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on Central Banking |
| By: | Takeshi Kimura (Bank of Japan); Jouchi Nakajima (Bank of Japan) |
| Abstract: | This paper proposes a new estimation framework for identifying monetary policy shocks in both conventional and unconventional policy regimes using a structural VAR model. Exploiting a latent threshold modeling strategy that induces time-varying shrinkage of the parameters, we explore a recursive identification switching with a time-varying overidentification for the interest rate zero lower bound. We empirically analyze Japan's monetary policy to illustrate the proposed approach for modeling regime-switching between conventional and unconventional monetary policy periods, and find that the proposed model is preferred over a nested standard time-varying parameter VAR model. The estimation results show that increasing bank reserves lowers long-term interest rates in the unconventional policy periods, and that the impulse responses of inflation and the output gap to a bank reserve shock appear to be positive but highly uncertain. |
| Keywords: | Identification; Latent threshold models; Monetary policy; Time-varying parameter VAR; Zero lower bound |
| JEL: | C32 E52 |
| Date: | 2013–05–02 |
| URL: | http://d.repec.org/n?u=RePEc:boj:bojwps:13-e-7&r=cba |
| By: | Fabia A. de Carvalho; Marcos R. Castro; Silvio M. A. Costa |
| Abstract: | This paper investigates the transmission channel of macroprudential instruments in a closed economy DSGE model with a rich set of nancial frictions. Banks' decisions on risky retail loan concessions are based on borrowers' capacity to settle their debt with labor income. We also introduce frictions in banks' optimal choices of balance sheet composition to better reproduce banks'strategic reactions to changes in funding costs, in risk perception and in the regulatory environment.The model is able to reproduce not only price effects from macroprudential policies, but also quantity effects. The model is estimated with Brazilian data using Bayesian techniques. Unanticipated changes in reserve requirements have important quantitative effects, especially on banks' optimal asset allocation and on the choice of funding. This result holds true even for required reserves deposited at the central bank that are remunerated at the base rate. Changes in required core capital substantially impact the real economy and banks' balance sheet. When there is a lag between announcements and actual implementation of increased capital requirement ratios, agents immediately engage in anticipatory behavior. Banks immediately start to retain dividends so as to smooth the impact of higher required capital on their assets, more particularly on loans. The impact on the real economy also shifts to nearer horizons. Announcements that allow the new regulation on required capital to be anticipated also improve banks' risk positions, since banks achieve higher capital adequacy ratios right after the announcement and throughout the impact period. The effects of regulatory changes to risk weights on bank assets are not constrained to impact the segment whose risk was reassessed. We compare the model responses with those generated by models with collateral constraints traditionally used in the literature. The choice of collateral constraint is found to have important implications for the transmission mechanisms. |
| Keywords: | Collateral, productivity, small open economy |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:460&r=cba |
| By: | Rodrigo Mariscal; Andrew Powell; Pilar Tavella |
| Abstract: | Inflation targeting has been adopted in a set of emerging economies, including eight countries in Latin America. The success of this regime may depend critically on the credibility of the target and the expectation that the authorities will take appropriate actions if the target is breached. This paper exploits a database of inflation expectations and attempts to measure whether, for a set of inflation targeters in Latin America, expectations are well anchored. A tighter anchoring of expectations is interpreted as a gain in credibility. Also considered are the effects on the credibility of the regime if the inflation target is breached. The results indicate that while inflation expectations have not been fully anchored over the whole sample period, credibility has risen, but at the same time the cost of breaching the target has grown. |
| Keywords: | Monetary Policy, Economic Development & Growth, Latin America, Inflation targeting, Credibility, Expectations |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:idb:brikps:86253&r=cba |
| By: | George Tavlas (Bank of Greece) |
| Abstract: | This paper examines the different policy rules proposed by Henry Simons, who, beginning in the mid-1930s, advocated a price-level stabilization rule, and by Milton Friedman, who, beginning in the late-1950s, advocated a rule that targeted a constant growth rate of the money supply. Although both rules shared the objective of eliminating the policy uncertainty emanating from discretion, they differed because of the different views of Simons and Friedman about the stability of secular relationships. Simons' rule relates to modern rules which emphasize the pursuit of price stability as representing optimal monetary policy. Â Â |
| Keywords: | Milton Friedman, Henry Simons, monetary-policy rules |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:bfi:wpaper:2014-002&r=cba |
| By: | Saten Kumar (Department of Economics, Faculty of Business and Law, Auckland University of Technology) |
| Abstract: | We investigate how the Federal Reserve (Fed) hit the zero lower bound (ZLB) interest rate while operating under a Taylor-type policy rule. We estimate a reaction function and the results indicate that during the crisis Fed increased the weight on output without also increasing the weight on inflation led them to hit the ZLB. |
| Keywords: | Ambiguity, Belief Function, Investment Bubble, Inference |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:aut:wpaper:201402&r=cba |
| By: | Byrne, Joseph P.; Korobilis, Dimitris; Ribeiro, Pinho J. |
| Abstract: | An expanding literature articulates the view that Taylor rules are helpful in predicting exchange rates. In a changing world however, Taylor rule parameters may be subject to structural instabilities, for example during the Global Financial Crisis. This paper forecasts exchange rates using such Taylor rules with Time Varying Parameters (TVP) estimated by Bayesian methods. In core out-of-sample results, we improve upon a random walk benchmark for at least half, and for as many as eight out of ten, of the currencies considered. This contrasts with a constant parameter Taylor rule model that yields a more limited improvement upon the benchmark. In further results, Purchasing Power Parity and Uncovered Interest Rate Parity TVP models beat a random walk benchmark, implying our methods have some generality in exchange rate prediction. |
| Keywords: | Exchange Rate Forecasting, Taylor Rules, Time-Varying Parameters, Bayesian Methods, |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:edn:sirdps:566&r=cba |
| By: | Ko Munakata (Bank of Japan); Koji Nakamura (Bank of Japan); Yuki Teranishi (Bank of Japan) |
| Abstract: | We introduce the financial market friction through the search and matching in the loan market into a dynamic stochastic general equilibrium (DSGE) model. We reveal that the second order approximation of social welfare includes the terms relating credit, such as credit market tightness, the volume of credit, and a loan separation rate, in addition to the inflation rate and the output gap under the financial market friction. Our analytical result justifies the reason why the optimal policy should take the credit variation into account. We introduce a monetary policy and other policy measures for the financial stability into the model. The optimal outcome is achieved through the monetary and other policy measures by taking into account not only price stability but also financial stability. |
| Date: | 2013–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:boj:bojwps:13-e-1&r=cba |
| By: | Rubén Albeiro Loaiza Maya; José Eduardo Gómez-González; Luis Fernando Melo Velandia |
| Abstract: | A regular vine copula approach is implemented for testing for contagion among the exchange rates of the six largest Latin American countries. Using daily data from June 2005 through April 2012, we find evidence of contagion among the Brazilian, Chilean, Colombian and Mexican exchange rates. However, there are interesting differences in contagion during periods of large exchange rate depreciation and appreciation. Our results have important implications for the response of Latin American countries to currency crises originated abroad. Classification JEL: C32, C51, E421. |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:842&r=cba |
| By: | Peter Tillmann; Maik Wolters |
| Abstract: | We examine both the degree and the structural stability of inflation persistence at different quantiles of the conditional inflation distribution. Previous research focused exclusively on persistence at the conditional mean of the inflation rate. As economic theory provides reasons for inflation persistence to differ across conditional quantiles, this is a potentially severe constraint. Conventional studies of inflation persistence cannot identify changes in persistence at selected quantiles that leave persistence at the median of the distribution unchanged. Based on post-war US data we indeed find robust evidence for a structural break in persistence at all quantiles of the inflation process in the early 1980s. While prior to the 1980s inflation was not mean reverting, quantile autoregression based unit root tests suggest that since the end of the Volcker disinflation the unit root can be rejected at every quantile of the conditional inflation distribution |
| Keywords: | inflation persistence, quantile regressions, structural breaks, unit root test, monetary policy, Federal Reserve |
| JEL: | E31 E37 E58 C22 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1951&r=cba |
| By: | Alexander Ballantyne (Reserve Bank of Australia); Jonathan Hambur (Reserve Bank of Australia); Ivan Roberts (Reserve Bank of Australia); Michelle Wright (Reserve Bank of Australia) |
| Abstract: | This paper describes the Australian experience of domestic financial deregulation, capital account liberalisation and the float of the exchange rate, and provides a comparison to China's current efforts to reform its own financial system. In doing so, it considers similarities and differences in the circumstances facing the two economies. Australia's financial reforms were essential, in the longer term, for building a stronger economy and more robust financial system, but the paper does not interpret the Australian experience as a prescription for financial reform in China. Indeed, the specific sequencing of deregulation that occurred in Australia might not be optimal in a Chinese context, although it is likely that the reforms themselves, pursued with appropriate caution, would have long-run benefits for the Chinese economy. |
| Keywords: | financial deregulation; financial development; China; Australia |
| JEL: | E44 G18 O53 O56 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbardp:rdp2014-10&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 try and detect whether there exists a threshold level of inflation for the US economy over 1801-2013, beyond which it has a negative effect on economic growth. We use a combination of nonparametric (NP) and instrumental variable semiparametric (SNP-IV) methods to obtain inflation thresholds for the United States. The results suggest that the relationship between growth and inflation is hump shaped—that higher levels of inflation reduce growth more. Our results consistently show that inflation above two per cent negatively affects growth. |
| Keywords: | Inflation, growth, nonparametric, semiparametric |
| JEL: | E31 O49 C14 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201447&r=cba |