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on Central Banking |
| By: | Adrian, Tobias (Federal Reserve Bank of New York); Liang, J. Nellie |
| Abstract: | In the conduct of monetary policy, there exists a risk-return trade-off between financial conditions and financial stability, which complements monetary policy’s traditional trade-off between inflation and real activity. The trade-off exists even if monetary policy does not target financial stability considerations independently of its inflation and real activity goals, because risks to future financial stability are increased by the buildup of financial vulnerabilities from persistent accommodative monetary policy when the economy is close to potential. We review monetary policy transmission channels and financial frictions that give rise to this trade-off between financial conditions and financial stability, within a monitoring program across asset markets, banking firms, shadow banking, and the nonfinancial sector. We focus on vulnerabilities that affect monetary policy’s risk-return trade-off, including 1) pricing of risk, 2) leverage, 3) maturity and liquidity mismatch, and 4) interconnectedness and complexity. We also discuss the extent to which structural and time-varying macroprudential policies can counteract the buildup of vulnerabilities, thus mitigating monetary policy’s risk-return trade-off. |
| Keywords: | risk-taking channel of monetary policy; monetary policy transmission; monetary policy rules; financial stability; financial conditions; macroprudential policy |
| JEL: | E52 G01 G28 |
| Date: | 2014–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:690&r=cba |
| By: | Yulia Vymyatnina; Evgeniya Goryacheva |
| Abstract: | Using monthly and quarterly data for 2000 – 2012 for Belarus, Kazakhstan and Russia we estimate monetary policy rules for these countries. The aim of our study is to find out similarities and differences in monetary policy practices in these countries in order to evaluate potential problems in switching to unified macroeconomic policy that is envisaged within the Common Economic Area. We analyze official statements of the Central Banks, dynamics of major macroeconomic indicators, estimate modified monetary policy rules and conclude that Kazakhstan and Russia have similar monetary policy, while Belarus will have to change most of its practices in case the unified monetary policy is introduced in the Common Economic Area. |
| Keywords: | Customs Union, Common Economic Area, monetary policy rules, inflation, Russia, Belarus, Kazakhstan |
| JEL: | E52 F42 |
| Date: | 2014–08–29 |
| URL: | http://d.repec.org/n?u=RePEc:eus:wpaper:ec0514&r=cba |
| By: | Javier Bianchi (Federal Reserve Bank of Minneapolis, University of Wisconsin, NBER); Saki Bigio (Columbia University) |
| Abstract: | We develop a new framework to study the implementation of monetary policy through the banking system. Banks finance illiquid loans by issuing deposits. Deposit transfers across banks must be settled using central bank reserves. Transfers are random and therefore create liquidity risk, which in turn determines the supply of credit and the money multiplier. We study how different shocks to the banking system and monetary policy affect the economy by altering the trade-off between profiting from lending and incurring greater liquidity risk. We calibrate our model to study quantitatively why banks have recently increased their reserve holdings but have not expanded lending despite policy efforts. Our analysis underscores an important role of disruptions in interbank markets, followed by a persistent credit demand shock. |
| Keywords: | Banks, monetary policy, liquidity, capital requirements |
| JEL: | G1 E44 E51 E52 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:apc:wpaper:2014-018&r=cba |
| By: | Daisuke Ikeda (Bank of Japan) |
| Abstract: | This paper integrates an asset price bubble and agency costs in firms' price-setting decisions into a monetary DSGE framework. Amplified by nominal wage rigidities, an asset price bubble causes an inefficiently excessive boom. Inflation, however, remains moderate in the boom, because a loosening in financial tightness lowers the agency costs and adds downward pressure on inflation. Stabilizing inflation makes the excessive boom even excessive in the short run. The optimal monetary policy calls for monetary tightening to restrain the boom at the cost of greater volatility in inflation. |
| Keywords: | Optimal monetary policy; Asset price bubbles |
| JEL: | E44 E52 |
| Date: | 2013–02–28 |
| URL: | http://d.repec.org/n?u=RePEc:boj:bojwps:13-e-4&r=cba |
| By: | Yoshino, Naoyuki (Asian Development Bank Institute); Taghizadeh-Hesary, Farhad (Asian Development Bank Institute); Hassanzadeh, Ali (Asian Development Bank Institute); Prasetyo, Ahmad Danu (Asian Development Bank Institute) |
| Abstract: | We estimate the response of Asian stock market prices to exogenous monetary policy shocks using a vector error correction model. In our paper, monetary policy transmits to stock market price through three routes: money by itself, exchange rate, and inflation. Our result points to the fact that stock prices increase persistently in response to an exogenous easing monetary policy. Variance deposition results show that, after 10 periods, the forecast error variance of beyond 53% of the Tehran Stock Exchange Price Index (TEPIX) can be explained by exogenous shocks to the US dollar–Iranian rial exchange rate, while this ratio for exogenous shocks to Iranian real gross domestic product was only 17%. We argue that such evidence can be accounted for by an endogenous response of the stock prices to the monetary policy shocks. |
| Keywords: | asian stock market; monetary policy shocks; vector error correction model |
| JEL: | E44 G10 G12 |
| Date: | 2014–09–05 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0497&r=cba |
| By: | Yoshiyuki Fukuda (Bank of Japan); Yuki Kimura (Bank of Japan); Nao Sudo (Bank of Japan); Hiroshi Ugai (Bank of Japan) |
| Abstract: | Monetary policy shocks in the United States are considered a significant cause of economic fluctuations in other countries. We study empirically how the spillover effects of such shocks have changed as a result of the recent deepening of global integration. We consider shocks to the Federal Funds rate and examine how domestic production in a number of advanced, Latin American, and Asian countries were affected by these shocks during the 1990s and 2000s. We show that contractionary U.S. monetary policy shocks reduced domestic production in most of the sampled countries during the 1990s. During the 2000s, by contrast, the adverse effects were moderated. To explore the reasons behind the weakened spillover effects, we construct a DSGE model and examine the theoretical implications of the recent changes in economic structure, including global integration. In addition, we estimate response of trade and financial variables as well as policy instruments to U.S. monetary policy shocks. Our model combined with the empirical exercises suggests that, despite being enhanced by deepened trade integration, spillover effects may be decreasing due to a decline in the relative importance of the U.S. economy, and to regime switches in domestic monetary and exchange rate policy in non-U.S. countries. Though we empirically find a sign of short-run financial contagion during the 2000s, its effect upon the real economy was minor, possibly reflecting its low persistence. |
| Keywords: | U.S. Monetary Policy; Spillover Effect; Financial and Trade Linkages |
| Date: | 2013–11–26 |
| URL: | http://d.repec.org/n?u=RePEc:boj:bojwps:13-e-16&r=cba |
| By: | NU. CEPAL. Subsede de México |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecr:col031:4926&r=cba |
| By: | Hiroshi Kawata (Bank of Japan); Yoshiyuki Kurachi (Bank of Japan); Koji Nakamura (Bank of Japan); Yuki Teranishi (Bank of Japan) |
| Abstract: | This paper uses a financial macro-econometric model to compare and analyze the impact of macroprudential policy measures -- a credit growth restriction, loan-to-value and debt-to-income regulations, and a time-varying capital requirement -- on the economic dynamics through the financial cycle with the asset price bubble. Our analysis shows that although these macroprudential policy measures dampen economic volatility, it is possible that they reduce average economic growth, and the effects on the economic dynamics differ widely among macroprudential policy measures. In addition, the policy effects are changed dramatically by lags in recognizing the state of the economy. Our results also suggest that macroprudential policy measures can help contribute to more stable financial intermediation by raising the resilience of the financial system against risks. |
| Date: | 2013–02–20 |
| URL: | http://d.repec.org/n?u=RePEc:boj:bojwps:13-e-3&r=cba |