nep-cba New Economics Papers
on Central Banking
Issue of 2014‒06‒14
eighteen papers chosen by
Maria Semenova
Higher School of Economics

  1. Monetary Policy Transmission during Financial Crises: An Empirical Analysis By Tatjana Dahlhaus
  2. Rollover Risk, Liquidity and Macroprudential Regulation By Toni Ahnert
  3. Inflation Targeting and Banking System Soundness: A Comprehensive Analysis By Dimas M. Fazio; Benjamin M. Tabak; Daniel O. Cajueiro
  4. Macroprudential framework:key questions applied to the French case. By Bennani, T.; Després, M.; Dujardin, M.; Duprey, T.; Kelber, A.
  5. International Reserves: Facing Model Uncertainty By Sona Benecka; Lubos Komarek
  6. Optimum and Adequate Level of International Reserves By Gerencia Técnica
  7. Inflation Targeting in Latin America By Adolfo Barajas; Roberto Steiner; Leonardo Villar; César Pabón
  8. The Financial and Macroeconomic Effects of OMT Announcements By Carlo Altavilla; Domenico Giannone; Michèle Lenza
  9. Bail-in Provisions in State Aid and Resolution Procedures: Are they consistent with systemic stability? By Micossi, Stefano; Bruzzone, Ginevra; Cassella, Miriam
  10. Monetary policy effects on bank risk taking By Abbate, Angela; Thaler, Dominik
  11. Financial stability and monetary policy: happy marriage or untenable union? By Williams, John C.
  12. Monetary rules: theory and practice By Plosser, Charles I.
  13. Monetary Regimes and EU Accession: Comparing Bulgaria and Romania By Nikolay Nenovsky; Kiril Tochkov; Camélia Turcu
  14. Monetary policy options for mitigating the impact of the global financial crisis on emerging market economies. By Dąbrowski, Marek A.; Śmiech, Sławomir; Papież, Monika
  15. Basel Accords and Islamic banking: A critical evaluation By Hasan, Zubair
  16. News, Housing Boom-Bust Cycles, and Monetary Policy By Birol Kanik; Wei Xiao
  17. The Relationship between Inflation Targeting and Exchange Rate Pass-Through in Turkey with a Model Averaging Approach By Ferhat Arslaner; Dogan Karaman; Nuran Arslaner; Suleyman Hilmi Kal
  18. Monetary policy, long real yields and the financial crisis By Moretti, Laura

  1. By: Tatjana Dahlhaus
    Abstract: This paper studies the effects of a monetary policy expansion in the United States during times of high financial stress. The analysis is carried out by introducing a smooth transition factor model where the transition between states (“normal” and high financial stress) depends on a financial conditions index. Employing a quarterly data set over the period 1970Q1 to 2009Q2 containing 108 U.S. macroeconomic and financial time series, I find that a monetary policy shock during periods of high financial stress has stronger and more persistent effects on macroeconomic variables such as output, consumption, and investment than it has during “normal” times. Differences in effects among the regimes seem to originate from non-linearities in the credit channel.
    Keywords: Econometric and statistical methods, Financial markets, Transmission of monetary policy
    JEL: C11 C32 E32 E44 G01
    Date: 2014
  2. By: Toni Ahnert
    Abstract: I study rollover risk in the wholesale funding market when intermediaries can hold liquidity ex ante and are subject to fire sales ex post. Precautionary liquidity restores multiple equilibria in a global rollover game. An intermediate liquidity level supports both the usual run equilibrium and an efficient equilibrium. I provide a uniqueness refinement to characterize the privately optimal liquidity choice. Because of fire sales, liquidity holdings are strategic substitutes. Intermediaries free ride on the liquidity of other intermediaries, causing excessive liquidation. A macroprudential authority internalizes the systemic nature of liquidity and restores constrained efficiency by imposing a macroprudential liquidity buffer.
    Keywords: Financial Institutions, Financial system regulation and policies
    JEL: G01 G11 G28
    Date: 2014
  3. By: Dimas M. Fazio; Benjamin M. Tabak; Daniel O. Cajueiro
    Abstract: Several specialists and authorities blame inflation targeting (IT) regime for not responding to the increasing systemic risk and the development of asset bubbles. Nevertheless, we employ a database with commercial banks from 71 countries between 1998 and 2012, and we present evidence that: banks from IT countries: (i) are, on average, more stable; (ii) have sounder systemically important banks; and (iii) are less affected in times of global liquidity shortage. These results are in line with the existence of a price stability channel towards financial stability. Our conclusions are robust to whether we compare banks from countries that have the same legal origins, whether we control for the responsibility of bank supervision being delegated to other bodies rather than the Central Bank
    Date: 2014–02
  4. By: Bennani, T.; Després, M.; Dujardin, M.; Duprey, T.; Kelber, A.
    Abstract: This paper presents the main features of macroprudential policy with a focus on the French case. We first recall the ultimate objective of this policy, which is to prevent and to mitigate systemic risk, i.e. the risk of “widespread disruptions to the provision of financial services that have serious consequences for the real economy” (CGFS, 2012). We put forward two goals to achieve this ultimate objective, namely (i) increasing the resilience of the financial sector and (ii) leaning against the financial cycle. Then, in the context of the ongoing reflections on the organisation of macroprudential policy at the national and European level, we analyse the macroprudential institutional framework recently adopted in France. We discuss the instruments available to macroprudential authorities in light of the two main goals of macroprudential policy. Drawing on theoretical considerations and past experience, we favour a macroprudential toolkit broadly consistent with the European CRD IV/CRR package. Finally, we emphasise the need for macroprudential authorities to be able to monitor and detect systemic risk. To this end, several indicators and their reliability are analysed.
    Keywords: macroprudential policy, central bank, systemic risk, financial crisis
    JEL: E58 G28 G18 G01 C50
    Date: 2014
  5. By: Sona Benecka; Lubos Komarek
    Abstract: The abundant literature on the competing motives for holding international reserves stresses different factors, giving rise to a problem called model uncertainty. In this paper we search for the most important determinants of reserve holdings using data for 104 countries in 1999–2010 and evaluate their importance using Bayesian model averaging (BMA). We enrich the ongoing empirical discussion by examining the role of financial globalization and monetary policy and by introducing new variables and searching for alternatives to the traditional ones. The results confirm that trade openness and the broad-money-to-GDP ratio are the key determinants with a positive link to the level of reserves. On the other hand, financial development seems to lower the need for reserves.
    Keywords: Bayesian model averaging, determinants, international reserves
    JEL: C23 E58 F41
    Date: 2014–03
  6. By: Gerencia Técnica
    Abstract: When managing international reserves, central banks generally face the problem of determining what their optimum or adequate level is. A critical review of some methodologies for calculating the optimum amount of reserves is presented in this document. Also, a combination of international liquidity indicators is shown to shed light on the proper level of international reserves, based on a method recently proposed by the International Monetary Fund (IMF). Different exercises are used to illustrate the high sensitivity of the optimum level or reserves when feasible variations in the models’ parameters are considered. In addition, these models rely on the questionable assumption that the country has a level of short term external liabilities that is independent of the level of reserves. These factors significantly limit the practical usefulness of these models in assessing the adequate level of international reserves
    Keywords: International reserves, optimum level.
    JEL: E58 F32
    Date: 2014–05–13
  7. By: Adolfo Barajas; Roberto Steiner; Leonardo Villar; César Pabón
    Abstract: Examinamos cómo se ha llevado a cabo la política monetaria en los cuatro primeros países en adoptar inflación objetiva: Brasil, Chile, Colombia y Perú. En primer lugar, un enfoque de Markov Switching muestra que si bien los cuatro países presentan una gran estabilidad en sus respuestas a las brechas de inflación y producto, la mayoría han salido de esta regla en tiempos de crisis extrema. También encontramos evidencia de un enfoque de IO "extendida" o "integrado" en dos países, la tasa de política en respuesta a un tipo de cambio real o una brecha de crédito privado, este último posiblemente indicando problemas de estabilidad financiera. No encontramos evidencia de cambios en la credibilidad a través del tiempo. En segundo lugar, la intervención de la divisa es impulsada principalmente por desajustes de los tipos de cambio, en lugar de por la volatilidad del tipo de cambio o por un objetivo de reservas internacionales. Tal intervención generalmente responde con más fuerza a las apreciaciones que las depreciaciones, y no responde a la inflación. Por lo tanto, la IO en estos países hasta el momento se puede caracterizar como flexibles, coexistiendo con un grado de temor a la flotación y un objetivo de estabilidad financiera, ya sea integrado directamente en la regla política o complementarse con medidas macroprudenciales.
    Keywords: Inflation targeting; Markov Switching; Taylor rules; intervention in foreign exchange markets.Inflación objetivo, Markov switching, regla de Taylor, intervención en mercados de cambio extranjeros.
    JEL: E31 E52 E61
    Date: 2014–01–30
  8. By: Carlo Altavilla; Domenico Giannone; Michèle Lenza
    Abstract: This study evaluates the macroeconomic effects of Outright Monetary Transaction (OMT)announcements by the European Central Bank (ECB). Using high-frequency data, we find that OMTannouncements decreased the Italian and Spanish 2-year government bond yields by about 2percentage points, while leaving unchanged the bond yields of the same maturity in Germany andFrance. These results are used to calibrate a scenario in a multi-country model describing the macrofinanciallinkages in France, Germany, Italy, and Spain. The scenario analysis suggests that thereduction in bond yields due to OMT announcements is associated with a significant increase in realactivity, credit, and prices in Italy and Spain with relatively muted spillovers in France and Germany.
    Keywords: outright monetary transactions; event study; news; multi-country vector autoregressive model
    JEL: E47 E58
    Date: 2014–06
  9. By: Micossi, Stefano; Bruzzone, Ginevra; Cassella, Miriam
    Abstract: This CEPS Policy Brief examines the provisions for bail-in in the European Union – that is, the principle whereby any public measure to recapitalise a bank with insufficient prudential capital must be preceded by a write-down or conversion into equity of creditors’ claims – in state aid policies and in the new resolution framework for failing banks, with two aims: i) to assess whether and how they are coordinated and ii) more importantly, whether they address satisfactorily the question of systemic stability that may arise when investors fear that creditors’ claims are likely to be bailed-in in a bank crisis. The issue is especially relevant in the present context, as the comprehensive assessment exercise underway for EU banks falling under the direct supervision of the European Central Bank may lead supervisors to require substantial capital injections simultaneously for many of the banks involved, possibly shaking investors’ confidence across EU banking markets. The authors conclude that the two sets of rules are, broadly speaking, mutually consistent and that they already contain sufficient safeguards to address systemic stability concerns. However, the balance of the elements underpinning the European Commission’s decisions in individual cases may not be clear to bank creditors and potential investors in financial markets. The impression of unneeded rigidity on this very sensitive issue has been heightened by official statements over-emphasising that each case will be assessed individually under competition rules, thus feeding the concern that the systemic dimension of the issue may have been underestimated. Therefore, further clarification by the Commission may be needed on how the various criteria will be applied during the ongoing transition to banking union – perhaps through a new communication completing the state aid framework for banks in view of the adoption of the new resolution rules.
    Date: 2014–05
  10. By: Abbate, Angela; Thaler, Dominik
    Abstract: The contribution of this paper is twofold. First, we provide empirical evidence on the existence of a risk-taking channel in the US economy. By identifying a Bayesian VAR through sign restrictions, we find that an expansionary monetary policy shock causes a persistent increase in proxies for bank risk-taking behaviour. We then develop a New Keynesian model with a risk-taking channel, where low levels of the risk free rates induce banks to extend credit to riskier borrowers. Conditional on calibration values, the simulated responses of key banking sector variables is compatible with the transmission mechanism observed in the data.
    Keywords: Bank Risk; Monetary policy; DSGE Models; Bayesian Analysis
    JEL: E12 E44 E58 C11
    Date: 2014
  11. By: Williams, John C. (Federal Reserve Bank of San Francisco)
    Abstract: Presentation to the Deutsche Bundesbank Conference, Eltville am Rhein, Germany, June 5, 2014
    Date: 2014–06–05
  12. By: Plosser, Charles I. (Federal Reserve Bank of Philadelphia)
    Abstract: Frameworks for Central Banking in the Next Century Policy Conference, Hoover Institution, Stanford, CA President Plosser discusses his views on the benefits of a systematic, rule-like approach to monetary policy. He gave related remarks on May 28, 2014, at the 2014 Bank of Japan–Institute for Monetary and Economic Studies Conference.
    Keywords: Monetary policy; Forecasts; John Taylor;
    Date: 2014–06–02
  13. By: Nikolay Nenovsky (LEO Laboratoire d'économie d'Orleans - bat. A Rue de Blois - BP 6739 45067 ORLEANS CEDEX 2 FR, Centre National de la Recherche Scientifique; LE STUDIUM LE STUDIUM - 3D avenue de la Recherche scientifique 45071 Orléans Cedex 2 FR, Centre National de la Recherche Scientifique); Kiril Tochkov (TCU Texas Christian University - Department of Economics Texas Christian University TCU Box 298510 Fort Worth, TX 76129, USA FR, University of Texas Christian); Camélia Turcu (LEO Laboratoire d'économie d'Orleans - bat. A Rue de Blois - BP 6739 45067 ORLEANS CEDEX 2 FR, Centre National de la Recherche Scientifique)
    Abstract: This paper traces the origins of the different monetary regimes adopted in Bulgaria and Romania in 1996-97 and examines their performance during the EU accession. The findings indicate that the constraints of the currency board in Bulgaria shifted economic activity towards the private sector, while the discretionary policies in Romania turned public finances into both a contributor and a response mechanism to economic imbalances. While the prospects of EU accession initially enhanced the performance of the monetary anchors, the implicit insurance of EU membership increased moral hazard and led to a rapid rise in private and public debt. The paper also explores the historical parallels between the monetary regimes of Bulgaria and Romania in 1996-97 and 1925-1940.
    Keywords: Post-communist transition, Monetary regimes, EU accession, Moral hazard, Interwar monetary history
    Date: 2013
  14. By: Dąbrowski, Marek A.; Śmiech, Sławomir; Papież, Monika
    Abstract: Though the hypothesis that exchange rate regimes fully predetermine monetary policy in the face of external shocks hardly finds any advocates on theoretical ground it has crept in the most of empirical research. This study adopts a more discerning empirical approach that looks at monetary policy tools used in order to accommodate the recent financial crisis. We investigated the GDP growth in 45 emerging market economies in the most intense phase of the crisis and found out that there is no clear difference in the growth performance between countries at the opposite poles of the exchange rate regime spectrum. Depreciation cum international reserve depletion outperforms the other policy options, especially the rise in the interest rate spread. We discovered certain complementarities between the information on the policy option and on exchange rate regime. Taking into account non-Gaussian settings, we decided to use quantile regression, which provide in addition, more complete picture of relationship between the covariates and the distribution of the GDP growth.
    Keywords: Global financial crisis, Emerging market economies, Monetary policy, Exchange rate regime, Quantile regressions
    JEL: C21 E52 F31 F41
    Date: 2013–02–24
  15. By: Hasan, Zubair
    Abstract: The worldwide colossal failures of financial institutions in the wake of the 2007–2010 financial turmoil the yesteryear advocates of liberalization and privatization converted almost overnight into vocal supporters of raising the safety walls around the interests of various stakeholders, especially the depositors. Admittedly, it was the heightened lure of leverage gains that led the financial institutions to expand credit beyond what the volume and quality of their capital assets warranted without crossing the limits of safety. The devastation led to a paradigm shift, so to say, at the national and international level in finance focusing on liquidity coverage of obligations that financial institutions must maintain for their own safety as also in the wider social interest. Stringent and regular watch was needed; it was felt, to ensure the compliance. The Basel Committee on Banking Supervision (BCBS), an organ of the Bank for International Settlements (BIS) developed what are known as Accords i.e. agreements defining capital and its adequacy for banks to keep the risk they could take within limits of safety. It is interesting to find that Malaysia was in a sense predictive of events that unfolded to revamp and strengthen its own regulatory framework. Also, the IFSB was alert to announce some new standards. This paper attempts a critical appraisal of these developments with a view to assess how far Islamic banks really need Basel Accords and are likely to absorb them without being cumbersome.
    Keywords: Key words: Islamic finance; Capital Adequacy; Basel Accords; Shari’ah compliance; Bank Negara action.
    JEL: G21 G32 G38
    Date: 2014–06–05
  16. By: Birol Kanik; Wei Xiao
    Abstract: We explore the possibility that a housing market boom-bust cycle may arise when public beliefs are driven by news shocks. News, imperfect and noisy by nature, may generate expectations that are overly optimistic or pessimistic. Over-optimism easily leads to excessive accumulation of housing assets, and creates a housing boom that is not based on fundamentals. When the news is found false or inaccurate, investors revert their actions, and a downturn in the housing market follows. By altering agents’ net worth conditions, a housing cycle can have significant repercussions in the aggregate economy. In this paper, we construct a dynamic general equilibrium model that can give rise to a news-driven housing boom-bust cycle, and we consider how monetary policies should respond to it.
    Keywords: Business cycle; News; Monetary policy.
    JEL: E3 E4 E5
    Date: 2014
  17. By: Ferhat Arslaner; Dogan Karaman; Nuran Arslaner; Suleyman Hilmi Kal
    Abstract: Turkey, as an emerging economy, has a unique experience regarding to the relationship between the rate of inflation and the exchange rate. As opposed to developed countries, the effects of exchange rate fluctuations are felt significantly on inflation dynamics and these fluctuations also influence many other macroeconomic variables via different channels with different magnitudes in developing countries. Therefore, the main concern of the paper, which is to evaluate the exchange rate pass-through (ERPT), has an important role in the success of inflation targeting regime. Using correlation coefficients between exchange rates and inflation differentials, single equation regressions, vector auto-regressions (VAR) and Markov switching regression methods; the determinants of ERPT to producer and consumer prices are quantitatively analyzed between January 1986 and August 2013. Error correction models are used to estimate the exchange rate pass-through. According to the estimation results, it is found that, similar to other developing countries, there is a substantial degree of ERPT for Turkey the greater part of which is realized almost instantaneously. Comparing to the studies on industrial countries, it is found that ERPT is higher but there are additional transmission channels just like the other emerging economies. The higher degree of ERPT in Turkey is found in those studies conducted for industrialized countries implies that there are additional transmission channels for Turkey. ERPT for producer price-index-based inflation is found to be higher than for consumer-price-index-based inflation. We also found that the degree of ERPT increases as the data frequency falls. We also determined an asymmetry in pricing behavior : while exchange rates increase, this increase is passed on to prices, yet decreases in exchange rates. Estimation results also indicate that the main factors contributing to high pass-through are past currency crises and the high degree of openness of the economy. These factors are the basis for the indexation behavior of agents. Although, the aforementioned factors are the main determinants of the degree of exchange rate pass-through, the persistency and the volatility of exchange rates can significantly affect the short run dynamics of the pass-through. The results also imply that, even if the pass-through slows down due to changing pattern of exchange rates, in order to achieve a low and stable inflation in the long run, fundamental factors that exacerbate the link between exchange rates and prices should change. Another crucial point is that according to Markov switching regression results of ERPT coefficients of domestic prices, the exchange rate pass-through coefficients vary significantly between different states.
    Keywords: Monetary Policy, Inflation Targeting, Exchange Rate Pass-Through, Vector Autogression, Markov Switching Regression
    JEL: C22 C87 E30 E31 E59
    Date: 2014
  18. By: Moretti, Laura
    Abstract: This paper investigates the role of monetary policy in the collapse in the long-term real interest rates in the decade before the onset of the financial crisis using a sample of five advanced economies (United States, United Kingdom, the euro area, Sweden and Canada). The results from an estimated panel VAR with monthly data show that, while monetary policy shocks had negligible effects on long-term real interest rates, shocks to the long-term real interest rates had a one-to-one effect on the short nominal rate. --
    Keywords: monetary policy,long-term real interest rates,panel VAR
    JEL: E43 E52 E58
    Date: 2014

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