nep-cba New Economics Papers
on Central Banking
Issue of 2014‒07‒13
43 papers chosen by
Maria Semenova
Higher School of Economics

  1. Monetary Policy Coordination and the Role of Central Banks By Rakesh Mohan; Muneesh Kapur
  2. Monetary Policy in the New Normal By Tamim Bayoumi; Giovanni Dell'Ariccia; Karl Friedrich Habermeier; Tommaso Mancini Griffoli; Fabian Valencia
  3. Monetary and Macroprudential Policies to Manage Capital Flows By Juan Pablo Medina Guzman; Jorge Roldos
  4. Optimal Prudential Regulation of Banks and the Political Economy of Supervision By Thierry Tressel; Thierry Verdier
  5. Central Bank Financial Strength in Central America and the Dominican Republic By Andrew Swiston; Florencia Frantischek; Przemek Gajdeczka; Alexander Herman
  6. Monetary Policy in Hybrid Regimes: The Case of Kazakhstan By Natan P. Epstein; Rafael Portillo
  7. On the use of Monetary and Macroprudential Policies for Small Open Economies By F. Gulcin Ozkan; D. Filiz Unsal
  8. Financial Soundness Indicators and the Characteristics of Financial Cycles By Natasha Xingyuan Che; Yoko Shinagawa
  9. Policy Responses to Aid Surges in Countries with Limited International Capital Mobility: The Role of the Exchange Rate Regime By Andrew Berg; Rafael A Portillo; Luis-Felipe Zanna
  10. Stability and Identification with Optimal Macroprudential Policy Rules. By Jean-Bernard Chatelain; Kirsten Ralf
  11. The Case for a Long-Run Inflation Target of Four Percent By Laurence M. Ball
  12. Inflation Persistence in Brazil - A Cross Country Comparison By Shaun K. Roache
  13. Inflation Reports and Models: How Well Do Central Banks Really Write? By Ales Bulir; Jaromír Hurník; Katerina Smidkova
  14. Interest rate pass-through in Poland. Evidence from individual bank data By Ewa Stanisławska
  15. Inflation expectations in Poland, 2001–2013. Measurement and macroeconomic testing By Tomasz Lyziak
  16. Financial Plumbing and Monetary Policy By Manmohan Singh
  17. Forward guidance: A new challenge for central banks By Issing, Otmar
  18. How Effective Is Central Bank Forward Guidance? By Clemens J. M. Kool Author-Name-First Clemens J. M.; Daniel L. Thornton Author-Name-First Daniel L.
  19. Financial Crises in DSGE Models: A Prototype Model By Jaromir Benes; Michael Kumhof; Douglas Laxton
  20. Financial regulation in the EU: Cross-border capital flows, systemic risk and the European Banking Union as reference points for EU financial market integration By Haar, Brigitte
  21. The recent turmoil and monetary policy in a dual financial system with Islamic perspective By Hasan, Zubair Hasan
  22. The Natural Rate of Interest with Endogenous Growth, Financial Frictions and Trend Inflation By Olmos, Lorena; Sanso Frago, Marcos
  23. The Net Stable Funding Ratio: Impact and Issues for Consideration By Jeanne Gobat; Mamoru Yanase; Joseph Maloney
  24. Exchange Rate Management and Crisis Susceptibility: A Reassessment By Atish R. Ghosh; Jonathan David Ostry; Mahvash Saeed Qureshi
  25. Inflation Targeting and Fiscal Rules: Do Interactions and Sequencing Matter? By Jean-Louis Combes; Xavier Debrun; Alexandru Minea; Rene Tapsoba
  26. Impact of Fed Tapering Announcements on Emerging Markets By Prachi Mishra; Kenji Moriyama; Papa M'B. P. N'Diaye; Lam Nguyen
  27. Global Liquidity through the Lens of Monetary Aggregates By Kyuil Chung; Jong-Eun Lee; Elena Loukoianova; Hail Park; Hyun Song Shin
  28. Transmission of Financial Stress in Europe: The Pivotal Role of Italy and Spain, but not Greece By Brenda González-Hermosillo; Christian A Johnson
  29. Assessing Countries’ Financial Inclusion Standing - A New Composite Index By Goran Amidžić; Alexander Massara; André Mialou
  30. Inflation and Public Debt Reversals in the G7 Countries By Bernardin Akitoby; Takuji Komatsuzaki; Ariel J Binder
  31. Was Anna Schwartz right? The role of government size and the exchange rate regime for macroeconomic stability By Philipp Wegmueller
  32. Monetary Policy and Inequality in Mexico By Villarreal, Francisco G.
  33. Inflation Dynamics in India: An Analysis By Nair, Manju S
  34. How to Capture Macro-Financial Spillover Effects in Stress Tests? By Heiko Hesse; Ferhan Salman; Christian Schmieder
  35. The Regulatory Responses to the Global Financial Crisis: Some Uncomfortable Questions By Stijn Claessens; Laura E. Kodres
  36. Financial Monitoring in the New ASEAN-5 Countries By Lim, Se Hee; Reyes, Noel G.
  37. Tales from the Bretton Woods By Michael D. Bordo
  38. Learning, Monetary Policy and Asset Prices. By Marco Airaudo; Salvatore Nisticò; Luis-Felipe Zanna
  39. Sub-National Credit Risk and Sovereign Bailouts: Who Pays the Premium? By E. Jenkner; Zhongjin Lu
  40. Why Was Asia Resilient? Lessons from the Past and for the Future By Phakawa Jeasakul; Cheng Hoon Lim; Erik J. Lundbäck
  41. Issues in Identifying Economic Crises: Insights from History By Xavier De Scheemaekere; Kim Oosterlinck; Ariane Szafarz
  42. Euro or not Euro - that is not the question! Economic well-being and the fate of the European Monetary Union By Heise, Arne
  43. Modelling the Real Exchange Rate: A new Sequential Approach By Slim Chaouachi; Zied Ftiti; Frédèric Teulon

  1. By: Rakesh Mohan; Muneesh Kapur
    Abstract: The unconventional monetary policies (UMPs) pursued by the advanced economies (AEs) have posed macroeconomic challenges for the emerging market economies (EMEs) through volatile capital flows and exchange rates. AE central banks need to acknowledge and appreciate the spillovers resulting from such UMPs. Central banks of the AEs, who have set up standing mutual swap facilities, should explore similar arrangements with other significant EMEs with appropriate risk mitigation measures. These initiatives could do much to actually curb volatility in global financial markets and hence in capital flows to EMEs, thus obviating the need for defensive policy actions on the part of EMEs.
    Keywords: Monetary policy;Spillovers;Developed countries;Emerging markets;Capital flows;Central banks;Central bank role;Capital flows, central banks, coordination, emerging markets, unconventional monetary policy, spillovers
    Date: 2014–04–29
  2. By: Tamim Bayoumi; Giovanni Dell'Ariccia; Karl Friedrich Habermeier; Tommaso Mancini Griffoli; Fabian Valencia
    Abstract: The proposed SDN would take stock of the current debate on the shape that monetary policy should take after the crisis. It revisits the pros and cons of expanding the objectives of monetary policy, the merits of turning unconventional policies into conventional ones, how to make monetary policy frameworks more resilient to the risk of being constrained by the zero-lower bound going forward, and the institutional challenges to preserve central bank independence with regards to monetary policy, while allowing adequate government oversight over central banks’ new responsibilities. It will draw policy conclusions where consensus has been reached, and highlight the areas where more work is needed to get more granular policy advice.
    Keywords: Monetary policy;Central banks;Central bank autonomy;Macroprudential Policy;Financial stability;Cross country analysis;Monetary Policy, Financial Stability, Central Bank Independence
    Date: 2014–04–04
  3. By: Juan Pablo Medina Guzman; Jorge Roldos
    Abstract: We study interactions between monetary and macroprudential policies in a model with nominal and financial frictions. The latter derive from a financial sector that provides credit and liquidity services that lead to a financial accelerator-cum-fire-sales amplification mechanism. In response to fluctuations in world interest rates, inflation targeting dominates standard Taylor rules, but leads to increased volatility in credit and asset prices. The use of a countercyclical macroprudential instrument in addition to the policy rate improves welfare and has important implications for the conduct of monetary policy. “Leaning against the wind†or augmenting a standard Taylor rule with an argument on credit growth may not be an effective policy response.
    Keywords: Monetary policy;Macroprudential Policy;Capital flows;Business cycles;Financial sector;Economic models;Capital Inflows, Monetary Policy, Macroprudential Policy, Welfare Analysis.
    Date: 2014–02–12
  4. By: Thierry Tressel; Thierry Verdier
    Abstract: We consider a moral hazard economy in banks and production to study how incentives for risk taking are affected by the quality of supervision. We show that low interest rates may generate excessive risk taking. Because of a pecuniary externality, the market equilibrium may not be optimal and there is a need for prudential regulation. We show that the optimal capital ratio depends on the macro-financial cycle, and that, in presence of production externalities, it should be complemented by a constraint on asset allocation. We show that the political process tends to exacerbate excessive risk taking and credit cycles.
    Keywords: Bank supervision;Bank capital;Regulatory forbearance;Prudential bank regulations;Political economy;Moral hazard;Banking Regulation, Regulatory Forbearance, Political Economy.
    Date: 2014–05–28
  5. By: Andrew Swiston; Florencia Frantischek; Przemek Gajdeczka; Alexander Herman
    Abstract: This paper examines the financial strength of central banks in Central America and the Dominican Republic (CADR). Some central banks are working off the effects of intervention in distressed financial institutions during the 1990’s and early 2000’s. Their net income has improved since then owing to lower interest rates, a reduction in interest bearing debt, and recapitalization transfers. Claims on the government have fallen, but remain high and are typically reimbursed at below-market rates, and capital is negative when adjusting for this. Capital is sufficient to back a low inflation target given that the income position is supported by unremunerated reserve requirements. Capital is likely to increase over time, but only gradually, leaving countries vulnerable to macroeconomic risks. The capacity of CADR central banks to engage in macroeconomic stabilization would benefit from increased emphasis on low inflation as the primary objective of monetary policy and a stronger commitment by governments to recapitalization.
    Keywords: Central banks;Dominican Republic;Central America;Capital;Demand for money;Accounting;Asset management;central bank, central bank financial strength, money demand, recapitalization, Central America, Costa Rica, Dominican Republic, Guatemala, Honduras, Nicaragua
    Date: 2014–05–13
  6. By: Natan P. Epstein; Rafael Portillo
    Abstract: This paper analyzes the monetary policy framework in Kazakhstan. The authorities have been successful in containing inflation in the context of a managed exchange rate regime. Over the past two years, the central bank has taken steps to enhance its ability to regulate liquidity in the financial system. However, the current policy interest rate does not properly signal the stance of policy, reflected in a weak transmission from the policy rate to money market interest rates. With the use of a stylized model, the paper studies the macro determinants of money market interest rates under the current framework, and illustrates both the benefits and challenges of active interest rate policy. The model shows that limited use of instruments to steer short-term interest rates weakens the framework’s ability to counteract shocks. Finally, the paper explores the implications of varying degrees of exchange rate flexibility for interest rate policy and open market operations.
    Keywords: Monetary policy;Kazakhstan;Exchange rate regimes;Interest rates;Money markets;External shocks;Devaluation;Econometric models;Monetary Policy, Interest Rate, Money Market, Exchange Rate.
    Date: 2014–06–13
  7. By: F. Gulcin Ozkan; D. Filiz Unsal
    Abstract: We explore optimal monetary and macroprudential policy rules for a small open economy. Delegating 'lean against the wind' squarely to macroprudential policy provides a more robust policy mix to shock uncertainty—(i) if macroprudential measures exist, there are no significant welfare gains from monetary policy reacting to credit growth under a financial shock; and (ii) monetary responses to financial markets could generate bigger welfare losses than macroprudential responses under different shocks. The source of outstanding liabilities also plays a role in the choice of policy instrument— macroprudential policies are particularly effective for emerging markets where foreign borrowing is sizeable.
    Keywords: Macroprudential Policy;Monetary policy;Small open economies;Emerging markets;Entrepreneurship;External borrowing;Financial stability;Econometric models;Financial instability; monetary policy; macroprudential measures; emerging
    Date: 2014–06–24
  8. By: Natasha Xingyuan Che; Yoko Shinagawa
    Abstract: Better “financial soundness†of banks could help mitigate the volatility of financial cycles by reducing banks’ risk exposure. But trying to improve financial soundness in the midst of a downturn can do the opposite—further aggravating the contraction of credit. Consistent with this notion, the paper found that better initial scores in certain financial soundness indicators (FSIs) are associated with milder and shorter downturns; and improving FSIs during a downturn worsens the shrinkage of credit and amplifies the cycle. In this context, our results suggest that policy makers should be mindful about the timing of regulating changes in banks’ FSIs.
    Keywords: Financial soundness indicators;Banks;Risk management;Business cycles;Economic models;financial cycle, bank supervision, capital ratio, banking, banking system, capital adequacy, subsidiaries, inflation rate, foreign exchange exposure, capital base, liquid – asset, banking crises, var model, bank capital, capital requirement, capital position, banking systems, credit expansion, capital – asset, bank balance sheets, return on equity, foreign asset, domestic credit, capital flow, credit market, capital – asset ratio, return on assets, bank credit, banking supervisors, bank of canada, bank provisioning, government securities
    Date: 2014–01–27
  9. By: Andrew Berg; Rafael A Portillo; Luis-Felipe Zanna
    Abstract: We study the role of the exchange rate regime, reserve accumulation, and sterilization policies in the macroeconomics of aid surges. Absent sterilization, a peg allows for almost full aid absorption — an increase in the current account deficit net of aid—delivering the same effects as those of a flexible regime but with a necessary increase in inflation. Regardless of the regime, policies that limit absorption—and result in large accumulation of reserves—are welfare reducing: they help reduce the real appreciation (and inflation under the peg), but at the expense of reducing private consumption and investment, and therefore medium-term growth.
    Keywords: Exchange rate regimes;Aid flows;Africa;Foreign exchange;Reserves accumulation;Central banks;Monetary policy;Fiscal policy;Economic models;Reserve Accumulation Policies, Sterilization Policies, Transfer Problem., fixed exchange rate, fixed exchange rate regime, flexible exchange rate, flexible exchange rate regime, real exchange rate, exchange rate appreciation, exchange rates, real exchange rate appreciation, fixed exchange rate regimes, nominal exchange rate, flexible exchange rates, flexible exchange rate regimes, exchange sales, exchange rate commitment, foreign exchange sales, exchange rate policies, currency substitution, exchange rate peg, exchange reserves, fixed exchange rates, foreign exchange reserves, exchange rate policy, exchange rate target
    Date: 2014–01–30
  10. By: Jean-Bernard Chatelain (Centre d'Economie de la Sorbonne - Paris School of Economics); Kirsten Ralf (ESCE - International Business School)
    Abstract: This paper investigates the identification, the determinacy and the stability of ad hoc, "quasi-optimal" and optimal policy rules augmented with financial stability indicators (such as asset prices deviations from their fundamental values) and minimizing the volatility of the policy interest rates, when the central bank precommits to financial stability. Firstly, ad hoc and quasi-optimal rules parameters of financial stability indicators cannot be identified. For those rules, non zero policy rule parameters of financial stability indicators are observationally equivalent to rule parameters set to zero in another rule, so that they are unable to inform monetary policy. Secondly, under controllability conditions, optimal policy rules parameters of financial stability indicators can all be identified, along with a bounded solution stabilizing an unstable economy as in Woodford (2003), with determinacy of the initial conditions of non-predetermined variables.
    Keywords: Identification, financial stability, monetary policy, optimal policy under commitment, augmented Taylor rule.
    JEL: C61 C62 E43 E44 E47 E52 E58
    Date: 2014–04
  11. By: Laurence M. Ball
    Abstract: Many central banks target an inflation rate near two percent. This essay argues that policymakers would do better to target four percent inflation. A four percent target would ease the constraints on monetary policy arising from the zero bound on interest rates, with the result that economic downturns would be less severe. This benefit would come at minimal cost, because four percent inflation does not harm an economy significantly.
    Keywords: Inflation targeting;Inflation rates;Monetary policy;Central banks;Inflation, Monetary Policy, Inflation Target
    Date: 2014–06–09
  12. By: Shaun K. Roache
    Abstract: Inflation persistence is sometimes defined as the tendency for price shocks to push the inflation rate away from its steady state—including an inflation target—for a prolonged period. Persistence is important because it affects the output costs of lowering inflation back to the target, often described as the “sacrifice ratioâ€. In this paper I use inflation expectations to provide a comparison of inflation persistence in Brazil with a sample of inflation targeting (IT) countries. This approach suggests that inflation persistence increased in Brazil through early 2013, in contrast to many of its IT peers, mainly due to “upward†persistence. The 2013 rate hiking cycle may have contributed to some recent decline in persistence.
    Keywords: Inflation;Brazil;Inflation targeting;Monetary policy;Cross country analysis;Economic models;
    Date: 2014–04–04
  13. By: Ales Bulir; Jaromír Hurník; Katerina Smidkova
    Abstract: We offer a novel methodology for assessing the quality of inflation reports. In contrast to the existing literature, which mostly evaluates the formal quality of these reports, we evaluate their economic content by comparing inflation factors reported by the central banks with ex-post model-identified factors. Regarding the former, we use verbal analysis and coding of inflation reports to describe inflation factors communicated by central banks in real time. Regarding the latter, we use reduced-form, new Keynesian models and revised data to approximate the true inflation factors. Positive correlations indicate that the reported inflation factors were similar to the true, model-identified ones and hence mark high-quality inflation reports. Although central bank reports on average identify inflation factors correctly, the degree of forward-looking reporting varies across factors, time, and countries.
    Keywords: Central banks;Inflation targeting;Monetary policy;Transparency;Keynesian economics;Economic models;Inflation targeting, Kalman filter, monetary policy communication.
    Date: 2014–05–29
  14. By: Ewa Stanisławska (Narodowy Bank Polski)
    Abstract: The paper employs on individual bank data with aim to analyse interest rate pass-through from money market rates to banks’ deposits and lending rates. In the first step, the speed and completeness of interest rate adjustment is assessed. As the sample covers period prior to and after the outburst of the financial crisis, some comparisons of interest rate transmission process in these periods are made. In the second step, the influence of individual banks characteristics, like size, strength of deposit base, quality of credit portfolio, etc., on the features of interest rate transmission is examined. It seems that t heir impact i s not strong, as they affect rather the speed of adjustment than its scale in the long term.
    Keywords: interest rates pass-through, monetary policy transmission mechanism, interest rate channel
    JEL: E52 E43 G21
    Date: 2014
  15. By: Tomasz Lyziak (Narodowy Bank Polski)
    Abstract: This paper presents survey-based direct measures of inflation expectations of consumers, enterprises and financial sector analysts in Poland. It then goes on to provide the results of testing those features of inflation expectations that seem the most important from the point of view of monetary policy and its transmission mechanism. The study is the revised version of the NBP Working Paper no. 115 [ Lyziak (2012)]. It uses new measures of consumer inflation expectations and covers the updated sample (2001- 2013). Characteristics of inflation expectations in Poland are diversified across the analysed groups of economic agents. Inflation expectations of financial sector analysts and enterprises outperform those of consumers in terms of their accuracy and information content, although consumer inflation expectations are also to some extent forward-looking.
    Date: 2014
  16. By: Manmohan Singh
    Abstract: This paper focuses on how changes in financial plumbing of the markets may impact the monetary policy options as central banks contemplate lift off from zero lower bound (ZLB). Under the proposed regulations, banks will face leverage ratio constraints. As a result of quantitative easing (QE), banks want balance sheet “space†for financial intermediation/ non-depository activities. At the same time, regulatory changes are boosting demand for high quality liquid assets. The paper also discusses the role of repo markets and the importance of collateral velocity and the need to avoid wedges between repo and monetary policy rates when leaving ZLB.
    Keywords: Central banks;Repurchase agreements;Securities markets;Balance sheets;Reserves;Financial intermediation;United States;Monetary policy;Financial stability;quantitative easing; collateral velocity; Federal Reserve; monetary policy; repo rate
    Date: 2014–06–20
  17. By: Issing, Otmar
    Abstract: In a contribution prepared for the Athens Symposium on 'Banking Union, Monetary Policy and Economic Growth', Otmar Issing describes forward guidance by central banks as the culmination of the idea of guiding expectations by pure communication. In practice, he argues, forward guidance has proved a misguided idea. What is presented as state of the art monetary policy is an example of pretence of knowledge. Forward guidance tries to give the impression of a kind of rule-based monetary policy. De facto, however, it is an overambitious discretionary approach which, to be successful, would need much more (or rather better) information than is currently available. In Issing's view, communication must be clear and honest about the limits of monetary policy in a world of uncertainty. --
    Keywords: central bank communication,monetary policy,forward guidance
    Date: 2014
  18. By: Clemens J. M. Kool Author-Name-First Clemens J. M. (Utrecht University); Daniel L. Thornton Author-Name-First Daniel L. (Federal Reserve Bank of St. Louis)
    Abstract: This paper investigates the effectiveness of forward guidance for the central banks of four countries: New Zealand, Norway, Sweden, and the United States. We test whether forward guidance improved market participantsÕ ability to forecast future short-term and long-term rates. We find some evidence that forward guidance improved market participantsÕ ability to forecast short-term rates over relatively short forecast horizons in New Zealand, Norway and Sweden, but not so for the United States. Most effects are small, often insignificant, and vary across benchmarks. In addition, forward guidance induces convergence of survey forecasts for New Zealand, but less so for the other countries, in particular the United States.
    Keywords: monetary policy, central bank transparency, interest rates, term structure, forecasting.
    JEL: E52 E43 E47
    Date: 2014
  19. By: Jaromir Benes; Michael Kumhof; Douglas Laxton
    Abstract: This paper presents the theoretical structure of MAPMOD, a new IMF model designed to study vulnerabilities associated with excessive credit expansions, and to support macroprudential policy analysis. In MAPMOD, bank loans create purchasing power that facilitates adjustments in the real economy. But excessively large and risky loans can impair balance sheets and sow the seeds of a financial crisis. Banks respond to losses through higher spreads and rapid credit cutbacks, with adverse effects for the real economy. These features allow the model to capture the basic facts of financial cycles. A companion paper studies the simulation properties of MAPMOD.
    Keywords: Financial crisis;Credit expansion;Bank credit;Credit risk;Banks;Loans;Macroprudential Policy;Monetary policy;Economic models;lending boom, credit crunch, financial crisis, financialy cycle, asset price bubble, macroprudential policy
    Date: 2014–04–04
  20. By: Haar, Brigitte
    Abstract: This is a chapter for a forthcoming volume Oxford Handbook of Financial Regulation (Oxford University Press 2014) (eds. Eilís Ferran, Niamh Moloney, and Jennifer Payne). It provides an overview of EU financial regulation from the first banking directive up until its most recent developments in the aftermath of the financial crisis, focusing on the multiple layers of multi-level governance and their characteristic conceptual difficulties. Therefore the paper discusses the need to accommodate cross-border capital flows following from the EU internal market and the resulting regulatory strategies. This includes a brief overview of the principle of home country control and the ensuing Financial Services Action Plan. Dealing with the accommodation of cross-border capital flows and their regulation necessarily require an orchestration of the underlying supervisory structures, which is therefore also discussed. In the aftermath of the financial crisis of 2007-09 an additional aspect of necessary orchestration has emerged, that is the need to control systemic risk. Specific attention is paid to microprudential supervision by the newly established European Supervisory Authorities and macroprudential supervision in the European Banking Union, the latter's underlying drivers and the accompanying Single Supervisory Mechanism, including the SSM's institutional framework as well as the consideration of its rationales and the Single Resolution Mechanism closely linked to it. --
    Keywords: Financial regulation,systemic risk,microprudential supervision,European Banking Authority,macroprudential supervision,European Systemic Risk Board,European Banking Union,Single Supervisory Mechanism
    JEL: G21 G28 G38 K22 K23
    Date: 2014
  21. By: Hasan, Zubair Hasan
    Abstract: The financial turmoil that the 2007 subprime debacle of the US set into motion has raised a welter of puzzling questions for the policy makers across the world. The position seems all the more confusing in the Muslim world where the fast expanding Islamic finance operates in competition with the conventional in a dual setting. The turmoil has led many to blaming the private lure for the colossal failure of financial institutions. In contrast, others counter argue to put public policy in the dock under the exalted banner of ‘regime uncertainty’. They blames the aggravation of the trouble on the uncalled for government intervention in financial markets. Interestingly, few draw attention to moral crimes committed on either side of the fence among the causative factors. This paper seeks to investigate if the monetary policies the Central Banks follow - now including the Basel capital adequacy norms as well - would suit or suffice Islamic banking institutions competing with the conventional in a dual financial framework? In this context, it questions the claim that risk-sharing is or can alone be the basis for Islamic finance.
    Keywords: Keywords: Monetary policy, Dual financial system, Profit sharing ratio, Regime uncertainty
    JEL: E3 E5 E51 E58
    Date: 2014–07–07
  22. By: Olmos, Lorena; Sanso Frago, Marcos
    Abstract: Given the unobservable quality of the natural rate of interest, the consequences of central banks using an incorrect value in the monetary policy rule are analyzed in a New Keynesian DSGE model with endogenous growth, financial frictions and trend inflation. Our results confirm the financial structure plays a key role in the determination of the natural rate of interest and show that the mismeasurements affect the long-run growth rate by modifying the actual inflation rate trend, which is different from the target. Finally, we develop a mechanism to monitor the accuracy of the natural rate estimate.
    Keywords: natural rate of interest, New Keynesian DSGE models, endogenous growth, �financial frictions, trend inflation
    JEL: E43 E44 E58 O40
    Date: 2014
  23. By: Jeanne Gobat; Mamoru Yanase; Joseph Maloney
    Abstract: As part of Basel III reforms, the NSFR is a new prudential liquidity rule aimed at limiting excess maturity transformation risk in the banking sector and promoting funding stability. The revised package has been issued for public consultation with a plan of making the rule binding in 2018. This paper complements earlier quantitative impact studies by discussing the potential impact of introducing the NSFR based on empirical analysis of end-2012 financial data for over 2000 banks covering 128 countries. The calculations show that a sizeable percentage of the banks in most countries would meet the minimum NSFR prudential requirement at end-2012, and, further, that larger banks tend to be more vulnerable to the introduction of the NSFR. Additionally, by comparing the NSFR to other structural funding mismatch indicators, we find that the NSFR is a relatively consistent regulatory measure for capturing banks’ funding risk. Finally, the paper discusses key policy issues for consideration in implementing the NSFR.
    Keywords: Banking sector;Liquidity;Financial risk;Risk management;Banking, Bank Regulation, Financing, Firm Size, Policy
    Date: 2014–06–12
  24. By: Atish R. Ghosh; Jonathan David Ostry; Mahvash Saeed Qureshi
    Abstract: This paper revisits the bipolar prescription for exchange rate regime choice and asks two questions: are the poles of hard pegs and pure floats still safer than the middle? And where to draw the line between safe floats and risky intermediate regimes? Our findings, based on a sample of 50 EMEs over 1980-2011, show that macroeconomic and financial vulnerabilities are significantly greater under less flexible intermediate regimes—including hard pegs—as compared to floats. While not especially susceptible to banking or currency crises, hard pegs are significantly more prone to growth collapses, suggesting that the security of the hard end of the prescription is largely illusory. Intermediate regimes as a class are the most susceptible to crises, but “managed floatsâ€â€”a subclass within such regimes—behave much more like pure floats, with significantly lower risks and fewer crises. “Managed floating,†however, is a nebulous concept; a characterization of more crisis prone regimes suggests no simple dividing line between safe floats and risky intermediate regimes.
    Keywords: Exchange rate regimes;Emerging markets;Currency pegs;Floating exchange rates;Economic models;Time series;crisis, vulnerabilities, real exchange rate, flexible exchange rate, intermediate exchange rate, exchange rate flexibility, intermediate exchange rate regimes, flexible exchange rate regimes, nominal exchange rate, exchange rate overvaluation, real exchange rate overvaluation, flexible exchange rates, exchange rate arrangements, current account balance, overvalued exchange rates, effective exchange rate, exchange rate regime classification, exchange rate guarantee, exchange rate volatility, fixed exchange rates, currency basket, nominal effective exchange rate, real effective exchange rate, history of exchange rate, exchange rate management, alternative exchange rate regimes, currency boards, currency appreciation, exchange rate movements, exchange rate regime classifications, real exchange rate misalignment, real exchange rates, de facto exchange rate regime, exchange reserves, foreign exchange, exchange rate parity, foreign exchange reserves, exchange rate systems
    Date: 2014–01–24
  25. By: Jean-Louis Combes; Xavier Debrun; Alexandru Minea; Rene Tapsoba
    Abstract: The paper examines the joint impact of inflation targeting (IT) and fiscal rules (FR) on fiscal behavior and inflation in a broad panel of advanced and developing economies over the period 1990-2009. The main contribution of the paper is to show that, as suggested by the theoretical literature, interactions between FR and IT matter a great deal for policy outcomes. Specifically, the combination of FR and IT appears to deliver more disciplined macroeconomic policies than each of these institutions in isolation. In addition, the sequencing of the monetary and fiscal reforms plays a role: adopting FR before IT delivers stronger results than the reverse sequence.
    Keywords: Inflation targeting;Fiscal rules;Fiscal policy;Macroprudential Policy;Monetary policy;Economic models;Inflation targeting, fiscal rules, institutional reform sequencing.
    Date: 2014–05–28
  26. By: Prachi Mishra; Kenji Moriyama; Papa M'B. P. N'Diaye; Lam Nguyen
    Abstract: This paper analyzes market reactions to the 2013–14 Fed announcements relating to tapering of asset purchases and their relationship to macroeconomic fundamentals and country economic and financial structures. The study uses daily data on exchange rates, government bond yields, and stock prices for 21 emerging markets. It finds evidence of markets differentiating across countries around volatile episodes. Countries with stronger macroeconomic fundamentals, deeper financial markets, and a tighter macroprudential policy stance in the run-up to the tapering announcements experienced smaller currency depreciations and smaller increases in government bond yields. At the same time, there was less differentiation in the behavior of stock prices based on fundamentals.
    Keywords: Monetary policy;United States;Unconventional monetary policy instruments;Announcements;Emerging markets;Financial markets;Bond yields;Stock prices;Emerging markets, tapering, Fed policy announcements, vulnerability.
    Date: 2014–06–17
  27. By: Kyuil Chung; Jong-Eun Lee; Elena Loukoianova; Hail Park; Hyun Song Shin
    Abstract: This paper examines how the financial activities of non-financial corporates (NFCs) in international markets potentially affects domestic monetary aggregates and financial conditions. Monetary aggregates reflect, in part, the activities of NFCs, who channel capital market financing into the domestic banking system, thereby influencing funding conditions and credit availability. Periods of capital inflows are also those when the domestic currency is appreciating, and such periods of rapid exchange rate appreciation coincide with increases in the central bank’s foreign exchange reserves, increasing the stock of narrow money. The paper examines economic significance of cross-country panel data on monetary aggregates and other measures of non-core bank liabilities. Non-core liabilities that reflect the activities of NFCs reflect broad credit conditions and predict global trade and growth.
    Keywords: Monetary aggregates;Corporate sector;International capital markets;Capital inflows;Liquidity;Exchange rate appreciation;Banking sector;capital flows, debt securities, global capital markets, open capital markets, index options, hedging, securities markets, international capital flows, corporate bonds, capital market financing, corporate bond market, hoarding, subsidiaries, border capital flows, net capital, real effective exchange rate
    Date: 2014–01–24
  28. By: Brenda González-Hermosillo; Christian A Johnson
    Abstract: This paper proposes a stochastic volatility model to measure sovereign financial distress. It examines how key European sovereign credit default swap (CDS) spreads affect each other; specifically, the paper analyses the volatility structure of Germany, Greece, Ireland, Italy, Spain and Portugal. The stability of Germany is a close proxy for the resilience of the euro area as markets use Germany’s sovereign CDS as a hedge for systemic risk. Although most of the CDS changes for Germany during 2009–12 were due to idiosyncratic factors, market developments in Italy and Spain contributed significantly, likely due to their relative importance in the region. Changes in Greece’s sovereign CDS had no significant effect on Germany’s sovereign CDS despite initial widespread concerns about such linkages. Spain and Italy show a notable co-dependence in explaining each other’s volatility while Germany also plays an important role. It is found that extreme bad news led to persistent and nearly permanent effects on the stochastic volatility of European sovereign CDS spreads.
    Keywords: Financial risk;Italy;Spain;Greece;Euro Area;Financial crisis;Spillovers;Global Financial Crisis 2008-2009;Economic models;Systemic Risk, Financial Crises, Volatility, Contagion, Credit Default Swaps
    Date: 2014–05–02
  29. By: Goran Amidžić; Alexander Massara; André Mialou
    Abstract: This paper leverages the IMF’s Financial Access Survey (FAS) database to construct a new composite index of financial inclusion. The topic of financial inclusion has gathered significant attention in recent years. Various initiatives have been undertaken by central banks both in advanced and developing countries to promote financial inclusion. The issue has also attracted increasing interest from the international community with the G-20, IMF, and World Bank Group assuming an active role in developing and collecting financial inclusion data and promoting best practices to improve financial inclusion. There is general recognition among policy makers that financial inclusion plays a significant role in sustaining employment, economic growth, and financial stability. Nonetheless, the issue of its robust measurement is still outstanding. The new composite index uses factor analysis to derive a weighting methodology whose absence has been the most persistent of the criticisms of previous indices. Countries are then ranked based on the new composite index, providing an additional analytical tool which could be used for surveillance and policy purposes on a regular basis.
    Keywords: Financial sector;Access to capital markets;Financial institutions;Banks;Data collection;Data analysis;Financial inclusion, access and usage of financial services, factor analysis, index
    Date: 2014–02–21
  30. By: Bernardin Akitoby; Takuji Komatsuzaki; Ariel J Binder
    Abstract: This paper investigates the impact of low or high inflation on the public debt-to-GDP ratio in the G-7 countries. Our simulations suggest that if inflation were to fall to zero for five years, the average net debt-to-GDP ratio would increase by about 5 percentage points over the next five years. In contrast, raising inflation to 6 percent for the next five years would reduce the average net debt-to-GDP ratio by about 11 percentage points under the full Fisher effect and about 14 percentage points under the partial Fisher effect. Thus higher inflation could help reduce the public debt-to-GDP ratio somewhat in advanced economies. However, it could hardly solve the debt problem on its own and would raise significant challenges and risks. First of all, it may be difficult to create higher inflation, as evidenced by Japan’s experience in the last few decades. In addition, un-anchoring of inflation expectations could increase long-term real interest rates, distort resource allocation, reduce economic growth, and hurt the lower–income households.
    Keywords: Inflation;Public debt;Developed countries;Group of seven;Econometric models;Inflation, debt drisis, G7, public debt, soverign debt
    Date: 2014–06–10
  31. By: Philipp Wegmueller
    Abstract: I contribute to the resurging debate on the reform of the international monetary system by asking: How does the size of the public sector under different exchange rate regimes affect macroeconomic stability and welfare? In response to a meeting of the Bretton Woods Commission in 1993, renowned economist Anna Schwartz (2000) claimed providently that the increasing size of the public sector impedes the viability of an exchange rate regime with a fixed rule for convertibility. I study her line of reasoning using a new Keynesian small open economy framework. One important feature of the paper is to bridge the literature on the choice of the exchange rate regime with the literature on the effects of government size for macroeconomic stability. The main findings are threefold: First, output is stabilized by the share of the public sector and destabilized by the tax rate, irrespective of the exchange rate regime in place. Second, inflation is destabilized by the level of income taxes under flexible prices but stabilized under sticky prices. Finally, irrespective of the model specification, an exchange rate peg exhibits the largest macroeconomic volatility and highest welfare losses.
    Keywords: Exchange Rate Regimes; Government Size; Welfare; Macroeconomic stability
    JEL: E32 E52 E63 F33
    Date: 2014–07
  32. By: Villarreal, Francisco G.
    Abstract: Despite growing interest regarding the distributive impact of macroeconomic policies, the relationship between monetary policy and inequality has received relatively little attention in the literature. This is partly explained by the fact that the workhorse model used for monetary policy analysis summarises the demand-side of the economy by means of a representative agent, whose welfare is the normative criterion of optimal policy. However, alternative formulations using incomplete market models which feature heterogeneous agents, indicate that monetary policy does have an effect on the distribution of income, consumption and wealth, which potentially has implications for the design and conduct of optimal policy. The document empirically investigates the nature of the relationship between monetary policy and household income inequality in Mexico. The ultimate purpose is to uncover certain regularities which characterise the relationship, which can eventually serve as stylised facts for the design of theoretical models. The response of household's income inequality, and its components, to monetary policy shocks indicate that unanticipated increases in the nominal interest rate are correlated with a reduction of household income inequality in the short run, and that the effect dissipates over a two-year horizon. The results are robust to the particular measure of inequality used, as well as the procedure used to identify the policy shocks.
    Keywords: Monetary Policy, Income Distribution, Small Open Economy
    JEL: C1 D3 E5
    Date: 2014–06–30
  33. By: Nair, Manju S
    Abstract: India has exhibited high variability in inflation during the last eight years owing to both internal and external factors. The Global Financial Meltdown, recurrent increase in global oil prices, wage employment programmes, widening current account deficits etc resulted in fluctuations in inflation. These factors have a direct influence on variables like output, money supply, exchange rate which in turn affect inflation. In this context, the study employs a Cointegrated Vector Auto Regression framework to analyse inflation dynamics in India. The determinants identified to affect inflation in India include broad money supply, exchange rate and output, which is substantiated by the existing theories of inflation. There exists a cointegrating relation between inflation and its determinants and in the short run inflation adjusts to past changes and policy fundamentals as inferred from the Error Correction Model. The Impulse Response Function traces out a stable relationship of inflation with its identified determinants.
    Keywords: Inflation dynamics, co-integration, impulse response
    JEL: E31
    Date: 2014–07–05
  34. By: Heiko Hesse; Ferhan Salman; Christian Schmieder
    Abstract: One of the challenges of financial stability analysis and bank stress testing is how to establish scenarios with meaningful macro-financial linkages, i.e., taking into account spillover effects and other forms of contagion. We come up with an approach to simulate the potential impact of spillover effects based on the “traditional†design of macro-economic stress tests. Specifically, we examine spillover effects observed during the financial crisis and simulate their impact on banks’ liquidity and capital positions. The outcome suggests that spillover effects have a highly non-linear impact on bank soundness, both in terms of liquidity and solvency.
    Keywords: Spillovers;Europe;Financial contagion;Financial systems;Stress testing;Regression analysis;Econometric models;Macro-financial linkages, Stress testing, Scenarios, Spillover, Contagion
    Date: 2014–06–12
  35. By: Stijn Claessens; Laura E. Kodres
    Abstract: We identify current challenges for creating stable, yet efficient financial systems using lessons from recent and past crises. Reforms need to start from three tenets: adopting a system-wide perspective explicitly aimed at addressing market failures; understanding and incorporating into regulations agents’ incentives so as to align them better with societies’ goals; and acknowledging that risks of crises will always remain, in part due to (unknown) unknowns – be they tipping points, fault lines, or spillovers. Corresponding to these three tenets, specific areas for further reforms are identified. Policy makers need to resist, however, fine-tuning regulations: a “do not harm†approach is often preferable. And as risks will remain, crisis management needs to be made an integral part of system design, not relegated to improvisation after the fact.
    Keywords: Financial systems;Fiscal risk;Financial crisis;Fiscal policy;Fiscal reforms;Macroprudential Policy;Monetary policy;Risk management;Financial crises, regulation, systemic risks, macroprudential policies
    Date: 2014–03–14
  36. By: Lim, Se Hee (Korea Center for International Finance); Reyes, Noel G. (Asian Development Bank)
    Abstract: This paper examines the issues surrounding the implementation of global regulatory reforms—spearheaded by the G20 and mainly under the aegis of the Financial Stability Board (FSB)—in Brunei Darussalam, Cambodia, the Lao People’s Democratic Republic (Lao PDR), Myanmar, and Viet Nam (BCLMV). These countries are the five newest members of the Association of Southeast Asian Nations (ASEAN). As such, there has been little consideration of the impact of global regulatory reforms on these countries. This paper contributes to the literature by providing an analysis of the capacity of the BCLMV countries to implement necessary financial regulatory reforms. Further, this analysis supplements ongoing efforts to establish the building blocks for the ASEAN Economic Community (AEC), which is scheduled to be implemented by 2015. Toward this end, the paper addresses six key development issues in the CLMV countries: (i) financial regulatory and supervisory systems, (ii) compliance with capital adequacy and liquidity management guidelines under the Basel reforms, (iii) macroprudential surveillance systems, (iv) transparency and disclosure, and (v) capital flow management.
    Keywords: financial regulatory systems; capital adequacy and liquidity management; Basel reforms; macroprudential surveillance; transparency and disclosure; capital flow; noncore liabilities; BCLMV and ASEAN-5 countries; ASEAN Economic Community
    JEL: G28 K22 O16
    Date: 2014–05–01
  37. By: Michael D. Bordo
    Abstract: An analogy has been made between the collapse of the Bretton Woods system in 1971 and the recent Eurozone crisis. The build up of TARGET balances in the Eurosystem of Central Banks after 2007 with the GIPS (deficit countries having large liabilities) and Germany (a surplus country) with large claims is seen as similar to the rising and persistent balance of payments deficits and declining gold reserves by the United States as center country of the BWS gold dollar standard in the 1960s. This paper argues that a better Bretton Woods analogy is between the UK which ran persistent balance of payments deficits reflecting low productivity growth and overly expansionary financial policies (an analogy to the GIPS) countries with West Germany which ran persistent balance of payments surpluses reflecting high productivity and conservative financial policies (analogous to Germany today). However Bretton Woods is very different from the Eurozone in many dimensions. An even better analogy than BWS is a comparison of the clearing mechanism in the U.S.—The Gold Settlement account— with the Target payments mechanism for the Eurozone. In the early 1930s massive gold flows from the interior, hard hit by banking panics, to New York City were similar to the payments imbalances within the Eurozone in the recent crisis. The Federal Reserve did little to accommodate the demands for liquidity leading to a collapse of the payments system in March 1933. By contrast the build up of TARGET reflected full accommodation of the liquidity demands of the member states. TARGET represented an institutional innovation that prevented a repeat of the 1930s payments crisis.
    JEL: N1
    Date: 2014–06
  38. By: Marco Airaudo (School of Economics, LeBow College of Business, Drexel University); Salvatore Nisticò (Dipartimento di Scienze Sociali ed Economiche, Sapienza University of Rome); Luis-Felipe Zanna (Research Department, International Monetary Fund, Washington (DC))
    Abstract: We explore the stability properties of interest rate rules granting an explicit response to stock prices in a New-Keynesian DSGE model populated by Blanchard-Yaari non-Ricardian households. The constant turnover between long-time stock holders and asset-poor newcomers generates a financial wealth channel where the wedge between current and expected future aggregate consumption is affected by the market value of financial wealth, making stock prices non-redundant for the business cycle. We find that if the financial wealth channel is sufficiently strong responding to stock prices enlarges the policy space for which the rational expectations equilibrium is both determinate and learnable (in the E-stability sense of Evans and Honkapohja, 2001). In particular, the Taylor principle ceases to be necessary, and also mildly passive policy responses to in ation lead to determinacy and E-stability. Our results appear to be more prominent in economies characterized by a lower elasticity of substitution across differentiated products and/or more rigid labor markets.
    Keywords: Learning; Expectational Stability; Interest Rate Rules; Multiple Equilibria; Determinacy, Stock Prices
    JEL: E4 E5
    Date: 2014–07
  39. By: E. Jenkner; Zhongjin Lu
    Abstract: Studies have shown that markets may underprice sub-national governments’ risk on the implicit assumption that these entities would be bailed out by their central government in case of financial difficulties. However, the question of whether sovereigns pay a premium on their own borrowing as a result of (implicitly or explicitly) guaranteeing sub-entities’ debt has been explored only little. We use an event study approach with separate equations for two levels of government to test for a simultaneous increase in sovereign risk premia and decrease in sub-national risk premia—or a de facto transfer of risk from the latter to the former—on the day a sovereign bailout is announced. Using daily financial market data for Spain and its autonomous regions from January 2010 to June 2013, we find support for our risk transfer hypothesis. We estimate that the Spanish sovereign’s spread may have increased by around 70 basis points as a result of the central government’s support for fiscally distressed comunidades autónomas.
    Keywords: Credit risk;Borrowing;Risk premium;Spain;Fiscal policy;sub-national public finances, sovereign risk premium, bailout, interest rates, bond, bond yields, bonds, financial sector, bond market, moral hazard, government bond, individual bond, hedging, financial market, bond spreads, liquidity support, bond prices, national bond, sovereign bond, hedges, rate bonds, sovereign bonds, national bond markets, credit derivatives, term bonds, interest rate risk, sub-national bond market, individual bonds, national bonds, municipal bond market, financial stability, government bond yields, coupon bonds, bond issuance, sovereign bond market, sub-national bonds
    Date: 2014–01–30
  40. By: Phakawa Jeasakul; Cheng Hoon Lim; Erik J. Lundbäck
    Abstract: Asia proved to be remarkably resilient in the face of the global financial crisis, but why was its output performance stronger than that of other regions? The paper shows that better initial conditions—in the form of lower external and financial vulnerabilities—contributed significantly to Asia’s resilience. Key pre-crisis factors included moderate credit expansion, reliance on deposit funding, enhanced bank asset quality, reduced external financing, and improved current accounts. These improvements reflected the lessons from the Asian financial crisis in the late 1990s, which helped reshape both public policies and private sector behavior. For example, several countries stepped up their use of macroprudential policies, well before they were recognized as an essential component of the financial stability toolkit. They also overhauled financial regulations and strengthened oversight of financial institutions, which helped reduce risk-taking by households and firms before the global financial crisis. Looking ahead, Asia is in the process of adjusting to more volatile external conditions and higher risk premiums. By drawing the right lessons from its pre-crisis experiences, Asia’s economies will be better equipped to address new risks associated with increased cross-border capital flows and greater integration with the rest of the world.
    Keywords: Economic growth;Asia;Global Financial Crisis 2008-2009;Credit expansion;Debt reduction;Macroprudential Policy;Monetary policy;Fiscal policy;Financial systems;Financial crisis;Global financial crisis, resilience, financial and external vulnerabilities
    Date: 2014–02–26
  41. By: Xavier De Scheemaekere; Kim Oosterlinck; Ariane Szafarz
    Abstract: Economists have been blamed for their inability to forecast and address crises. This paper attributes this inability to intertwined factors: the lack of a coherent definition of crises, the reference class problem, the lack of imagination regarding the nature of future crises, and sample selection biases. Specifically, economists tend to adapt their views on crises to recent episodes, and omit averted and potential crises. Threshold-based definitions of crises run the risk of being ad hoc. Using historical examples, this paper highlights some epistemological shortcomings of the current approach.
    Keywords: Economic Crisis; Single-Case Probability; Epistemology; Economic History
    JEL: B40 G00 N00
    Date: 2014–06–23
  42. By: Heise, Arne
    Abstract: It will be argued that it is not of fundamental importance for growth and employment whether the EU clings to the Euro or allows for a dissolution of the Eurozone and a reemergence of national currencies but how multi-level macroeconomic coordination of different policy areas and nation-states will be achieved. Given that this insight is based on an alternative economic reasoning which is (still) not the common view of most political and economic actors relevant in the EU, it will be analysed under which conditions it would be recommendable to maintain the Euro or to reestablish national currencies. --
    Keywords: european integration,neo-functionalism,neo-realism
    JEL: F15 P16
    Date: 2014
  43. By: Slim Chaouachi; Zied Ftiti; Frédèric Teulon
    Abstract: The aim of this work is to propose a new sequential strategy-three steps testing procedure- based on recently introduced econometric techniques, in order to assess the meanreverting properties of the real exchange rate and to check whether real exchange r
    Keywords: Real Exchange Rate, Long Memory, Structural Breaks, Spurious, and Tunisia.
    JEL: C22 F31
    Date: 2014–06–23

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