nep-cba New Economics Papers
on Central Banking
Issue of 2014‒07‒21
eighteen papers chosen by
Maria Semenova
Higher School of Economics

  1. An Alternative Model to Basel Regulation By Aboura, Sofiane; Lépinette-Denis, Emmanuel
  2. Stability and Identification with Optimal Macroprudential Policy Rules By Jean-Bernard Chatelain; Kirsten Ralf
  3. Monetary policy and real exchange rate dynamics in sticky-price models By Carvalho, Carlos; Nechio, Fernanda
  4. Leaning Against Windy Bank Lending By Giovanni Melina; Stefania Villa
  5. The Eurosystem, the banking sector and the money market By Paul Mercier
  6. Global liquidity trap By Yuki Teranishi; Nao Sudo; Tomoyuki Nakajima; Ippei Fujiwara
  7. Efficient Financial Crises By Ariel Zetlin-Jones
  8. International spillovers from US forward guidance to equity markets By Richhild Moessner
  9. Banking Union: Time Is Not On Our Side By Adrien Béranger; Jézabel Couppey Soubeyran; Jézabel Laurence Scialom
  10. The Yield Curve Information Under Unconventional Monetary Policies By Damián Romero; Luis Ceballos
  11. Is There a Stable Relationship between Unemployment and Future Inflation? Evidence from U.S. Cities By Fitzgerald, Terry J.; Nicolini, Juan Pablo
  12. Transparency and Deliberation within the FOMC: a Computational Linguistics Approach By Stephen Hansen; Michael McMahon; Andrea Prat
  13. Global Finance Brief: Monetary Policy Shocks from the EU and US: Implications for Sub-Sharan Africa By Jeremy Kronick
  14. The Changing Nature of Real Exchange Rate Fluctuations. New Evidence for Inflation-Targeting Countries By Rodrigo Caputo; Gustavo Leyva; Michael Pedersen
  15. Deposit Insurance Database By Asli Demirgüç-Kunt; Edward J. Kane; Luc Laeven
  16. Tests of Policy Ineffectiveness in Macroeconometrics By Hashem Pesaran; Ron Smith
  17. Privatisation of Banks in Mexico and the Tequila Crisis By Shanti Chakravarty; Jonathan Williams
  18. Políticas Monetaria y Macro-Prudencial para el Manejo de Flujos de Capital By Jorge Roldós

  1. By: Aboura, Sofiane; Lépinette-Denis, Emmanuel
    Abstract: The post-crisis financial reforms address the need for systemic regulation, focused not only on individual banks but also on the whole financial system. The regulator principal objective is to set banks' capital requirements equal to international minimum standards in order to mimimise systemic risk. Indeed, Basel agreement is designed to guide a judgement about minimum universal levels of capital and remains mainly microprudential in its focus rather than being macroprudential. An alternative model to Basel framework is derived where systemic risk is taken into account in each bank's dynamic. This might be a new departure for prudential policy. It allows for the regulator to compute capital and risk requirements for controlling systemic risk. Moreover, bank regulation is considered in a two-scale level, either at the bank level or at the system-wide level. We test the adequacy of the model on a data set containing 19 banks of 5 major countries from 2005 to 2012. We compute the capital ratio threshold per year for each bank and each country and we rank them according to their level of fragility. Our results suggest to consider an alternative measure of systemic risk that requires minimal capital ratios that are bank-specic and time-varying.
    Keywords: Systemic risk; Bank Regulation; Basel Accords;
    JEL: E44 E58 G01 G21 G28
    Date: 2014–05
  2. By: Jean-Bernard Chatelain (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Kirsten Ralf (Ecole Supérieure du Commerce Extérieur - ESCE)
    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
    Date: 2014–04
  3. By: Carvalho, Carlos (Departamento de Economia, Pontifícia Universidade Católica do Rio de Janeiro); Nechio, Fernanda (Federal Reserve Bank of San Francisco)
    Abstract: We study how real exchange rate dynamics are affected by monetary policy in dynamic, stochastic, general equilibrium, sticky-price models. Our analytical and quantitative results show that the source of interest rate persistence – policy inertia or persistent policy shocks – is key. When the monetary policy rule has a strong interest rate smoothing component, these models fail to generate high real exchange rate persistence in response to monetary shocks, as policy inertia hampers their ability to generate a hump-shaped response to such shocks. Moreover, in the presence of persistent monetary shocks, increasing policy inertia may decrease real exchange rate persistence.
    Keywords: real exchange rates; monetary policy; interest rate smoothing; PPP puzzle; persistence
    JEL: E0 F3 F41
    Date: 2014–07
  4. By: Giovanni Melina (City University London); Stefania Villa (University of Foggia)
    Abstract: Using a dynamic stochastic general equilibrium model with banking, this paper first provides evidence that, during the Great Moderation, monetary policy leaned against the wind blowing from the loan market in the US. It then shows that the extent to which this occurred delivers a small welfare loss relative to the optimised simple interest-rate rule that features only a response to inflation. The source of business cycle fluctuations is crucial for the optimality of a leaning-against-the-wind policy. In fact, the pro-cyclical nature of lending creates a trade-off between inflation and financial stabilisation when supply shocks are prevalent.
    Keywords: lending relationships, augmented Taylor rule, Bayesian estimation, optimal policy.
    JEL: E32 E44 E52
    Date: 2014–07
  5. By: Paul Mercier
    Abstract: Since October 2008, the credit granted by the Eurosystem to the Euro zone banking sector increased in a substantial way, as a result of the implementation of nonconventional measures, in particular the fact that the Eurosystem left to the banks the faculty to determine themselves the quantity of credit that they wished to obtain. This paper first recalls the foundations of the interbank money market and then analyses the evolution of the ?net liquidity needs? of the banking sector. It provided a clarification of the relation between the Eurosystem, the euro zone banking sector and the money market. In particular, it develops arguments against the myth of ?idle money parked with the Eurosystem?.
    Keywords: monetary policy implementation, central bank, central bank?s balance sheet, money market, liquidity deficit, excess liquidity
    Date: 2014–06
  6. By: Yuki Teranishi; Nao Sudo; Tomoyuki Nakajima; Ippei Fujiwara
    Abstract: How should monetary policy respond to a global liquidity trap, where the two countries may fall into a liquidity trap simultaneously? Using a two-country New Open Economy Macroeconomics model, we first characterise optimal monetary policy, and show that the optimal rate of inflation in one country is affected by whether or not the other country is in a liquidity trap. We next examine how well the optimal monetary policy is approximated by relatively simple monetary policy rules. The interest-rate rule targeting the producer price index performs very well in this respect.
    JEL: E52 E58 F41
    Date: 2013
  7. By: Ariel Zetlin-Jones
    Abstract: We develop a theory of systemic banking crises. For a single bank, we obtain conditions under which a bank optimally chooses a fragile capital structure that is subject to events which resemble bank runs. When depositors have limited ability to commit to long-term lending arrangements, they optimally finance the bank using short-term debt. With multiple banks, the same limited commitment friction leads depositors to invest via short-term debt in a financial system in which all banks make loans with correlated, volatile returns. Such a system is strictly preferred by depositors and bankers over one in which banks pursue independent, less volatile returns. The optimal financial system features occasional, costly systemic crises in which all banks are subject to ex post inefficient liquidations. In this sense, financial crises are efficient.
  8. By: Richhild Moessner
    Abstract: We quantify the international spillovers of explicit FOMC policy rate guidance used as an unconventional monetary policy tool at the zero lower bound of the policy rate on international equity markets, considering equity indices of both advanced and emerging economies. We find that explicit FOMC policy rate guidance announcements at the zero lower bound led to higher equity prices in a number of advanced and emerging economies. Moreover, we find that equity indices of economies with lower sovereign ratings rose by more, consistent with the risk-taking channel of monetary policy.
    Keywords: Monetary policy; forward guidance; equity prices; international spillovers
    JEL: E52 E58
    Date: 2014–07
  9. By: Adrien Béranger; Jézabel Couppey Soubeyran; Jézabel Laurence Scialom
    Abstract: This paper reviews the various mechanisms and rules that has been proposed to build a banking union in Europe. We argue that the banking union is a promising solution to the Eurozone crisis because it completes the unification of the Euro currency, forms a solution to both the financial and monetary fragmentation of the Euro area financial markets and helps breaking the vicious circle created by domestic banking system impairments and the sovereign debt crisis. We underline not only the shortcomings and hurdles to reach a fully-fledged banking union, and the hazards created by the inconsistencies between their phasing-in in the sequential schedule decided by states. To reduce the loopholes induced by the sequential approach, we propose to implement a rule of shared-bailout during the transition period that consist in a loss-sharing rule among countries hosting an entity of a bank group and indicted in the living wills of the systemic banking companies.
    Keywords: Eurozone, banking union, bank supervision, resolution
    JEL: G21 G28 H12 E58
    Date: 2014
  10. By: Damián Romero; Luis Ceballos
    Abstract: This paper attempts to address the question of how unconventional monetary policies affected the market expectations in both the future paths of the monetary policy rate and economic growth implicit in interest rates in the period 2007-2013 for several developed and developing countries where these kind of policies were applied. The approach used in this paper is to compare the implicit expectations in the yield curve with market surveys and econometric models to see whether the first ones were affected. We conclude that in the period where unconventional monetary policies were applied, the yield curve provided relevant additional information to forecast the monetary policy rate and economic growth, especially in developed economies.
    Date: 2014–07
  11. By: Fitzgerald, Terry J. (Federal Reserve Bank of Minneapolis); Nicolini, Juan Pablo (Federal Reserve Bank of Minneapolis)
    Abstract: This paper makes two straightforward points that we argue are central to understanding the literature and debate surrounding the stability of the Phillips curve. First, the endogeneity of monetary policy implies that aggregate data are largely uninformative as to the existence of a stable relationship between unemployment and future inflation. Second, if the NAIRU model is assumed to be true, regional data can be used to identify the structural relationship between unemployment and future inflation. We find that a 1 percentage point increase in the unemployment rate is associated with a roughly 0.3 percentage point decline in inflation over the next year.
    Keywords: Endogenous monetary policy; Stability of the Philips Curve
    JEL: E52 E58
    Date: 2014–05–30
  12. By: Stephen Hansen; Michael McMahon; Andrea Prat
    Abstract: How does transparency, a key feature of central bank design, affect the deliberation of monetary policymakers? We exploit a natural experiment in the Federal Open Market Committee in 1993 together with computational linguistic models (particularly Latent Dirichlet Allocation) to measure the effect of increased transparency on debate. Commentators have hypothesized both a beneficial discipline effect and a detrimental conformity effect. A difference-in-differences approach inspired by the career concerns literature uncovers evidence for both effects. However, the net effect of increased transparency appears to be a more informative deliberation process.
    Keywords: monetary policy, deliberation, FOMC, transparency, career concerns
    JEL: E52 E58 D78
    Date: 2014–05
  13. By: Jeremy Kronick (International Business School, Brandeis University)
    Abstract: Monetary policy transmission from the developed to the developing world.
    Keywords: monetary policy, development, real economic growth
    JEL: O23
    Date: 2014
  14. By: Rodrigo Caputo; Gustavo Leyva; Michael Pedersen
    Abstract: We assess the role of real and nominal shocks on the real exchange rate (RER) dynamics for a set of small open economies. In doing so, we estimate a SVAR model for five inflation targeting countries: Australia, Canada, Chile, Israel and Norway. In sharp contrast with the existing empirical evidence, we find that in most countries demand shocks tend to explain a small proportion of RER volatility for the period 1986-2011. In that period nominal shocks are relatively more important in explaining RER fluctuations. When we perform a subsample analysis, however, we can reconcile the empirical findings in the literature with our results. In particular, we conclude that the relative importance of demand shocks has been declining substantially over time. In contrast, the relative importance of nominal shocks, and in particular exchange rate shocks, increased importantly in the last decade.
    Date: 2014–07
  15. By: Asli Demirgüç-Kunt; Edward J. Kane; Luc Laeven
    Abstract: This paper provides a comprehensive, global database of deposit insurance arrangements as of 2013. We extend our 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. We 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.
    JEL: G01 G21 G28
    Date: 2014–07
  16. By: Hashem Pesaran; Ron Smith
    Abstract: This paper proposes tests of policy ineffectiveness in the context of macroeconometric rational expectations models. It is assumed that there is a policy intervention that takes the form of changes in the parameters of a policy rule, and that there are sufficient observations before and after the intervention. The test is based on the difference between the realisations of the outcome variable of interest and counterfactuals based on no policy intervention, using only the pre-intervention parameter estimates, and in consequence the Lucas Critique does not apply. The paper develops tests of policy ineffectiveness for a full structural model, with and without exogenous, policy or non-policy, variables. Asymptotic distributions of the proposed tests are derived both when the post intervention sample is fixed as the pre-intervention sample expands, and when both samples rise jointly but at different rates. The performance of the test is illustrated by a simulated policy analysis of a three equation New Keynesian Model, which shows that the test size is correct but the power may be low unless the model includes exogenous variables, or if the policy intervention changes the steady states, such as the inflation target.
    Keywords: Counterfactuals, policy analysis, policy ine¤ectiveness test, macroeconomics
    JEL: C18 C54 E65
    Date: 2014–06–19
  17. By: Shanti Chakravarty (Bangor University, UK); Jonathan Williams (Bangor University, UK)
    Abstract: The Mexican programme of bank privatisation in the early 1990s was dictated not just by a desire for distancing government from the running of the economy but also by the need to raise money by selling public assets in favour of a particular fiscal stance. The conflict of objectives entailed in this liberalisation process contributed to the subsequent financial crisis entailing the re-nationalisation of banks after a short period of three years at a cost to the exchequer which was five times greater than the money raised at privatisation.
    Keywords: Mexico; Privatisation; Financial Liberalisation; Banking
    JEL: G21 G28
    Date: 2013–11
  18. By: Jorge Roldós
    Date: 2013–12–09

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