|
on Central Banking |
| By: | Winkelmann, Lars; Bibinger, Markus; Linzert, Tobias |
| Abstract: | This paper proposes a new econometric approach to disentangle two distinct response patterns of the yield curve to monetary policy announcements. Based on cojumps in intraday tick-data of a short and long term interest rate, we develop a day-wise test that detects the occurrence of a significant policy surprise and identifies the market perceived source of the surprise. The new test is applied to 133 policy announcements of the European Central Bank (ECB) in the period from 2001-2012. Our main findings indicate a good predictability of ECB policy decisions and remarkably stable perceptions about the ECB’s policy preferences. JEL Classification: E58, C14, C58 |
| Keywords: | central bank communication, non-synchronous and noisy high frequency tick-data, spectral cojump estimator, yield curve |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20141674&r=cba |
| By: | Pagano, Marco |
| Abstract: | This paper distils three lessons for bank regulation from the experience of the 2009-12 euro-area financial crisis. First, it highlights the key role that sovereign debt exposures of banks have played in the feedback loop between bank and fiscal distress, and inquires how the regulation of banks' sovereign exposures in the euro area should be changed to mitigate this feedback loop in the future. Second, it explores the relationship between the forbearance of non-performing loans by European banks and the tendency of EU regulators to rescue rather than resolving distressed banks, and asks to what extent the new regulatory framework of the euro-area "banking union" can be expected to mitigate excessive forbearance and facilitate resolution of insolvent banks. Finally, the paper highlights that capital requirements based on the ratio of Tier-1 capital to banks' risk-weighted assets were massively gamed by large banks, which engaged in various forms of regulatory arbitrage to minimize their capital charges while expanding leverage. This argues in favor of relying on a set of simpler and more robust indicators to determine banks' capital shortfall, such as book and market leverage ratios. |
| Keywords: | bank regulation,euro,financial crisis,sovereign exposures,forbearance,bank resolution,bank capital requirements |
| JEL: | G01 G21 G28 G33 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:486&r=cba |
| By: | Pablo Federico; Carlos A. Vegh; Guillermo Vuletin |
| Abstract: | Based on a novel quarterly dataset for 52 countries for the period 1970-2011, we analyze the use and cyclical properties of reserve requirements (RR) as a macroeconomic stabilization tool and whether RR policy substitutes or complements monetary policy. We find that (i) around two thirds of developing countries have used RR policy as a macroeconomic stabilization tool compared to just one third of industrial countries (and no industrial country since 2004); (ii) most developing countries that rely on RR use them countercyclically; and (iii) in many developing countries, monetary policy is procyclical and hence RR policy has substituted monetary policy as a countercyclical tool. We interpret the latter finding as reflecting the need of many emerging markets to raise interest rates in bad times to defend the currency and not raise or lower the interest rate in good times to prevent further currency appreciation. Under these circumstances, RR policy provides a second instrument that substitutes for monetary policy. Evidence from expanded Taylor rules (i.e., Taylor rules that include a nominal exchange rate target) supports these mechanisms. |
| JEL: | E52 F41 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20612&r=cba |
| By: | Jean-Bernard Chatelain (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, UP1 - Université Paris 1, Panthéon-Sorbonne - Université Paris I - Panthéon-Sorbonne - PRES HESAM); Kirsten Ralf (Ecole Supérieure du Commerce Extérieur - ESCE - International business school) |
| Abstract: | This paper investigates the identification, the determinacy and the stability of ad hoc, "quasi-optimal" and optimal policy rules augmented with financial stability indicators (such as asset prices deviations from their fundamental values) and minimizing the volatility of the policy interest rates, when the central bank precommits to financial stability. Firstly, ad hoc and quasi-optimal rules parameters of financial stability indicators cannot be identified. For those rules, non zero policy rule parameters of financial stability indicators are observationally equivalent to rule parameters set to zero in another rule, so that they are unable to inform monetary policy. Secondly, under controllability conditions, optimal policy rules parameters of financial stability indicators can all be identified, along with a bounded solution stabilizing an unstable economy as in Woodford (2003), with determinacy of the initial conditions of non- predetermined variables. |
| Keywords: | Identification; Financial Stability; Optimal Policy under Commitment; Augmented Taylor rule; Monetary Policy. |
| Date: | 2014–04–12 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00978145&r=cba |
| By: | Ashley, Richard (Virginia Tech); Tsang, Kwok Ping (Virginia Tech); Verbrugge, Randal (Federal Reserve Bank of Cleveland) |
| Abstract: | We estimate a monetary policy rule for the US allowing for possible frequency dependence—i.e., allowing the central bank to respond differently to more persistent innovations than to more transitory innovations, in both the unemployment rate and the inflation rate. Our estimation method uses real-time data in these rates—as did the FOMC—and requires no a priori assumptions on the pattern of frequency dependence or on the nature of the processes generating either the data or the natural rate of unemployment. Unlike other approaches, our estimation method allows for possible feedback in the relationship. Our results convincingly reject linearity in the monetary policy rule, in the sense that we find strong evidence for frequency dependence in the key coefficients of the central bank's policy rule: i.e., the central bank's federal funds rate response to a fluctuation in either the unemployment or the inflation rate depended strongly on the persistence of this fluctuation in the recently observed (real-time) data. These results also provide useful insights into how the central bank's monetary policy rule has varied between the Martin-Burns-Miller and the Volcker-Greenspan time periods. |
| Keywords: | Taylor rule; frequency dependence; spectral regression; real-time data |
| JEL: | C22 C32 E52 |
| Date: | 2014–11–19 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1430&r=cba |
| By: | Lejsgaard Autrup, Søren; Grothe, Magdalena |
| Abstract: | This paper analyses price formation in medium- to longer-term maturity segments of euro area and US inflation-linked and nominal bond markets around the releases of important economic indicators. We compare the pre-crisis and crisis periods, controlling for liquidity effects observed in financial markets. The results allow us to draw conclusions about the anchoring of inflation expectations in the two currency areas before and during the crisis. We find a somewhat stronger anchoring of inflation expectations in the euro area than in the United States. During the crisis, the degree of anchoring of inflation expectations did not change in the euro area, but it decreased to some extent in the United States. JEL Classification: E44, G12, G01 |
| Keywords: | break-even inflation rates, inflation expectations, inflation markets, macroeconomic announcements, nominal and real bond yields |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20141671&r=cba |
| By: | John H. Cochrane |
| Abstract: | I analyze monetary policy with interest on reserves and a large balance sheet. I show that conventional theories do not determine inflation in this regime, so I base the analysis on the fiscal theory of the price level. I find that monetary policy can peg the nominal rate, and determine expected inflation. With sticky prices, monetary policy can also affect real interest rates and output, though higher interest rates raise output and then inflation. The conventional sign requires a coordinated fiscal-monetary policy contraction. I show how conventional new-Keynesian models also imply strong monetary-fiscal policy coordination to obtain the usual signs. I address theoretical controversies. A concluding section places our current regime in a broader historical context, and opines on how optimal fiscal and monetary policy will evolve in the new regime. |
| JEL: | E5 E52 E58 E61 E62 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20613&r=cba |
| By: | Guillaume Bazot; Michael D. Bordo; Eric Monnet |
| Abstract: | Under the classical gold standard (1880-1914), the Bank of France maintained a stable discount rate while the Bank of England changed its rate very frequently. Why did the policies of these central banks, the two pillars of the gold standard, differ so much? How did the Bank of France manage to keep a stable rate and continuously violate the "rules of the game"? This paper tackles these questions and shows that the domestic asset portfolio of the Bank of France played a crucial role in smoothing international shocks and in maintaining the stability of the discount rate. This policy provides a striking example of a central bank that uses its balance sheet to block the interest rate channel and protect the domestic economy from international constraints (Mundell's trilemma). |
| JEL: | E42 E43 E50 E58 N13 N23 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20554&r=cba |
| By: | Covas, Francisco (Board of Governors of the Federal Reserve System (U.S.)); Driscoll, John C. (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | We develop a nonlinear dynamic general equilibrium model with a banking sector and use it to study the macroeconomic impact of introducing a minimum liquidity standard for banks on top of existing capital adequacy requirements. The model generates a distribution of bank sizes arising from differences in banks' ability to generate revenue from loans and from occasionally binding capital and liquidity constraints. Under our baseline calibration, imposing a liquidity requirement would lead to a steady-state decrease of about 3 percent in the amount of loans made, an increase in banks' holdings of securities of at least 6 percent, a fall in the interest rate on securities of a few basis points, and a decline in output of about 0.3 percent. Our results are sensitive to the supply of safe assets: the larger the supply of such securities, the smaller the macroeconomic impact of introducing a minimum liquidity standard for banks, all else being equal. Finally, we show that relaxing the liquidity requirement under a situation of financial stress dampens the response of output to aggregate shocks. |
| Keywords: | Bank regulation; liquidity requirements; capital requirements; incomplete markets; idiosyncratic risk; macroprudential policy |
| JEL: | D52 E13 G21 G28 |
| Date: | 2014–09–12 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2014-85&r=cba |
| By: | Tatjana Dahlhaus; Kristina Hess; Abeer Reza |
| Abstract: | The U.S. Federal Reserve responded to the great recession by reducing policy rates to the effective lower bound. In order to provide further monetary stimulus, they subsequently conducted large-scale asset purchases, quadrupling their balance sheet in the process. We assess the international spillover effects of this quantitative easing program on the Canadian economy in a factor-augmented vector autoregression (FAVAR) framework, by considering a counterfactual scenario in which the Federal Reserve’s long-term asset holdings do not rise in response to the recession. We find that U.S. quantitative easing boosted Canadian output, mainly through the financial channel. |
| Keywords: | International topics, Monetary policy framework, Transmission of monetary policy |
| JEL: | C C3 C32 E E5 E52 E58 F F4 F42 F44 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:14-43&r=cba |
| By: | Plamen Iossifov; Jiri Podpiera |
| Abstract: | The synchronized disinflation across Europe since end-2011 raises the question of whether non-euro area EU countries are affected by the undershooting of the euro area inflation target. To shed light on this issue, we estimate an open-economy, New Keynsian Phillips curve, in which we control for imported inflation. Regression results suggest that falling food and energy prices have been the main disinflationary driver. But low core inflation in the euro area has also had a clear and significant impact. Countries with more rigid exchange-rate regimes and higher share of foreign value added in domestic demand have been more affected. The scope for monetary response to low inflation in non-euro area EU countries depends on concerns about financial stability and unanchoring of inflationary expectations, as well as on exchange rate regime and capital flows dynamics. |
| Keywords: | Disinflation;Europe;Euro Area;Inflation targeting;Open economies;Econometric models;Inflation, Central and Eastern Europe, Sweden, United Kingdom, Denmark |
| Date: | 2014–10–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:14/191&r=cba |
| By: | Michael D. Bordo; Owen F. Humpage |
| Abstract: | During the Bretton Woods era, balance-of-payments developments, gold losses, and exchange-rate concerns had little influence on Federal Reserve monetary policy, even after 1958 when such issues became critical. The Federal Reserve could largely disregard international considerations because the U.S. Treasury instituted a number of stopgap devices—the gold pool, the general agreement to borrow, capital restraints, sterilized foreign-exchange operations—to shore up the dollar and Bretton Woods. These, however, gave Federal Reserve policymakers the latitude to focus on the domestic objectives and shifted responsibility for international developments to the Treasury. Removing the pressure of international considerations from Federal Reserve policy decisions made it easier for the Federal Reserve to pursue the inflationary policies of the late 1960s and 1970s that ultimate destroyed Bretton Woods. In the end, the Treasury’s stopgap devices, which were intended to support Bretton Woods, contributed to its demise. |
| JEL: | E5 N1 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20656&r=cba |
| By: | Stijn Claessens; Swati R. Ghosh; Roxana Mihet |
| Abstract: | Macro-prudential policies aimed at mitigating systemic financial risks have become part of the policy toolkit in many emerging markets and some advanced countries. Their effectiveness and efficacy are not well-known, however. Using panel data regressions, we analyze how changes in balance sheets of some 2,800 banks in 48 countries over 2000–2010 respond to specific macro-prudential policies. Controlling for endogeneity, we find that measures aimed at borrowers––caps on debt-to-income and loan-to-value ratios––and at financial institutions––limits on credit growth and foreign currency lending––are effective in reducing asset growth. Countercyclical buffers are little effective through the cycle, and some measures are even counterproductive during downswings, serving to aggravate declines, consistent with the ex-ante nature of macro-prudential tools. |
| Keywords: | Macroprudential policies and financial stability;Banking systems;Systemic risk;Risk management;Econometric models;Systemic risk, Macropudential policies, Effectiveness, Banking vulnerabilities |
| Date: | 2014–08–19 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:14/155&r=cba |
| By: | Francesco Bianchi; Leonardo Melosi |
| Abstract: | We develop and estimate a general equilibrium model in which monetary policy can deviate from active inflation stabilization and agents face uncertainty about the nature of these deviations. When observing a deviation, agents conduct Bayesian learning to infer its likely duration. Under constrained discretion, only short deviations occur: Agents are confident about a prompt return to the active regime, macroeconomic uncertainty is low, welfare is high. However, if a deviation persists, agents' beliefs start drifting, uncertainty accelerates, and welfare declines. If the duration of the deviations is announced, uncertainty follows a reverse path. When estimated to match past U.S. experience, our model suggests that transparency lowers uncertainty and increases welfare. |
| JEL: | C11 D83 E52 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20566&r=cba |
| By: | Eric Eisenstat; Rodney W. Strachan |
| Abstract: | This paper discusses estimation of US inflation volatility using time varying parameter models, in particular whether it should be modelled as a stationary or random walk stochastic process. Specifying inflation volatility as an unbounded process, as implied by the random walk, conflicts with priors beliefs, yet a stationary process cannot capture the low frequency behaviour commonly observed in estimates of volatility. We therefore propose an alternative model with a change-point process in the volatility that allows for switches between stationary models to capture changes in the level and dynamics over the past forty years. To accommodate the stationarity restriction, we develop a new representation that is equivalent to our model but is computationally more efficient. All models produce effectively identical estimates of volatility, but the change-point model provides more information on the level and persistence of volatility and the probabilities of changes. For example, we find a few well defined switches in the volatility process and, interestingly, these switches line up well with economic slowdowns or changes of the Federal Reserve Chair. Moreover, a decomposition of inflation shocks into permanent and transitory components shows that a spike in volatility in the late 2000s was entirely on the transitory side and a characterized by a rise above its long run mean level during a period of higher persistence. |
| Keywords: | Inflation volatility, monetary policy, time varying parameter model, Bayesian estimation, change-point model. |
| JEL: | C11 C22 E31 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2014-68&r=cba |
| By: | Tröger, Tobias H. |
| Abstract: | This essay argues that at least some of the financial stability concerns associated with shadow banking can be addressed by an approach to financial regulation that imports its functional foundations more vigorously into the interpretation and implementation of existing rules. It shows that the general policy goals of prudential banking regulation remain constant over time despite dramatic transformations in the financial and technological landscape. Moreover, these overarching policy goals also legitimize intervention in the shadow banking sector. On these grounds, this essay encourages a more normative construction of available rules that potentially limits both the scope for regulatory arbitrage and the need for ever more rapid updates and a constant increase in the complexity of the regulatory framework. By tying the regulatory treatment of financial innovation closely to existing prudential rules and their underlying policy rationales, the proposed approach potentially ends the socially wasteful race between hare and tortoise that signifies the relation between regulators and a highly dynamic industry. In doing so it does not generally hamper market participants' efficient discoveries where disintermediation proves socially beneficial. Instead, it only weeds-out rent-seeking circumventions of existing rules and standards. |
| Keywords: | shadow banking,regulatory arbitrage,prudential supervision |
| JEL: | G21 G28 H77 K22 K23 L22 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:imfswp:83&r=cba |
| By: | Betz, Frank; Hautsch, Nikolaus; Peltonen, Tuomas A.; Schienle, Melanie |
| Abstract: | We propose a framework for estimating network-driven time-varying systemic risk contributions that is applicable to a high-dimensional financial system. Tail risk dependencies and contributions are estimated based on a penalized two-stage fixed-effects quantile approach, which explicitly links bank interconnectedness to systemic risk contributions. The framework is applied to a system of 51 large European banks and 17 sovereigns through the period 2006 to 2013, utilizing both equity and CDS prices. We provide new evidence on how banking sector fragmentation and sovereign-bank linkages evolved over the European sovereign debt crisis and how it is reflected in network statistics and systemic risk measures. Illustrating the usefulness of the framework as a monitoring tool, we provide indication for the fragmentation of the European financial system having peaked and that recovery has started. |
| Keywords: | systemic risk contribution,tail dependence,network topology,sovereignbank linkages,Value-at-Risk |
| JEL: | G01 G18 G32 G38 C21 C51 C63 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:467&r=cba |
| By: | Philipp König; David Pothier |
| Abstract: | The recent financial crisis has exposed the fragility of the banking sector to sudden withdrawals of wholesale funding, asset price declines and market dry-ups. Governments and central banks had to step in to prevent major banks from defaulting. These events led to renewed interest in the question whether the fragility of banks should be tolerated as a necessary, even desirable feature of an efficient process of financial intermediation, or whether banks should be subject to stricter regulation ex ante. This Round-Up summarizes the key arguments on both sides of the debate. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwrup:17en&r=cba |
| By: | Yoshiyasu Ono |
| Abstract: | This paper presents a two-country two-commodity dynamic model with free international asset trade in which one country achieves full employment and the other suffers long-run unemployment. Own and spill-over effects of changes in policy, technological and preference parameters that emerge through exchange-rate adjustment are examined. Parameter changes that worsen the stagnant countryfs current account depreciate the home currency, expand home employment and improve the foreign terms of trade, making both countries better off. The stagnant countryfs foreign aid to the fully employed country also yields the same beneficial effects. |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:0893r&r=cba |
| By: | Ellen Gaston; Inwon Song |
| Abstract: | Countries implementing International Financial Reporting Standards (IFRS) for loan loss provisioning by banks have been guided by two different approaches: International Accounting Standards (IAS) 39 and Basel standards. This paper discusses the different accounting and regulatory approaches in loan loss provisioning, and the challenges supervisors face when there are different perspectives and lack of guidance from IFRS. It suggests actions that supervisors can take to help banks meet regulatory and capital requirements and, at the same time, comply with accounting principles. |
| Keywords: | Loans;Banks;Bank supervision;Accounting standards;Basel Core Principles;Supervisory role, loan loss provisioning, IFRS implementation |
| Date: | 2014–09–15 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:14/170&r=cba |
| By: | Pablo D'Erasmo (University of Maryland / FRB Philadelphi) |
| Abstract: | We develop a model of banking industry dynamics to study the quantitative impact of capital requirements on bank risk taking, commercial bank failure, and market structure. We propose a market structure where big, dominant banks interact with small, competitive fringe banks. The paper extends our previous work by letting banks accumulate securities like treasury bills and to undertake short-term borrowing when there are cash flow shortfalls. A nontrivial size distribution of banks arises out of endogenous entry and exit, as well as banks' buffer stocks of securities. We find that a 50% rise in capital requirements leads to a 45% reduction in exit rates of small banks and a more concentrated industry. Aggregate loan supply falls by 8.71% and interest rates rise by 50 basis points. The lower exit rate causes the tax/output rate necessary to fund deposit insurance to drop in half. Higher interest rates, on the other hand, result in a higher default frequency as well as a lower level of intermediated output. We also use the model to study the effect of lowering the rate different sized banks are charged when borrowing on their lending behavior studied by Kashyap and Stein (2001). |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:476&r=cba |