nep-cba New Economics Papers
on Central Banking
Issue of 2014‒11‒07
29 papers chosen by
Maria Semenova
Higher School of Economics

  1. Euro Area monetary policy shocks: impact on financial asset prices during the crisis? By C.Jardet; A. Monks
  2. Economic Policy Uncertainty and Inflation Expectations. By K. Istrefi; A. Piloiu
  3. Three Scenarios for Interest Rates in the Transition to Normalcy By Cooke, Diana A.; Gavin, Michael K.
  4. Are US Inflation Expectations Re-Anchored? By Dieter Nautz; Till Strohsal; ;
  5. Monetary policy stress in EMU during the moderation and the global crisis By Pawel Gajewski
  6. Central Bank Purchases of Private Assets By Williamson, Stephen D.
  7. ECB Policy Responses between 2007 and 2014: a chronological analysis and a money quantity assessment of their effects By Carlos Rodriguez; Carlos A. Carrasco
  8. Time-Varying Persistence in US Inflation By Massimiliano Caporin; Rangan Gupta
  9. Limited Asset Market Participation and the Optimal Fiscal and Monetary Policies By Lorenzo Menna; Patrizio Tirelli
  10. The Bank of France and the Open-Market instrument: an impossible wedding? By Nicolas Barbaroux
  11. Bank Interventions and Options-based Systemic Risk: Evidence from the Global and Euro-area Crisis By Londono, Juan M.; Tian, Mary
  12. Euro area Inflation as a Predictor of National Inflation Rates By Antonella Cavallo; Antonio Ribba
  13. Surprise! Euro area inflation has fallen By Marianna Riggi; Fabrizio Venditti
  14. The Evolution of the Federal Reserve Swap Lines since 1962 By Bordo, Michael D.; Humpage, Owen F.; Schwartz, Anna J.
  15. Navigating toward normal: the road back to the future for monetary policy By Williams, John C.
  16. Differential Capital Requirements: Leverage Ratio versus Risk-Based Capital Ratio from a Monitoring Perspective By Balasubramanyan, Lakshmi
  17. Recent Estimates of Exchange Rate Pass-Through to Import Prices in the Euro Area By Nidhaleddine Ben Cheikh; Christophe Rault
  18. The redistributive effects of financial deregulation: wall street versus main street By Anton Korinek; Jonathan Kreamer
  19. Transmission de la volatilité et central banking : quelles réactions durant la crise des subprimes ? By Kamel Malik BENSAFTA; Gervasio SEMEDO
  20. Monetary Policy in Oil Exporting Economies By Drago Bergholt
  21. Financial regulation in Spain By Santiago Carbo-Valverde; Francisco Rodriguez-Fernandez
  22. Financial Regulation in Germany By Daniel Detzer; Hansjorg Herr
  23. Financial Regulation in Poland By Alfred Janc; Pawel Marszalek
  24. Financial Regulation in Hungary By Badics, Judit; Kiss, Karoly Miklos; Stenger, Zsolt; Szikszai, Szabolcs
  25. Financial Regulation in Estonia By Egert Juuse; Rainer Kattel
  26. US Inflation Dynamics on Long Range Data By Vasilios Plakandaras; Periklis Gogas; Rangan Gupta; Theophilos Papadimitriou
  27. Global liquidity, money growth and UK inflation By Michael Ellington; Costas Milas
  28. Effective Exchange Rates in Central and Eastern European Countries: Cyclicality and Relationship with Macroeconomic Fundamentals By Daniel StavaÌrek; Cynthia Miglietti
  29. The effects of global monetary policy and Greek debt crisis on the dynamic conditional correlations of currency markets By Costas Karfakis; Theodore Panagiotidis

  1. By: C.Jardet; A. Monks
    Abstract: We use high-frequency intraday interest rate data to measure euro area monetary policy shocks on the days of ECB interest rate announcements between 2002 and 2013. In line with Gürkaynak et al. (2005), we look at monetary policy shocks along two time dimensions: one related to the current level of short-term interest rates and a second related to expectations for the future path of these rates. We undertake regression analysis in order to determine the impact of monetary policy shocks on euro-denominated financial asset prices and confirm that shocks related to the future path of monetary policy are an important driver, particularly for longer-term bond yields. We find that this relationship has changed for certain asset classes since the onset of the crisis, notably the sovereign bonds of stressed euro area countries. These findings highlight the changed nature of the monetary policy transmission mechanism for some euro area countries during the sovereign debt crisis.
    Keywords: Monetary policy, ECB, Transmission mechanism, financial crisis.
    JEL: E43 E52 E58 E61 E65
    Date: 2014
  2. By: K. Istrefi; A. Piloiu
    Abstract: Theory and evidence suggest that in an environment of well-anchored expectations, temporary economic news or shocks should not affect agents' expectations of inflation in the long term. Our estimated structural VARs show that both long- and short-term inflation expectations are sensitive to policy-related uncertainty shocks. While economic activity contracts, long-term inflation expectations raise in response to such shocks. These results suggest that observed uncertainty about the stance and perceived effectiveness of policy raises concerns about future inflation and entails additional risks to central banks' hard-won inflation credibility.
    Keywords: Policy uncertainty; central banks; inflation expectations; structural VAR.
    JEL: E02 E31 E58 E63 P16
    Date: 2014
  3. By: Cooke, Diana A. (Federal Reserve Bank of St. Louis); Gavin, Michael K. (Federal Reserve Bank of St. Louis)
    Abstract: This article develops time-series models to represent three alternative, potential monetary policy regimes as monetary policy returns to normal. The first regime is a return to the high and volatile inflation rate of the 1970s. The second regime, the one that most Federal Reserve officials and business economists expect, is a return to the credible low inflation policy that characterized the U.S. economy from 1983 to 2007, a period that has come to be known as the Great Moderation. The third regime is one in which policymakers decide to keep policy interest rates at or near zero for the foreseeable future. Japanese data are used to estimate this regime. These time-series models include four variables, per capita GDP growth, CPI inflation, the policy rate and the 10-year bond rate. These models are used to forecast the U.S. economy from 2008 through 2013 and represent the possible outcomes for interest rates that may follow the return of monetary policy to normal. Here, normal depends on the policy regime that follows the liftoff of the federal funds rate target that is expected in mid-2015.
    Keywords: Exit strategy; Credibility; Interest rate policy
    JEL: E43 E47 E52 E58 E65
    Date: 2014–10–03
  4. By: Dieter Nautz; Till Strohsal; ;
    Abstract: Anchored inflation expectations are of key importance for monetary policy. If long-terminflation expectations arewell-anchored, they should be unaffected by short-termeconomic news. This letter introduces newsregressions with multiple endogenous breaks to investigate the de- and re-anchoring of US inflation expectations. We confirm earlier evidence on the de-anchoring of expectations driven by the outbreak of the crisis. Our results indicate that expectations have not been re-anchored ever since.
    Keywords: Anchoring of Inflation Expectations, Break-Even Inflation Rates, News-Regressions, Multiple Structural Break Tests
    JEL: E31 E52 E58 C22
    Date: 2014–10
  5. By: Pawel Gajewski (University of Lodz, Faculty of Economics and Sociology)
    Abstract: This paper re-examines the problem of monetary policy stress in the EMU, both prior to the crisis as well as after its outbreak. It aims to (firstly) reconfirm that monetary policy during the great moderation (i.e. until late 2008) was responsible for fuelling the process of imbalance accumulation in the EMU, and (secondly) to determine to what extent the stress was caused by macroeconomic divergences. We employ a forward-looking Taylor-type monetary policy reaction function with realtime forecasted data to mimic the ECB monetary policy during the great moderation. The estimated coefficients are subsequently used to create counterfactual series of ruleconsistent country-specific interest rates and compute monetary policy stress in EMU individual member states. The results confirm that peripheral countries were exposed to risks emerging from excessively low interest rates, while the “core” countries had to live with too-high interest rates, and the stress was generally stronger in the former case. Interestingly, the bulk of it was non-fundamental, i.e. not caused by inflation and output gap differentials between countries. There are several potential sources of this stress and we show that missed forecasts were making an important contribution and they were mainly responsible for pushing the interest rate below its rule-consistent level.
    Keywords: monetary stress, crisis, Taylor rule, EMU
    JEL: C22 E52 E58
    Date: 2014–08
  6. By: Williamson, Stephen D. (Federal Reserve Bank of St. Louis)
    Abstract: A model is constructed in which consumers and banks have incentives to fake the quality of collateral. Conventional monetary easing can exacerbate these problems, in that the mispresentation of collateral becomes more profitable, thus increasing haircuts and interest rate differentials. Central bank purchases of private mortgages may not be feasible, due to misrepresentation of asset quality. If feasible, central bank asset purchase programs work by circumventing suboptimal fiscal policy, not by mitigating incentive problems in asset markets.
    Keywords: monetary policy; fiscal policy
    JEL: E31 E5 E58
    Date: 2014–10–01
  7. By: Carlos Rodriguez; Carlos A. Carrasco (University of the Basque Country (UPV/EHU))
    Abstract: In this paper, we analyse the ECB policy measures in place since the outbreak of the financial crisis. First, we discuss the categorisation of the measures implemented by the ECB. Second, we study the phases of the crises and the concrete policy responses. Third, we conduct a comparative analysis of the ECB and the FED responses at the beginning of the crises with regard to the financial system structure, the determinants of the balance sheet size and composition, the risk absorbed, and the exit strategy involved. Finally, we discuss the effectiveness of the ECB’s monetary policy from a traditional monetarist perspective during the entire period, by analysing its impact on monetary aggregates and the money multiplier.
    Keywords: ECB, unconventional monetary policy, money multiplier, monetary aggregates, European crises
    JEL: E52 E58 F15 N14
    Date: 2014–09–01
  8. By: Massimiliano Caporin (Department of Economics and Management “Marco Fanno ”, University of Padova); Rangan Gupta (Department of Economics, University of Pretoria)
    Abstract: The persistence property of inflation is an important issue for not only economists, but, especially for central banks, given that the degree of inflation persistence determines the extent to which central banks can control inflation. Also, not only is the level of inflation persistence that is important in economic analyses, but also the question of whether the persistence varies over time, for instance, across business cycle phases, is equally pertinent, since assuming constant persistence across states of the economy, is sure to lead to misguided policy decisions. Against this backdrop, we extend the literature on long-memory models of inflation persistence for the US economy over the monthly period of 1876:2-2014:5, by developing an autoregressive fractionally integrated moving average-generalized autoregressive conditional heteroskedastic (ARFIMA-GARCH) model, with a time-varying memory coefficient which varies across expansions and recessions. In sum, we find that, inflation persistence does vary across recessions and expansions, with it being significantly higher in the former than in the latter. As an aside, we also show that, persistence of inflation volatility however, is higher during expansions than in recessions. Understandably, our results have important policy implications.
    Keywords: Persistence, US Inflation Rate, Time-Varying Long Memory
    JEL: C12 C13 C22 C51 E31 E52
    Date: 2014–10
  9. By: Lorenzo Menna; Patrizio Tirelli
    Abstract: In the workhorse DSGE model, the optimal steady state inflation rate is near to zero or slightly negative and inflation is almost completely stabilized along the business cycle (Schmitt-Grohè and Uribe, 2011). We reconsider the issue, allowing for agent heterogeneity in the access to the market for interest bearing assets. We show that inflation reduces inequality and that LAMP can justify relatively high optimal inflation rates. When we calibrate the share of constrained agents to fit the wealth Gini index for the US, the optimal inflation rate is well above 2%. The optimal response to shocks is also a¤ected. Rather than using public debt to smooth tax distortions, the Ramsey planner front loads tax rates and reduces public debt variations in order to limit the redistributive e¤ects of debt service payments.
    Keywords: trend in�ation, monetary and �scal policy, Ramsey plan, Limited Asset Market Participation.
    JEL: E52 E58 J51 E24
    Date: 2014–10
  10. By: Nicolas Barbaroux (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: In the aftermath of the sovereign debt criss, open-market interventions prevailed within the central bank's policy answers known under the label unconventional monetary policy measures. During interwar period, France was an isolated case, among the leading countries, by everlastingly rejecting open-market operations in its monetary policy toolset. The present study analyzes the French monetary policy history by explaining why Bank of France had been so old-fashioned in monetary policymaking for too long time. Moreover, the article provides an explanation of the latter point by raising five major arguments of explanation : (1) the irrelevancy of the French interwar monetary reforms which enabled the Bank of France to conduct open-market operations per se; (2) the French conservatism throughout the insiders' view from the Bank of France leaders (not only governors and deputy governors, but also the General Council's members at the head of the French central bank); (3) the legacy of a metallist vision, embodied by Charles Rist, within the French economists of that time (4) the negative public opinion regarding open-market operations which were seen as being an inflationist public debt financing instrument and lastly (5) the unfair competition that occurred between the discounting operations and the open-market operations in the Bank of France's balance sheet.
    Keywords: Open-market; Monetary policy; Central banking
    Date: 2014
  11. By: Londono, Juan M. (Board of Governors of the Federal Reserve System (U.S.)); Tian, Mary (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: Using a novel dataset on central bank interventions to financial institutions, we examine the impact of capital injection announcements on systemic risk for the banking sector in the U.S. and the euro area between 2008 and 2013. We propose a new measure of options-based systemic risk called downside correlation risk premium (DCRP), which quantifies the compensation investors demand for being exposed to the risk of large correlated drops in bank stock prices. DCRP is calculated using options that provide a hedge against large drops in the price of a bank index and its individual components. We find that, irrespective of their characteristics, intervention announcements significantly reduce DCRP in the U.S. while for the euro area, interventions were largely unsuccessful at reducing DCRP.
    Keywords: Systemic Risk; Downside Correlation Risk Premium; Bank Interventions; Variance Risk Premium; European Banking Union
    JEL: F36 G15 G21 G28
    Date: 2014–09–04
  12. By: Antonella Cavallo; Antonio Ribba
    Abstract: The stability of inflation differentials is an important condition for the smooth working of a currency area, such as the European Economic and Monetary Union. In the presence of stability, changes in national inflation rates, while holding Euro-area inflation fixed contemporaneously, should be only transitory. If this is the case, the rate of inflation of the whole area can also be interpreted as a predictor, at least in the long run, of the different national inflation rates. However, in this paper we show that this condition is satisfied only for a small number of countries, including France and Italy. Better convergence results for inflation differentials are, instead, found for the USA. Some policy implications are drawn for the Eurozone.
    Keywords: Inflation Differentials; Euro area; Structural Cointegrated VARs; Permanent-transitory Decompositions;
    JEL: E31 C32
    Date: 2013–10
  13. By: Marianna Riggi (Bank of Italy); Fabrizio Venditti (Bank of Italy)
    Abstract: Between 2013 and 2014, following the recession triggered by the sovereign debt crisis, euro-area inflation decreased sharply. Although a fall in the inflation rate was to be expected, given the severity of the recession, professional forecasters failed to anticipate it. A possible explanation for this forecast failure lies in a break in the cyclicality of inflation, which was unaccounted for in forecasting models. We probe this explanation in the context of a simple backward-looking Phillips curve and find that the sensitivity of inflation to the output gap has recently increased. We rationalize this result through a structural model, in which a steepening of the Phillips curve arises either from lower nominal rigidities (a decrease in the average duration of prices) or from fewer strategic complementarities in price-setting due to a reduction in the number of firms in the economy.
    Keywords: inflation, Phillips curve, structural break, strategic complementarities
    JEL: E31 E37 C53
    Date: 2014–09
  14. By: Bordo, Michael D. (Rutgers University); Humpage, Owen F. (Federal Reserve Bank of Cleveland); Schwartz, Anna J. (Federal Reserve Bank of Cleveland)
    Abstract: In this paper, we describe the evolution of the Federal Reserve’s swap lines from their inception in 1962 as a mechanism to forestall claims on US gold reserves under Bretton Woods to their use during the Great Recession as a means of extending emergency dollar liquidity. We describe the Federal Reserve’s successes and failures. We argue that swaps calm crisis situations by both supplementing foreign countries’ dollar reserves and by signaling central-bank cooperation. We show how swaps exposed the Federal Reserve to conditionality and raised fears that they bypassed the Congressional appropriations process.
    Keywords: Swap lines; Federal Reserve; Bretton Woods; Intervention; Mexico; Lender of last resort
    JEL: F3 N2
    Date: 2014–10–02
  15. By: Williams, John C. (Federal Reserve Bank of San Francisco)
    Abstract: Presentation to Business and Community Leaders, Las Vegas, Nevada, October 9, 2014
    Date: 2014–10–09
  16. By: Balasubramanyan, Lakshmi (Federal Reserve Bank of Cleveland)
    Abstract: In this paper, I attempt to amalgamate the study of leverage-ratio performance with the monitoring decisions of a profit-maximizing bank. Applying tools used in studying the industrial organization of banking, my paper serves as a first step to tying the performance differences between the leverage and risk-based constraints to the more fundamental issue of monitoring. Does a bank faced with a leveragebased capital constraint monitor its loans better than a bank under a risk-based capital constraint? In a market that is characterized by a dominant bank and fringe banks, I seek to understand if the dominant bank monitors its loan when faced with a Basel III–style leverage ratio. The results show that under certain parameter ranges, the dominant bank will monitor its portfolio when faced with a leverage-based capital constraint. The results also show that the dominant bank will not monitor its portfolio when faced with a risk-based capital constraint.
    Keywords: Differential capital requirements; dominant-bank model; bank loan monitoring
    JEL: G2
    Date: 2014–10–02
  17. By: Nidhaleddine Ben Cheikh; Christophe Rault
    Abstract: This paper provides an update on the exchange rate pass-through (ERPT) estimates for 12 Euro area (EA) countries. First, based on quarterly data over the 1990-2012 period, our study does not find a significant heterogeneity in the degree of pass-through across the monetary union members, in contrast to previous empirical studies. As we use a longer time span for the post-EA era than existing studies, this is not surprising, since the process of monetary union has entailed some convergence towards more stable macroeconomic conditions across Euro Area (EA) Member States. Second, when assessing the stability of pass-through elasticities we find very weak evidence of a decline around the inception of the Euro in 1999. However, our results reveal that a downtrend in ERPT estimates became apparent starting from the beginning of the 1990s. This observed decline was synchronous to the shift towards reduced inflation regimes in our sample of countries. Finally, we notice that the distinction between “peripheral” and “core” EA economies in terms of pass-through has significantly decreased over the last two decades.
    Keywords: Exchange Rate Pass-Through, Import Prices, Euro area
    JEL: E31 F31 F40
    Date: 2014–08–01
  18. By: Anton Korinek; Jonathan Kreamer
    Abstract: Financial regulation is often framed as a question of economic efficiency. This paper, by contrast, puts the distributive implications of financial regulation at center stage. We develop a formal model in which the financial sector benefits from financial risk-taking by earning greater expected returns. However, risk-taking also increases the incidence of large losses that lead to credit crunches and impose negative externalities on the real economy. We describe a Pareto frontier along which different levels of risk-taking map into different levels of welfare for the two parties, pitting Main Street against Wall Street. A regulator has to trade off efficiency in the financial sector, which is aided by deregulation, against efficiency in the real economy, which is aided by tighter regulation and a more stable supply of credit. We also show that financial innovation, asymmetric compensation schemes, concentration in the banking system, and bailout expectations enable or encourage greater risk-taking and allocate greater surplus to Wall Street at the expense of Main Street.
    Keywords: financial regulation, distributive conflict, rent extraction, growth of the financial sector
    Date: 2014–10
  19. By: Kamel Malik BENSAFTA; Gervasio SEMEDO
    Keywords: Transmission volatilité, central banking, réactions, crise des subprimes
    Date: 2013
  20. By: Drago Bergholt
    Abstract: How should monetary policy be constructed when national income depends on oil exports? I set up a general equilibrium model for an oil exporting small open economy to analyze this question. Fundamentals include an oil sector and domestic non-oil firms – some of which are linked to oil markets via supply chains. In the model, the intermediate production network implies transmission of international oil shocks to all domestic industries. The presence of wage and price rigidities at the sector level leads to non-trivial trade-offs between different stabilization tar- gets. I characterize Ramsey-optimal monetary policy in this environment, and use the framework to shed light on i) welfare implications of the supply chain channel, and ii) costs of alternative policy rules. Three results emerge: First, optimal policy puts high weight on nominal wage stability. In contrast, attempts to target impulses from the oil sector can be disastrous for welfare. Second, while oil sector activities contribute to macroeconomic fluctuations, they do not change the nature of optimal policy. Third, operational Taylor rules with high interest rate inertia can approximate the Ramsey equilibrium reasonably well.
    Keywords: Monetary policy, oil exports, small open economy, Ramsey equilibrium, DSGE
    JEL: E52 F41 Q33 Q43
    Date: 2014–07
  21. By: Santiago Carbo-Valverde (Bangor Business School); Francisco Rodriguez-Fernandez (University of Granada)
    Abstract: This paper analyses the regulatory framework of the financial system in Spain. Particular attention is paid to the adoption of the EU directives and the way they have been transposed to Spain from 1986 to present, including the regulatory developments in the last few years from the onset of the financial crisis. The Spanish case appears particularly interesting as it has shown one of the most significant transformations during the period considered in the structure of regulation. This paper surveys the implementation of the most important EU regulations since the early 1980s to present. Overall, the implementation has been successful and has been timely. The implementation has been particularly intense and fast in what the solvency regulation is concerned. However, some other regulations, in particular those concerning capital markets, have normally required more time to be transposed or have had to be gradually implemented. The financial crisis has brought a number of significant changes beyond EU regulations for Spanish banks and it has shown that there was still substantial room for improvement in supervision and prudential regulations. The reaction has been significant as the recapitalization and restructuring process, have brought a number of regulatory changes beyond EU Directives.
    Keywords: Financial regulation, Spain, EU Directives, crisis, restructuring
    JEL: G18 G28 G38
    Date: 2014–09–01
  22. By: Daniel Detzer (Berlin School of Economics and Law, Institute for International Political Economy); Hansjorg Herr (Berlin School of Economics and Law, Institute for International Political Economy)
    Abstract: The paper is looking at the historical development of financial regulation in Germany. It is part of a series of papers that outline the development of financial regulation in other European countries such as France, Italy, Estonia, Slovenia, Hungary and Spain, and culminates in a synthesis aiming to understand what has changed in the regulatory structures of different countries because of the decisions made in the Single European Act and had the aim to create a single market also in the sphere of financial markets and what approaches have been taken to implement the long list of EU Directives following the act. This study is structured according to different areas of financial regulation and takes within each area a chronological approach detailing the main changes in each policy area. However, in the first part (section 1), a general overview of the German regulatory system is given and the main overarching changes are described. The second part (sections 4 – 14) focuses on policy areas that were heavily influenced by EU legislation. In the third part largely national regulations are analysed (section 15). Thereafter a short look at the currently constructed banking union is taken. The last section concludes.
    Keywords: Financial Regulation, Banking Regulation, Germany
    JEL: G18 G28 G38 K20
    Date: 2014–09–01
  23. By: Alfred Janc (Poznan University of Economics); Pawel Marszalek (Poznan University of Economics)
    Abstract: The paper aims at short synthesis of the Polish regulatory framework referring to the financial sector with special attention paid to the banking system. We describe origins of the financial regulations in Poland, as well as their further evolution. Then, in the context of changes in the EU directives, we present changes in the Polish regulation resulting from the necessity of adjustments.
    Keywords: financial regulation, Poland, integration, financial crisis
    JEL: G21 G28
    Date: 2014–09–01
  24. By: Badics, Judit; Kiss, Karoly Miklos; Stenger, Zsolt; Szikszai, Szabolcs
    Abstract: The paper aims to study the evolution of the financial regulation and supervision in Hungary from 1987, the year when the foundations of the two-tier banking system were laid. After a brief overview of the history of the Hungarian financial system we turn our attention to the history of the financial regulation. We investigate systematically the main areas of the national financial regulation and discuss the implementation of the financial directives of the European Union in Hungary. Our analysis on the development of the Hungarian legal system concludes that it is almost fully harmonized with the European legislation.
    Keywords: banking system, Hungary, financial crisis, financial institution, financial system, regulation
    JEL: G01 G20 G21 G23 G28 N24
    Date: 2014–09–01
  25. By: Egert Juuse; Rainer Kattel (Tallinn University of Technology)
    Abstract: Regulation of the banking industry in Estonia is theoretically significant in many respects. There is no clear straightforward model that would explain the evolution of the banking legislation, as all theoretical concepts are applicable for understanding the dynamics at certain periods in the regulatory development trajectory. This is witnessed in the interplay of domestic features and external factors. Both the need to build up the institutional framework for private finance and address re-occurring crises anchored the banking regulation and supervision to the EU and other international principles and practices. Estonia has been “accused” of meticulous punctuality in applying the EU regulations, in some cases directly copying from external legal sources, and setting even stricter requirements than the EU would dictate. This, however, has created a paradox of exemplary compliance with the EU standards in terms of its extensiveness, but meager effectiveness in addressing real-life developments. The paper shows the pragmatic approach to establishing regulatory and supervisory framework in the 1990s in the context of crises, internationalization of banking, and also EU accession aspirations, while 2000s mark gradual outsourcing of oversight and embedded formalism in terms of deepening reliance on external normative standards with insignificant economic substance, given the local circumstances.
    Keywords: Financial regulation, financial supervision, banking, transition economies, financial fragility, Europeanization, Estonia
    JEL: G28
    Date: 2014–09–01
  26. By: Vasilios Plakandaras (Department of Economics, Democritus University of Thrace); Periklis Gogas (Department of Economics, Democritus University of Thrace); Rangan Gupta (Department of Economics, University of Pretoria); Theophilos Papadimitriou (Department of Economics, Democritus University of Thrace)
    Abstract: In this paper we evaluate inflation persistence in the U.S. using long range monthly and annual data. The importance of inflation persistence is crucial to policy authorities and market participants, since the level of inflation persistence provides an indication on the susceptibility of the economy to exogenous shocks. Departing from classic econometric approaches found in the relevant literature, we evaluate persistence through the nonparametric Hurst exponent within both a global and a rolling window framework. Moreover, we expand our analysis to detect the potential existence of chaos in the data generating process, in order to enhance the robustness of conclusions. Overall, we find that inflation persistence is high from 1775 to 2013 for the annual dataset and from February 1876 to May 2014 in monthly frequency, respectively. Especially from the monthly dataset, the rolling window approach allows us to derive that inflation persistence has reached to historically high levels in the post Bretton Woods period and remained there ever since.
    Keywords: Inflation, Persistence, Hurst exponent, Detrended Fluctuation Analysis, Lyapunov exponent
    JEL: E31 E60 C14
    Date: 2014–10
  27. By: Michael Ellington (University of Liverpool Management School, UK); Costas Milas (University of Liverpool Management School, UK)
    Abstract: This paper examines the inflationary impact of domestic and global liquidity conditions on UK inflation through the lens of monetary aggregates. To do so, we rely on standard linear models as well as non-linear models that allow for regime switching behaviour in terms of a contained regime (when domestic money growth is relatively concealed) versus an uncontained regime (when domestic money growth is unusually unconcealed). We find that global liquidity yields inflationary pressures in the UK over and above the impact of domestic money growth, spare capacity and money disequilibria (the latter accounting for the property sector and financial asset markets). All effects are regime-switching as they depend on whether domestic money growth is contained within or exceeds threshold boundaries. Finally, broad (M4) money has greater explanatory power than divisia money in modelling UK inflation.
    Date: 2014–10
  28. By: Daniel StavaÌrek (Department of Finance and Accounting, School of Business Administration, Silesian University); Cynthia Miglietti (Department of Applied Sciences, Firelands College, Bowling Green State University)
    Abstract: This paper provides direct empirical evidence on the nature of the relationship between effective exchange rates and selected macroeconomic fundamentals in nine central and Eastern European countries. Therefore, the paper addresses a key precondition of numerous exchange rate determination models and theories that will explain the role of exchange rates in the economy. Additionaly, short-term volatility and medium-term variability of effective exchange rates are examined. The results suggest that flexible exchange rate arrangements are reflected in higher volatility and variability of nominal as well as real effective exchange rates. Furthermore, the results provide mixed evidence in intensity, direction and cyclicality but show a weak correlation between exchange rates and fundamentals. Sufficiently high coefficients are found only for the money supply. Consequently, using fundamentals for the determination of exchange rates and using the exchange rate for an explanation of economic development can be limited for the countries analyzed.
    Keywords: effective exchange rates, volatility, variability, cycle, high/low analysis, peak/trough analysis, cross correlation
    JEL: E32 E44 F31
    Date: 2014–10
  29. By: Costas Karfakis (Department of Economics, University of Macedonia, Greece); Theodore Panagiotidis (Department of Economics, University of Macedonia, Greece)
    Abstract: This study examines first the effects of financial market turmoil in the fall of 2008 on the conditional correlations between three exchange rate returns (USD/EUR, JPY/USD, USD/GBP), and then the effects of quantitative easing programs and Greek debt crisis on the entire distribution of estimated correlations. The dynamic correlations have sharply increased during the period that followed the collapse of Lehman Brothers, indicating a financial contagion across currency markets. The quantitative easing programs of the Federal Reserve and the Bank of England have affected the conditional correlations between the currency pairs. Finally, the Greek debt crisis has emerged as the most significant covariate of the quantile regressions..
    Keywords: Currency markets, quantitative easing, GARCH, dynamic conditional correlation, quantile regression.
    JEL: C32 F31 G15
    Date: 2014–09

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