nep-cba New Economics Papers
on Central Banking
Issue of 2014‒05‒04
29 papers chosen by
Maria Semenova
Higher School of Economics

  1. Bank Lending, Risk Taking, and the Transmission of Monetary Policy: New Evidence for Colombia By Nidia Ruth Reyes; José Eduardo Gómez G.; Jair Ojeda Joya
  2. Inflation-Targeting, Flexible Exchange Rates and Macroeconomic Performance since the Great Recession By Barnebeck Andersen, Thomas; Malchow-Møller, Nikolaj; Nordvig, Jens
  3. The Impact of Different Types of Foreign Exchange Intervention: An Event Study Approach By Juan José Echavarría; Luis Fernando Melo Velandia; Mauricio Villamizar
  4. Effects of Mineral-Commodity Price Shocks on Monetary Policy in Developed Countries By Atsushi Sekine
  5. What Asset Prices Should be Targeted by a Central Bank? By Kengo Nutahara
  6. Sectoral shocks and monetary policy in the United Kingdom By Dixon, Huw; Franklin, Jeremy; Millard, Stephen
  7. Ex Ante Capital Position, Changes in the Different Components of Regulatory Capital and Bank Risk By Boubacar Camara; Laetitia Lepetit; Amine Tarazi
  8. A macroeconomic model of liquidity crises By Keiichiro Kobayashi; Tomoyuki Nakajima
  9. A model of viability for a monetary economy By Saint-Pierre, Patrick; Cartelier, Jean
  10. The international transmission of bank capital requirements: evidence from the United Kingdom By Aiyar, Shekhar; Calomiris, Charles; Hooley, John; Korniyenko , Yevgeniya; Wieladek, Tomasz
  11. Ben Bernanke: Theory and Practice By Alexander J. Gill
  12. The role of financial intermediaries in monetary policy transmission By Thorsten Beck; Andrea Colciago; Damjan Pfajfar
  13. Policy Regime Change against Chronic Deflation? Policy option under a long-term liquidity trap By FUJIWARA Ippei; NAKAZONO Yoshiyuki; UEDA Kozo
  14. Contrôle de Gestion Bancaire : de l’évolution de la fonction et des outils By Elisabeth CALLANDRET-BIGOT; Dominique BONET; Jean-Louis GALLIAN
  15. Identifying central bank liquidity super-spreaders in interbank funds networks By Carlos León; Clara Machado; Miguel Sarmiento
  16. An exploration on interbank markets and the operational framework of monetary policy in Colombia By Camilo González; Luisa F. Silva; Carmiña O. Vargas; Andrés M. Velasco
  17. Bond Market Exposures to Macroeconomic and Monetary Policy Risks By Dongho Song
  18. The FRBNY staff underlying inflation gauge: UIG By Amstad, Marlene; Potter, Simon M.; Rich, Robert W.
  19. Price-Level Targeting: an omelette that requires breaking some Inflation-Targeting eggs? By Julian A. Parra-Polania; Luisa F. Acuña-Roa
  20. A Survey of Systemic Risk Measures: Methodology and Application to the Japanese Market By Akio Hattori; Kentaro Kikuchi; Fuminori Niwa; Yoshihiko Uchida
  21. The impact of the global and eurozone crises on European banks stocks Some evidence of shift contagion By Jean-Pierre Allegret; Hélène Raymond; Houda Rharrabti
  22. Globalization and Inflation: A Swiss Perspective By John A. Tatom
  23. Should Financial Regulators Engage in International Policy Coordination? By David VanHoose
  24. The Elusive Predictive Ability of Global Inflation By Carlos Medel; Michael Pedersen; Pablo Pincheira
  25. Accuracy, Speed and Robustness of Policy Function Iteration By Todd B. Walker; Alexander W. Richter; Nathaniel A. Throckmorton
  26. Systemic Risk and Regulation of the U.S. Insurance Industry By J. David Cummins; Mary A. Weiss
  27. Electronic Money and Payments: Recent Developments and Issues By Ben Fung; Miguel Molico; Gerald Stuber
  28. Forecasting Chilean Inflation with International Factors By Pablo Pincheira; Andrés Gatty
  29. Forecasting South African Inflation Using Non-Linear Models: A Weighted Loss-Based Evaluation By Pejman Bahramian; Mehmet Balcilar; Rangan Gupta; Patrick T. kanda

  1. By: Nidia Ruth Reyes; José Eduardo Gómez G.; Jair Ojeda Joya
    Abstract: We study the existence of a monetary policy transmission mechanism through banks in Colombia, using monthly banks’ balance sheet data for the period 1996:4 – 2012:12. We obtain results which are consistent with the basic postulates of the bank lending channel (and the risk-taking channel) literature. The impact of short-term interest rates on the growth rate of loans is negative, indicating that increases in these rates lead to reductions in the growth rate of loans. This impact is stronger for consumer loans than for commercial loans. We find important heterogeneity in the monetary policy transmission across banks depending on banks-specific characteristics.
    Keywords: Monetary policy transmission, Bank lending channel, Risk taking channel, Colombia
    JEL: E5 E52 E59 G21
    Date: 2013–06–17
  2. By: Barnebeck Andersen, Thomas; Malchow-Møller, Nikolaj; Nordvig, Jens
    Abstract: Has inflation targeting (IT) conferred benefits in terms of economic growth on countries that followed this particular monetary policy strategy during the crisis period 2007-12? This paper answers this question in the affirmative. Countries with an IT monetary regime with flexible exchange rates weathered the crisis much better than countries with other monetary regimes, predominantly countries with fixed exchange rates. Part of this difference in growth performance reflects differences in export performance during the initial years of the crisis, which in turn can be explained by real exchange rate depreciations. However, IT seems also to confer other benefits on the countries above and beyond the effects from currency depreciation.
    Date: 2014–03
  3. By: Juan José Echavarría; Luis Fernando Melo Velandia; Mauricio Villamizar
    Abstract: To date, there is still great controversy as to which exchange rate model should be used or which monetary channel should be considered, when measuring the effects of monetary policy. Since most of the literature relies on structural models to address identification problems, the validity of results largely turn on how accurate the assumptions are in describing the full extent of the economy. In this paper we compare the effect of different types of central bank interventions using an event study approach for the Colombian case during the period 2000-2012, without imposing restrictive parametric assumptions or without the need to adopt a structural model. We find that all types of interventions (international reserve accumulation options, volatility options and discretionary) have been successful according to the smoothing criterion. In particular, volatility options seemed to have the strongest effect. We find that results are robust when using different windows sizes and counterfactuals
    Keywords: Central bank intervention, foreign exchange intervention mechanisms, event study.
    JEL: E52 E58 F31
    Date: 2013–10–09
  4. By: Atsushi Sekine (Graduate School of Economics, Kyoto University)
    Abstract: This paper investigates effects of changes in mineral commodity prices on monetary policy. Using macroeconomic data from five developed countries (Australia, Canada and New Zealand as mineral-producing countries, and the US and the UK as non-mineral-resource countries), I estimate the impulse response functions of the policy interest rates and the core consumer price index (CPI) inflation rates to mineral-commodity price shocks. I find that, in response to an unexpected 10 percent increase in mineral commodity prices, the central banks in the mineral-producing countries are estimated to increase their policy interest rates by approximately one percentage point, and they seem to take anticipatory policy reactions to control core CPI variations triggered by these shocks. Thus, mineral commodity prices appear to be important determinants of the monetary policies in the mineral-producing countries. However, the effects of the increase in their policy interest rates on core CPI inflation are different across the examined mineral-producing countries. I also find that the central banks in the non-mineral- resource countries insignificantly respond to mineral-commodity price shocks because such price shocks have little impact on those countries’ core CPI inflation.
    Keywords: Mineral commodity prices; Systematic monetary policy; Structural vector autoregressions; Impulse responses; Response decompositions; Counterfactual analysis
    JEL: E31 E52 Q02
    Date: 2014–04
  5. By: Kengo Nutahara
    Abstract: This paper investigates the monetary policy design for restoring equilibrium determinacy. Our interests are whether a central bank should respond to asset price fluctuations, and if so, what asset prices should be targeted. We show that a monetary policy response to the price of a productive tangible asset (capital price) is helpful for equilibrium determinacy, while that to the price of an intangible asset that reflects a firm’s profit (share prices) is a source of equilibrium indeterminacy. This result comes from the two assets’ prices moving in opposite directions in response to a permanent increase in inflation.
    Date: 2013–08
  6. By: Dixon, Huw (Cardiff Business School); Franklin, Jeremy (Bank of England); Millard, Stephen (Bank of England)
    Abstract: In this paper, we use an open economy model of the United Kingdom to examine the extent to which monetary policy should respond to movements in sectoral inflation rates. To do this we construct a Generalised Taylor model that takes specific account of the sectoral make up of the consumer price index (CPI), where the sectors are based on the COICOP classification the UK CPI microdata. We calibrate the model for each sector using the UK CPI microdata and model the sectoral shocks that drive sectoral inflation rates as white noise processes, as in the UK data. We find that a policy rule that allows for different responses to inflation in different sectors outperforms a rule which just targets aggregate CPI. However, the gain is small and comes from partially looking through movements in aggregate inflation driven by movements in petrol price inflation, which is volatile and tends not to reflect underlying inflationary pressure.
    Keywords: CPI inflation; Sectoral inflation rates; Generalised Taylor economy
    JEL: E17 E31 E52
    Date: 2014–04–17
  7. By: Boubacar Camara (LAPE - Laboratoire d'Analyse et de Prospective Economique - Université de Limoges : EA1088 - Institut Sciences de l'Homme et de la Société); Laetitia Lepetit (LAPE - Laboratoire d'Analyse et de Prospective Economique - Université de Limoges : EA1088 - Institut Sciences de l'Homme et de la Société); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - Université de Limoges : EA1088 - Institut Sciences de l'Homme et de la Société)
    Abstract: We investigate the impact of changes in capital of European banks on their risk- taking behavior from 1992 to 2006, a time period covering the Basel I capital requirements. We specifically focus on the initial level and type of regulatory capital banks hold. First, we assume that risk changes depend on banks' ex ante regulatory capital position. Second, we consider the impact of an increase in each component of regulatory capital on banks' risk changes. We find that, for highly capitalized and strongly undercapitalized banks, an increase in equity positively affects risk; but an increase in subordinated debt has the opposite effect namely for undercapitalized banks. Moderately undercapitalized banks tend to invest in less risky assets when their equity ratio increases but not when they improve their capital position by extending hybrid capital. Hybrid capital and equity have the same impact for banks with low capital buffers. On the whole, our conclusions support the need to implement more explicit thresholds to classify European banks according to their capital ratios but also to clearly distinguish pure equity from hybrid and subordinated instruments.
    Date: 2013
  8. By: Keiichiro Kobayashi; Tomoyuki Nakajima
    Abstract: We develop a simple macroeconomic model that captures key features of a liquidity crisis. During a crisis, the supply of short-term loans vanishes, the interest rate rises sharply, and the level of economic activity declines. A crisis may be caused either by self-ful lling beliefs or by fundamental shocks. It occurs as a result of market failure due to debt overhang in short-term loans. The government's commitment to deposit guarantee reduces the likelihood of self-ful lling crisis but increases that of fundamental crisis.
    Date: 2014–01
  9. By: Saint-Pierre, Patrick; Cartelier, Jean
    Keywords: Exchange and Production Economies; Applied General Equilibrium Models; exchange; monetary economy;
    JEL: D58 D51 E52
    Date: 2013–06
  10. By: Aiyar, Shekhar (International Monetary Fund); Calomiris, Charles (Columbia Business School); Hooley, John (International Monetary Fund); Korniyenko , Yevgeniya (International Monetary Fund); Wieladek, Tomasz (Bank of England)
    Abstract: We use data on UK banks’ minimum capital requirements to study the impact of changes to bank-specific capital requirements on cross-border bank loan supply from 1999 Q1 to 2006 Q4. By examining a sample in which each recipient country has multiple relationships with UK-resident banks, we are able to control for demand effects. We find a negative and statistically significant effect of changes to banks’ capital requirements on cross-border lending: a 100 basis point increase in the requirement is associated with a reduction in the growth rate of cross-border credit of 5.5 percentage points. We also find that banks tend to favour their most important country relationships, so that the negative cross-border credit supply response in ‘core’ countries is significantly less than in others. Banks tend to cut back cross-border credit to other banks (including foreign affiliates) more than to firms and households, consistent with shorter maturity, wholesale lending which is easier to roll off and may be associated with weaker borrowing relationships.
    Keywords: Cross-border lending; loan supply; capital requirements; international transmission
    JEL: E44 E51 E52 G18 G21
    Date: 2014–04–17
  11. By: Alexander J. Gill
    Abstract: Ben Bernanke researched monetary policy for over 25 years prior to becoming a policymaker, and his two-term career as Chairman of the Federal Reserve featured a severe recession coupled with a nancial crisis, a chief subject of Bernanke's research. His reaction to economic events is noteworthy in its originality and breadth, but its intellectual underpinnings are, with a few exceptions discussed in the paper, not without written precedent. This paper will summarize and connect Bernanke's research and policymaking and show that the two are closely aligned.
    Keywords: Economic thought, history of economic thought, central banking, Fed, Bernanke
    JEL: B31 E58 E65
    Date: 2014
  12. By: Thorsten Beck; Andrea Colciago; Damjan Pfajfar
    Abstract: The recent financial crisis has stimulated theoretical and empirical research on the propagation mechanisms underlying business cycles, in particular on the role of financial frictions. Many issues concerning the interactions between banking and monetary policy forced policy makers to economic policies, and motivated macroeconomists to focus on the implications of financial intermediation constraints on asset price fluctuations, the behavior of non-financial firms, households, governments and in turn for real macroeconomic performance. This paper surveys research on the role of financial intermediaries and financial frictions in the transmission of monetary policy and discusses how to design both the new banking regulatory and supervisory structures and monetary policy in order to stabilize the economy. It also serves as an introduction to this special issue.
    Keywords: Financial Intermediation; DSGE models; Financial Frictions
    JEL: E40 E50 G20
    Date: 2014–04
  13. By: FUJIWARA Ippei; NAKAZONO Yoshiyuki; UEDA Kozo
    Abstract: The policy package known as Abenomics appears to have influenced the Japanese economy drastically, in particular, in the financial markets. In this paper, focusing on the aggressive monetary easing of Abenomics, the first arrow, we evaluate its role in guiding public perceptions on monetary policy stance through the management of expectations. In order to end chronic deflation, such as that which Japan has been suffering over the last two decades, policy regime change must be perceived by economic agents. Analysis using the Quarterly Services Survey (QSS) monthly survey data shows that monetary policy reaction to inflation rates has been in a declining trend since the mid 2000s, implying intensified forward guidance well before Abenomics. However, Japan seems to have moved closer to a long-term liquidity trap, where even long-term bond yields are constrained by the zero lower bound. Consequently, no sizable difference in perceptions has been found before and after the introduction of Abenomics. Estimated changes in perceptions are not abrupt enough to satisfy "Sargent's (1982) criteria for regime change" termed by Eggertsson (2008). This poses a serious challenge to central banks: what is an effective policy option left under the long-term liquidity trap?
    Date: 2014–04
  14. By: Elisabeth CALLANDRET-BIGOT; Dominique BONET; Jean-Louis GALLIAN
    Abstract: Since the 1984 Banking Act and the Regulatory Reforms (Basel I, II and, in the very near future, Basel III), French and European banks have developed performance analysis systems based on the implementation of internal control, regulatory reporting, and compliance with prudential standards, changing the role and content of management control. In this context, our exploratory research aims to study the evolution of bank control and related management tools. It allows us to understand how banks have adapted their business model to profound changes in the sector, particularly in a context of crisis.
    Keywords: Controller, bank, function, tools
    Date: 2014–04–28
  15. By: Carlos León; Clara Machado; Miguel Sarmiento
    Abstract: Evidence suggests that the Colombian interbank funds market is an inhomogeneous and hierarchical network in which a few financial institutions fulfill the role of “super-spreaders” of central bank liquidity among market participants. Results concur with evidence from other interbank markets and other financial networks regarding the flaws of traditional direct financial contagion models based on homogeneous and non-hierarchical networks, and provide further evidence about financial networks’ self-organization emerging from complex adaptive financial systems. Our research work contributes to central bank’s efforts by (i) examining and characterizing the actual connective structure of interbank funds networks; (ii) identifying those financial institutions that may be considered as the most important conduits for monetary policy transmission, and the main drivers of contagion risk within the interbank funds market; (iii) providing new elements for the implementation of monetary policy and for safeguarding financial stability. Classification JEL: E5, G2, L14.
    Date: 2014–04
  16. By: Camilo González; Luisa F. Silva; Carmiña O. Vargas; Andrés M. Velasco
    Abstract: We set a dynamic stochastic model for the interbank daily market for funds in Colombia. The framework features exogenous reserve requirements and requirement period, competitive trading among heterogeneous commercial banks, daily open market operations held by the Central Bank (auctions and window facilities), and idiosyncratic demand shocks and uncertainty in the daily auction. The model highlights the institutional framework and the money supply mechanisms for the interbank market. We construct a data base for the Colombian case that incorporates the principal variables of the model and give us some insights about the behavior of them in a typical requirement period. We corroborate the Martingale hypothesis for the interbank interest rate.
    Keywords: Interbank Market; Overnight Rates; Reserve Demand.
    JEL: E44 E52 G21
    Date: 2013–09–18
  17. By: Dongho Song (Department of Economics, University of Pennsylvania)
    Abstract: I provide empirical evidence of changes in the U.S. Treasury yield curve and related macroeconomic factors, and investigate whether the changes are brought about by external shocks, monetary policy, or by both. To explore this, I characterize bond market exposures to macroeconomic and monetary policy risks, using an equilibrium term structure model with recursive preferences in which inflation dynamics are endogenously determined. In my model, the key risks that affect bond market prices are changes in the correlation between growth and inflation and changes in the conduct of monetary policy. Using a novel estimation technique, I find that the changes in monetary policy affect the volatility of yield spreads, while the changes in the correlation between growth and inflation affect both the level as well as the volatility of yield spreads. Consequently, the changes in the correlation structure are the main contributor to bond risk premia and to bond market volatility. The time variations within a regime and risks associated with moving across regimes lead to the failure of the Expectations Hypothesis and to the excess bond return predictability regression of Cochrane and Piazzesi (2005), as in the data.
    Keywords: Monetary Policy Risks, Regime-Switching Macroeconomic Risks, Stochastic Volatility, Taylor-Rule, Term Structure
    JEL: E43 G12
    Date: 2014–04–30
  18. By: Amstad, Marlene (Federal Reserve Bank of New York); Potter, Simon M. (Federal Reserve Bank of New York); Rich, Robert W. (Federal Reserve Bank of New York)
    Abstract: Monetary policymakers and long-term investors would benefit greatly from a measure of underlying inflation that uses all relevant information, is available in real time, and forecasts inflation better than traditional underlying inflation measures such as core inflation measures. This paper presents the “FRBNY Staff Underlying Inflation Gauge (UIG)” for CPI and PCE. Using a dynamic factor model approach, the UIG is derived from a broad data set that extends beyond price series to include a wide range of nominal, real, and financial variables. It also considers the specific and time-varying persistence of individual subcomponents of an inflation series. An attractive feature of the UIG is that it can be updated on a daily basis, which allows for a close monitoring of changes in underlying inflation. This capability can be very useful when large and sudden economic fluctuations occur, as at the end of 2008. In addition, the UIG displays greater forecast accuracy than traditional measures of core inflation.
    Keywords: expectations; survey forecasts; imperfect information; term structure of disagreement
    JEL: C13 C33 C43 E31
    Date: 2014–04–22
  19. By: Julian A. Parra-Polania; Luisa F. Acuña-Roa
    Abstract: This manuscript can be divided into two main parts. The first one, using a simple example by Minford (2004) and Hatcher (2011), gives the reader a basic introduction to understand the comparison between two monetary-policy regimes: Inflation Targeting (IT) and Price-Level Targeting (PLT). The second part, using a model with a New Keynesian Phillips curve and a loss function (both of which incorporate partial indexation to lagged inflation), finds that for standard values of underlying parameters (i) the social loss associated to macroeconomic volatility may decrease about 26% by switching from IT to PLT and (ii) only when the initial level of indexation to lagged inflation is higher than 60% then it is better not to switch to PLT.
    Keywords: Inflation targeting, price-level targeting, indexation, macroeconomic stability.
    JEL: E52 E58
    Date: 2013–09–20
  20. By: Akio Hattori (Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Kentaro Kikuchi (Deputy Director and Economist, Institute for Monetary and Economic Studies, Bank of Japan (currently, Lecturer, Faculty of Economics, Shiga University, E-mail: kentaro-kikuchi@biwako.; Fuminori Niwa (Deputy Director and Economist, Institute for Monetary and Economic Studies (currently, Financial Markets Department), Bank of Japan (E-mail:; Yoshihiko Uchida (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: The recent financial crisis has prompted academia, country authorities, and international bodies to study quantitative tools to monitor the financial system, especially systemic risk measures. This paper aims to outline these measures and apply them to Japanfs financial system. The paper demonstrates that they are effective tools for monitoring the robustness of financial system on a real-time basis, although there are some caveats.
    Keywords: Systemic risk, Risk measure, Early warning indicators, Stress test, Scenario analysis, Macro-prudence, Financial crisis
    JEL: C51 G01 G19
    Date: 2014–04
  21. By: Jean-Pierre Allegret; Hélène Raymond; Houda Rharrabti
    Abstract: This paper analyzes the influence of successive crises, including the recent European sovereign debt crisis, on banks’ equity returns for 11 countries. Our data span the period December 14th 2007-March 8th 2013 that encompasses different episodes of economic and financial turmoil since the collapse of the subprime credit market. Our contribution to the literature is twofold. First, we use an explicit multifactor model of equity returns extended with a sovereign risk factor. Second, we adopt a Smooth Transition Regression(STR) framework that allows for an endogenous definition of crisis periods and captures the changes in parameters associated with shift contagion. We find that contagion from the European sovereign debt crisis to banks’ equity returns has been confined to eurozone banks, whereas U.S. banks’ equity returns were unharmed by its direct impact and may even have benefited from a kind of flight to quality effect. Besides, across banks from the euro area, German financial institutions have not been completely spared by the eurozone debt crisis, though they have been relatively less affected.
    Keywords: Smooth Transition Regression model, European sovereign debt crisis, Banks’ equity returns, Contagion, Interdependence.
    JEL: E6 F3 G2
    Date: 2014
  22. By: John A. Tatom
    Abstract: Globalization has given rise to new concerns that domestic inflation is caused by global developments, especially in the state of the global gap in GDP and resource utilization, and whether domestic monetary policy can control it. This paper explores the role of globalization, if any, for inflation, particularly in Switzerland, one of the smallest and most open economies where the globalization hypothesis should be most relevant, but where inflation historically has been among the lowest in the world. Is Switzerland and Swiss monetary policy unique in providing a benchmark for price stability, or is Swiss inflation performance an accident, with Swiss inflation being dictated by global experience or at least by its larger neighbors? It provides tests of whether inflation in Switzerland is causally related to inflation elsewhere. It focuses in more detail on Swiss inflation in a P* model and on whether it is also influenced by inflation in Germany, other countries or by inflation abroad via an import channel. Finally, the paper looks more broadly at other evidence of whether Swiss inflation or that in other industrial countries is influenced by globalization. Swiss inflation is largely made at home. There is evidence presented of a cointegrating relationship of Swiss and German inflation, but this and the high correlation of Swiss and German inflation are more likely due to common inflation objectives.
    Keywords: Inflation, Globalization, Switzerland, GDP gap
    JEL: E31 E32 F4
    Date: 2013–12
  23. By: David VanHoose
    Abstract: This policy brief examines issues associated with the design and implementation of regulatory policymaking in interconnected financial markets. The policy brief explains why international interdependence among nations’ financial markets and regulations can provide an incentive for national financial supervisory agencies to contemplate coordinating their regulatory policies. It also assesses, in the context of a review of recent research on the part of banking and financial economists, ways in which interdependence among financial systems can create a potential for international regulatory policy conflicts. In addition, the policy brief evaluates whether such conflicts are insurmountable or might be somewhat mitigated at least somewhat via bargains among regulatory authorities.
    Keywords: international financial regulation, financial regulatory coordination
    JEL: G2 G28 F3 F5
    Date: 2013–08
  24. By: Carlos Medel; Michael Pedersen; Pablo Pincheira
    Abstract: In this paper we analyze the contribution of international measures of inflation to predict local ones. To that end, we consider the set of current thirty one OECD economies for which inflation data is available at a monthly frequency. By considering this set of countries, a span of time including the post-crisis period and measures of both core and headline inflation, we are extending in three important dimensions the previous literature on this topic. Our main results indicate that on average there is a non-negligible predictive pass-through from international to local inflation both at the core and headline levels. This predictive pass-through has increased in the last period of our sample. Nevertheless, there is heterogeneity in the size and statistical significance of this pass-through which is especially important at the core level. Finally, important reductions in the Root Mean Squared Prediction Error are obtained only for a handful of countries
    Date: 2014–03
  25. By: Todd B. Walker; Alexander W. Richter; Nathaniel A. Throckmorton
    Abstract: Policy function iteration methods for solving and analyzing dynamic stochastic general equilibrium models are powerful from a theoretical and computational perspective. Despite obvious theoretical appeal, significant startup costs and a reliance on grid-based methods have limited the use of policy function iteration as a solution algorithm. We reduce these costs by providing a user-friendly suite of MATLAB functions that introduce multi-core processing and Fortran via MATLAB's executable function. Within the class of policy function iteration methods, we advocate using time iteration with linear interpolation. We examine a canonical real business cycle model and a new Keynesian model that features regime switching in policy parameters, Epstein-Zin preferences, and monetary policy that occasionally hits the zero-lower bound on the nominal interest rate to highlight the attractiveness of our methodology. We compare our advocated approach to other familiar iteration and approximation methods, highlighting the tradeoffs between accuracy, speed and robustness.
    Keywords: Policy function iteration; Zero lower bound; Epstein-Zin preferences; Markov switching; Chebyshev polynomials; Real business cycle model; New Keynesian model
    JEL: C63 C68 E52 E62
    Date: 2014–04
  26. By: J. David Cummins; Mary A. Weiss
    Abstract: This paper analyzes the characteristics of U.S. insurers for purposes of determining whether they are systemically risky. More specifically, primary factors (size, interconnectedness, and lack of substitutability) and contributing factors (leverage, liquidity risk and maturity mismatch, complexity and government regulation) associated with systemic risk are assessed for the insurance sector. A distinction is made between the core activities of insurers (e.g., underwriting, reserving, claims settlement, etc.) and non-core activities (such as providing financial guarantees). Statistical analysis of insurer characteristics and their relationship with a well-known systemic risk measure, systemic expected shortfall, is provided. Consistent with other research, the core activities of propertycasualty insurers are found not to be systemically risky. However, we do find evidence that some core activities of life insurers, particularly separate accounts and group annuities, may be associated with systemic risk. The non-core activities of both property-casualty and life insurers can contribute to systemic risk. However, research findings indicate that generally insurers are victims rather than propagators of systemic risk events. The study also finds that insurers may be susceptible to intrasector crises such as reinsurance crises arising from counterparty credit risk. New and proposed state and federal regulation are reviewed in light of the potential for systemic risk for this sector.
    Keywords: Systemic risk, Insurance regulation, Financial Stability Oversight Council
    JEL: G20 G22
    Date: 2013–03
  27. By: Ben Fung; Miguel Molico; Gerald Stuber
    Abstract: The authors review recent developments in retail payments in Canada and elsewhere, with a focus on e-money products, and assess their potential public policy implications. In particular, they study how these developments will affect the demand for bank notes, and the central bank’s balance sheet and its seigniorage revenue, which as a result might affect the central bank’s ability to implement and conduct monetary policy and to promote financial stability. Other public policy issues, such as safety and efficiency, and user protection as well as legal, security and law enforcement, are also considered. While the demise of cash is not imminent, it is important for the central bank to continue to evaluate its potential roles with regard to e-money.
    Keywords: Bank notes, E-money, Financial services, Payment clearing and settlement systems
    JEL: E41 E42
    Date: 2014
  28. By: Pablo Pincheira; Andrés Gatty
    Abstract: In this paper we build forecasts for Chilean year-on-year inflation using simple time-series models augmented with different measures of international inflation. Broadly speaking, we construct two families of international inflation factors. The first family is built using year-on-year inflation of 18 Latin American (LA) countries (excluding Chile). The second family is built using year-on-year inflation of 30 OECD countries (excluding Chile). We show sound in-sample and pseudo out-ofsample evidence indicating that these international factors do help forecast Chilean inflation at several horizons. Incorporating the international factors reduce the Root Mean Squared Prediction Error of pure univariate SARIMA models statistically speaking. We also show that the predictive pass-through from international to local inflation has increased in the recent years. As a final exercise we construct another international inflation factor as an average of the inflation of fifteen countries from which Chile gets a high percentage of its imports. With the aid of this factor the models outperform our univariate benchmarks but also underperform the results obtained with the broader factors built with LA or OECD countries, suggesting that imported inflation is not the only channel explaining our findings.
    Date: 2014–02
  29. By: Pejman Bahramian (Department of Economics, Eastern Mediterranean University, Famagusta, Turkish Republic of Northern Cyprus, via Mersin 10, Turkey); Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Famagusta, Turkish Republic of Northern Cyprus, via Mersin 10, Turkey); Rangan Gupta (Department of Economics, University of Pretoria); Patrick T. kanda (Department of Economics, University of Pretoria)
    Abstract: The conduct of inflation targeting is heavily dependent on accurate inflation forecasts. Non-linear models have increasingly featured, along with linear counterparts, in the forecasting literature. In this study, we focus on forecasting South African infl ation by means of non-linear models and using a long historical dataset of seasonally-adjusted monthly inflation rates spanning from 1921:02 to 2013:01. For an emerging market economy such as South Africa, non-linearities can be a salient feature of such long data, hence the relevance of evaluating non-linear models' forecast performance. In the same vein, given the fact that 1969:10 marks the beginning of a protracted rising trend in South African inflation data, we estimate the models for an in-sample period of 1921:02-1966:09 and evaluate 24 step-ahead forecasts over an out-of-sample period of 1966:10-2013:01. In addition, using a weighted loss function specification, we evaluate the forecast performance of different non-linear models across various extreme economic environments and forecast horizons. In general, we find that no competing model consistently and significantly beats the LoLiMoT's performance in forecasting South African inflation.
    Keywords: Inflation, forecasting, non-linear models, weighted loss function, South Africa
    JEL: C32 E31 E52
    Date: 2014–04

This nep-cba issue is ©2014 by Maria Semenova. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.