nep-cba New Economics Papers
on Central Banking
Issue of 2014‒12‒19
thirty papers chosen by
Maria Semenova
Higher School of Economics

  1. The Effects of Unconventional Monetary Policies on Bank Soundness By Frederic Lambert; Kenichi Ueda
  2. Jointly optimal regulation of bank capital and maturity structure By Ansgar Walther
  3. Policy-making of the European Central Bank during the crisis: Do personalities matter? By Basham, James; Roland, Aanor
  4. Bringing Financial Stability into Monetary Policy By Eric M. Leeper; James M. Nason
  5. Central Banking after the Crisis: Brave New World or Back to the Future? Replies to a questionnaire sent to central bankers and economists By Emmanuel Carré; Jézabel Couppey-Soubeyran; Dominique Plihon; Marc Pourroy
  6. Inflation-Targeting and Foreign Exchange Interventions in Emerging Economies By Marc Pourroy
  7. Monetary Policy Effectiveness in China: Evidence from a FAVAR Model By John Fernald; Mark M. Spiegel; Eric T. Swanson
  8. Effectiveness of the Easing of Monetary Policy in the Japanese Economy, Incorporating Energy Prices By Yoshino, Naoyuki; Taghizadeh-Hesary, Farhad
  9. Financial Frictions and Optimal Monetary Policy in a Small Open Economy By Jesús A. Bejarano; Luisa F. Charry
  10. Financial stress and economic dynamics: the transmission of crises By Hubrich, Kirstin; Tetlow, Robert J.
  11. Dynamic Debt Deleveraging and Optimal Monetary Policy By Pierpaolo Benigno; Gauti B. Eggertsson; Federica Romei
  12. The Evolution of Bank Supervision: Evidence from U.S. States By Kris James Mitchener; Matthew Jaremski
  13. Towards a consumer sentiment channel of monetary policy By Debes, Sebastian; Gareis, Johannes; Mayer, Eric; Rüth, Sebastian
  15. House Prices, Capital Inflows and Macroprudential Policy By Mendicino, Caterina; Punzi, Maria Teresa
  16. Monetarism rides again? US monetary policy in a world of Quantitative Easing By Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick
  17. Emerging Market Volatility: Lessons from The Taper Tantrum By Ratna Sahay; Vivek B. Arora; Athanasios V Arvanitis; Hamid Faruqee; Papa N'Diaye; Tommaso Mancini Griffoli
  18. Governing by Panic: The Politics of the Eurozone Crisis By David M. Woodruff
  19. Optimal Stabilization Policy with Search Externalities By Berentsen, Aleksander; Waller, Christopher
  20. Monetary Policy Effects on Financial Intermediation via the Regulated and the Shadow Banking Systems By Falk Mazelis; ; ;
  21. Is there a threat of self-reinforcing deflation in the Euro area? A view through the lens of the Phillips curve By Wieland, Volker; Wolters, Maik
  22. Effective Monetary Policy Strategies in New Keynesian Models: A Re-examination By Hess Chung; Edward Herbst; Michael T. Kiley
  23. News and Monetary Shocks at a High Frequency: A Simple Approach By Troy Matheson; Emil Stavrev
  24. Interest Rate Uncertainty and Economic Fluctuations By Drew D. Creal; Jing Cynthia Wu
  25. On the European debt crisis By Beker, Victor
  26. Sovereign spreads and financial market behavior before and during the crisis By Pawel Gajewski; ; ;
  27. Interest Rate Swap Credit Valuation Adjustment By Jakub Èerný; Jiøí Witzany
  28. The effects of government spending in a small open economy within a monetary union By Clancy, Daragh; Jacquinot, Pascal; Lozej, Matija
  29. Fire-Sale Spillovers and Systemic Risk By Thomas Eisenbach; Fernando Duarte
  30. General Theory of Money: A New Approach By Rezaie, Mohsen

  1. By: Frederic Lambert; Kenichi Ueda
    Abstract: Unconventional monetary policy is often assumed to benefit banks. However, we find little supporting evidence. Rather, we find some evidence for heightened medium-term risks. First, in an event study using a novel instrument for monetary policy surprises, we do not detect clear effects of monetary easing on bank stock valuation but find a deterioration of medium-term bank credit risk in the United States, the euro area, and the United Kingdom. Second, in panel regressions using U.S. banks’ balance sheet information, we show that bank profitability and risk taking are ambiguously affected, while balance sheet repair is delayed.
    Keywords: Monetary policy;Interest rate policy;United States;Euro Area;United Kingdom;Banks;Credit risk;Bank soundness;Balance sheets;Regression analysis;Monetary Policy, Bank Profitability, Bank Risk, Balance Sheet Repair
    Date: 2014–08–13
  2. By: Ansgar Walther
    Abstract: Banks create excessive systemic risk through leverage and maturity mismatch, as financial constraints introduce welfare-reducing pecuniary externalities.  Macroprudential regulators can achieve efficiency with simple linear constraints on banks' balance sheets, which require less information than Pigouvian taxes.  These can be implemented using the Liquidity Coverage and Net Stable Funding ratios of Basel III.  When bank failures are socially costly, microprudential regulation of leverage is also required.  Optimally, macroprudential policy reacts to changes in systematic risk and credit conditions over the business cycle, while microprudential policy reacts to both systematic and idiosyncratic risk.
    Keywords: Systemic risk, leverage, maturity mismatch, macroprudential regulation, liquidiity, capital requirements, fire sales
    JEL: G18 G21 G28 E44
    Date: 2014–09–25
  3. By: Basham, James; Roland, Aanor
    Abstract: The European sovereign debt crisis represents an interesting opportunity to investigate the reaction of the European Central Bank as a crisis fighting institution and the importance of central bank personalities in policy execution. Accordingly, this paper aims at investigating to what extent the policy-making of the ECB during the crisis has been influenced by Trichet's and Draghi's different personalities. Based on Friedman's hypothesis that "accidents of personality" have a great impact on the functioning of a rulebased institution, we find that the clear differences in policy-making between Trichet and Draghi can be explained by specific features of their respective personalities. Institutions matter, but so do personalities.
    Keywords: European Central Bank,Central Bankers,Personality Theory,European Sovereign Debt Crisis,Monetary Policy
    JEL: E5 E6
    Date: 2014
  4. By: Eric M. Leeper; James M. Nason
    Abstract: This paper arms central bank policy makers with ways to think about interactions between financial stability and monetary policy. We frame the issue of whether to integrate financial stability into monetary policy operating rules by appealing to the observation that in actual economies financial markets are incomplete. Incomplete markets create financial market frictions that prevent economic agents from perfectly sharing risk; in the absence of frictions, financial (in)stability would be of no concern. Overcoming these frictions to improve risk sharing across economic agents is, in our view, the intent of policies geared toward ensuring financial stability. There are many definitions of financial stability. Although the definitions share the notion that financial stability becomes an issue for policy makers when a breakdown in risk-sharing arrangements in financial markets has a negative effect on real economic activity, we give several examples that show this notion is too general for thinking about the role that monetary policy might have in smoothing shocks to financial stability. Examples include statistical models that seek to separate “good” from “bad” changes in private-sector debt aggregates, new Keynesian policy prescriptions grounded in neo-Wicksellian natural rate rules, and a historical episode involving the 1920s Federal Reserve. These examples raise a cautionary flag for policy attempts to control both the growth and the composition of debt that financial markets produce. We conclude with some advice for revising central banks’ Monetary Policy Reports.
    Keywords: Financial frictions, incomplete markets, crises, new Keynesian, natural rate, monetary transmission mechanism.
    JEL: E3 E4 E5 E6 G2 N12
    Date: 2014–11
  5. By: Emmanuel Carré (CEPN - Centre d'Economie de l'Université Paris Nord - CNRS : UMR7234 - Université Paris 13 - Université Sorbonne Paris Cité (USPC)); Jézabel Couppey-Soubeyran (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne); Dominique Plihon (CEPN - Centre d'Economie de l'Université Paris Nord - CNRS : UMR7234 - Université Paris 13 - Université Sorbonne Paris Cité (USPC)); Marc Pourroy (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)
    Abstract: This paper provides a snapshot of the current state of central banking doctrine in the aftermath of the crisis, using data from a questionnaire produced in 2011 and sent to central bankers (from 13 countries plus the euro zone) and economists (31) for a report by the French Council of Economic Analysis to the Prime Minister. The results of our analysis of the replies to the questionnaire are twofold. First, we show that the financial crisis has led to some amendments of pre-crisis central banking. We highlight that respondents to the questionnaire agree on the general principle of a 'broader' view of central banking extended to financial stability. Nevertheless, central bankers and economists diverge or give inconsistent answers about the details of implementation of this 'broader' view. Therefore, the devil is once again in the details. We point out that because of central bankers' conservatism, a return to the status quo cannot be excluded.
    Keywords: Central banking; macroprudential policy; financial stability
    Date: 2013–10
  6. By: Marc Pourroy (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)
    Abstract: Are emerging economies implementing inflation targeting (IT) with a perfectly flexible exchange-rate arrangement, as developed economies do, or have these countries developed their own IT framework? This paper offers a new method for assessing exchange-rate policies that combines the use of "indicator countries", providing an empirical definition of exchange-rate flexibility or rigidity, and clustering through Gaussian mixture estimates in order to identify countries' de facto regimes. By applying this method to 19 inflation-targeting emerging economies, I find that the probability of those countries having a perfectly flexible arrangement as developed economies do is 52%, while the probability of having a managed float system, obtained through foreign exchange market intervention, is 28%, and that of having a rigid exchange-rate system (similar to those of pegged currencies) is 20%. The results also provide evidence of two different monetary regimes under inflation targeting: flexible IT when the monetary authorities handle only one tool, the interest rate, prevailing in ten economies, and hybrid IT when the monetary authorities add foreign exchange interventions to their toolbox, prevailing in the remaining nine economies.
    Keywords: Inflation-targeting; foreign exchange interventions; Gaussian mixture model
    Date: 2013–10
  7. By: John Fernald; Mark M. Spiegel; Eric T. Swanson
    Abstract: We use a broad set of Chinese economic indicators and a dynamic factor model framework to estimate Chinese economic activity and inflation as latent variables. We incorporate these latent variables into a factor-augmented vector autoregression (FAVAR) to estimate the effects of Chinese monetary policy on the Chinese economy. A FAVAR approach is particularly well-suited to this analysis due to concerns about Chinese data quality, a lack of a long history for many series, and the rapid institutional and structural changes that China has undergone. We find that increases in bank reserve requirements reduce economic activity and inflation, consistent with previous studies. In contrast to much of the literature, however, we find that central-bank-determined changes in Chinese interest rates also have substantial impacts on economic activity and inflation, while other measures of changes in credit conditions, such as shocks to M2 or lending levels, do not once other policy variables are taken into account. Overall, our results indicate that the monetary policy transmission channels in China have moved closer to those of Western market economies.
    JEL: C38 E43 E52
    Date: 2014–09
  8. By: Yoshino, Naoyuki (Asian Development Bank Institute); Taghizadeh-Hesary, Farhad (Asian Development Bank Institute)
    Abstract: Japan has reached the limits of conventional macroeconomic policy. In order to overcome deflation and achieve sustainable economic growth, the Bank of Japan (BOJ) recently set an inflation target of 2% and implemented an aggressive monetary policy so this target could be achieved as soon as possible. Although prices started to rise after the BOJ implemented monetary easing, this may have been for other reasons, such as higher oil prices. Oil became expensive as a result of the depreciated Japanese yen and this was one of the main causes of the rise in inflation. This paper shows that quantitative easing may not have stimulated the Japanese economy either. Aggregate demand, which includes private investment, did not increase significantly in Japan with lower interest rates. Private investment displays this unconventional behavior because of uncertainty about the future and because Japan's population is aging. We believe that the remedy for Japan's economic policy is not to be found in monetary policy. The government needs to implement serious structural changes and growth strategies.
    Keywords: monetary policy; energy; oil prices; japanese economy
    JEL: E47 E52 Q41 Q43
    Date: 2014–11–10
  9. By: Jesús A. Bejarano; Luisa F. Charry
    Abstract: In this paper we set up a small open economy model with financial frictions, following Curdia and Woodford (2010)’s model. Unlike other results in the literature such as Curdia and Woodford (2010), McCulley and Ramin (2008) and Taylor (2008), we find that optimal monetary policy should not respond to changes in domestic interest rate spreads when the source of fluctuations are exogenous financial shocks. A novel result here is that the optimal size of policy responses to changes in the credit spread is large when the disturbance source are shocks to the foreign interest rate. Our results suggest that such a response is welfare enhancing. Classification JEL: E44, E50, E52, E58, F41.
    Date: 2014–11
  10. By: Hubrich, Kirstin; Tetlow, Robert J.
    Abstract: A financial stress index for the United States is introduced – an index that was used in real time by the staff of the Federal Reserve Board to monitor the financial crisis of 2008-9 – and the interaction with real activity, inflation and monetary policy is demonstrated using a richly parameterized Markov-switching VAR model, estimated using Bayesian methods. A "stress event" is defined as a period where the latent Markov states for both shock variances and model coefficients are adverse. Results show that allowing for time variation is economically and statistically important, with solid (quasi) real-time properties. Stress events line up well with financial events in history. A shift to a stress event is highly detrimental to the outlook for the real economy, and conventional monetary policy is relatively weak during such periods. JEL Classification: E44, C11, C32
    Keywords: financial crises, Markov switching, monetary policy, nonlinearity
    Date: 2014–09
  11. By: Pierpaolo Benigno; Gauti B. Eggertsson; Federica Romei
    Abstract: This paper studies optimal monetary policy under dynamic debt deleveraging once the zero bound is binding. Unlike the existing literature, the natural rate of interest is endogenous and depends on macroeconomic policy. Optimal monetary policy successfully raises the natural rate of interest by creating an environment that speeds up deleveraging, thus endogenously shortening the duration of the crisis and a binding zero bound. Inflation should be front loaded. Fiscal-policy multipliers can be even higher than in existing models, but depend on the way in which public spending is financed.
    JEL: E31 E32 E52
    Date: 2014–10
  12. By: Kris James Mitchener; Matthew Jaremski
    Abstract: We use a novel data set spanning 1820-1910 to examine the origins of bank supervision and assess factors leading to the creation of formal bank supervision across U.S. states. We show that it took more than a century for the widespread adoption of independent supervisory institutions tasked with maintaining the safety and soundness of banks. State legislatures initially pursued cheaper regulatory alternatives, such as double liability laws; however, banking distress at the state level as well as the structural shift from note-issuing to deposit-taking commercial banks and competition with national banks propelled policymakers to adopt costly and permanent supervisory institutions.
    JEL: E44 G28 N11
    Date: 2014–10
  13. By: Debes, Sebastian; Gareis, Johannes; Mayer, Eric; Rüth, Sebastian
    Abstract: We investigate the role of consumer confidence in the transmission of monetary policy shocks from an empirical and theoretical perspective. Standard VAR based analysis suggests that an empirical measure of consumer confidence drops significantly after a monetary tightening and amplifies the impact of monetary policy on aggregate consumption. Using a behavioral DSGE model, we show that a consumer sentiment channel can account for the empirical findings. In an environment of heterogeneous expectations, which gives rise to the notion of consumer sentiment, innovations to the Federal Funds rate impact on consumer confidence and thereby the broader economy.
    Keywords: monetary policy,monetary transmission,consumer sentiment
    JEL: E32 E52 D83
    Date: 2014
  14. By: Elisabetta Gualandri; Mario Noera
    Abstract: The aim of the paper is to analyze the state of the art of macroprudential policies (MAP) with a focus on the case of the European Union. To this end the institutional framework of MAP is introduced and discussed with regard to several issues: the relationships and/or the conflicts with other policies and among the different institutional bodies involved, their mandate, accountability and governance. The operative framework - intermediate and final targets and toolkit - is specifically analyzed with regard to the case of the European Union and the introduction, in 2011, of a macroprudential supervisory pillar based on the European Systemic Risk Board (ESRB). Finally the main features of the new European supervisory architecture are addressed: the organization of MAP within the Single Supervisory Mechanisms (SSM), the definition of the role of the European Central Bank (ECB) and of the ESRB as far as macroprudential policy is concerned. In the conclusions, we evaluate the new architecture which is quite complex and cumbersome, and the challenge that the SSM is facing: to achieve comprehensive, rational, effective and efficient supervision, avoiding overlapping of competences and clarifying the specific roles of different bodies while keeping away additional burdens for the institutions supervised.
    Keywords: macroprudential policy, systemic risk, supervision, EU supervisory architecture, ESRB, SSM, financial crisis
    JEL: G01 G18 G G28
    Date: 2014–10
  15. By: Mendicino, Caterina; Punzi, Maria Teresa
    Abstract: This paper evaluates the monetary and macroprudential policies that mitigate the procyclicality arising from the interlinkage4s between current account deficits and financial vulnerabilities. We develop a two-country dynamic stochastic general equilibrium (DSGE) model with heterogeneous households and collateralised debt. The model predicts that external shocks are important in driving current account deficits that are coupled with run-ups in house prices and household dept. In this context, optimal policy features an interestrate response to credit and a LTV ration that countercyclically responds to house price dynamics. By allowing an interest-rate response to changes in financial variables, the monetary policy authority improves social welfare, because of the large welfare gains accrued to the savers. The additional use of a countercyclical LTV ratio that responds to house prices, increases the ability of borrowers to smooth consumption over the cycle and is Pareto improving. Domestic and foreign shocks account for a similar fraction of the welfare gains delivered by such a policy.
    Keywords: house prices,financial frictions,global imbalances,saving glut,dynamic loan-to value ratios,monetary policy,optimized simple rules
    JEL: C33 E51 F32 G21
    Date: 2014
  16. By: Le, Vo Phuong Mai (Cardiff Business School); Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School)
    Abstract: This paper gives money a role in providing cheap collateral in a model of banking; besides the Taylor Rule, monetary policy can affect the risk-premium on bank lending to firms by varying the supply of M0, so at the zero bound monetary policy is effective; fiscal policy crowds out investment via the risk-premium. A rule for making M0 respond to credit conditions can enhance the economy’s stability. Both price-level and nominal GDP targeting rules for interest rates combined with this stabilise the economy further. With these rules for monetary control, aggressive and distortionary regulation of banks’ balance sheets becomes redundant.
    Keywords: DSGE model; Financial Frictions; Crises; Indirect Inference; money supply; QE; monetary policy; fiscal multiplier; zero bound
    JEL: E3 E44 E52 C1
    Date: 2014–10
  17. By: Ratna Sahay; Vivek B. Arora; Athanasios V Arvanitis; Hamid Faruqee; Papa N'Diaye; Tommaso Mancini Griffoli
    Abstract: Accommodative monetary policies in advanced economies have spurred increased capital inflows into emerging markets since the global financial crisis. Starting in May 2013, when the Federal Reserve publicly discussed its plans for tapering unconventional monetary policies, these emerging markets have experienced financial turbulence at the same that their domestic economic activity has slowed. This paper examines their experiences and policy responses and draws broad policy lessons. For emerging markets, good macroeconomic fundamentals matter, and early and decisive measures to strengthen macroeconomic policies and reduce vulnerabilities help dampen market reactions to external shocks. For advanced economies, clear and effective communication about the exit from unconventional monetary policy can and did help later to reduce the risk of excessive market volatility. And for the global community, enhanced global cooperation, including a strong global financial safety net, offers emerging markets effective protection against excessive volatility.
    Keywords: Emerging markets;International capital market volatility;Capital flows;Monetary policy;Macroprudential Policy;United States;Developed countries;Tapering, unconventional monetary policy, volatility, macroprudential, capital flow measures, foreign exchange intervention
    Date: 2014–10–02
  18. By: David M. Woodruff
    Abstract: The Eurozone’s reaction to the economic crisis beginning in late 2008 involved both efforts to mitigate the arbitrarily destructive effects of markets and vigorous pursuit of policies aimed at austerity and deflation. To explain this paradoxical outcome, this paper builds on Karl Polanyi’s account of how politics reached a similar deadlock in the 1930s. Polanyi argued that democratic impulses pushed for the protective response to malfunctioning markets. However, under the gold standard the prospect of currency panic afforded great political influence to bankers, who used it to push for austerity, deflationary policies, and the political marginalization of labor. Only with the achievement of this last would bankers and their political allies countenance surrendering the gold standard. The paper reconstructs Polanyi’s theory of governing by panic and uses it to explain the course of the Eurozone policy over three key episodes in the course of 2010-2012. The prospect of panic on sovereign debt markets served as a political weapon capable of limiting a protective response, wielded in this case by the European Central Bank (ECB). Committed to the neoliberal Brussels-Frankfurt consensus, the ECB used the threat of staying idle during panic episodes to push policies and institutional changes promoting austerity and deflation. Germany’s Ordoliberalism, and its weight in European affairs, contributed to the credibility of this threat. While in September 2012 the ECB did accept a lender-of-last-resort role for sovereign debt, it did so only after successfully promoting institutional changes that severely complicated any deviation from its preferred policies.
    Keywords: Euro; European Central Bank; European Central Bank; fiscal policy
    Date: 2014–10–24
  19. By: Berentsen, Aleksander; Waller, Christopher
    Abstract: We study optimal monetary stabilization policy in a DSGE model with microfounded money demand. A search externality creates ‘congestion’ which causes aggregate output to be inefficient. Due to the informational frictions that give rise to money, households are unable to perfectly insure themselves against aggregate shocks. This gives rise to a welfare improving role for monetary policy that works by adjusting the nominal interest rate in response to these shocks. Optimal policy is determined by choosing a set of state-contingent nominal interest rates to maximize the expected lifetime utility of the agents subject to the constraints of being an equilibrium.
    Keywords: monetary policy, optimal stabilization policy, search equilibrium, microfoundation of money
    JEL: E00 E40
    Date: 2013–09
  20. By: Falk Mazelis; ; ;
    Abstract: We extend the monetary DSGE model by Gertler and Karadi (2011) with a non-bank financial intermediary to investigate the impact of monetary policy shocks on aggregate loan supply. We distinguish between bank and non-bank intermediaries based on the liquidity of their credit claims. While banks can endogenously create deposits to fund firm loans, non-banks have to raise deposits on the funding market to function as intermediaries. The funding market is modeled via search and matching by non-banks for available deposits of households. Because deposit creation responds to economy-wide productivity automatically, bank reaction to shocks corresponds to the balance sheet channel. Non-banks are constrained by the available deposits and their behavior is better explained by the lending channel. The two credit channels are affected differently following a monetary policy shock. As a result of these counteracting effects, an increasing non-bank sector leads to a reduced reaction of aggregate loan supply following a monetary policy shock, which is consistent with the data. An extension to deposit like-issuance by the non-bank sector will allow further studies of re-regulating the non-bank sector.
    Keywords: Shadow Banking, Monetary Transmission Mechanism, Credit Channel
    JEL: E32 E44 E51 G20
    Date: 2014–10
  21. By: Wieland, Volker; Wolters, Maik
    Abstract: The recent decline in euro area inflation has triggered new calls for additional monetary stimulus by the ECB in order to counter the threat of a self-reinforcing deflation and recession spiral. This note reviews the available evidence on inflation expectations, output gaps and other factors driving current inflation through the lens of the Phillips curve. It also draws a comparison to the Japanese experience with deflation in the late 1990s and the evidence from Japan concerning the outputinflation nexus at low trend inflation. The note concludes from this evidence that the risk of a selfreinforcing deflation remains very small. Thus, the ECB best await the impact of the long-term refinancing operations decided in June that have the potential to induce substantial monetary accommodation once implemented for the first time in September.
    Date: 2014
  22. By: Hess Chung; Edward Herbst; Michael T. Kiley
    Abstract: We explore the importance of the nature of nominal price and wage adjustment for the design of effective monetary policy strategies, especially at the zero lower bound. Our analysis suggests that sticky-price and sticky-information models fit standard macroeconomic time series comparably well. However, the model with information rigidity responds differently to anticipated shocks and persistent zero-lower bound episodes - to a degree important for monetary policy and for understanding the effects of fundamental disturbances when monetary policy cannot adjust. These differences may be important for understanding other policy issues as well, such as fiscal multipliers. Despite these differences, many aspects of effective policy strategy are common across the two models: In particular, highly inertial interest rate rules that respond to nominal income or the price level perform well, even when hit by adverse supply shocks or large demand shocks that induce the zero-lower bound. Rules that respond to the level or change in the output gap can perform poorly under those conditions.
    JEL: E31 E37 E52
    Date: 2014–10
  23. By: Troy Matheson; Emil Stavrev
    Abstract: We develop a simple approach to identify economic news and monetary shocks at a high frequency. The approach is used to examine financial market developments in the United States following the Federal Reserve’s May 22, 2013 taper talk suggesting that it would begin winding down its quantitative easing program. Our findings show that the sharp rise in 10-year Treasury bond yields immediately after the taper talk was largely due to monetary shocks, with positive economic news becoming increasingly important in subsequent months.
    Keywords: Monetary policy;United States;External shocks;Financial markets;Treasury bills and bonds;Bond yields;Econometric models;Monetary Policy, Economic News
    Date: 2014–09–12
  24. By: Drew D. Creal; Jing Cynthia Wu
    Abstract: Uncertainty associated with the monetary policy transmission mechanism is a key driving force of business cycles. To investigate this link, we propose a new term structure model that allows the volatility of the yield curve to interact with macroeconomic indicators. The data favors a model with two volatility factors that capture short-term and long-term interest rate uncertainty. Increases in either of them lead higher unemployment rates, but they interact with inflation in opposite directions.
    JEL: C5 E4
    Date: 2014–10
  25. By: Beker, Victor
    Abstract: A common explanation for the European debt crisis has been that the introduction of the euro in 2001 caused interest rates to fall in those countries where expectations of high inflation previously kept interest rates high. Bond buyers assumed that a bond issued by any government in the European Monetary Union was equally safe. As a result, the interest rates on Greek, Italian, etc. government bonds were not significantly different from the interest rate on the German government bonds. Governments responded to the low interest rates by increasing their borrowing. However, data do not endorse this explanation, as is shown in the paper. An alternative explanation has been that the European debt crisis was just a consequence of the American subprime one. Again, data do not entirely support this hypothesis although the connection between both crises is explored in the paper. A third argument states that the introduction of the euro, and its effects on external competitiveness, triggered mounting disequilibria and debt accumulation in the noncore countries or periphery. This argument seems to be valid to a certain extent just in the cases of Greece and Portugal, but not for the rest of the countries involved in the crisis where other factors seem to have played a major role. A distinction is made between a first group of countries whose debt problems have roots before 2007 but did not worsen significantly after that year and a second one of ¨new¨ highly indebted countries. Finally, Spain appears as a special case. The development of the indebtedness process in these three different types of countries allows isolating the factors which were determinant in each case. The conclusion is that the European indebtedness process does not accept a unique explanation and its solution will necessarily require resource transfers from the richer to the poorer countries of the euro-zone.The mechanism of the European redemption pact proposed in the 2011 annual report of the German Council of Economic Experts (GCEE) may be one way of doing this.
    Keywords: Keywords: sovereign-debt crisis, euro-zone, budget deficit.
    JEL: F3 F34
    Date: 2014–05
  26. By: Pawel Gajewski (University of Lodz, Faculty of Economics and Sociology); ; ;
    Abstract: This paper aims at shedding some light on the mechanisms of pricing the EMU countries’ sovereign bonds in financial markets. Employing the Augmented Mean Group (AMG) estimator, we find that major changes have occurred in terms of variables underlying sovereign risk. Since 2009, macroeconomic and fiscal fundamentals has started to play a more important role, but only those that capture domestic demand evolution. In contrast, price competitiveness seems less important. The second conclusion lies in reversed attitude towards banking sector imbalances, as compared to the earlier period. One of the problems addressed concerns the horizon of projected macroeconomic and fiscal variables taken into account. The paper presents some evidence that financial markets have become more myopic and started to rely on short-term forecasts, whilst they had tended to encompass longer-term forecast horizon before the crisis.
    Keywords: financial crisis, fiscal policy, EMU, panel estimation
    JEL: C23 E43 E62 F34 G01 G12 H60
    Date: 2014–09
  27. By: Jakub Èerný (Charles University in Prague, Faculty of Mathematics and Physics Department of Probability and Mathematical Statistics, Sokolovska 83, 186 75, Prague, Czech Republic); Jiøí Witzany (University of Economics, Faculty of Finance and Accounting, Department of Banking and Insurance, W. Churchill Sq. 4, 130 67, Prague, Czech Republic)
    Abstract: The credit valuation adjustment (CVA) of OTC derivatives is an important part of the Basel III credit risk capital requirements and current accounting rules. Its calculation is not an easy task - not only it is necessary to model the future value of the derivative, but also the probability of default of a counterparty. Another complication arises in the calculation when the exposure to a counterparty is adversely correlated with the credit quality of that counterparty, i.e. when it is needed to incorporate the wrong-way risk. A semi-analytical CVA formula simplifying the interest rate swap (IRS) valuation with the counterparty credit risk including the wrong-way risk is derived and analyzed in the paper. The formula is based on the fact that the CVA of an IRS can be expressed using swaption prices. The link between the interest rates and the default time is represented by a Gaussian copula with constant correlation coefficient. Finally, the results of the semi-analytical approach are compared with the results of a complex simulation study.
    Keywords: Counterparty Credit Risk, Credit Valuation Adjustment, Wrong-way Risk, Risky Swaption Price, Semi-analytical Formula, Interest Rate Swap Pricecointegration test
    JEL: C63 G12 G13 G32
    Date: 2014–05
  28. By: Clancy, Daragh; Jacquinot, Pascal; Lozej, Matija
    Abstract: Small open economies within a monetary union have a limited range of stabilisation tools, as area-wide nominal interest and exchange rates do not respond to country-specific shocks. Such limitations imply that imbalances can be difficult to resolve. We assess the role that government spending can play in mitigating this issue using a global DSGE model, with an extensive fiscal sector allowing for a rich set of transmission channels. We find that complementarities between government and private consumption can substantially increase spending multipliers. Government investment, by raising productive public capital, improves external competitiveness and counteracts external imbalances. An ex-ante budget-neutral switch of government expenditure towards investment has beneficial effects in the medium run, while short-run effects depend on the degree of co-movement between private and government consumption. Finally, spillovers from a fiscal stimulus in one region of a monetary union depend on trade linkages and can be sizeable. JEL Classification: E22, E62, H54
    Keywords: fiscal policy, imbalances, public capital, trade
    Date: 2014–08
  29. By: Thomas Eisenbach (Federal Reserve Bank of New York); Fernando Duarte (Federal Reserve Bank of New York)
    Abstract: We construct a new systemic risk measure that quantifies vulnerability to fire-sale spillovers using detailed regulatory balance sheet data for U.S. commercial banks and repo market data for broker-dealers. Even for moderate shocks in normal times, fire-sale externalities can be substantial. For commercial banks, a 1 percent exogenous shock to assets in 2013-Q1 produces fire sale externalities equal to 21 percent of system capital. For broker-dealers, a 1 percent shock to assets in August 2013 generates spillover losses equivalent to almost 60 percent of system capital. Externalities during the last financial crisis are between two and three times larger. Our systemic risk measure reaches a peak in the fall of 2007 but shows a notable increase starting in 2004, ahead of many other systemic risk indicators. Although the largest banks and broker-dealers produce – and are victims of – most of the externalities, leverage and linkages of financial institutions also play important roles.
    Date: 2014
  30. By: Rezaie, Mohsen
    Abstract: Money, credit and monetary markets are interlinked with each other and linked to real sector of the economy. There is clearly no single market called money market, but there are two money markets, asset-money and credit-money markets, that money is created by the interactions between them. This created money would, then, enter into economic activities and to facilitate producing and transacting in the real sector. In other words, money is a heavenly creature that is created through interactions between money markets in the sky of monetary markets that returns to the land of real markets. In other words, monetary intermediaries, like firms, produce money within credit and savings process. In addition, monetary integration takes place by interaction of money markets.
    Keywords: Asset-money, Credit-money, Saving, Monetary Theory, Monetary Variables, Monetary Integration
    JEL: E40
    Date: 2014–01–01

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