|
on Central Banking |
| By: | Orphanides, Athanasios |
| Abstract: | Following the experience of the global financial crisis, central banks have been asked to undertake unprecedented responsibilities. Governments and the public appear to have high expectations that monetary policy can provide solutions to problems that do not necessarily fit in the realm of traditional monetary policy. This paper examines three broad public policy goals that may overburden monetary policy: full employment; fiscal sustainability; and financial stability. While central banks have a crucial position in public policy, the appropriate policy mix also involves other institutions, and overreliance on monetary policy to achieve these goals is bound to disappoint. Central Bank policies that facilitate postponement of needed policy actions by governments may also have longer-term adverse consequences that could outweigh more immediate benefits. Overburdening monetary policy may eventually diminish and compromise the independence and credibility of the central bank, thereby reducing its effectiveness to preserve price stability and contribute to crisis management. -- |
| Keywords: | Global financial crisis,monetary policy real-time output gap,fiscal dominance,financial stability,central bank independence |
| JEL: | E50 E52 E58 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:imfswp:75&r=cba |
| By: | Laban K. Chesang (Department of Economics, University of Pretoria); Ruthira Naraidoo (Department of Economics, University of Pretoria) |
| Abstract: | This paper exploits the Lucas’ (1973) signal extraction model to study the effect of uncertainty in the output-inflation trade-off on inflation, using a monetary model with asymmetric central bank preferences over inflation and output. We show that the implication of the uncertainty is two-fold: firstly, it causes the interaction of output and volatility of monetary policy to influence inflation movements so that, higher volatility in monetary policy causes inflation to rise. Secondly, as suggested in an optimal rule, it causes output to contract by less whenever inflation increases above the target, and to expand by less whenever inflation is below the target. We also find that the Reserve Bank’s asymmetric aversion to inflation stabilization explains inflation movements significantly, and that the monetary authority seems to penalize more for inflationary rather than deflationary pressures. Overall, the Bank’s deflationary bias would allow for a relatively flat output-inflation trade-off, which could be helpful for economic stability. |
| Keywords: | Monetary policy, Asymmetric preferences, Inflation, Uncertainty |
| JEL: | E31 E52 E58 E61 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201437&r=cba |
| By: | Mauricio Villamizar |
| Abstract: | Many central banks, particularly in the developing world, aim for exchange rate stability as a macroeconomic goal. However, most are reluctant to relinquish monetary policy autonomy, so they end up operating through both interest rate and foreign exchange interventions. But the use of multiple policy instruments does not necessarily equip monetary authorities with better tools to achieve their targets. On the contrary, their effects can potentially offset each other. Using daily data from the Central Bank of Colombia during the period of 1999-2012, I study the effects of simultaneous policies by first deriving new measures of monetary shocks and then determining their impact on economic activity. The main findings indicate that (i) while interest rate interventions have a significant impact on real and nominal variables, foreign exchange interventions tend to have limited effects; and (ii) empirical anomalies, such as the price puzzle, are eliminated when properly accounting for the systematic responses of policy. |
| Keywords: | Central bank intervention, simultaneous policies, monetary shocks, price puzzle, monetary policy trilemma, foreign exchange intervention. |
| JEL: | E31 E43 E52 E58 F31 |
| Date: | 2014–08–04 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:012010&r=cba |
| By: | Halit Aktürk (Meliksah University, Department of Economics, Kayseri, Turkey); Diana N. Weymark (Vanderbilt University, Department of Economics, Nashville, TN, USA) |
| Abstract: | This study provides a detailed quantitative analysis of a transition to inflation targeting with a focus on the role of expectations. We investigate the impact of the Turkish central bank’s inflation reduction programs on inflation in Turkey from 1996 to 2005. Over this period there was a transition from non-targeting to semi-formal targeting, and then, finally, to full-fledged inflation targeting. In order to analyze the effectiveness of Turkish monetary policy quantitatively, a structural model of the Turkish economy that allows for structural breaks is estimated under the alternative assumptions of rational expectations and adaptive learning. Using these estimates, counterfactual experiments are conducted to obtain ex ante and ex post inflation pressure measures which characterize, respectively, the pre-policy and post-policy inflationary environment. To evaluate the impact of the central bank’s disinflation program on its credibility, we introduce an index of monetary policy credibility that is new to the literature. The inflation pressure indices indicate that there was no significant difference between the inflationary environments in the 2002-2005 periods as compared to the 1996-2001 periods. However, the monetary policy effectiveness index shows that the semi-formal inflation targeting program that was implemented from 2002-2005 was considerably more successful in reducing inflation than the policies in the previous period had been. Surprisingly, the index of monetary policy credibility suggests that the improvement in inflation control was not accompanied by a significant improvement in the central bank’s credibility. |
| Keywords: | inflation pressure, transition, counterfactual, monetary policy |
| JEL: | E50 E52 E58 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:eyd:cp2013:246&r=cba |
| By: | Mauricio Villamizar |
| Abstract: | Many central banks, particularly in the developing world, aim for exchange rate stability as a macroeconomic goal. However, most are reluctant to relinquish monetary policy autonomy, so they end up operating through both interest rate and foreign exchange interventions. But the use of multiple policy instruments does not necessarily equip monetary authorities with better tools to achieve their targets. On the contrary, their effects can potentially offset each other. Using daily data from the Central Bank of Colombia during the period of 1999-2012, I study the effects of simultaneous policies by first deriving new measures of monetary shocks and then determining their impact on economic activity. The main findings indicate that (i) while interest rate interventions have a significant impact on real and nominal variables, foreign exchange interventions tend to have limited effects; and (ii) empirical anomalies, such as the price puzzle, are eliminated when properly accounting for the systematic responses of policy. Classification JEL: E31, E43, E52, E58, F31. |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:835&r=cba |
| By: | Bucher, Monika; Hauck, Achim; Neyer, Ulrike |
| Abstract: | This paper shows that depending on the distribution of banks' uncertain liquidity needs and on how monetary policy is implemented, frictions in the interbank market may reinforce the effectiveness of monetary policy. These frictions imply that with its lending and deposit facilities the central bank has an additional effective instrument at hand to impose an impact on bank loan supply. While lowering the rate on the lending facility has, taken for itself, an expansionary effect, lowering the rate on the deposit facility has a contractionary effect. This result has interesting implications for monetary policy implementation at the zero lower bound. -- |
| Keywords: | interbank market,monetary policy,monetary policy implementation,zero lower bound,loan supply |
| JEL: | E52 E58 G21 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:dicedp:134r&r=cba |
| By: | Alexandros Kontonikas; Charles Nolan; Zivile Zekaite |
| Abstract: | Some studies argue that the Fed reacts to financial market developments. Using data covering the period 1985:Q1 - 2008:Q4 and employing an augmented Taylor rule specification, we re-examine that conjecture. We find that evidence in favour of such a reaction is largely driven by the Fed’s behaviour during the 2007-2008 financial crisis. |
| Keywords: | Monetary Policy; Taylor Rule; Financial Crisis |
| JEL: | E52 E58 G01 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2014_08&r=cba |
| By: | Carrasco, Bruno (Asian Development Bank); Mukhopadhyay, Hiranya (Asian Development Bank) |
| Abstract: | This paper reviews some of the more critical policy dilemmas facing the Reserve Bank of India (RBI) in its pursuit of inflation stabilization and balanced growth objectives. The challenge in meeting these objectives further increased in the mid-2000s with the advent of large capital flows into the country and with RBI’s role in preserving financial stability. The paper argues, drawing on several empirical results including Taylor rule estimation and nonparametric regression, that there is no simple policy solution to apply in different states of the market and reviews policy decisions undertaken by RBI against the backdrop of a disequilibrium framework where credit markets may be demand or supply constrained. Superimposing two capital flow regimes into this framework leads to identification of episodes where a hawkish (anti-inflationary) stance can give way to a dovish(pro-growth) stance. |
| Keywords: | India; monetary policy dilemmas; central bank; RBI policies; price stability; financial stability; Taylor rule; credit market disequilibrium |
| JEL: | E50 E52 E58 |
| Date: | 2014–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbewp:0393&r=cba |
| By: | Alex Haberis (Bank of England); Richard Harrison (Bank of England; Author-Workplace-Name: Centre for Macroeconomics (CFM)); Matt Waldron (Bank of England) |
| Abstract: | In this paper we show that the macroeconomic effects of a transient interestrate peg can be significantly dampened when the peg is perceived to be imperfectly credible by the private sector. By doing so, we provide a solution to what has become known as the "forward guidance puzzle". This is the finding that pegging nominal interest rates to a specific value or path for an extended, yet finite, period of time in New Keynesian models generates macroeconomic responses that are implausibly large. This puzzle has been of interest because several central banks have implemented "forward guidance" which has been interpreted by some as a promise to hold the policy rate lower than had been previously expected: a so-called lower-for-longer (LFL) policy. The New Keynesian models that these central banks routinely use for policy analysis would predict that LFL policies generate very large effects. The possibility that LFL policies might be imperfectly credible arises from their potential to be time inconsistent . Indeed, using an ad-hoc loss function for the central bank we show that it may have an incentive to renounce the LFL policy along the full commitment path. We examine cases in which the degree of imperfect credibility is exogenous and in which it is endogenously related to the state of the economy via the policymaker's incentive to renounce. Allowing for endogenous imperfect credibility tends to dampen the response of macroeconomic variables to an LFL policy announcement by more than under exogenous imperfect credibility. |
| Keywords: | New Keynesian model, monetary policy, zero lower bound |
| JEL: | E12 E17 E20 E30 E42 E52 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1422&r=cba |
| By: | Nakata, Taisuke (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | Can the central bank credibly commit to keeping the nominal interest rate low for an extended period of time in the aftermath of a deep recession? By analyzing credible plans in a sticky-price economy with occasionally binding zero lower bound constraints, I find that the answer is yes if contractionary shocks hit the economy with sufficient frequency. In the best credible plan, if the central bank reneges on the promise of low policy rates, it will lose reputation and the private sector will not believe such promises in future recessions. When the shock hits the economy sufficiently frequently, the incentive to maintain reputation outweighs the short-run incentive to close consumption and inflation gaps, keeping the central bank on the originally announced path of low nominal interest rates. |
| Keywords: | Credible policy; forward guidance; reputation; sustainable plan; time consistency; trigger strategy; zero lower bound |
| JEL: | E32 E52 E61 E62 E63 |
| Date: | 2014–06–17 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2014-50&r=cba |
| By: | Tröger, Tobias |
| Abstract: | This paper analyzes the evolving architecture for the prudential supervision of banks in the euro area. It is primarily concerned with the likely effectiveness of the SSM as a regime that intends to bolster financial stability in the steady state. By using insights from the political economy of bureaucracy it finds that the SSM is overly focused on sharp tools to discipline captured national supervisors and thus underincentives their top-level personnel to voluntarily contribute to rigid supervision. The success of the SSM in this regard will hinge on establishing a common supervisory culture that provides positive incentives for national supervisors. In this regard, the internal decision making structure of the ECB in supervisory matters provides some integrative elements. Yet, the complex procedures also impede swift decision making and do not solve the problem adequately. Ultimately, a careful design and animation of the ECB-defined supervisory framework and the development of inter-agency career opportunities will be critical. The ECB will become a de facto standard setter that competes with the EBA. A likely standoff in the EBA’s Board of Supervisors will lead to a growing gap in regulatory integration between SSM-participants and other EU Member States. Joining the SSM as a non-euro area Member State is unattractive because the current legal framework grants no voting rights in the ECB’s ultimate decision making body. It also does not supply a credible commitment opportunity for Member States who seek to bond to high quality supervision. -- |
| Keywords: | prudential supervision,banking union,regulatory capture,political economy of bureaucracy,Single Supervisory Mechanism (SSM),European Central Bank (ECB),European Banking Authority (EBA) |
| JEL: | G21 G28 H77 K22 K23 L22 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:imfswp:73&r=cba |
| By: | Layal Mansour (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure (ENS) - Lyon - PRES Université de Lyon - Université Jean Monnet - Saint-Etienne - Université Claude Bernard - Lyon I (UCBL)) |
| Abstract: | This aim of the present paper is to measure first, the degree of trilemma indexes: exchange rate stability, monetary independence capital account openness while taking into account the increase of hording IR ratio over GDP, over External Debt and over Short Term External Debt. The evolution of the trilemma indexes shows that countries applying de facto flexible Exchange Rate Regime (ERR) take advantage of the IR and become able to adopt a managed ERR that consist of achieving the three trilemma indexes simultaneously without renouncing to anyone of them. We found that different IR ratio could have different interpretations and different directions of monetary policies, where external debt should be taken into consideration in such study while using the IR. As for country that is applying a de facto fixed exchange rate regime, the IR (different ratio) do not play any role in changing the patter of the Mundell trilemma and do not intervene in monetary authority policies. This paper treats as well the normative aspects of the trilemma, relating the policy choices to macroeconomic outcomes such as the volatility of output growth. We found different results from country to another, while taking different ratios of measuring IR, concluding that the impact of IR on the output volatility could change due to the level of external debt and adopted exchange rate regime. |
| Keywords: | Monetary policy; International Reserve; External Debts; Impossible Trinity; Managed Exchange Rate; Quadrilemma; Output Volatilily |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01054614&r=cba |
| By: | Stephen Williamson (Washington University in St. Louis) |
| Abstract: | A model is constructed in which consumers and banks have incentives to fake the quality of collateral. Conventional central banking policy can exacerbate these problems, in that lower nominal interest rates make asset prices higher, which makes faking collateral more profitable, thus increasing haircuts and interest rate differentials. Central bank purchases of private mortgages can increase welfare by bypassing incentive problems associated with private banks, increasing asset prices, and relaxing collateral constraints. However, this may exacerbate incentive problems in the mortgage market. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:208&r=cba |
| By: | Bletzinger, Tilman; Wieland, Volker |
| Abstract: | On July 4, 2013 the ECB Governing Council provided more specific forward guidance than in the past by stating that it expects ECB interest rates to remain at present or lower levels for an extended period of time. As explained by ECB President Mario Draghi this expectation is based on the Council’s medium-term outlook for inflation conditional on economic activity and money and credit. Draghi also stressed that there is no precise deadline for this extended period of time, but that a reasonable period can be estimated by extracting a reaction function. In this note, we use such a reaction function, namely the interest rate rule from Orphanides and Wieland (2013) that matches past ECB interest rate decisions quite well, to project the rate path consistent with inflation and growth forecasts from the survey of professional forecasters published by the ECB on August 8, 2013. This evaluation suggests an increase in ECB interest rates by May 2014 at the latest. We also use the Eurosystem staff projection from June 6, 2013 for comparison. While it would imply a longer period of low rates, it does not match past ECB decisions as well as the reaction function with SPF forecasts. -- |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:imfswp:74&r=cba |
| By: | Leroi Raputsoane |
| Abstract: | This paper analyses the relationship between financial stress indicator variables and monetary policy in South Africa with emphasis on how robust these variables are related to the monetary policy interest rate. The financial stress indicator variables comprise a set of variables from the main segments of the South African financial market that include the bond and equity securities markets, the commodities market and the foreign exchange rate market. The empirical results show that the set of financial stress indicator variables from the bond and equity securities markets as well as those from credit markets and property markets are robustly associated with the monetary policy interest rate, while the set of financial stress indicator variables from commodities markets and the foreign exchange rate market are weakly associated with the monetary policy interest rate. |
| Keywords: | Financial stress indicator variables, Monetary policy |
| JEL: | C32 C51 E52 E61 G01 G10 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:443&r=cba |
| By: | Aguiar, Mark; Amador, Manuel; Farhi, Emmanuel; Gopinath, Gita |
| Abstract: | We propose a continuous time model to investigate the impact of inflation credibility on sovereign debt dynamics. At every point in time, an impatient government decides fiscal surplus and inflation, without commitment. Inflation is costly, but reduces the real value of outstanding nominal debt. In equilibrium, debt dynamics is the result of two opposing forces: (i) impatience and (ii) the desire to conquer low inflation. A large increase in inflation credibility can trigger a process of debt accumulation. This rationalizes the sovereign debt booms that are often experienced by low inflation credibility countries upon joining a currency union. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:hrv:faseco:12559514&r=cba |
| By: | Hans Geeroms (Professor at KULeuven and College of Europe, Research Associate at CES); Pawel Karbownik (Deputy Director at the EU Economic Department of the Polish MFA) |
| Abstract: | This paper argues that a monetary union requires a banking union. While the USA developed both during a time span of two centuries, the EMU was created in the course of two decades and remains unfinished as the economic pillar is largely missing. The financial crisis and the Eurocrisis have shown that a genuine banking union is even more needed for the Eurozone than a budget or a fiscal union to let the euro survive. |
| Keywords: | banking Union, ECB, EMU, monetary policy, eurozone |
| JEL: | E10 E42 E44 E52 E58 E61 E63 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:coe:wpbeep:33&r=cba |
| By: | Michael D. Bordo |
| Abstract: | “Most people would say that Europe is still sort of coming out of the financial crisis that we had 5 years ago, which was probably the worst since the Great Depression of 1930s. Now just to keep things in context, at the time people were saying that it was going to be worse than the Great Depression, but it was not. It was big, but it was actually not that big compared to some of the crises, especially compared to what happened in the 1930s.” writes prof. Michael Bordo in the newly published mBank – CASE Seminar Proceedings No. 130. He discusses the lessons learned from the history of previous financial crises for the monetary policy, focusing mainly on the recent experience of the United States (and namely its Federal Reserve), where the current crisis began. He argues that the crisis of 2007-2008 was not as devastating as is commonly believed, and - more importantly – claims that the Fed’s policy during the crisis, based on lessons learn from the Great Depression, not only “did not exactly fit the facts of the recent crisis”, but may in fact have “exacerbated the crisis and may have led to serious problems which could contribute to the next (one)”. |
| Keywords: | Financial sector, Global/Multiregional, Crisis, credit crisis, financial crisis, banking sector, Fed |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:sec:ceuwps:0130&r=cba |
| By: | Julian A. Parra-Polania; Carmiña O. Vargas |
| Abstract: | We study ?financial crises in a model of a small open production economy subject to a credit constraint and to uncertainty on the real value of debt repayments. We find that, unlike most of the previous literature, the decentralized equilibrium exhibits underborrowing. The future possibility of reducing the severity of crises gives the incentives to the central planner (CP) to increase both current debt and the crisis probability. We also ?find that the CP equilibrium can be implemented by means of a tax on debt (a macro-prudential policy) and, only during crises, subsidies on consumption and a tax on non-tradable labor. The welfare gain of moving to the CP equilibrium is small for the baseline scenario but very sensitive to changes in debt volatility and the degree of openness of the economy. |
| Keywords: | Financial crisis, capital controls, debt shocks, optimal tax. |
| JEL: | F34 F41 H21 |
| Date: | 2014–08–13 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:012027&r=cba |
| By: | Robert G. Murphy (Boston College); Adam Rohde (Charles River Associates) |
| Abstract: | This paper argues that individuals may rationally weight price increases for food and energy products differently from their expenditure shares when forming expectations about price inflation. If food and energy price inflation exhibits a sufficient degree of persistence and wage adjustment is not too sluggish, we show that it is rational to put more weight on inflation in these sectors than their expenditure shares in the Consumer Price Index would warrant. We develop a simple dynamic model of the economy in which individuals are partly backward looking and use the model to illustrate this finding. We then test the prediction of the model using data on expected inflation from the Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters. Our results show that the weights implied by the model for constructing expectations of inflation differ from the expenditure weights of food and energy prices in the Consumer Price Index. In particular, we find that food price inflation is weighted more heavily and energy price inflation is weighted less heavily. But importantly, we cannot reject the hypothesis that these weights reflect rational behavior in forming expectations about inflation. Our analysis validates concerns sometimes raised by policymakers as to whether expectations might not be well anchored with respect to commodity price shocks. As a consequence, policy may need to be calibrated carefully to prevent such shocks from becoming embedded in expected inflation. |
| Keywords: | Inflation Expectations, Core Inflation, Food and Energy Prices, Anchored Expectations |
| JEL: | E30 E31 E52 E58 |
| Date: | 2014–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:857&r=cba |
| By: | Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Famagusta, Northern Cyprus , via Mersin 10, Turkey); Rangan Gupta (Department of Economics, University of Pretoria); Charl Jooste (Department of Economics, University of Pretoria) |
| Abstract: | We test the inertial properties of South African inflation in a Markov-Switching autoregressive fractionally integrated moving average model. This allows us to test for long memory and study the persistence of inflation in multiple regimes. We show that inflation is more volatile and persistent during high inflation episodes relative to low inflation episodes. We estimate that it takes approximately 70 months for 50 percent of the shocks to dissipate in a high inflation regime compared to 10 months in a low inflation regime. |
| Keywords: | Inflation persistence, MS-ARFIMA, inflation regimes |
| JEL: | E31 C20 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201440&r=cba |
| By: | Seunghoon Na; Stephanie Schmitt-Grohe; Martin Uribe; Vivian Z. Yue |
| Abstract: | This paper characterizes jointly optimal default and exchange-rate policy. The theoretical environment is a small open economy with downward nominal wage rigidity as in Schmitt-Grohe and Uribe (2013) and limited enforcement of international debt contracts as in Eaton and Gersovitz (1981). It is shown that under optimal policy default is accompanied by large devaluations. At the same time, under fixed exchange rates, optimal default takes place in the context of large involuntary unemployment. Fixed-exchange-rate economies are found to be able to support less external debt than economies with optimally floating rates. In addition, the following three analytical results are presented: 1) Real economies with limited enforcement of international debt contracts in the tradition of Eaton and Gersovitz (1981) can be decentralized using capital controls; 2) Real economies in the tradition of Eaton and Gersovitz can be interpreted as the centralized version of models with downward nominal wage rigidity, optimal capital controls, and a full-employment exchange-rate policy; and 3) Full-employment is optimal in an economy with downward nominal wage rigidity, limited enforcement of debt contracts, and optimal capital controls. |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:emo:wp2003:1404&r=cba |
| By: | Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Famagusta, Northern Cyprus , via Mersin 10, Turkey); Rangan Gupta (Department of Economics, University of Pretoria); Charl Jooste (Department of Economics, University of Pretoria) |
| Abstract: | We analyse the relationship between the South African real exchange rate and economic fundamentals - demand, supply and nominal shocks. Using a time-varying parameter VAR we study the coherence, conditional volatility and impulse responses of the exchange rate over specific periods and policy regimes. The model is identified using sign-restrictions that allow for some neutrality of impulse responses over contemporaneous and long horizons. Our results suggest that the importance of fundamental shocks on the exchange rate is time dependent. Hence there is a loss in information when using standard linear models that average out effects over time. The response of the exchange rate to demand and supply shocks have weakened over the 1994-2010 period. The period following financial crisis, however, has strengthened the relationship between supply and demand shocks to the exchange rate, but has weakened the relationship between interest rate shocks and the exchange rate response. |
| Keywords: | Exchange rates, fundamentals, coherence, sign-restricted TVP-VAR |
| JEL: | C3 F41 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201439&r=cba |
| By: | Michele Fratianni (Department of Business Economics and Public Policy, Indiana University Kelley School of Business); Francesco Marchionne (Universita Politecnica delle Marche) |
| Abstract: | This paper examines how banks around the world have resized and reallocated their earning assets in response to the subprime and sovereign debt crises. We focus especially on the interaction between sovereign debt and the bank asset allocation process. After the crisis we observe a general substitution away from loans and in favor of securities. Our econometric findings corroborate that banks have readjusted the composition of their assets and the overall regulatory credit risk by substituting securities for loans. Banks, furthermore, have also been sensitive to those variables that are of direct interest to the regulator. The picture that emerges is a mutual protection pact regime, in which high-debt governments exert pressure on banks-- either through the regulatory system or through moral suasion-- to privilege the purchase of government securities over credit to the private sector in exchange for receiving protection against default. |
| Keywords: | crisis, loans, regulator, securities, mutual protection pact |
| JEL: | G01 G11 G21 G28 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:iuk:wpaper:2014-09&r=cba |
| By: | Burçhan Sakarya (BRSA (Banking Regulation and Supervision Agency), Strategy Development Department, Turkey) |
| Abstract: | Following the 2007-8 Global Crisis, a significant shift is observed towards the international regulatory approach about the banks. Apart from reform efforts from international institutions such as the IMF, G20 and BIS, several proposals are set forward in some advanced financial systems. Moreover, it is debated that, these so called structural bank reform efforts, also present a chance to indirectly solve the issue of “To-big-to-fail” problem, the SIFI-“systemically Important Financial Institution” problem by its new title. In this study the fundamental characteristics of globally known structural bank reform initiatives are compared and a panel data analysis conducted for the Turkish commercial banks for the 2002-2012 period to investigate the effect of risk diversification on profitability to test for diversification in bank activities. |
| Keywords: | : Structural Reforms in Banking, Turkish Banking Sector |
| JEL: | G21 G01 C23 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:eyd:cp2013:21&r=cba |
| By: | Christoph Basten; Catherine Koch |
| Abstract: | We examine mortgage pricing before and after Switzerland was the first country to activate the Counter-Cyclical Capital Buffer of Basel III. Observing multiple mortgage offers per request, we obtain three core findings. First, capitalconstrained and mortgage-specialized banks raise their rates relatively more. Second, risk-weighting schemes supposed to discriminate against more risky borrowers do not amplify the effect of higher capital requirements. Third, CCB-subjected banks and CCB-exempt insurers raise mortgage rates, but insurers raise rates by on average 8.8 bp more. To conclude, lenders welcome the opportunity to increase mortgage rates, but stricter capital requirements do not discourage banks from risky mortgage lending. |
| Keywords: | Bank lending, mortgage market |
| JEL: | G21 E51 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:169&r=cba |
| By: | Oğuz Esen (Izmir University of Economics, Department of Economics); Ayla Oğuş Binatlı (Izmir University of Economics, Department of Economics) |
| Abstract: | The recent global financial crisis has underlined the need to go beyond the microprudential perspective to financial instability and move in a macroprudential direction. There is a growing consensus among policymakers and academics that macroprudential policy should be adopted. Through these changes, policymakers appear to be moving in a direction broadly consistent with Minsky’s view.The theoretical framework of macroprudential policy can be found in Minsky’s financial instability theory. Emerging economies, including Turkey, have adopted macroprudential tools to prevent and mitigate system wide risks. This paper offers a Minsky perspective on macroprudential policy and evaluates macroprudential tools through an examination of the Turkish experience as a case study. |
| Keywords: | Macroprudential policy, Minsky, Reserve Requirement |
| JEL: | E58 E60 G01 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:eyd:cp2013:305&r=cba |
| By: | Yoshino, Naoyuki (Asian Development Bank Institute); Taghizadeh-Hesary, Farhad (Asian Development Bank Institute) |
| Abstract: | “Abenomics” refers to the economic policies advocated by Prime Minister Shinzo Abe who became prime minister of Japan for a second time when his party, the Liberal Democratic Party, won an overwhelming majority at the general election in December 2012. Abenomics has “three arrows”: (i) aggressive monetary policy, (ii) fiscal consolidation, and (iii) growth strategy. The Japanese economy faces an aging population and expanding social welfare expenses. No other country has experienced Japan’s rapid growth of retired people. In this paper we will explain these three aspects of Abenomics and the current state of the Japanese economy, and examine what further remedies may be required if Japan is to recover from its long-term deflation. We look at such proposals as hometown investment trust funds and postponing of the retirement age through the introduction of a flexible wage rate system. |
| Keywords: | Abenomics; structural reform; hometown investment funds; monetary policy; fiscal consolidation; growth strategy |
| JEL: | E52 E62 G21 |
| Date: | 2014–08–03 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0492&r=cba |
| By: | James Bernstein, Leroi Raputsoane and Eric Schaling |
| Abstract: | This study assesses the behaviour of credit extension over the economic cycle to determine its usefulness as a reference guide for implementing the countercyclical capital buffers for financial institutions in South Africa. The study finds that the common reference guide for implementing the countercyclical capital buffers, which is based on the gap between the ratio of aggregate private sector credit to gross domestic product and its long term trend, increases during the economic cycle busts, while such a relationship is broken during the economic cycle booms. The study also finds that this common reference guide decreases during the upturns in the economic cycle, while it increases during the periods of downturns in the economic cycle. Thus credit extension should be used with caution as a common reference guide to determine the level of the countercyclical capital buffers for financial institutions in South Africa. |
| Keywords: | Credit Procyclicality, Financial Regulation |
| JEL: | C32 E32 E61 G21 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:445&r=cba |
| By: | International Monetary Fund; World Bank |
| Keywords: | Finance and Financial Sector Development - Access to Finance Banks and Banking Reform Finance and Financial Sector Development - Financial Intermediation Private Sector Development - Emerging Markets Finance and Financial Sector Development - Debt Markets |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wboper:16744&r=cba |
| By: | Tomanova, Lucie (Silesian University in Opava/Finance, School of Business Administration in Karvina, Karvina, Czech Republic) |
| Abstract: | The exchange rate plays an important role in a country’s export performance and currency volatility has impact on international trade, the balance of payments and economic performance, however, views on the impact of exchange rate volatility on international trade flows are inconsistent, thus it is necessary to examine this matter further, and with knowledge of the application to small open economies. This paper analyzes impact of exchange rate volatility on the export performance of Central and Eastern European countries. Using monthly time series data, the empirical analyses has been carried out for the period 01/1999 to 03/2013. Volatility’s impact on export performance is estimated on bilateral export flows of Czech Republic, Slovakia, Hungary and Poland to euro area. For the volatility measurement, G/ARCH models are used. Autoregressive distributed lag and error-correction approach are used to examine the impact of exchange rate volatility on the exports. The results suggest no significant relationship among the exchange rate volatility and export performance in CEE countries, impact of exchange rate volatility turns out to be ambiguous. |
| Keywords: | exchange rates, VECM, ARDL, export, volatility |
| JEL: | F31 F42 C22 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:eyd:cp2013:267&r=cba |
| By: | David Miller (Federal Reserve Board) |
| Abstract: | Price commitment results in lower welfare. I explore the consequences of price commitment by pairing an independent monetary authority issuing nominal bonds with a fiscal authority whose endogenous spending decisions are determined by a political economy model. Without price commitment, nominal bonds are backed by a new form of endogenous commitment that overcomes time inconsistency to make tax smoothing possible. With price commitment, nominal bonds will be used for both tax smoothing and wasteful spending. Price commitment eliminates monetary control over fiscal decisions. I show that the combination observed in advanced economies of a politically distorted fiscal authority and an independent monetary authority with nominal bonds and without price commitment is the solution to a constrained mechanism design problem that overcomes time inconsistency and results in the highest welfare. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:80&r=cba |
| By: | Iordan-Constantinescu, Nicolae |
| Abstract: | The article argues that neither the EU member states, nor the EU candidate states give enough attention to the requirement of maintaining a high economic performance of their economies by convergence and competitiveness strategies, so that they could have "the capacity to cope with competitive pressures and market forces within the Union" and ensure the proper functioning of the single currency. Instead, by the synergy of internal market and single currency, coupled with a populist nationalistic policy at the level of most EU member states, ideal conditions were generated so that factors distribution spontaneously acts, as proved consistently and more visible during the latest financial and economic crisis, by the so-called countries' specialization, deindustrialization and a North-South rupture. |
| Keywords: | competitiveness, competition, convergence, euro, single currency, monetary policy |
| JEL: | E42 E61 F36 F43 G15 O47 |
| Date: | 2014–08–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:57980&r=cba |
| By: | Haifang Huang, Ke Pang, Yao Tang (Wilfrid Laurier University) |
| Abstract: | Under the flexible exchange rate regime, the Canadian economy is constantly af- fected by fluctuations in exchange rates. This paper focuses on the employment effect of the exchange rate in Canada. We find that appreciations of the Canadian dol- lar have significant effects on employment in manufacturing industries; such effects are mostly associated with the export-weighted exchange rate and not the import- weighted exchange rate. Meanwhile, the exchange rate has little effect on jobs in nonmanufacturing industries. Because the manufacturing sector accounts for only about 10% of the employment in Canada, the overall employment effect of the ex- change rate is small. In addition, we quantify the loss of manufacturing employment associated with a boom in the commodity market during which the Canadian dollar tends to appreciate. Our estimates suggest that when commodity prices increase by 15.77% (one standard deviation of annual change in commodity price between 1994 and 2010), Canada’s manufacturing employment decreases by 0.8%, about 0.08% of the total employment. |
| Keywords: | exchange rate, employment in Canada |
| JEL: | F1 F3 J2 |
| Date: | 2014–04–29 |
| URL: | http://d.repec.org/n?u=RePEc:wlu:lcerpa:0076&r=cba |
| By: | Graham Bird (Claremont McKenna College and Claremont Graduate University); Alex Mandilaras (University of Surrey) |
| Abstract: | Has the global economic crisis resulted in countries shifting their exchange rate regimes and, if so, in what way? Focusing on the relevant period of 2008-12, and using the IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER) classification of exchange rate regimes and database, we calculate exchange rate regime transition probabilities and test their statistical significance. Even though there is some evidence of state dependence, in the sense that transitions are relatively infrequent, we do find that these are significant, especially in the direction of fixity. Our testing procedure employs the Wilson (1927) statistic, which is appropriate for drawing inference based on relatively rare events. By examining all transitions in detail, we also find further evidence that countries that shift often flip back to their previous regime. |
| Keywords: | Exchange rate regimes, Transition probabilities |
| JEL: | F33 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:0614&r=cba |
| By: | Joshua Aizenman; Yin-Wong Cheung; Hiro Ito |
| Abstract: | We evaluate the impact of the global financial crisis (GFC) and recent structural changes in the patterns of hoarding international reserves (IR). We confirm that the determinants of IR hoarding evolve with developments in the global economy. During the pre-GFC period of 1999-2006, gross saving is associated with higher IR in developing and emerging markets. The negative impact of outward direct investment on IR accumulation is consistent with the recent trend of diverting international assets from the international reserve account into tangible foreign assets; the "Joneses' effect" lends support to the regional rivalry in hoarding IR as a motivation; and commodity price volatility induces precautionary buffer hoarding. During the 2007–2009 GFC period, previously significant variables become insignificant or display the opposite effect, probably reflecting the frantic market conditions driven by financial instability. Nevertheless, the propensity to import and gross saving continue to display strong and even larger positive effects on IR holding. The results from the 2010–2012 post-GFC period are dominated by factors that had been mostly overlooked in earlier decades. While the negative effect of swap agreements and the positive effect of gross saving on IR holdings are in line with our expectations, we find a change in the link between outward direct investment and IR in the pre- and post-crisis period. The macro-prudential policy tends to complement IR accumulation. Developed countries display different demand behaviors for IRs -- higher gross saving is associated with lower IR holding, possibly reflecting high-income countries' tendency to deploy their savings in the global capital markets. The presence of sovereign wealth funds motivates developed countries to hold a lower level of IR. Our predictive exercise affirms that an emerging market economy with insufficient IR holdings in 2012 tends to experience exchange rate depreciation against the U.S. dollar when many emerging markets were adjusted to the news of tapering quantitative easing (QE) in 2013. |
| JEL: | F3 F31 F32 F36 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20386&r=cba |
| By: | Jae Sim (Federal Reeserve Board); Raphael Schoenle (Brandeis University); Egon Zakrajsek (Federal Reserve Board); Simon Gilchrist (Boston University) |
| Abstract: | Using confidential product-level price data underlying the U.S. Producer Price Index (PPI), this paper analyzes the effect of changes in firms' financial conditions on their price-setting behavior during the "Great Recession" that surrounds the financial crisis. The evidence indicates that during the height of the crisis in late 2008, firms with "weak" balance sheets increased prices significantly relative to industry averages, whereas firms with "strong" balance sheets lowered prices, a response consistent with an adverse demand shock. These stark differences in price-setting behavior are consistent with the notion that financial frictions may significantly influence the response of aggregate inflation to macroeconomic shocks. We explore the implications of these empirical findings within a general equilibrium framework that allows for customer markets and departures from the frictionless financial markets. In the model, firms have an incentive to set a low price to invest in market share, though when financial distortions are severe, firms forgo these investment opportunities and maintain high prices in an effort to preserve their balance-sheet capacity. Consistent with our empirical findings, the model with financial distortions—relative to the baseline model without such distortions—implies a substantial attenuation of price dynamics in response to contractionary demand shocks. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:206&r=cba |
| By: | Nan Jiang; Catrice Christ; Yasmin Zand |
| Keywords: | Banks and Banking Reform Finance and Financial Sector Development - Bankruptcy and Resolution of Financial Distress Finance and Financial Sector Development - Financial Intermediation Private Sector Development - E-Business Finance and Financial Sector Development - Debt Markets |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wboper:18682&r=cba |
| By: | Schock, Matthias |
| Abstract: | This paper examines the predictive power of the yield spread for GDP growth and recessions in the Eurozone from the 1990s to the recent past. An OLS and probit framework are used. Credit Default Swap (CDS) data on sovereign bonds as a new risk-adjustment method and a direct measure of default risk improve the quality of prediction significantly. Results show that the quality of growth and recession prediction with the commonly used yield spread remains high, as long as Eurozone sovereign default risk biases are considered. |
| Keywords: | yield curve, CDS spreads, economic activity |
| JEL: | E37 E43 E44 G1 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:han:dpaper:dp-532&r=cba |