nep-cba New Economics Papers
on Central Banking
Issue of 2014‒12‒24
eighteen papers chosen by
Maria Semenova
Higher School of Economics

  1. Conventional and Unconventional Monetary Policy with Endogenous Collateral Constraints By Araujo, Aloisio; Schommer, Susan; Woodford, Michael
  2. Transparency and Deliberation within the FOMC: a Computational Linguistics Approach By Hansen, Stephen; McMahon, Michael; Prat, Andrea
  3. Conventional and Unconventional Votes: A Tale of Three Monetary Policy Committees By Christopher Spencer
  4. The Effects of Monetary Policy on Stock Market Bubbles: Some Evidence By Galí, Jordi; Gambetti, Luca
  5. The impact of Basel III on financial (in)stability: An agent-based credit network approach By Krug, Sebastian; Lengnick, Matthias; Wohltmann, Hans-Werner
  6. The Global Financial Crisis—What Drove The Build-Up? By Merrouche, Ouarda; Nier, Erlend
  7. Does Low Inflation Justify a Zero Policy Rate? By Bullard, James B.
  8. A Critical Evaluation of Bail-in as a Bank Recapitalisation Mechanism By Avgouleas, Emilios; Goodhart, Charles A
  9. Monetary and macroprudential policy with multi-period loans By Paolo Gelain; Marcin Kolasa; Michał Brzoza-Brzezina
  10. "Minsky, Monetary Policy, and Mint Street: Challenges for the Art of Monetary Policymaking in Emerging Economies" By Srinivas Yanamandra
  11. Capital Controls and Recovery from the Financial Crisis of the 1930s By Mitchener, Kris; Wandschneider, Kirsten
  12. Assessing the macroeconomic effects of LTROS. By C. Cahn; J. Matheron; J-G. Sahuc
  13. On the influence of institutional design on monetary policy making By Raes, L.B.D.
  14. Should central banks provide reserves via repos or outright bond purchases? By Miles, David; Schanz, Jochen
  15. A Volatility and Persistence-Based Core Inflation By Tito Nícias Teixeira da Silva Filho; Francisco Marcos Rodrigues Figueiredo
  16. Does regulation improve bank peroformance in South and East Asia? By Mamatzakis, Emmanuel; Hu, Wentao
  17. Carry funding and safe haven currencies: A threshold regression approach By Hossfeld, Oliver; MacDonald, Ronald
  18. Macroeconomic linkages between monetary policy and the term structure of interest rates By Howard Kung

  1. By: Araujo, Aloisio; Schommer, Susan; Woodford, Michael
    Abstract: We consider the effects of central-bank purchases of a risky asset, financed by issuing riskless nominal liabilities (reserves), as an additional dimension of policy alongside “conventional” monetary policy (central-bank control of the riskless nominal interest rate), in a general-equilibrium model of asset pricing and risk sharing with endogenous collateral constraints of the kind proposed by Geanakoplos (1997). When sufficient collateral exists for collateral constraints not to bind for any agents, we show that central-bank asset purchases have no effects on either real or nominal variables, despite the differing risk characteristics of the assets purchased and the ones issued to finance these purchases. At the same time, the existence of collateral constraints allows our model to capture the common view that large enough central-bank purchases would eventually have to effect asset prices. But even when central-bank purchases raise the price of the asset, owing to binding collateral constraints, the effects need not be the ones commonly assumed. We show that under some circumstances, central-bank purchases relax financial constraints, increase aggregate demand, and may even achieve a Pareto improvement; but in other cases, they may tighten financial constraints, reduce aggregate demand, and lower welfare. The latter case is almost certainly the one that arises if central-bank purchases are sufficiently large.
    JEL: D53 E52 E58
    Date: 2014–05
  2. By: Hansen, Stephen; McMahon, Michael; Prat, Andrea
    Abstract: How does transparency, a key feature of central bank design, affect the deliberation of monetary policymakers? We exploit a natural experiment in the Federal Open Market Committee in 1993 together with computational linguistic models (particularly Latent Dirichlet Allocation) to measure the effect of increased transparency on debate. Commentators have hypothesized both a beneficial discipline effect and a detrimental conformity effect. A difference-in-differences approach inspired by the career concerns literature uncovers evidence for both effects. However, the net effect of increased transparency appears to be a more informative deliberation process.
    Keywords: career concerns; deliberation; FOMC; monetary policy; transparency
    JEL: D78 E52 E58
    Date: 2014–05
  3. By: Christopher Spencer (School of Business and Economics, Loughborough University)
    Abstract: Following the 2008 global financial crisis, short-term interest rates in a number of major economies reached the effective zero-lower bound (ZLB), joining Japan, which has experienced prolonged deflation and virtually zero interest-rates since 1998. In such a low policy interest-rate environment, members of monetary policy committees no longer vote solely on the level of the policy-rate, but measures which are commonly described as being `unconventional'. Focussing on the experience of the United States FOMC, the Bank of Japan's Policy Board, and the Bank of England's MPC, the drivers of dissent voting behavior under conventional and unconventional monetary policy regimes are modeled. Among our findings, we show that relative to conventional policy regimes, committee members voting in unconventional regimes who are (i) directly appointed by the government, and (ii) appointed in periods during which left-wing governments are in power, are more likely to dissent on the side of monetary ease. Put another way, the decision to dissent is partially governed by whether the monetary policy regime is a conventional or an unconventional one.
    Keywords: quantitative easing, conventional and unconventional monetary policy regimes, dissent voting, monetary policy committees, panel data, career characteristics.
    JEL: O11 O33 O47 L52 C22
    Date: 2014–12
  4. By: Galí, Jordi; Gambetti, Luca
    Abstract: We estimate the response of stock prices to exogenous monetary policy shocks using a vector-autoregressive model with time-varying parameters. Our evidence points to protracted episodes in which stock prices end up increasing persistently in response to an exogenous tightening of monetary policy, even though they experience a small decline in the short run. That response is clearly at odds with the "conventional" view on the effects of monetary policy on bubbles, as well as with the predictions of bubbleless models. We also argue that it is unlikely that such evidence be accounted for by an endogenous response of the equity premium to the monetary policy shocks.
    Keywords: asset price booms; financial stability; inflation targeting; leaning against the wind policies
    JEL: E52 G12
    Date: 2014–07
  5. By: Krug, Sebastian; Lengnick, Matthias; Wohltmann, Hans-Werner
    Abstract: The Basel III accord reacts to the events of the recent financial crisis with a combination of revised micro- and new macroprudential regulatory instruments to address various dimensions of systemic risk. This approach of cumulating requirements bears the risk of individual measures negating or even conflicting with each other which might lessen their desired effects on financial stability. We provide an analysis of the impact of Basel III's main components on financial stability in a stock-flow consistent (SFC) agent-based computational economic (ACE) model. We find that the positive joint impact of the microprudential instruments is considerably larger than the sum of the individual contributions to stability, i.e. the standalone impacts are non-additive. However, except for the buffers, the macroprudential overlay's impact is either marginal or even destabilizing. Despite its simplicity, the leverage ratio performs poorly especially when associated drawbacks are explicitly taken into account. Surcharges on SIBs seem to rather contribute to financial regulations complexity than to the resilience of the system.
    Keywords: Banking Supervision,Basel III,Liquidity Coverage Ratio,Macroprudential Regulation,Financial Instability,Agent-based Computational Economics
    JEL: G01 G28 E40 C63
    Date: 2014
  6. By: Merrouche, Ouarda; Nier, Erlend
    Abstract: This paper investigates empirically three potential drivers of financial imbalances ahead of the global financial crisis: rising global imbalances (capital flows); loose monetary policy; and inadequate supervision and regulation. We perform panel data regressions for OECD countries from 1999 to 2007 to explore the relative importance of these factors, as well as the extent to which they might have interacted in fuelling the build-up. We find that the build-up of financial imbalances was driven by capital inflows and an associated compression of the spread between long and short rates. The effect of capital inflows on the build-up was amplified where the supervisory and regulatory environment was relatively weak. In contrast, differences in monetary policy did not significantly affect differences across countries in the build-up of financial imbalances ahead of the crisis.
    Keywords: global imbalances; monetary policy; supervision and regulation
    JEL: E5 F3 G28
    Date: 2014–06
  7. By: Bullard, James B. (Federal Reserve Bank of St. Louis)
    Abstract: November 14, 2014. Presentation. "Does Low Inflation Justify a Zero Policy Rate?" St. Louis Regional Chamber Financial Forum, St. Louis.
    Date: 2014–11–26
  8. By: Avgouleas, Emilios; Goodhart, Charles A
    Abstract: Many of the world’s developed economies have introduced, or are planning to introduce, bank bail-in regimes. Both the planned EU resolution regime and the European Stability Mechanism Treaty involve the participation of bank creditors in bearing the costs of bank recapitalization via the bail-in process as one of the (main) mechanisms for restoring a failing bank to health. There is a long list of actual or hypothetical advantages attached to bail-in centred bank recapitalizations. Most importantly the bail-in tool involves replacing the implicit public guarantee, on which fractional reserve banking has operated, with a system of private penalties. The bail-in tool may, indeed, be much superior in the case of idiosyncratic failure. Nonetheless, there is need for a closer examination of the bail-in process, if it is to become a successful substitute to the unpopular bailout approach. This paper discusses some of its key potential shortcomings. It explains why bail-in regimes will fail to eradicate the need for an injection of public funds where there is a threat of systemic collapse, because a number of banks have simultaneously entered into difficulties, or in the event of the failure of a large complex cross-border bank, except in those cases where failure was clearly idiosyncratic.
    Keywords: bail-in; bank recapitalisation; bank regulation; creditor flight; moral hazard
    JEL: G18 G28 K20 L51
    Date: 2014–07
  9. By: Paolo Gelain (Norges Bank); Marcin Kolasa (National Bank of Poland); Michał Brzoza-Brzezina (National Bank of Poland)
    Abstract: We study the implications of multi-period loans for monetary and macroprudential policy, considering several realistic modifications -- variable vs. fixed loan rates, non-negativity constraint on newly granted loans, and occasionally binding collateral constraint -- to an otherwise standard DSGE model with housing and financial intermediaries. In line with the literature, we find that monetary policy is less effective when contracts are multi-period, but only under fixed rate mortgages or when borrowers cannot be forced to accelerate repayment of their loans. Moreover, the probability that the collateral constraint becomes slack depends on loan maturity only for fixed rate mortgages while the probability that the non-negativity constraint becomes binding grows with loan maturity regardless of the contract type. As a result, muti-period loans not only weaken monetary and macroprudential policy, but also introduce asymmetry into their transmission.
    Date: 2014
  10. By: Srinivas Yanamandra
    Abstract: This paper examines the emerging challenges to the art of monetary policymaking using the case study of the Reserve Bank of India (RBI) in light of developments in the Indian economy during the last decade (2003-04 to 2013-14). The paper uses Hyman P. Minsky's financial instability hypothesis as the conceptual framework for evaluating the endogenous nature of financial instability and its potential impact on monetary policymaking, and addresses the need to pursue regulatory policy as a tool that is complementary to monetary policy in light of the agenda of reforms put forward by Minsky. It further reviews the extensions to the Minskyan hypothesis in the areas of setting fiscal policy, managing cross-border capital flows, and developing financial institutional infrastructure. The lessons learned from the interplay of policy choices in these areas and their impact on monetary policymaking at the RBI are presented.
    Keywords: Financial Crisis; Central Bank; Monetary Policy; Bank Regulation; Fiscal Policy; Exchange Rate Policy; Financial Institution Infrastructure
    JEL: E58 G01 G28
    Date: 2014–11
  11. By: Mitchener, Kris; Wandschneider, Kirsten
    Abstract: We examine the first widespread use of capital controls in response to a global or regional financial crisis. In particular, we analyze whether capital controls mitigated capital flight in the 1930s and assess their causal effects on macroeconomic recovery from the Great Depression. We find evidence that they stemmed gold outflows in the year following their imposition; however, time-shifted, difference-in-differences (DD) estimates of industrial production, prices, and exports suggest that exchange controls did not accelerate macroeconomic recovery relative to countries that went off gold and floated. Countries imposing capital controls also appear to perform similar to the gold bloc countries once the latter group of countries finally abandoned gold. Time series analysis suggests that countries imposing capital controls refrained from fully utilizing their newly acquired monetary policy autonomy.
    Keywords: capital controls; financial crises; Great Depression; interwar gold standard
    JEL: E44 E61 F32 F33 F41 G15 N1 N2
    Date: 2014–06
  12. By: C. Cahn; J. Matheron; J-G. Sahuc
    Abstract: In response to the 2008-2009 crisis, faced with distressed financial intermediaries, the ECB embarked in long-term refinancing operations (LTROs). Using an estimated DSGE model with a frictional banking sector, we find that such liquidity injections can have large macroeconomic effects, with multipliers up to 0.5. However, the latter depend in an important way on how standard monetary policy is adjusted in conjunction with these non-standard measures. We find that the effects are larger when the separation principle is breached, that is to say when we force monetary policy not to react to the stimulative effects of LTROs.
    Keywords: Financial frictions, unconventional monetary policy, long-term refinancing operations, DSGE model.
    JEL: E32 E58
    Date: 2014
  13. By: Raes, L.B.D. (Tilburg University, School of Economics and Management)
    Abstract: This thesis consists of a collection of essays on monetary policy making. These essays focus on institutional aspects which impact monetary policy making. Two chapters focus on analyzing voting records of central banks. A method is proposed to use the observed votes to infer the preferences of central bank committee members. These preferences characterize nearly fully the voting behavior. Subsequently these preferences are analyzed to learn about differences between certain groups of committee members. The practical relevance of this is that it allows us to think about how we should design these committees. For example, we show that some voters who are internally appointed tend to have preferences close to each other. If diversity of opinions in a board is deemed important, then this finding suggests that the number of internally appointed members should be limited. This methodology is applied to a variety of central bank committees. Each committee is a different case study and allows us to focus on another aspect. A third chapter presents an analysis of a phenomenon known as the bond yield conundrum. This term refers to the remarkable behavior of long-term U.S. interest rates in the period 2004-2005. To study this we set up a so-called macro-finance model which combines features of modern asset pricing models with empirical macroeconomic methods. Our results are somewhat disheartening in the sense that we are not fully able to explain the behavior. The final chapter gauges the impact of central bank communication on the stock market. Central bank communication is hot nowadays. The Federal Reserve as well as the European Central Bank organize press conferences on a regular basis. These press conferences are one form of communication which is followed closely by financial market participants. In this chapter we set up an event study to analyze the impact of the FOMC communication on the S&P 500. Our results suggest that central bank communication does move the stock market but does so in a nonlinear fashion. The impact depends on the business cycle as well as on the type of stock and industry. Combined, these essays allow the reader to understand some of the intricacies of central bank policy.
    Date: 2014
  14. By: Miles, David; Schanz, Jochen
    Abstract: In the wake of the financial crisis banks are likely to wish to hold far more highly liquid assets than before. Some of those liquid assets are likely to be held in the form of reserves at the central bank. We ask whether the central bank should provide these reserves by purchasing nominal, fixed-rate government bonds outright, or by repo-ing them in for a limited period. The key difference between these options is that with repos, the private sector retains the price risk associated with bonds, whereas this risk rests with the central bank if it purchases these bonds outright. There is a significant, practical policy issue for central banks here: should those central banks (most notably the Fed and the Bank of England) who built up a large stock of bonds during the QE operations, which were financed by creating reserves for commercial banks, expect to sell those bonds in due course or continue to hold a high proportion of them for a long period since the demand for reserves will be permanently higher? We develop and calibrate a simple OLG model in which risk-averse households hold money and bonds to insure against risk. We find that the composition of the central bank's assets should depend on how fiscal policy is conducted; but in general it has only a small impact on welfare.
    Keywords: Central bank balance sheet; Liquidity provision
    JEL: E52 E58
    Date: 2014–11
  15. By: Tito Nícias Teixeira da Silva Filho; Francisco Marcos Rodrigues Figueiredo
    Abstract: Intuitively core inflation is understood as a measure of inflation where noisy price movements are avoided. This is typically achieved by either excluding or downplaying the importance of the most volatile items. However, some of those items show high persistence, and one certainly does not want to disregard persistent price changes. The non equivalence between volatility and (the lack of) persistence implies that when one excludes volatile items relevant information is likely to be discarded. Therefore we propose a new type of core inflation measure, one that takes simultaneously into account both volatility and persistence. The evidence shows that such measures far outperform those based on either volatility or persistence
    Date: 2014–11
  16. By: Mamatzakis, Emmanuel; Hu, Wentao
    Abstract: In this paper, we utilize stochastic frontier analysis to estimate the impact of the regulations and institutions on bank efficiency through analyzing 389 savings and commercial banks in 11 Asian countries during the period 2000-2012. We find that activity restriction, capital requirement, official supervisory and private monitoring have a positive impact on bank performance. Furthermore, a wholesome institutional environment with powerful government, low corruption and strict law can enhance bank inefficiency. Our results suggest that banking regulations can improve bank performance with high quality of the institutional environment.
    Keywords: Bank efficiency, regulations, institutions.
    JEL: G0 G00 G1 G18
    Date: 2014–11–14
  17. By: Hossfeld, Oliver; MacDonald, Ronald
    Abstract: In this paper, we analyze which currencies can be regarded as safe haven currencies. Our empirical approach allows us to distinguish between a low- and high stress regime, and to control for the impact of carry trade reversals and other fundamental determinants. We therefore address the question of whether a supposed safe haven currency only appreciates in times of crises because carry trades are unwound, in which the corresponding currency has served as funding currency, or whether it possesses 'true' safe haven qualities; i.e. it provides a hedge against global stock market losses in stressful times even after controlling for the impact of carry trade reversals. The latter issue has largely been brushed aside in the extant literature but has important policy implications for the justification of central bank FX interventions in times of crises. According to the estimation results, two currencies, the Swiss franc and (to a lesser extent) the US dollar qualify as safe haven currencies, and the euro serves as a hedge currency. Results for the yen support its role as a carry funding vehicle, but not necessarily that of a safe haven currency. While the focus is on effective exchange rates, the paper also contains a separate analysis of bilateral euro-based exchange rates, given the euro's prominent role during the euro area sovereign debt crisis.
    Keywords: Nonlinear Regression,Threshold Model,Safe Haven,Carry Trade
    JEL: C32 F31
    Date: 2014
  18. By: Howard Kung (University of British Columbia)
    Abstract: This paper studies the equilibrium term structure of nominal and real interest rates and time-varying bond risk premia implied by a stochastic endogenous growth model with imperfect price adjustment. The production and price-setting decisions of firms drive low-frequency movements in growth and inflation rates that are negatively related. With recursive preferences, these growth and inflation dynamics are crucial for rationalizing key stylized facts in bond markets. When calibrated to macroeconomic data, the model quantitatively explains the means and volatilities of nominal bond yields and the failure of the expectations hypothesis.
    Date: 2014

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