nep-cba New Economics Papers
on Central Banking
Issue of 2014‒05‒17
nineteen papers chosen by
Maria Semenova
Higher School of Economics

  1. The Effects of Central Bank Independence and Inflation Targeting on Macroeconomic Performance: Evidence from Natural Experiments By Michael Parkin
  2. Monetary and macroprudential policies in an estimated model with financial intermediation By Paolo Gelain; Pelin Ilbas
  3. Inflation Targeting in Colombia, 2002-2012 By Franz Hamann; Marc Hofstetter; Miguel Urrutia
  4. Inflation targeting and the anchoring of inflation expectations: cross-country evidence from consensus forecasts By Davis, J. Scott; Presno, Ignacio
  5. Denmark's fixed exchange rate regime and the delayed recovery from the Global Financial Crisis: A comparative macroeconomic analysis By Andersen, Thomas Barnebeck; Malchow-Møller, Nikolaj
  6. Optimal Exchange Rate Policy in a Growing Semi-Open Economy By Philippe Bacchetta; Kenza Benhima; Yannick Kalantzis
  7. Monetary Policy and Real Borrowing Costs at the Zero Lower Bound By Simon Gilchrist; David López-Salido; Egon Zakrajšek
  8. Communication and transparency in the conduct of monetary policy By Plosser, Charles I.
  9. The Taylor Rule and Financial Stability: A Literature Review with Application for the Eurozone By Benjamin Käfer
  10. Addressing weak inflation: The European Central Bank's shopping list By Grégory Claeys; Zsolt Darvas; Silvia Merler; Guntram B. Wolff
  11. Optimal Monetary Responses to Oil Discoveries By Samuel Wills
  12. Forward guidance with an escape clause: When half a promise is better than a full one By Maria Lucia Florez-Jimenez; Julian A. Parra-Polania
  13. Measuring the Macroeconomic Impact of Monetary Policy at the Zero Lower Bound By Jing Cynthia Wu; Fan Dora Xia
  14. Identifying central bank liquidity super-spreaders in interbank funds networks By Carlos León; Clara Machado; Miguel Sarmiento
  15. Credit shocks and monetary policy in Brazil: A structural FAVAR approach By Fonseca, Marcelo Gonçalves da Silva; Pereira, Pedro L. Valls
  16. Macro-prudential assessment of Colombian financial institutions’ systemic importance By Carlos León; Clara Machado; Andrés Murcia
  17. Floating a "Lifeboat": The Banque de France and the Crisis of 1889 By Pierre-Cyrille Hautcoeur; Angelo Riva; Eugene N. White
  18. Fundamental principles of financial regulation and supervision By Jan A. Kregel; Mario Tonveronachi
  19. Mandatory Disclosure and Financial Contagion By Alvarez, Fernando; Barlevy, Gadi

  1. By: Michael Parkin (University of Western Ontario, Canada)
    Date: 2014–04
  2. By: Paolo Gelain (Norges Bank); Pelin Ilbas (National Bank of Belgium, Research Department)
    Abstract: We estimate the Smets and Wouters (2007) model augmented with the Gertler and Karadi (2011) financial intermediation sector on US data by using real and financial observables. Given the framework of the estimated model, we address the question whether and how standard monetary policy should interact with macroprudential policy in order to safeguard real and financial stability. For this purpose, monetary policy is described by a flexible inflation targeting regime using the interest rate as instrument, while the macroprudential regulator adopts a tax/subsidy on bank capital in a countercyclical manner in order to stabilize nominal credit growth and the output gap. We look at the gains from coordination between the central bank and the macroprudential regulator under alternative assumptions regarding the degree of importance assigned to output gap fluctuations in the macroprudential mandate. The results suggest that there can be considerable gains from coordination if the macroprudential regulator has been assigned a sufficiently high weight on output gap stabilization, i.e. the common objective with monetary policy. If, on the other hand, the main focus of the macroprudential mandate is on credit growth, the macroprudential policy maker can reach better outcomes, while the central bank does worse, in the absence of coordination. Therefore, whether and to which extent monetary policy gains from coordination with the macroprudential regulator depends on the relative weight assigned to output fluctuations in the macroprudential mandate. Our counterfactual analysis further confirms the effectiveness of the countercyclical macroprudential tax/subsidy in containing the amplification effects triggered by a financial shock, and suggests that having a macroprudential regulatory tool at work could have successfully avoided the massive drop in credit such as the one observed at the onset of the Great Recession.
    Keywords: Monetary policy, financial frictions, macroprudential policy, policy coordination, capital tax/subsidy
    JEL: E42 E44 E52 E58 E61
    Date: 2014–05
  3. By: Franz Hamann; Marc Hofstetter; Miguel Urrutia
    Abstract: Abstract After decades using monetary aggregates as the main instrument of monetary policy and having different varieties of crawling peg exchange rate regimes, Colombia adopted a full-fledged inflation-targeting (IT) regime in 1999, with inflation as the nominal anchor, a floating exchange rate, and the short-term interest rate as the main instrument. We examine the experience of the Colombian Central Bank over the last decade, a period of consolidation and innovation of its IT strategy. We study the increasing number of instruments used by the CB, including systematic foreign exchange interventions, announcements, and, sporadically, macro-prudential policies, capital controls, and changes in reserve requirements, among others. The study also examines some political economy dimensions that help explain the behavior of the CB during this period. To guide the discussion, we estimate a small-scale open-economy-policy-model.
    Keywords: Inflation Targeting, Monetary Policy, Exchange Rate, Taylor Rule, Colombia.
    JEL: E02 E32 E42 E43 E52 E58 E61 F31 F33 F42
    Date: 2014–03–04
  4. By: Davis, J. Scott (Federal Reserve Bank of Dallas); Presno, Ignacio (Federal Reserve Bank of Boston)
    Abstract: Using survey data of inflation expectations across a 36 developed and developing countries, this paper examines whether the adoption of inflation targeting has helped to anchor inflation expectations. We examine the response of inflation expectations following a shock to inflation, inflation expectations, and oil prices. For the 13 countries that adopted inflation targeting midway through the time period used in this study, there is a significant difference in the responses between the earlier and the later subperiods. A shock leads to a positive, significant, and persistent increase inflation expectations in the earlier, pre-targeting subperiod, but the same response is much less significant and persistent in the later, posttargeting subperiod. For the control group of 23 countries that did not adopt inflation targeting during this time period, there is no difference between responses in the earlier and the later sub-periods.
    Keywords: price levels; inflation; deflation; monetary policy
    JEL: D80 E31 E50
    Date: 2014–05–13
  5. By: Andersen, Thomas Barnebeck (Department of Business and Economics); Malchow-Møller, Nikolaj (Department of Business and Economics)
    Abstract: This paper compares Denmark’s growth performance to that of the other 18 non-Eurozone OECD economies during 2008-12. Denmark is the only country with a fixed exchange rate regime; the other 18 countries all have flexible exchange rates, mostly as part of an inflation-targeting framework. At the same time, Denmark is one of the worst growth performers during 2008-12. Our analysis indicates that the lack of monetary policy independence is central to understanding the meager Danish performance. Aggressive monetary policy during 2008-09 is an important predictor of economic growth during 2008-12; and Denmark, having outsourced monetary policy to the ECB, did not pursue monetary easing as aggressively as most other countries. Overall, the analysis suggests that had Denmark been able to follow Sweden in aggressively cutting interest rates in the wake of the Global Financial Crisis, it would have added three quarters of a percentage point to average annual real GDP growth during 2008-12.
    Keywords: Exchange rate regimes; monetary policy; financial crisis; economic growth
    JEL: E52 E62 E65 F33 O57
    Date: 2014–05–12
  6. By: Philippe Bacchetta (University of Lausanne and Centre for Economic Policy Research and Hong Kong Institute for Monetary Research); Kenza Benhima (University of Lausanne and Centre for Economic Policy Research); Yannick Kalantzis (Banque de France)
    Abstract: In this paper, we consider an alternative perspective to China's exchange rate policy. We study a semi-open economy where the private sector has no access to international capital markets but the central bank has full access. Moreover, we assume limited financial development generating a large demand for saving instruments by the private sector. We analyze the optimal exchange rate policy by modelling the central bank as a Ramsey planner. Our main result is that in a growth acceleration episode it is optimal to have an initial real depreciation of the currency combined with an accumulation of reserves, which is consistent with the Chinese experience. This depreciation is followed by an appreciation in the long run. We also show that the optimal exchange rate path is close to the one that would result in an economy with full capital mobility and no central bank intervention.
    JEL: E58 F31 F32
    Date: 2014–05
  7. By: Simon Gilchrist; David López-Salido; Egon Zakrajšek
    Abstract: This paper compares the effects of conventional monetary policy on real borrowing costs with those of the unconventional measures employed after the target federal funds rate hit the zero lower bound (ZLB). For the ZLB period, we identify two policy surprises: changes in the 2-year Treasury yield around policy announcements and changes in the 10-year Treasury yield that are orthogonal to those in the 2-year yield. The efficacy of unconventional policy in lowering real borrowing costs is comparable to that of conventional policy, in that it implies a complete pass-through of policy-induced movements in Treasury yields to comparable-maturity private yields.
    JEL: E43 E52
    Date: 2014–05
  8. By: Plosser, Charles I. (Federal Reserve Bank of Philadelphia)
    Abstract: Council on Foreign Relations, May 8, 2014, New York, NY President Charles Plosser outlines his views that monetary policy transparency and forward guidance could be enhanced if the central bank would be more explicit about its reaction function.
    Keywords: Monetary policy; Communication; Transparency;
    Date: 2014–05–08
  9. By: Benjamin Käfer (University of Kassel)
    Abstract: The question of whether central banks should bear responsibility for financial stability is still unan-swered. Regarding interest rate implementation, it is thus not clear if and how the Taylor rule should be augmented by an additional financial stability term. This paper reviews the normative and positive literature on Taylor rules augmented with exchange rates, asset prices, credit, and spreads. These measures have developed as common indicators of financial (in)stability in the Taylor rule literature. In addition, our own analysis describes the development of these indicators for the core and the periphery of the Eurozone. Given the large degree of heterogeneity between euro area countries, the conclusion here is that an interest rate reaction to instability by the European Central Bank would be inappropriate in times of crisis. However, this conclusion is somewhat weakened if there is no crisis.
    Keywords: Taylor rule, financial stability, sovereign debt crisis, Eurozone heterogeneity, exchange rates, asset prices, credit spreads
    JEL: E52 F33 F42
    Date: 2014
  10. By: Grégory Claeys; Zsolt Darvas; Silvia Merler; Guntram B. Wolff
    Abstract: See comments by the authors 'Addressing weak inflation: The ECBâ??s Shopping List' and by Ashoka Mody 'The ECB must - and can - act' Euro-area inflation has been below 1 percent since October 2013, and medium-term inflation expectations are well below 2 percent. Forecasts of the return to target inflation have proved wrong. The European Central Bank should act forcefully, but should undermine neither the major relative price adjustments between the euro-area core and the periphery that are needed, nor the ongoing process of addressing weaknesses in Europeâ??s banking system. Reducing the deposit rate or introducing another long-term refinancing operation could be beneficial, but would be unlikely to change substantially inflation expectations. Government bond purchases would be significantly beneficial, but in a monetary union with 18 different treasuries, such purchases are difficult for economic, political and legal reasons. We recommend a monthly asset-purchase programme of â?¬35 billion with a review of the amount after three months. EFSF/ESM/EU/EIB bonds, corporate bonds and assetbacked securities should be purchased, of which at least â?¬490 billion, â?¬900 billion and â?¬330 billion respectively are suitables. Bonds of sound banks could be considered after the completion of the ECBâ??s assessment of bank balance sheets. While bond purchases distort incentives and make the ECB subject to private and public sector pressure, with potential consequences for inflation, such risks need to be weighed against the risk of persistently low inflation.
    Date: 2014–05
  11. By: Samuel Wills
    Abstract: This paper studies how monetary policy should respond to news about an oil discovery, using a workhorse New Keynesian model. Good news about future production can create a recession today under exchange rate pegs and a simple Taylor rule, as seen in practice. This is explained by forward-looking inflation. Recession is avoided by a Taylor rule that accommodates changes in the natural level of output, which closely approximates optimal policy. Central banks have an incentive to exploit oil revenues by appreciating the terms of trade, creating “Dutch disease” and a deflationary bias which is overcome by committing to future policy.
    Keywords: Natural resources, oil, optimal monetary policy, small open economy, news shock.
    JEL: E52 E62 F41 O13 Q30 Q33
    Date: 2014–05
  12. By: Maria Lucia Florez-Jimenez; Julian A. Parra-Polania
    Abstract: We incorporate an escape clause into a model with forward guidance and find that such clause is welfare improving as it allows the monetary authority to avoid cases in which the cost of reduced flexibility is too high. The escape clause provides the central bank with another instrument (additional to the promised policy rate), the announced threshold. Under zero-lower-bound episodes, such threshold is a more suitable instrument to respond to an increase in the size of the recessionary shock. However, in extreme cases (i.e. when the shock is enormous), the optimal response is to make an unconditional promise and further reduce the promised rate.
    Keywords: Forward guidance, escape clause, zero lower bound, central bank communication
    JEL: E47 E52 E58
    Date: 2014–03–03
  13. By: Jing Cynthia Wu; Fan Dora Xia
    Abstract: This paper employs an approximation that makes a nonlinear term structure model extremely tractable for analysis of an economy operating near the zero lower bound for interest rates. We show that such a model offers an excellent description of the data and can be used to summarize the macroeconomic effects of unconventional monetary policy at the zero lower bound. Our estimates imply that the efforts by the Federal Reserve to stimulate the economy since 2009 succeeded in making the unemployment rate in December 2013 0.13% lower than it otherwise would have been.
    JEL: E43 E44 E52 E58 G12
    Date: 2014–05
  14. 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.
    Keywords: Interbank, monetary policy, contagion, networks, super-spreader, central bank.
    JEL: E5 G2 L14
    Date: 2014–04–28
  15. By: Fonseca, Marcelo Gonçalves da Silva; Pereira, Pedro L. Valls
    Abstract: This paper investigates the implications of the credit channel of the monetary policy transmission mechanism in the case of Brazil, using a structural FAVAR (SFAVAR) approach. The term structural comes from the estimation strategy, which generates factors that have a clear economic interpretation. The results show that unexpected shocks in the proxies for the external nance premium and the bank balance sheetchannel produce large and persistent uctuations in in ation and economic activity accounting for more than 30% of the error forecast variance of the latter in a three-year horizon. The central bank seems to incorporate developments in credit markets especially variations in credit spreads into its reaction function, as impulse-response exercises show the Selic rate is declining in response to wider credit spreads and acontraction in the volume of new loans. Counterfactual simulations also demonstrate that the credit channel ampli ed the economic contraction in Brazil during the acute phase of the global nancial crisis in the last quarter of 2008, thus gave an important impulse to the recovery period that followed.
    Date: 2014–05–05
  16. By: Carlos León; Clara Machado; Andrés Murcia
    Abstract: This document presents an enhanced and condensed version of preceding proposals for identifying systemically important financial institutions in Colombia. Three systemic importance metrics are implemented: (i) money market net exposures network hub centrality; (ii) large-value payment system network hub centrality; and (iii) an adjusted assets measure. Two complementary aggregation methods for those metrics are implemented: fuzzy logic and principal component analysis. The two resulting indexes concur in several features: (i) the ranking and remoteness of the top-two most systemically important financial institutions; (ii) the preeminence of credit institutions in the indexes; (iii) the appearance of a brokerage firm in the top-six; (iv) the skewed nature of the indexes, which match the skewed (i.e. inhomogeneous) nature of the three metrics and their approximate scale-free distribution. The indexes are non-redundant and provide a comprehensive relative assessment of each financial institution’s systemic importance, in which the choice of metrics pursues the macro-prudential perspective of financial stability. The indexes may serve financial authorities as quantitative tools for focusing their attention and resources where the severity resulting from an institution failing or near-failing is estimated to be the greatest. They may also serve them for enhanced policy and decision-making.
    Keywords: Systemic Importance, Systemic Risk, Fuzzy Logic, Principal Component Analysis, Financial Stability, Macro-prudential
    JEL: D85 C63 E58 G28
    Date: 2013–12–26
  17. By: Pierre-Cyrille Hautcoeur; Angelo Riva; Eugene N. White
    Abstract: When faced with a run on a “systemically important” but insolvent bank in 1889, the Banque de France pre-emptively organized a lifeboat to ensure that depositors were protected and an orderly liquidation could proceed. To protect the Banque from losses on its lifeboat loan, a guarantee syndicate was formed, penalizing those who had participated in the copper speculation that had caused the crisis bringing the bank down. Creation of the syndicate and other actions were consistent with mitigating the moral hazard from such an intervention. This episode contrasts the advice given by Bagehot to the Bank of England to counter a panic by lending freely at a high rate on good collateral, allowing insolvent institutions to fail.
    JEL: E58 G01 N13 N23
    Date: 2014–05
  18. By: Jan A. Kregel; Mario Tonveronachi (Tallinn University of Technology, Estonia)
    Abstract: The financial system is a private-public partnership coming from government ceding the right to produce means of payment with the related permission on leveraged lending services, against the acceptance of rules designed to ensure stability for both individual institutions and the financial system. The experience shows that market-based regulation does not produce the wanted results, while rules-based and principle-based regulatory systems are prone to regulatory avoidance and capture, especially with complex regulatory schemes. While the reaction to the recent crisis has prompted a wide range of financial reforms, in a duel to match complexity with complexity, the previous approach based on leaving market forces to mould the financial structure with few if any constraints maintained. The paper shows that this approach adopts faulty or casuistic policy implications derived from both the laissez faire and the second-best versions of mainstream economic theory. However, some of its basic features, such as regulating institutions and products and not functions, and as promoting the international level playing field, are not coherent with its reputed theoretical foundations. Furthermore, the absence of strong principles and the impossibility to derive conclusive quantitative proposals from cost-benefit evaluations leaves an unacceptably wide area of discretion for experimentation with trial and error processes, easily leading to weak or distorted regulation. The difficulties experienced within this framework to deal with problems such as those posed by systemic institutions, shadow banking, weak rules and supervision, distorted risk evaluation, high compliance costs, etc. has convinced some observers that a ‘revolution’ in economic thinking and policy is required. Following Minsky, the conclusions review a heterodox approach to financial fragility and regulation. Characterising banking in terms of liquidity creation through acceptance, and distinguishing it from the production of liquidity by other financial institutions, it concludes that financial organisations should be regulated according to their function in providing liquidity of different types to the financial system.
    Keywords: Financial regulation, financial supervision, financial fragility, Hyman Minsky
    JEL: G01 G21 G24 G28 G32
    Date: 2014–03–19
  19. By: Alvarez, Fernando (University of Chicago); Barlevy, Gadi (Federal Reserve Bank of Chicago)
    Abstract: This paper analyzes the welfare implications of mandatory disclosure of losses at financial institutions when it is common knowledge that some banks have incurred losses but not which ones. We develop a model that features contagion, meaning that banks not hit by shocks may still suffer losses because of their exposure to banks that are. In addition, we assume banks can profitably invest funds provided by outsiders, but will divert these funds if their equity is low. Investors thus value knowing which banks were hit by shocks to assess the equity of the banks they invest in. We find that when the extent of contagion is large, it is possible for no information to be disclosed in equilibrium but for mandatory disclosure to increase welfare by allowing investment that would not have occurred otherwise. Absent contagion, mandatory disclosure cannot raise welfare, even if markets are frozen.
    Keywords: Information; Networks; Contagion; Stress Tests
    JEL: G01 G14 G17
    Date: 2014–04–28

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