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on Central Banking |
| By: | Ansgar Belke |
| Abstract: | This Paper comments on the role of the Monetary Dialogue in the context of an evolving monetary policy. The discussion is conducted in terms of the adoption of forward guidance on interest rates by the European Central Bank (ECB), the ECB’s model choice and data revision policies in inflation forecasts, its membership in the Troika, its activities as a financial supervisor, as well as regards its bond purchasing activities and the implication for ECB monetary policy stemming from Fed’s envisaged exit from unconventional monetary policies. This paper also assesses on a case-by-case basis the actual exchange of information between the European Parliament (EP) and the ECB. We argue that the new ECB supervisory role has made the Monetary Dialogue exercise even more important “now” than in “normal” times. Still, we suggest changes, both procedural as well as regarding its focus range, to make it even more effective. In our view, the transparency/accountability issue represented by a Supervisory Board ‘hosted’ by ECB needs to be addressed. A crucial challenge for the Monetary Dialogue is also to assess the optimal degree of ECB transparency and accountability towards the EP, the key democratic institution. |
| Keywords: | Accountability; European Parliament; forward guidance; monetary dialogue; transparency |
| JEL: | E52 E58 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0477&r=cba |
| By: | Cloyne, James (Bank of England); Hürtgen, Patrick (Department of Economics, University of Bonn) |
| Abstract: | This paper estimates the effects of monetary policy on the UK economy based on a new, extensive real-time forecast data set. Employing the Romer–Romer identification approach we first construct a new measure of monetary policy innovations for the UK economy. We find that a 1 percentage point increase in the policy rate reduces output by up to 0.6% and inflation by up to 1.0 percentage point after two to three years. Our approach resolves the price puzzle for the United Kingdom and we show that forecasts are crucial for this result. Finally, we show that the response of policy after the initial innovation is crucial for interpreting estimates of the effect of monetary policy. We can then reconcile differences across empirical specifications, with the wider vector autoregression literature and between our United Kingdom results and the larger narrative estimates for the United States. |
| Keywords: | monetary policy; narrative identification; real-time forecasts; business cycles |
| JEL: | E31 E32 E52 E58 |
| Date: | 2014–03–28 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0493&r=cba |
| By: | Daniel Detzer (Berlin School of Economics and Law, and Institute for International Political Economy Berlin (IPE)) |
| Abstract: | This paper examines capital adequacy regulation in Germany. After a general overview of financial regulation in Germany, 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 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 procyclicality 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: | 2014–02–15 |
| URL: | http://d.repec.org/n?u=RePEc:fes:wpaper:wpaper26&r=cba |
| By: | Noss, Joseph (Bank of England); Toffano, Priscilla (International Monetary Fund) |
| Abstract: | This paper estimates the effect of changes in capital requirements applied to all UK-resident banks on lending by studying the joint dynamics of the aggregate capital ratio of the UK banking system and a set of macro-financial variables. This is achieved by means of sign restrictions that attempt to identify shocks in past data that match a set of assumed directional responses of other variables to future changes in capital requirements aimed at increasing the resilience of the banking system to losses during an upswing. This may provide policymakers with a plausible ‘upper bound’ on the short-term effects of future increases in macroprudential capital requirements in certain states of the economic cycle. An increase in the aggregate bank capital requirement during an economic upswing is associated with a reduction of lending, with the effect larger for lending to corporates than for that to households. The impact on GDP growth is statistically insignificant. |
| Keywords: | Bank capital; bank lending; regulatory capital requirements; capital buffer; macroprudential policy |
| JEL: | G21 G28 |
| Date: | 2014–03–28 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0494&r=cba |
| By: | Zhongbo Jing; Jakob de Haan; Jan P. A. M. Jacobs; Haizhen Yang |
| Abstract: | We construct a money market pressure index based on central bank reserves and the short-term nominal interest rate to identify banking crises, thereby extending the index proposed by Von Hagen and Ho (2007). We compare the crises identified by both indices with banking crises according to the benchmark of Laeven and Valencia (2010). Both indices identify more crises than these benchmarks. The crises identified by our index are more in line with the benchmark than the crises identified by the Von Hagen and Ho index, while our index also gives fewer false signals. |
| Keywords: | banking crises, money market pressure index, |
| JEL: | C43 E44 G21 |
| Date: | 2013–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2013s-41&r=cba |
| By: | Gilles Dufrénot (AMSE - Aix-Marseille School of Economics - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM), Centre de recherche de la Banque de France - Banque de France, CEPII - Centre d'Etudes Prospectives et d'Informations Internationales - Centre d'analyse stratégique); Anwar Khayat (AMSE - Aix-Marseille School of Economics - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM)) |
| 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 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00973504&r=cba |
| By: | Bauer, Michael D. (Federal Reserve Bank of San Francisco) |
| Abstract: | This paper provides new evidence on the importance of inflation expectations for variation in nominal interest rates, based on both market-based and survey-based measures of inflation expectations. Using the information in TIPS breakeven rates and inflation swap rates, I document that movements in inflation compensation are important for explaining variation in long-term nominal interest rates, both unconditionally as well as conditionally on macroeconomic data surprises. Daily changes in inflation compensation and changes in long-term nominal rates generally display a close statistical relationship. The sensitivity of inflation compensation to macroeconomic data surprises is substantial, and it explains a sizable share of the macro response of nominal rates. The paper also documents that survey expectations of inflation exhibit significant comovement with variation in nominal interest rates, as well as significant responses to macroeconomic news. |
| Keywords: | inflation expectations; macroeconomic news; inflation compensation; TIPS; inflation swaps; survey expectations |
| JEL: | E43 E44 E52 |
| Date: | 2014–03–27 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2014-09&r=cba |
| By: | George S. Tavlas (Bank of Greece) |
| Abstract: | This paper examines the different policy rules proposed by Henry Simons, who, beginning in the mid-1930s, advocated a price-level stabilization rule, and by Milton Friedman, who, beginning in the late-1950s, advocated a rule that targeted a constant growth rate of the money supply. Although both rules shared the objective of eliminating the policy uncertainty emanating from discretion, they differed because of the different views of Simons and Friedman about the stability of secular relationships. Simons' rule relates to modern rules which emphasize the pursuit of price stability as representing optimal monetary policy. |
| Keywords: | Milton Friedman; Henry Simons; monetary-policy rules |
| JEL: | B22 E52 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:177&r=cba |
| By: | Orsolya Csortos (Magyar Nemzeti Bank (the central bank of Hungary)); Zoltán Szalai (Magyar Nemzeti Bank (the central bank of Hungary)) |
| Abstract: | In this paper we apply the Early Warning System methodology to ten Central and Eastern European Countries to find useful sets of indicators which could predict macroeconomic and financial imbalances. We argue that finding such indicators is crucial in the current monetary policy framework because significant imbalances could build up without any sign of risk to price stability. We examine the stylised behaviour of the most important macroeconomic variables over the business cycle and select the most preferred indicator variables. Our methodology consists of choosing the most useful combination of variables in terms of false alarms and misses, taken as given the preferences of the decision maker in terms of committng various types of errors. We find, that a certain combination of the global financial variable, the real exchange rate, capital flows and credit is a plausible signal macroeconomic imbalances. The results suggest that although the above indicators should not be used mechanically, they could usefully complement analytical tools available to modern central banks. |
| Keywords: | early warning indicators, signalling approach, macroeconomic stability, financial stability, monetary policy strategy |
| JEL: | E32 E37 E44 E58 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:wpaper:2014/2&r=cba |
| By: | Escudé, Guillermo J. |
| Abstract: | A traditional way of thinking about the exchange rate regime and capital account openness has been framed in terms of the 'impossible trinity' or 'trilemma', according to which policymakers can only have two of three possible outcomes: open capital markets, monetary independence and pegged exchange rates. The present paper is a natural extension of Escude (A DSGE Model for a SOE with Systematic Interest and Foreign Exchange Policies in Which Policymakers Exploit the Risk Premium for Stabilization Purposes, 2013), which focuses on interest rate and exchange rate policies, since it introduces the third vertex of the 'trinity' in the form of taxes on private foreign debt. These affect the risk-adjusted uncovered interest parity equation and hence influence the SOE's international financial flows. A useful way to illustrate the range of policy alternatives is to associate them with the faces of an isosceles triangle. Each of three possible government intervention policies taken individually (in the domestic currency bond market, in the foreign currency market, and in the foreign currency bonds market) corresponds to one of the vertices of the triangle, each of the three possible pairs of intervention policies corresponds to one of the three edges of the triangle, and the three simultaneous intervention policies taken jointly correspond to the triangle's interior. This paper shows that this interior, or 'possible trinity' is quite generally not only possible but optimal, since the central bank obtains a lower loss when it implements a policy with all three interventions. -- |
| Keywords: | DSGE models,small open economy,monetary and exchange rate policy,capital controls,optimal policy |
| JEL: | E58 O24 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:201413&r=cba |
| By: | Dudley, William (Federal Reserve Bank of New York) |
| Abstract: | Remarks at the Roundtable Discussion in Honor of Terrence Checki: Three Decades of Crises: What Have We Learned?, Federal Reserve Bank of New York, New York City |
| Keywords: | asset purchase program; unconventional monetary policy; Terrence Checki |
| JEL: | E52 F15 |
| Date: | 2014–03–27 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsp:133&r=cba |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:cge:wacage:181&r=cba |
| By: | Daniel Detzer (Berlin School of Economics and Law, and Institute for International Political Economy Berlin (IPE)); Hansjorg Herr (Berlin School of Economics and Law, and Institute for International Political Economy Berlin (IPE)) |
| Abstract: | This paper analyses financial crises from a theoretical point of view. For this it reviews what different schools of economic thought have to say about financial crises. It examines first the approaches that regard financial crises as a disturbing factor of a generally stable real economy (Wicksell, Hayek, Schumpeter, Fisher, and the early Keynes). Thereafter, approaches, where the dichotomy between the monetary and the real sphere is lifted are reviewed. Here in particular the later works of Keynes and the contributions of Minsky are of importance. Lastly, it is looked at the behavioural finance approaches. After having reviewed the different approaches it is examined, where those approaches have similarities and where they fruitfully can be combined. Based on this, we develop an own theoretical framework methodologically based on a Wicksellian cumulative process, however, overcoming the neoclassical dichotomy. The paper ends with some policy recommendations based on the developed theoretical framework. |
| Keywords: | Financial crisis, crisis theory, behavioral finance, Hayek, Keynes, Minsky, Schumpeter, Wicksell |
| JEL: | E12 E13 G01 |
| Date: | 2014–02–15 |
| URL: | http://d.repec.org/n?u=RePEc:fes:wpaper:wpaper25&r=cba |
| By: | Ray C. Fair (Cowles Foundation, Yale University) |
| Abstract: | An important question for central banks is how they should report the uncertainty of their forecasts. This paper discusses a way in which a central bank could report the uncertainty of its forecasts in a world in which it used a single macroeconometric model to make its forecasts and guide its policies. Suggestions are then made as to what might be feasible for a central bank to report given that it is unlikely to be willing to commit to a single model. A particular model is used as an illustration. |
| Keywords: | Central Bank, Uncertainty, Stochastic Simulation |
| JEL: | E50 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1943&r=cba |
| By: | Blaise Gnimassoun |
| Abstract: | One of the major current concerns of economic policy in developing countries is the choice of the appropriate exchange rate regime to consolidate and accelerate the pace of economic growth. This paper aims to investigate whether the choice of a country’s exchange rate regime may affect current account imbalances for sub-Saharan African economies. To this end, we first use Bayesian model averaging (BMA) to address concerns about model uncertainty and identify the key determinants (fundamentals) of external balances. Then, estimating current account imbalances over the 1980-2012 period, we show that flexible exchange rate regimes are more effective in preventing such disequilibria. Consequently, candidates for membership of monetary unions should discuss widely the possible adjustment mechanisms before forming such unions; one potential measure being the sharing of external risks at regional level |
| Keywords: | Current account imbalances, Exchange rate regime, Bayesian model averaging, Sub-Saharan Africa. |
| JEL: | F32 F33 C11 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2014-22&r=cba |