nep-cba New Economics Papers
on Central Banking
Issue of 2014‒10‒17
twenty papers chosen by
Maria Semenova
Higher School of Economics

  1. Anchoring of Inflation Expectations in Light of Adverse Supply Shocks By Aguilar-Argaez Ana María; Cuadra Gabriel; Ramírez Claudia; Sámano Daniel    
  2. Deposit Insurance Adoption and Bank Risk-Taking: the Role of Leverage By M. Lé
  3. The effectiveness of countercyclical capital requirements and contingent convertible capital: a dual approach to macroeconomic stability By Hylton Hollander
  4. Solution Algorithm to a Class of Monetary Rational Equilibrium Macromodels with Optimal Monetary Policy Design By Frank Hespeler
  5. Explaining exchange rate anomalies in a model with Taylor-rule fundamentals and consistent expectations By Lansing, Kevin J.; Ma, Jun
  6. The Optimal Monetary Policy Rule For the European Central Bank By Paolo Gelain
  7. Inflation Targets Reconsidered: Comments on Paul Krugman By Guido Tabellini
  8. Ramsey Monetary Policy and GHG Emission Control By Barbara Annicchiarico; Fabio Di Dio
  9. A Bank Lending Channel of Monetary Policy in Spain: Evidence from Bank Balance Sheets By Rafaela PIZARRO-BARCELÓ
  10. Multiplicity of monetary steady states By Ryoji Hiraguchi; Keiichiro Kobayashi
  11. Inflation Stabilization and Default Risk in a Currency Union By Okano Eiji; Masashige Hamano; Pierre Picard
  12. Monetary policy transmission mechanism in Poland What do we know in 2013? By Tomasz Łyziak; Mariusz Kapuściński; Ewa Stanislawska; Jan Przystupa; Ewa Wrobel; Anna Sznajderska
  13. The Macroeconomics of a Financial Dutch Disease By Alberto Botta
  14. Why Do Floating Exchange Rates Float? Evidence From Capital Flows in a Structural VAR Model By Wei Sun
  15. On the Effectiveness of Exchange Rate Interventions in Emerging Markets By Christian Daude; Eduardo Levy Yeyati; Arne Nagengast
  16. Effects of Labor Market Reform on the Efficiency of Monetary Policy By Alvaro AGUIAR; Ana Paula RIBEIRO
  17. Stress-testing banks’ corporate credit portfolio By O. de Bandt; N. Dumontaux; V. Martin; D. Médée
  18. Financial contagion and market intervention in the 1772-3 credit crisis By Paul Kosmetatos
  19. Macro Stress Testing at the Bank of Japan By Tomiyuki Kitamura; Satoko Kojima; Koji Nakamura; Kojiro Takahashi; Ikuo Takei
  20. The Macroeconomic Effects of Losing Autonomous Monetary Policy after the Euro Adoption in Poland By Krzysztof MAKARSKI; Michal GRADZEWICZ

  1. By: Aguilar-Argaez Ana María; Cuadra Gabriel; Ramírez Claudia; Sámano Daniel    
    Abstract: In order to create an environment of low and stable inflation in Mexico it has been necessary to generate a framework for the conduction of monetary policy focused on price stability along with fiscal discipline. This paper describes some structural achievements to control inflation that have been attained in Mexico. In addition, it shows empirical evidence in favor of the anchoring of inflation expectations, particularly those for the medium and long term, being recently strengthened. Considering three episodes, within the period 2004-2012, in which inflation was subject to different supply shocks, it finds that during the episode in 2012 inflation expectations showed greater stability. Results show that the response from inflation expectations to supply shocks has diminished over time, up to values that are not significantly different from zero. This suggests a strengthening of the credibility of the Bank of Mexico's commitment to price stability.
    Keywords: inflation expectations, anchoring inflation expectations, cost-push shocks.
    JEL: E52 E58 E65
    Date: 2014–09
  2. By: M. Lé
    Abstract: Explicit deposit insurance is a crucial ingredient of modern financial safety nets. This paper investigates the effect of deposit insurance adoption on individual bank leverage. Using a panel of banks across 117 countries during the period 1986-2011, I show that deposit insurance adoption pushes banks to increase significantly their leverage by reducing their capital buffer. This increase in bank leverage then translates into higher probability of insolvency. Most importantly, I bring evidence that deposit insurance adoption has important competitive effects: I show that large, systemic and highly leveraged banks are unresponsive to deposit insurance adoption.
    Keywords: Deposit Insurance, Bank Risk-Taking, Leverage, Systemic Bank, Capital Buffer.
    JEL: G18 G21 G28 G32
    Date: 2013
  3. By: Hylton Hollander (Department of Economics, University of Stellenbosch)
    Abstract: This paper studies the effectiveness of countercyclical capital requirements and contingent convertible capital (CoCos) in limiting financial instability, and its associated influence on the real economy. To do this, I augment both features into a standard real business cycle framework with an equity market and a banking sector. The model is calibrated to real U.S. data and used for simulations. The findings suggest that CoCos effectively re-capitalize the banking sector and foster the objectives of countercyclical capital requirements (i.e., Basel III). Under financial shocks, CoCos provide an effective automatic stabilization effect on the financial cycle and the real economy. Conversely, a countercyclical capital adequacy rule dominates CoCos in the stabilization of real shocks.
    Keywords: Contingent convertible debt, bank capital, bank regulation, Basel
    JEL: G28 G38 E44
    Date: 2014
  4. By: Frank Hespeler
  5. By: Lansing, Kevin J. (Federal Reserve Bank of San Francisco); Ma, Jun (University of Alabama)
    Abstract: We introduce a form of boundedly-rational expectations into a standard asset-pricing model of the exchange rate, where cross-country interest rate differentials are governed by Taylor-type rules. We postulate that agents augment a lagged-information random walk forecast with a term that relates to news about Taylor-rule fundamentals. We solve for a “consistent expectations equilibrium,” in which the coefficient on fundamental news in the agent’s forecast rule is pinned down using the moments of observable data. The forecast errors observed by the agent are close to white noise, making it di¢ cult for the agent to detect any misspecification. We show that the model generates volatility and persistence that is remarkably similar to that observed in monthly bilateral exchange rate data (relative to the U.S.) for Canada, Japan, and the U.K. over the period 1974 to 2012. Moreover, we show that regressions performed on model-generated data can deliver the well-documented forward premium anomaly whereby a high interest rate currency tends to appreciate, thus violating the uncovered interest rate parity condition.
    JEL: D83 D84 E44 F31 G17
    Date: 2014–09
  6. By: Paolo Gelain
  7. By: Guido Tabellini
    Abstract: Paul Krugman has written a very timely paper. It discusses an old issue, that has become very relevant again. My comments address two questions. First, should inflation targeting be reconsidered? Here my answer is a clear and resounding yes. Inflation targeting performed very well in the fight against inflation and in stabilizing inflation expectations. But now, even leaving issues of financial stability aside, monetary policy is faced with different challenges. Second, which features of the inflation targeting framework should be changed? Here I argue that other aspects of the framework are more important than the numerical value of the target. In addressing these questions, I review Paul Krugman’s arguments, agreeing with many but not all of them.
    Date: 2014
  8. By: Barbara Annicchiarico (DEDI and CEIS, Università di Roma "Tor Vergata"); Fabio Di Dio (Sogei S.p.a. - IT Economia)
    Abstract: We study Ramsey monetary policy in a New Keynesian model embodying pollutant emissions and greenhouse gas emissions control policy. We find that the optimal response of inflation to technology shocks is crucially affected by the environmental regime adopted for emissions control.
    Keywords: Monetary Policy, Ramsey Problem, GHG Emission Control Policy
    JEL: E32 E52 Q58
    Date: 2014–09–24
  9. By: Rafaela PIZARRO-BARCELÓ
  10. By: Ryoji Hiraguchi; Keiichiro Kobayashi
    Abstract: In the Lagos-Wright model of money, monetary frictions alone cannot be a source of equilibrium multiplicity. However, the conclusion depends on the assumption that the agents always enter the centralized market after completing a transaction in the decentralized markets. In this paper, we investigate a monetary model in which the centralized market opens once, but the decentralized markets open twice in each period. We show that as the sellers money balances affect the buyers problem in the first decentralized market, there may be multiple stationary equilibria.
    Date: 2014–09
  11. By: Okano Eiji (Nagoya City University,); Masashige Hamano (Sophia University); Pierre Picard (University of Luxembourg)
    Abstract: By developing a class of dynamic stochastic general equilibrium models with nominal rigidities and assuming a two-country currency union with sovereign risk, we show that there is not necessarily a trade-off between the prevention of default risk and stabilizing inflation. Under optimal monetary and fiscal policy, comprising a de facto inflation stabilization policy, the tax rate as an optimal fiscal policy tool plays an important role in stabilizing inflation, although not completely because of the distorted steady state. Changes in the tax rate to minimize welfare costs via stabilizing inflation then improve the fiscal surplus, and because of this and the incompletely stabilized inflation, the default rate does not increase as much.
    Keywords: Sovereign Risk; European Crisis; Optimal Monetary Policy; Fiscal Theory of the Price Level; Currency Union
    JEL: E52 E60 F41 F47
    Date: 2014–09
  12. By: Tomasz Łyziak (Narodowy Bank Polski / Instytut Ekonomiczny); Mariusz Kapuściński (Narodowy Bank Polski / Instytut Ekonomiczny); Ewa Stanislawska (Narodowy Bank Polski); Jan Przystupa (National Bank of Poland, Institute for Market, Consumption and Business Cycles Research); Ewa Wrobel (National Bank of Poland and University of Warsaw); Anna Sznajderska (National Bank of Poland)
    Abstract: For a central bank knowledge of the monetary policy transmission mechanism is a prerequisite for achieving its final goal, i.e. price stability. Therefore, this area of analyses and research is of key importance for central banks, including Narodowy Bank Polski (NBP). Every two years since 2011, the Research Bureau of the Economic Institute at NBP, prepares a report on the functioning of the transmission mechanism in Poland. Our aim is to gather the results of the most recent studies and to present them in a non-technical manner. Though we remain within the New-Keynesian school, we treat the theoretical achievements – according to Mayer’s (1996) terminology – rather in terms of empirical-science theory than formalistic theory. Therefore, the studies presented in this report share a common empirical character and aim at finding the most complete answer to the question on the role of monetary policy for the main economic variables in Poland. In our analyses we employ a broad set of various modelling tools. Thus, following monetary transmission literature, we use structural vector autoregression models (SVAR) as they are an important tool of inference on stylized facts, main transmission channels and their effectiveness. To examine the strength and delays in the transmission mechanism and ways in which the central bank affects the economy, we use classic structural models, i.e. the new version of the structural monetary transmission model (MMT 2.0) and the model based on the Global Projection Models, adjusted for specific features of the Polish economy, called QMOTR. In contrast to the previously used models, the new ones explicitly treat equilibria of the main macroeconomic categories and allow for a higher degree of forward-lookingness. To assess the impact of the exchange rate on the real sector, we use another structural model, i.e. the natural exchange rate model, NATREX. Finally, to analyse interest rate pass-through we apply error correction models (ECM). As in the previous report (Demchuk et al., 2012), presentation of model results is preceded by an assessment of the structural features of the Polish economy, which are potentially important for the functioning of the monetary policy transmission.
    Date: 2014
  13. By: Alberto Botta (Department of Political and Social Sciences, University of Pavia and Department of Law and Economics, Mediterranean University of Reggio Calabria)
    Abstract: In this paper we describe the medium-run macroeconomic effects and long-run development consequences of a financial Dutch disease that may takes place in a small developing country with abundant natural resources. The first move of such a peculiar Dutch disease is on financial markets. An initial surge in FDI flows targeting domestic natural resources sets in motion a perverse cycle between exchange rate appreciation and mounting short-term capital flows. Such a spiral easily turns out to give rise to exchange rate volatility, foreign capital reversals, and sharp macroeconomic instability. In the long run, such acute macroeconomic instability as well as overdependence on natural resource exports all dampen the development of non-traditional tradable good sectors and curtail labor productivity dynamics. We advise the introduction of constraints to short-term capital inflows, in the form of taxes on exchange rate-based capital gains, to tame exchange rate/capital flows boom-and-bust cycles. We provide support to a developmentalist monetary policy that targets competitive nominal and real exchange rates in order to favor the process of production and export diversification. Such a policy stand can be particularly effective to counter-act the long-run negative effects of the financial Dutch disease we describe.
    Keywords: Financial Dutch Disease, exchange rate volatility, macroeconomic instability, developmentalist monetary policy
    JEL: O14 F32 O24
    Date: 2014–09
  14. By: Wei Sun
  15. By: Christian Daude; Eduardo Levy Yeyati; Arne Nagengast
    Abstract: We analyse the effectiveness of exchange rate interventions for a panel of 18 emerging market economies during the period 2003-11. Using an error-correction model approach, we find that on average intervention is effective in moving the real exchange rate in the desired direction, controlling for deviations from the equilibrium and short-term changes in fundamentals and global financial variables. Our results are robust to different samples and estimation methods. We find little evidence of asymmetries in the effect of sales and purchases, but some evidence of more effective interventions for large deviations from the equilibrium. We also explore differences across countries according to the possible transmission channels and nature of some global shocks. Nous analysons l’efficacité des interventions sur le taux de change pour un panel de 18 économies de marché émergentes pendant la période 2003-11. À l’aide d’une approche basée sur un modèle à correction d’erreurs, nous trouvons que, en moyenne, l’intervention est efficace pour faire évoluer le taux de change réel dans la direction désirée, en contrôlant pour les écarts à l’équilibre et les variations à court-terme des fondamentaux et des variables financières globales. Nos résultats ressortent comme robustes à différents échantillons et méthodes d’estimation. Nous dégageons peu d’évidences d’asymétries dans la vente et l’achat, mais certains signes d’une plus grande efficacité d’interventions pour de grands écarts à l’équilibre. Nous explorons également les différences entre pays selon les canaux de transmission possibles et la nature de certains chocs globaux.
    Keywords: exchange rate, equilibrium exchange rate, FX intervention, intervention de change, taux de change d’équilibre, taux de change
    JEL: F31 F37
    Date: 2014–09–22
  16. By: Alvaro AGUIAR; Ana Paula RIBEIRO
  17. By: O. de Bandt; N. Dumontaux; V. Martin; D. Médée
    Abstract: The paper describes the methods used by the French Banking Supervision Authority (ACP) to run stress tests for the corporate credit portfolio, through credit migration matrices (or transition matrices). This approach is currently used for “top-down” stress tests exercises. Developed for Basel II, it is still relevant under the Basel III framework. It includes sufficient flexibility to accommodate the severe crisis period observed recently. The paper introduces the basic model underlying the approach, largely based on Merton’s model; it then describes carefully the different steps for its practical implementation, providing hints on how it can be extended to other banking sectors. Finally the paper comments a few outputs of a stress testing exercise.
    Keywords: credit risk, corporate, stress tests, migration matrices.
    JEL: G21 G28 G32 E44
    Date: 2013
  18. By: Paul Kosmetatos (Darwin College, Cambridge)
    Abstract: The 1772-3 credit crisis impressed its contemporaries for its suddenness, geographical range, and for arising during a time of relative peace and robust economic growth. It also arguably displayed an early instance of a Lender of Last Resort (LLR) in action, some thirty years before the classical articulation of the concept. This paper investigates whether financial contagion was at work in 1772-3, and describes its possible routes of transmission. It furthermore identifies the agents of market intervention, and discusses whether theirs was a conscious policy to limit systemic risk, or ad hoc improvisation in response to other considerations.
    Keywords: Monetary economics, Financial markets and institutions, Financial crises
    JEL: B12 E58 G01 N13 N23
  19. By: Tomiyuki Kitamura (Bank of Japan); Satoko Kojima (Bank of Japan); Koji Nakamura (Bank of Japan); Kojiro Takahashi (Bank of Japan); Ikuo Takei (Bank of Japan)
    Abstract: Since the global financial crisis, macro stress testing has attracted much attention in many countries as a method to evaluate potential risks of financial system. The Bank of Japan has conducted macro stress testing with various scenarios reflecting financial and economic conditions at each point in time, and published the results in the semi-annual Financial System Report. This paper explains the framework of macro stress testing reported in the Financial System Report. The framework has been improved over time to ensure it appropriately analyzes risk factors in Japan's financial system. Current notable features of the Bank's macro stress testing are as follows. First, it includes a mechanism reflecting the feedback loop between the financial and economic sectors by using the FMM, a medium-sized structural macro model comprising two sectors: financial and macroeconomic. Second, it can analyze not only aggregate figures such as capital adequacy ratios and net interest income, but also those for individual financial institutions.
    Keywords: stress testing; macroprudential policy
    JEL: E44 G21
    Date: 2014–10–08
  20. By: Krzysztof MAKARSKI; Michal GRADZEWICZ

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