nep-cba New Economics Papers
on Central Banking
Issue of 2014‒06‒28
seventeen papers chosen by
Maria Semenova
Higher School of Economics

  1. Banking and Sovereign Debt Crises in a Monetary Union Without Central Bank Intervention By Jing Cheng; Meixing Dai; Frédéric Dufourt
  2. Marriner S. Eccles and the 1951 Treasury–Federal Reserve Accord: Lessons for central bank By Thorvald Grung Moe
  3. Investigating the Zero Lower Bound on the Nominal Interest Rate Under Financial Instability By Julio A. Carrillo; Céline Poilly    
  4. Optimal Taylor Rules in New Keynesian Models By Christoph E. Boehm; Christopher L. House
  5. Neue regulatorische Konzepte der Bankenaufsicht und ihre Auswirkungen auf die Gesamtbanksteuerung By Noack, Tim; Cremers, Heinz; Mala, Julia
  6. How might a central bank report uncertainty? By Fair, Ray C.
  7. Effects of Unconventional Monetary Policy on Financial Institutions By Gabriel Chodorow-Reich
  8. Is India ready for flexible inflation-targeting? By Abhijit Sen Gupta; Rajeswari Sengupta
  9. Central BanksÕ Transparency: Words as Signals By Francesco Cendron; Gianfranco Tusset
  10. A note on the long-run neutrality of monetary policy: new empirics By Asongu, Simplice
  11. The European Central Bank’s outright monetary transactions and the Federal Constitutional Court of Germany By Siekmann, Helmut; Wieland, Volker
  12. Interventions and Expected Exchange Rates in Emerging Market Economies By Santiago García-Verdú; Manuel Ramos Francia
  13. Determinants of OECD countries’ sovereign yields: safe havens, purgatory, and the damned. By C. Bortoli; L. Harreau; C. Pouvelle
  14. Consumer Attitudes and the Epidemiology of Inflation Expectations By Michael Ehrmann; Damjan Pfajfar; Emiliano Santoro
  15. Exchange Rate Regimes and Business Cycles: An Empirical Investigation By Fatma Pinar Erdem; Erdal Ozmen
  16. Deposit insurance database By Demirguc-Kunt, Asli; Kane, Edward; Laeven, Luc
  17. Procyclicality and path dependence of sovereign credit ratings: The example of Europe By Freitag L.

  1. By: Jing Cheng (Université de Strasbourg (BETA), CNRS); Meixing Dai (Université de Strasbourg (BETA), CNRS); Frédéric Dufourt (Aix-Marseille UniversitÈ (Aix-Marseille School of Economics), CNRS-GREQAM & EHESS and Institut Universitaire de France)
    Abstract: We analyze the conditions of emergence of a twin banking and sovereign debt crisis within a monetary union in which: (i) the central bank is not allowed to provide direct financial support to stressed member states or to play the role of lender of last resort in sovereign bond markets, and (ii) the responsibility of fighting against large scale bank runs, ascribed to domestic governments, is ensured through the implementation of a financial safety net (banking regulation and government deposit guarantee). We show that this broad institutional architecture, typical of the Eurozone at the onset of the financial crisis, is not always able to prevent the occurrence of a twin banking and sovereign debt crisis triggered by pessimistic investors' expectations. Without significant backstop by the central bank, the financial safety net may actually aggravate, instead of improve, the financial situation of banks and of the government.
    Keywords: banking crisis, sovereign debt crisis, bank runs, financial safety net, liquidity regulation, government deposit guarantee, self-fulfilling propheties
    JEL: E32 E44 F3 F4 G01 G28
    Date: 2014–06
  2. By: Thorvald Grung Moe (Norges Bank)
    Abstract: The 1951 Treasury–Federal Reserve Accord is an important milestone in central bank history. It led to a lasting separation between monetary policy and the Treasury's debtmanagement powers and established an independent central bank focused on price and macroeconomic stability. This paper revisits the history of the Accord and elaborates on the role played by Marriner Eccles in the events leading up to the Accord. As chairman of the Board of Governors since 1934, Eccles was also instrumental in drafting key banking legislation that enabled the Federal Reserve System to assume a more independent role following the Accord. The global financial crisis has generated renewed interest in the Accord and its lessons for central bank independence. This paper shows that Eccles' support for the Accord—and central bank independence—was clearly linked to the strong inflationary pressures in the US economy at the time, and that he was equally supportive of deficit financing in the 1930s. This broader interpretation of the Accord holds the key to a more balanced view of Eccles's role at the Federal Reserve, where his contributions from the mid-1930s up to the Accord are seen as equally important. Accordingly, the Accord should not be viewed as the final triumph of central bank independence, but rather as an enlightened vision for a more symmetric policy role for central banks, with equal weight given to fighting inflation and preventing depressions.
    Keywords: Marriner Eccles; Central Banking; Monetary Policy; Fiscal Policy
    JEL: B31 E52 E58 E63 N12
    Date: 2014–05–15
  3. By: Julio A. Carrillo; Céline Poilly    
    Abstract: This paper studies the effects of three financial shocks in the economy: a net-worth shock, an uncertainty or risk shock, and a credit-spread shock. We argue that only the latter can push the nominal interest rate against its zero lower bound. Further, a recessionary shock to the net worth or the credit spread generates a positive response for loans, which is counter-intuitive during an economic downturn. Finally, we find that there is an optimal commitment period for the central bank to keep the nominal interest rate equal to zero (forward guidance) after a financial turmoil. Beyond that optimal period, the volatility of inflation and output rise quick and sharply. Thus, an excessive forward guidance policy may destabilize the economy.
    Keywords: Zero Lower Bound, Financial Accelerator, Financial Shocks
    JEL: E31 E44 E52 E58
    Date: 2014–01
  4. By: Christoph E. Boehm; Christopher L. House
    Abstract: We analyze the optimal Taylor rule in a standard New Keynesian model. If the central bank can observe the output gap and the inflation rate without error, then it is typically optimal to respond infinitely strongly to observed deviations from the central bank’s targets. If it observes inflation and the output gap with error, the central bank will temper its responses to observed deviations so as not to impart unnecessary volatility to the economy. If the Taylor rule is expressed in terms of estimated output and inflation then it is optimal to respond infinitely strongly to estimated deviations from the targets. Because filtered estimates are based on current and past observations, such Taylor rules appear to have an interest smoothing component. Under such a Taylor rule, if the central bank is behaving optimally, the estimates of inflation and the output gap should be perfectly negatively correlated. In the data, inflation and the output gap are weakly correlated, suggesting that the central bank is systematically underreacting to its estimates of inflation and the output gap.
    JEL: E3 E31 E4 E43 E5 E52 E58
    Date: 2014–06
  5. By: Noack, Tim; Cremers, Heinz; Mala, Julia
    Abstract: -- The Basel III framework represents the response to the regulation deficits of the financial cri-sis and the immense losses of many banks in years 2007/2008. The aim of the framework is to increase the level of capital in financial institutions and to improve the loss absorption and risk coverage of capital. With its' implementation in the European Union in form of a Regulation, which came into force in January 2014, the framework will cause massive capital short-falls, forcing banks to rethink their capital structure and improve their capital management. Furthermore the Basel III implementation will have noticeable effects on banks' profitability, their costs of capital as well as their business models. This Working Paper presents the measures of the new regulatory framework and discusses potential impacts on the overall bank management.
    Keywords: Basel III,CRR,own funds,Leverage Ratio,Liquidity Coverage Ratio,Net Stable Funding Ratio,Monitoring Tools,CVA Charge,Central Counterparty,Counterparty Credit Risk,basel committee on banking supervision,EPE models,capital requirements,capital conservation buffer,additional capital buffers,additional capital buffers for G-SIFIS,transitional arrangement,consequences on solvability,consequences on liquidity,consequences Leverage Ratio
    JEL: G00 G01 G18 G28 G29 F33
    Date: 2014
  6. By: Fair, Ray C.
    Abstract: An important question for central banks is how they should report the uncertainty of their forecasts. This paper discusses a way in which a central bank could report the uncertainty of its forecasts in a world in which it used a single macroeconometric model to make its forecasts and guide its policies. Suggestions are then made as to what might be feasible for a central bank to report given that it is unlikely to be willing to commit to a single model. A particular model is used as an illustration. --
    Keywords: central bank,uncertainty,stochastic simulation
    JEL: E50
    Date: 2014
  7. By: Gabriel Chodorow-Reich
    Abstract: Monetary policy affects the real economy in part through its effects on financial institutions. High frequency event studies show the introduction of unconventional monetary policy in the winter of 2008-09 had a strong, beneficial impact on banks and especially on life insurance companies. I interpret the positive effects on life insurers as expansionary policy recapitalizing the sector by raising the value of legacy assets. Expansionary policy had small positive or neutral effects on banks and life insurers through 2013. The interaction of low nominal interest rates and administrative costs forced money market funds to waive fees, producing a possible incentive to reach for yield to reduce waivers. I show money market funds with higher costs reached for higher returns in 2009-11, but not thereafter. Some private defined benefit pension funds increased their risk taking beginning in 2009, but again such behavior largely dissipated by 2012. In sum, unconventional monetary policy helped to stabilize some sectors and provoked modest additional risk taking in others. I do not find evidence that the financial institutions studied formented a tradeoff between expansionary policy and financial stability at the end of 2013.
    JEL: E44 E52 G20
    Date: 2014–06
  8. By: Abhijit Sen Gupta (Asian Development Bank); Rajeswari Sengupta (Indira Gandhi Institute of Development Research)
    Abstract: In this paper we analyze whether the current macroeconomic environment in India is suitable for implementation of inflation targeting as a monetary policy strategy, in light of the recommendation of the Urjit Patel Committee Report. Our results indicate that historically the Reserve Bank of India has given more importance to inflation compared to output growth and exchange rate changes in its monetary policy conduct and that in recent times there has been an increased emphasis on monetary independence thereby comfortably placing the RBI on a path to move towards flexible inflation targeting. However we also find factors, which are traditionally outside the control of monetary policy do exert a strong impact on aggregate prices in India thereby making the choice of nominal anchor a tricky one. Furthermore, the success of monetary policy in containing inflation is found to be crucially contingent on an appropriate fiscal policy as well.
    Keywords: Reserve Bank of India, Monetary Policy, Taylor Rule, Financial trilemma, Inflation, Nominal anchor, Fiscal deficit
    JEL: E43 E52 E58
    Date: 2014–06
  9. By: Francesco Cendron; Gianfranco Tusset (University of Padova)
    Abstract: Evidence of the evolution of ideas on central bank transparency can be found in the central bankersÕ speeches during the period 1997-2012. Exploratory analysis of the central bankersÕ speeches provides an overview of their use of language: speeches define the historical evolution of central banksÕ discourses, and thus suggest how the concept of transparency has evolved. The paper invites reconsideration of the role of central banksÕ transparency through analysis of central bankersÕ speeches and their use of language as a part of their communication framework. While literature on transparency indexes shows increasing central bank transparency, the semantic area of transparency in central bankersÕ speeches changed over the period 1997-2012. The paper investigates this evolution until recent shift towards new semantic areas pertaining more to the financial and real economy than to traditional inflation concerns.
    Keywords: central banks; transparency; language; speeches; content analysis.
    JEL: B59 E58
    Date: 2014–04
  10. By: Asongu, Simplice
    Abstract: Economic theory traditionally suggests that monetary policy can influence the business cycle, but not the long-run potential output. Despite well documented theoretical and empirical consensus on money neutrality in the literature, the role of money as an informational variable for monetary policy decision has remained opened to debate with empirical works providing mixed outcomes. This paper addresses two substantial challenges to this debate: the neglect of developing countries in the literature and the use of new financial dynamic fundamentals that broadly reflect monetary policy. The empirics are based on annual data from 34 African countries for the period 1980 to 2010. Using a battery of tests for integration and long-run equilibrium properties, results offer overall support for the traditional economic theory.
    Keywords: Monetary policy; Credit; Empirics; Africa
    JEL: E51 E52 E58 E59 O55
    Date: 2013–09–15
  11. By: Siekmann, Helmut; Wieland, Volker
    Abstract: This note reviews the legal issues and concerns that are likely to play an important role in the ongoing deliberations of the Federal Constitutional Court of Germany concerning the legality of ECB government bond purchases such as those conducted in the context of its earlier Securities Market Programme or potential future Outright Monetary Transactions. --
    Date: 2013
  12. By: Santiago García-Verdú; Manuel Ramos Francia
    Abstract: We study variations in the risk-neutral distributions of the exchange rates in Brazil, Chile, Colombia, Mexico, and Peru due to interventions implemented by these countries. For this purpose, we first estimate the risk-neutral densities of the exchange rates based on derivatives market data, for one-day and one-week horizons. Second, using a linear regression model, we assess possible effects on the distributions of the expected exchange rates due to these interventions. We find little evidence of an effect on the expected exchange rates' means, volatilities, skewness, kurtoses, risk premia, and tails' parameters. In the few cases for which we do find some statistical evidence of an effect, it tends to be short-lived or not economically significant. On the other hand, we find evidence that interventions which objective is to restore and/or assure the proper functioning of exchange rate markets have a higher probability of success. This probability increases as the amount of resources to intervene at disposal of the central bank increases. Needless to say, there are limits to the methodology we use.
    Keywords: Interventions, Exchange Rates, Risk-Neutral Distributions, Generalized Extreme, Value Distributions.
    JEL: E5 F31 G12 C58
    Date: 2014–06
  13. By: C. Bortoli; L. Harreau; C. Pouvelle
    Abstract: In this paper, we estimate the determinants of the spreads between the 10-year sovereign bond yields and the (interest rate) swap rate for a sample of 22 OECD countries over the January 1999-December 2013 period, using various models. Our main, fixed-effect, model highlights the crucial role of GDP growth, public deficit and debt liquidity in explaining the level of spreads, while the public debt-to-GDP ratio plays a lesser role. We find that our results are mainly driven by observations on euro area countries after the onset of the 2008 crisis, with observed spreads found to significantly exceed estimated values during the crisis for a number of euro area countries. We also shed light on the effect of unconventional monetary policies, while Target 2 balances are used for euro area countries in order to reflect concerns on the stability of the euro area. Finally, according to our cointegration model, we find a long-term relationship between the spread, the debt-to-GDP ratio, and potential GDP growth, with a larger impact of the latter variable.
    Keywords: interest rates; sovereign spreads; public debt; panel data.
    JEL: C23 E43 E44 G15
    Date: 2014
  14. By: Michael Ehrmann; Damjan Pfajfar; Emiliano Santoro
    Abstract: This paper studies the formation of consumers’ inflation expectations using micro-level data from the Michigan Survey. It shows that beyond the well-established socio-economic determinants of inflation expectations such as gender, income or education, other characteristics such as the households’ financial situation and their purchasing attitudes also matter. Respondents with current or expected financial difficulties, pessimistic attitudes about major purchases, or expectations that income will go down in the future have considerably higher forecast errors, are further away from professional forecasts, and have a stronger upward bias in their expectations than other households. However, their bias shrinks by more than that of the average household in response to increasing media reporting about inflation.
    Keywords: Inflation and prices
    JEL: C53 D84 E31
    Date: 2014
  15. By: Fatma Pinar Erdem (Central Bank of the Republic of Turkey); Erdal Ozmen (Department of Economics, METU)
    Abstract: This paper investigates the impacts of domestic and external factors along with exchange rate regimes on business cycles in a large panel of advanced and emerging market economies by employing panel logit, cointegration and autoregressive distributed lag model estimation procedures. The results for classical business cycles suggest that emerging market economies tend to experience much deeper recessions and relatively steeper expansions during almost the same duration. The probability of expansions significantly increases with exchange rate regimes flexibility. Our results, different from the bipolar view, strongly support exchange rate regime flexibility for both AE and EME other than the East Asian countries. The impacts of external real and financial shocks and domestic variables are significantly greater under managed regimes as compared to floats. Our results strongly suggest that the evolution and determinants of both classical business and growth cycles are not invariant to the prevailing exchange rate regimes.
    Keywords: Business cycles, Exchange rate regimes, Emerging markets.
    JEL: C33 E32 F33 F41
    Date: 2014–06
  16. By: Demirguc-Kunt, Asli; Kane, Edward; Laeven, Luc
    Abstract: This paper provides a comprehensive, global database of deposit insurance arrangements as of 2013. The authors extend their earlier dataset by including recent adopters of deposit insurance and information on the use of government guarantees on banks'assets and liabilities, including during the recent global financial crisis. They also create a Safety Net Index capturing the generosity of the deposit insurance scheme and government guarantees on banks'balance sheets. The data show that deposit insurance has become more widespread and more extensive in coverage since the global financial crisis, which also triggered a temporary increase in the government protection of non-deposit liabilities and bank assets. In most cases, these guarantees have since been formally removed but coverage of deposit insurance remains above pre-crisis levels, raising concerns about implicit coverage and moral hazard going forward.
    Keywords: Deposit Insurance,Debt Markets,Bankruptcy and Resolution of Financial Distress,Banks&Banking Reform,Access to Finance
    Date: 2014–06–01
  17. By: Freitag L. (GSBE)
    Abstract: This paper investigates empirically the behavior of Credit Rating Agencies CRAs when assessingsovereign solvency for European countries. Using Probit regressions I find that even after controllingfor macroeconomic factors, CRAs take the business cycle into account. Also, there is a clear case ofpath dependence in sovereign ratings. Additionally, it turns out that there seems to be a discrepancybetween upgrades and downgrades. These results are robust to a number of different specifications.
    Keywords: International Financial Markets; Investment Banking; Venture Capital; Brokerage; Ratings and Ratings Agencies;
    JEL: G15 G24
    Date: 2014

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