout, il montre qu’aller dans le sens d’une moins grande complexité serait sans doute judicieux, et qu’un système complexe ne doit pas forcément aller de pair avec une réglementation plus complexe encore. Il serait sans doute également recommandé de lever les obstacles à une plus grande efficacité de l’autoréglementation et de la discipline de marché dans le secteur financier.
    Keywords: globalisation, financial crisis, bank regulation, bail out, sauvetage, réglementation bancaire, crise financière, mondialisation
    JEL: G28
    Date: 2014–03–24

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