nep-cba New Economics Papers
on Central Banking
Issue of 2014‒04‒29
seven papers chosen by
Maria Semenova
Higher School of Economics

  1. Capital Buffers Based on Banks' Domestic Systemic Importance: Selected Issues By Michal Skorepa; Jakub Seidler
  2. Institutional Quality and Inflation By Salahodjaev, Raufhon; Chepel, Sergey
  3. Indeterminacy and Learning: An Analysis of Monetary Policy in the Great Inflation By Lubik, Thomas A.; Matthes, Christian
  4. Optimized Taylor Rules for Disinflation When Agents are Learning By Cogley, Timothy; Matthes, Christian; Sbordone, Argia M.
  5. The role of monetary policy in the New Keynesian Model: Evidence from Vietnam By Van Hoang
  6. Bank Leverage, Financial Fragility and Prudential Regulation By Olivier Bruno; André Cartapanis; Eric Nasica
  7. Macroprudential oversight, risk communication and visualization By Peter Sarlin

  1. By: Michal Skorepa; Jakub Seidler
    Abstract: Regulators in many countries are currently considering ways to impose domestic systemic importance-based capital requirements on banks. Aiming to assist these considerations, this article discusses a number of issues concerning the calculation of a bank's systemic importance to the domestic banking sector, such as the choice of indicators used and the pros and cons of focusing on an individual or consolidated level. Also, the 'equal expected impact' procedure for determining adequate additional capital requirements is presented in detail and some of its properties are discussed. As an illustrative example of the practical use of the procedures presented, systemic importance scores and implied capital buffers are calculated for banks in the Czech Republic. The article also stresses the crucial role of public communication of the motivation for the buffers: regulators should make every effort to explain that the imposition of a non-zero systemic importance-based capital buffer on a bank is not to be interpreted by the markets as a signal that the bank is too big to fail and would therefore be guaranteed a public bail-out if it got into difficulties.
    Keywords: Bank failure, Basel III, capital adequacy, consolidation, systemic importance, public support
    JEL: G21 G28
    Date: 2014–03
  2. By: Salahodjaev, Raufhon; Chepel, Sergey
    Abstract: The purpose of this paper is to empirically analyze the effects of the quality of institutions on inflation. Using panel data from 1991 to 2007, we find that increase in institutional development which is measured by the ratio of domestic credit to private sector to GDP has significant and sizeable effect on inflation. This paper finds that in countries with high inflation rates, financial sectors cannot resist current levels of inflation and banking system does not decrease inflation in the environment where private banks and financial companies have adapted to existing monetary environment.
    Keywords: Inflation; Credit; Institutions; Quality
    JEL: E51 E52
    Date: 2014–03–25
  3. By: Lubik, Thomas A. (Federal Reserve Bank of Richmond); Matthes, Christian (Federal Reserve Bank of Richmond)
    Abstract: We argue in this paper that the Great Inflation of the 1970s can be understood as the result of equilibrium indeterminacy in which loose monetary policy engendered excess volatility in macroeconomic aggregates and prices. We show, however, that the Federal Reserve inadvertently pursued policies that were not anti-inflationary enough because it did not fully understand the economic environment it was operating in. Specifically, it had imperfect knowledge about the structure of the U.S. economy and it was subject to data misperceptions. The real-time data flow at that time did not capture the true state of the economy, as large subsequent revisions showed. It is the combination of learning about the economy and, more importantly, the use of data riddled with measurement error that resulted in policies, which the Federal Reserve believed to be optimal, but when implemented led to equilibrium indeterminacy in the economy.
    Keywords: Federal Reserve; Great Moderation; Bayesian Estimation; Least Squares Learning
    JEL: C11 C32 E52
    Date: 2014–01–31
  4. By: Cogley, Timothy (New York University); Matthes, Christian (Federal Reserve Bank of Richmond); Sbordone, Argia M. (Federal Reserve Bank of New York)
    Abstract: Highly volatile transition dynamics can emerge when a central bank disinflates while operating without full transparency. In our model, a central bank commits to a Taylor rule whose form is known but whose coefficient are not. Private agents learn about policy parameters via Bayesian updating. Under McCallum's (1999) timing protocol, temporarily explosive dynamics can arise, making the transition highly volatile. Locally-unstable dynamics emerge when there is substantial disagreement between actual and perceived feedback parameters. The central bank can achieve low average inflation, but its ability to adjust reaction coefficients is more limited.
    Keywords: Inflation; Monetary policy; Learning; Policy reforms; Transitions
    JEL: E31 E52
    Date: 2014–03–15
  5. By: Van Hoang
    Abstract: This paper reproduces a version of the New Keynesian model developed by Ireland (2004) and then uses the Vietnamese data from January 1995 to December 2012 to estimate the model’s parameters. The empirical results show that before August 2000 when the Taylor rule was adopted more firmly, the monetary policy shock made considerable contributions to the fluctuations in key macroeconomic variables such as the short-term nominal interest rate, the output gap, inflation, and especially output growth. By contrast, the loose adoption of the Taylor rule in the period of post-August 2000 leads to a fact that the contributions of the monetary policy shock to the variations in such key macroeconomic variables become less substantial. Thus, one policy implication is that adopting firmly the Taylor rule could strengthen the role of the monetary policy in driving movements in the key macroeconomic variables, for instance, enhancing economic growth and stabilizing inflation.
    Keywords: New Keynesian model, Monetary Policy, Technology Shock, Cost-Push Shock, Preference Shock.
    JEL: E12 E32
    Date: 2014–02–01
  6. By: Olivier Bruno (GREDEG CNRS; University of Nice Sophia Antipolis, France; SKEMA Business School; OFCE-DRIC); André Cartapanis (Sciences Po Aix-en-Provence; GREDEG CNRS; CHERPA-Sciences Po Aix-en-Provence); Eric Nasica (GREDEG CNRS; University of Nice Sophia Antipolis, France)
    Abstract: We analyse the determinants of bank balance-sheets and leverage-ratio dynamics, and their role in increasing financial fragility. Our results are twofold. First, we show that there is a value of bank leverage that minimises financial fragility. Second, we show that this value depends on the overall business climate, the expected value of the collateral provided by firms, and the risk-free interest rate. These results lead us to advocate for the establishment of an adjustable leverage ratio depending on economic conditions, rather than the fixed ratio provided for under the new Basel III regulation.
    Keywords: Bank leverage, Leverage ratio, Financial instability, Prudential regulation
    JEL: E44 G28
    Date: 2014–04
  7. By: Peter Sarlin
    Abstract: This paper discusses the role of risk communication in macroprudential oversight and of visualization in risk communication. Beyond the soar in availability and precision of data, the transition from firm-centric to system-wide supervision imposes obvious data needs. Moreover, broad and effective communication of timely information related to systemic risks is a key mandate of macroprudential supervisors, which further stresses the importance of simple representations of complex data. Risk communication comprises two tasks: internal and external dissemination of information about systemic risks. This paper focuses on the background and theory of information visualization and visual analytics, as well as techniques provided within these fields, as potential means for risk communication. We define the task of visualization in internal and external risk communication, and provide a discussion of the type of available macroprudential data and an overview of visualization techniques applied to systemic risk. We conclude that two essential, yet rare, features for supporting the analysis of big data and communication of risks are analytical visualizations and interactive interfaces. This is illustrated with implementations of three analytical visualizations and five web-based interactive visualizations to systemic risk indicators and models.
    Date: 2014–04

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