nep-cba New Economics Papers
on Central Banking
Issue of 2014‒09‒25
fourteen papers chosen by
Maria Semenova
Higher School of Economics

  1. Macroprudential Regulation and the Role of Monetary Policy By William Tayler; Roy Zilberman
  2. How does credit supply respond to monetary policy and bank minimum capital requirements? By Aiyar, Shekhar; Calomiris, Charles; Wieladek, Tomasz
  3. How Central Banks End Crises By Gary B. Gorton; Guillermo L. Ordoñez
  4. Term Structures of Inflation Expectations and Real Interest Rates: The Effects of Unconventional Monetary Policy By Aruoba, S. Boragan
  5. Operational targets and the yield curve: The euro area and Switzerland By Kedan, Danielle; Stuart, Rebecca
  6. Are Banks Less Likely to Issue Equity When They Are Less Capitalized? By Valeriya Dinger; Francesco Vallascas
  7. On the Reliability of Japanese Inflation Expectations Using Purchasing Power Parity By Koichiro Kamada; Jouchi Nakajima
  8. Inflation Expectations and Consumer Spending at the Zero Bound: Micro Evidence By Hibiki Ichiue; Shusaku Nishiguchi
  9. The international monetary and financial system: its Achilles heel and what to do about it By Claudio Borio
  10. Simple Macroeconomic Policies and Welfare: a quantitative assessment By Eurilton Araújo; Alexandre B. Cunha
  11. Revisitando as Medidas de Núcleo de Inflação do Banco Central do Brasil By Tito Nícias Teixeira da Silva Filho; Francisco Marcos Rodrigues Figueiredo
  12. Are subjective distributions in inflation expectations symmetric? By Nikola Mirkov; Andreas Steinhauer
  13. Conditional graphical models for systemic risk measurement By Paola Cerchiello; Paolo Giudici
  14. Employment, hours and optimal monetary policy By Maarten Dossche; Vivien Lewis; Céline Poilly

  1. By: William Tayler; Roy Zilberman
    Abstract: We study the macroprudential roles of bank capital regulation and monetary policy in a borrowing cost channel model with endogenous financial frictions, driven by credit risk, bank losses and bank capital costs. These frictions induce financial accelerator mechanisms and motivate the examination of a macroprudential toolkit. Following credit shocks, countercyclical regulation is more effective than monetary policy in promoting price, financial and macroeconomic stability. For supply shocks, combining macroprudential regulation with a stronger anti-inflationary policy stance is optimal. The findings emphasize the importance of the Basel III accords and cast doubt on the desirability of conventional Taylor rules during periods of financial distress.
    Date: 2014
  2. By: Aiyar, Shekhar (International Monetary Fund); Calomiris, Charles (Columbia Business School); Wieladek, Tomasz (Bank of England)
    Abstract: We use data on UK banks’ minimum capital requirements to study the interaction of monetary policy and capital requirement regulation. UK banks were subject to both time-varying capital requirements and changes in interest rate policy. Tightening of either capital requirements or monetary policy reduces the supply of lending. Lending by large banks reacts substantially to capital requirement changes, but not to monetary policy changes. Lending by small banks reacts to both. There is little evidence of interaction between these two policy instruments. The differences in the responses of small and large banks, and the lack of interaction between capital requirement changes and monetary policy, have important policy implications. Our results confirm the theoretical consensus view that monetary policy should focus on price stability objectives and that capital requirement changes are a more effective tool to achieve financial stability objectives related to loan supply. We also identify important distributional consequences within the financial system of these two policy instruments. Finally, our findings do not corroborate theoretical models that raise concerns about complex interactions between monetary policy and macroprudential variation in capital requirements.
    Keywords: loan supply; capital requirements; monetary policy; macroprudential regulation
    JEL: E44 E51 E52 G18 G21
    Date: 2014–09–05
  3. By: Gary B. Gorton (Yale School of Management, National Bureau of Economic Research); Guillermo L. Ordoñez (Department of Economics, University of Pennsylvania, National Bureau of Economic Research)
    Abstract: To end a financial crisis, the central bank is to lend freely, against good collateral, at a high rate, according to Bagehot’s Rule. We argue that in theory and in practice there is a missing ingredient to Bagehot’s Rule: secrecy. Re-creating confidence requires that the central bank lend in secret, hiding the identities of the borrowers, to prevent information about individual collateral from being produced and to create an information externality by raising the perceived value of average collateral. Ironically, the participation of "bad" borrowers, with low quality collateral, in the central bank’s lending program is a desirable part of re-creating confidence because it creates stigma. Stigma is critical to sustain secrecy because no borrower wants to reveal his participation in the lending program, and it is limited by the central bank charging a high rate for its loans.
    Keywords: Central Bank, Discount Window, Financial Crisis, Confidence
    JEL: E32 E44 E58
    Date: 2014–09–02
  4. By: Aruoba, S. Boragan (Federal Reserve Bank of Minneapolis)
    Abstract: Inflation expectations have recently received increased interest because of the uncertainty created by the Federal Reserve’s unprecedented reaction to the Great Recession. The effect of this reaction on the real economy is also an important topic. In this paper I use various surveys to produce a term structure of inflation expectations – inflation expectations at any horizon from 3 to 120 months – and an associated term structure of real interest rates. Inflation expectations extracted from this model track actual (ex-post) realizations of inflation quite well, and in terms of forecast accuracy they are at par with or superior to some popular alternatives obtained from financial variables. Looking at the period 2008–2013, I conclude that the unconventional policies of the Federal Reserve kept long-run inflation expectations anchored and provided a large level of monetary stimulus to the economy.
    Keywords: Inflation expectations; Real interest rate; Unconventional policies;
    JEL: C22 E31 E43 E58
    Date: 2014–08–13
  5. By: Kedan, Danielle (Central Bank of Ireland); Stuart, Rebecca (Central Bank of Ireland)
    Abstract: When setting monetary policy, central banks seek to aect the entire term structure of interest rates. Most central banks with a price stability or in ation mandate do this by targeting a very short-term market rate. This Letter presents a comparative analysis of the correlation between policy rate changes and bond yields in the euro area, where the implicit target of monetary policy is the overnight rate, and Switzerland, where the target is a three- month rate. The analysis indicates that unanticipated policy rate changes by the European Central Bank and Swiss National Bank are signicantly and positively correlated with changes in German and Swiss government bond yields out to 6 years and 20 years, respectively.
    Date: 2014–06
  6. By: Valeriya Dinger (University of Osnabrueck); Francesco Vallascas (University of Leeds)
    Abstract: Debt overhang and moral hazard related to risk-shifting opportunities predict that low capitalized banks have a lower likelihood to issue equity. In contrast to this view, for an international sample of bank Seasoned Equity Offerings (SEOs), we show that the likelihood of issuing an SEO is generally higher in low capitalized banks. We provide a series of tests exploring the variation of capital regulation, systemic conditions and market discipline to understand the driving forces behind this result. We find that market mechanisms rather than capital regulation are the primary, key driver of the decision to issue by low capitalized banks.
    Keywords: SEOs, Banking Regulation, Banking Crises, Counter-cyclical capital regulation
    JEL: G21 G28 G32
  7. By: Koichiro Kamada (Bank of Japan); Jouchi Nakajima (Bank of Japan)
    Abstract: This paper shows how purchasing power parity (PPP) can be used to construct a measure for inflation expectations and discusses the properties of this measure from both a theoretical and an empirical perspective. Under the PPP hypothesis, inflation expectations in one country are equal to inflation expectations in another country plus the expected depreciation rate of the nominal exchange rate. Exploiting this formula, we calculate Japanese inflation expectations from the break-even inflation rates (BEI) and FX forward spreads for five countries (United States, United Kingdom, Australia, Canada, and Sweden). The resulting PPP-based measure of inflation expectations follows a trend that largely coincides with long-run developments in the Japanese BEI. However, we find that both levels of and variations in the new measure differ across the reference countries, and that a recent gap between the new measure and the Japanese BEI is not negligible from a short-run perspective. Consequently, there remain several issues that need to be addressed to assess the usefulness of this new formula.
    Keywords: BEI; Foreign exchange forward spread; Inflation expectations; Inflation-indexed bonds; PPP
    Date: 2013–09–20
  8. By: Hibiki Ichiue (Bank of Japan); Shusaku Nishiguchi (Bank of Japan)
    Abstract: Standard theoretical models predict that higher inflation expectations generate greater current consumer spending at the zero lower bound of interest rates. However, a recent empirical study using US micro data finds negative results for this relationship. We use micro data for Japan, which has experienced low interest rates for a prolonged period, to estimate ordered probit models with a variety of controls. We find evidence supporting the prediction of standard models: survey respondents with higher expected inflation tend to indicate that their household has increased real spending compared with one year ago but will decrease it in the future. This relationship appears to be stronger for asset holders and older people.
    Keywords: Inflation expectations; Survey data; Monetary policy; Zero lower bound; Japan
    JEL: E20 E21 E30 E31 E50 E52
    Date: 2013–07–12
  9. By: Claudio Borio
    Abstract: This essay argues that the Achilles heel of the international monetary and financial system is that it amplifies the “excess financial elasticity” of domestic policy regimes, ie it exacerbates their inability to prevent the build-up of financial imbalances, or outsize financial cycles, that lead to serious financial crises and macroeconomic dislocations. This excess financial elasticity view contrasts sharply with two more popular ones, which stress the failure of the system to prevent disruptive current account imbalances and its tendency to generate a structural shortage of safe assets – the "excess saving" and "excess demand for safe assets" views, respectively. In particular, the excess financial elasticity view highlights financial rather than current account imbalances and a persistent expansionary rather than contractionary bias in the system. The failure to adjust domestic policy regimes and their international interaction raises a number of risks: entrenching instability in the global system; returning to the modern-day equivalent of the divisive competitive devaluations of the interwar years; and, ultimately, triggering an epoch-defining seismic rupture in policy regimes, back to an era of trade and financial protectionism and, possibly, stagnation combined with inflation.
    Keywords: Interbank markets, networks, entropy, intermediation, systemic risk
    Date: 2014–08
  10. By: Eurilton Araújo; Alexandre B. Cunha
    Abstract: We quantitatively compare three macroeconomic policies in a cash-credit goods framework. The policies are: the optimal one; another one that fully smoothes out oscillations in output; and a simple one that prescribes constant values for tax and monetary growth rates. As often found in the related literature, the welfare gains or losses from changing from a given policy to another are small. We also show that the simple policy dominates the one that leads to constant output
    Date: 2014–08
  11. By: Tito Nícias Teixeira da Silva Filho; Francisco Marcos Rodrigues Figueiredo
    Abstract: Since 2000, Banco Central do Brasil (BCB) announces measures of core inflation in its Inflation Reports. Throughout this period, the set of measures has been altered as the result of either the evolution of the Brazilian economy or the incorporation of new approaches to measuring core inflation. This article reassesses the current set of core measures published by BCB. The evidences show that within the classes of measures (exclusion, trimmed means and double weighted), the chosen measures here do not differ substantially from those currently disclosed. Furthermore, regarding the performance in terms of capturing the inflation trend, the ranking among classes remains, highlighting the results for the measures using smoothed trimmed means
    Date: 2014–05
  12. By: Nikola Mirkov; Andreas Steinhauer
    Abstract: We conducted an anonymous survey in December 2013 asking around 200 economists worldwide to provide an interval (a to b) of average inflation in the US expected "over the next two years". The respondents were also instructed to give a probability of inflation being higher or lower than the mid-interval (a+b)/2. The aggregate distribution of inflation expectations we obtain closely resembles the outcome of the Survey of Professional Forecasters for 1Q2014. More importantly, we find that the subjective probability mass on either side of the mid-interval is not statistically different from 0.5, which means that the subjective distributions are symmetric. Our results align well with several papers evaluating the Survey of Professional Forecasters or similar data sets and finding no significant departures from symmetry.
    Keywords: Inflation expectations, subjective probability distributions
    JEL: C42 E31
    Date: 2014–09
  13. By: Paola Cerchiello (Department of Economics and Management, University of Pavia); Paolo Giudici (Department of Economics and Management, University of Pavia)
    Abstract: Financial network models are a useful tool to model interconnectedness and systemic risks in financial systems. They are essentially descriptive, and based on highly correlated networks. In this paper we embed them in a stochastic framework, aimed at a more parsimonious and more realistic representation. First we introduce Gaussian graphical models in the field of systemic risk modelling, thus estimating the adjacency matrix of a network in a robust and coherent way. Second, we propose a conditional graphical model that can usefully decompose correlations between financial institutions into correlations between countries and correlations between institutions, within countries. While the former may be further explained by macroeconomic variables, the latter may be further explained by idiosyncratic balance sheet indicators. We have applied our proposed methods to the largest European banks, with the aim of identifying central in situations, more subject to contagion or, conversely, whose failure could result in further distress or breakdowns in the whole system. Our results show that, in the transmission of the perceived default risk, there is a strong country effect, that reflects the weakness and the strength of the underlying economies. In addition, each country reveals specific idiosyncratic factors, with communalities among similar countries
    Keywords: Conditional independence, network models, financial risk management
    Date: 2014–09
  14. By: Maarten Dossche (National Bank of Belgium, Research Department); Vivien Lewis (Center for Economic Studies, KU Leuven, Belgium); Céline Poilly (University of Lausanne, HEC-DEEP Switzerland)
    Abstract: We characterize optimal monetary policy in a New Keynesian search-and-matching model where multiple-worker firms satisfy demand in the short run by adjusting hours per worker. Imperfect product market competition and search frictions reduce steady state hours per worker below the efficient level. Bargaining results in a convex ‘wage curve’ linking wages to hours. Since the steadystate real marginal wage is low, wages respond little to hours. As a result, firms overuse the hours margin at the expense of hiring, which makes hours too volatile. The Ramsey planner uses inflation as an instrument to dampen inefficient hours fluctuations.
    Keywords: employment, hours, wage curve, optimal monetary policy
    JEL: E30 E50 E60
    Date: 2014–09

This nep-cba issue is ©2014 by Maria Semenova. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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