nep-cba New Economics Papers
on Central Banking
Issue of 2015‒01‒03
eighteen papers chosen by
Maria Semenova
Higher School of Economics

  1. Interaction Between Monetary Policy and Regulatory Capital Requirements By Du, Chuan; Miles, David K
  2. Monetary Policy and Real Borrowing Costs at the Zero Lower Bound By Gilchrist, Simon; López-Salido, J David; Zakrajsek, Egon
  3. Informational Effects of Monetary Policy By Giuseppe Ferrero; Marcello Miccoli; Sergio Santoro
  4. Monetary Policy and Bank Lending Rates in Low-Income Countries: Heterogeneous Panel Estimates By Mishra, Prachi; Montiel, Peter J; Pedroni, Peter; Spilimbergo, Antonio
  5. When does a central bank’s balance sheet require fiscal support? By Del Negro, Marco; Sims, Christopher A.
  6. Monetary and macroprudential policy with multi-period loans By Michal Brzoza-Brzezina; Paolo Gelain; Marcin Kolasa
  7. Monetarism rides again? US monetary policy in a world of Quantitative Easing By Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick
  8. An Empirical Assessment of Optimal Monetary Policy Delegation in the Euro Area By Chen, Xiaoshan; Kirsanova, Tatiana; Leith, Campbell
  9. Regulatory Capture by Sophistication By Hakenes, Hendrik; Schnabel, Isabel
  10. Exceptional policies for exceptional times: The ECB's response to the rolling crises of the Euro Area, and how it has brought us towards a new grand bargain By Pill, Huw; Reichlin, Lucrezia
  11. Effectiveness and Transmission of the ECB’s Balance Sheet Policies By JEF BOECKX; MAARTEN DOSSCHE; GERT PEERSMAN
  12. How do oil price forecast errors impact inflation forecast errors? An empirical analysis from French and US inflation forecasts. By F. Bec; A. De Gaye
  13. Pro-cyclical capital regulation and lending By Behn, Markus; Haselmann, Rainer; Wachtel, Paul
  14. Regulatory Capital Modelling for Credit Risk By Marek Rutkowski; Silvio Tarca
  15. The risk of self-protection: the role of bank bailout guarantees in channelling sovereign credit risk internationally By filippo gori
  16. The Effectiveness of Non-Standard Monetary Policy Measures: Evidence from Survey Data By Altavilla, Carlo; Giannone, Domenico
  17. Real Effects of the Sovereign Debt Crisis in Europe: Evidence from Syndicated Loans By Acharya, Viral V; Eisert, Tim; Eufinger, Christian; Hirsch, Christian
  18. Credit Booms, Banking Crises, and the Current Account By Scott Davis; Adrienne Mack; Wesley Phoa; Anne Vandenabeele

  1. By: Du, Chuan; Miles, David K
    Abstract: Banks’ behaviour can be influenced by both monetary policy and regulatory capital requirements. This paper explores the interaction between these two policy tools in promoting better lending decisions by banks. We develop and calibrate a model of bank lending to examine what an optimal combination of monetary policy and regulatory capital requirements might look like. We find that as prudential standards strengthen globally in the aftermath of the financial crises, it is likely that the that equilibrium level of central bank policy rates should be lower than they had been prior to the crisis.
    Keywords: capital requirements; macro prudential policy; monetary policy
    JEL: E52 E58 G21 G28
    Date: 2014–10
  2. By: Gilchrist, Simon; López-Salido, J David; Zakrajsek, Egon
    Abstract: This paper compares the effects of conventional monetary policy on real borrowing costs with those of the unconventional measures employed after the target federal funds rate hit the zero lower bound (ZLB). For the ZLB period, we identify two policy surprises: changes in the 2-year Treasury yield around policy announcements and changes in the 10-year Treasury yield that are orthogonal to those in the 2-year yield. The efficacy of unconventional policy in lowering real borrowing costs is comparable to that of conventional policy, in that it implies a complete pass-through of policy-induced movements in Treasury yields to comparable-maturity private yields.
    Keywords: corporate bond yields; forward guidance; LSPAs; mortgage interest rates; term premia; Unconventional monetary policy
    JEL: E43 E52
    Date: 2014–05
  3. By: Giuseppe Ferrero (Bank of Italy); Marcello Miccoli (Bank of Italy); Sergio Santoro (Bank of Italy)
    Abstract: We analyse a simplified New-Keynesian model with an unobserved aggregate cost-push shock in which firms and the central bank have different information about the shock. We consider a linear policy rule where a pure inflation targeting central bank decides how much to react to the shock given its information. In this framework we show that monetary policy performs both an allocational and an informational role, the latter due to firms extracting information on the aggregate shock from the monetary policy tool. When the informational role is present, optimal monetary policy is more cautious, that is, it responds less to the shock than the perfect information benchmark. A more cautious reaction to the shock implies that firms make more effective use of their private information and the endogenous information coming from the aggregate price in order to make inferences about the shock.
    Keywords: imperfect information, endogenous information, learning, monetary policy
    JEL: D83 E52 E58
    Date: 2014–10
  4. By: Mishra, Prachi; Montiel, Peter J; Pedroni, Peter; Spilimbergo, Antonio
    Abstract: This paper studies the transmission of monetary shocks to lending rates in a large sample of advanced, emerging, and low-income countries. Transmission is measured by the impulse response of bank lending rates to monetary policy shocks. Long-run restrictions are used to identify such shocks. Using a heterogeneous structural panel VAR approach, we find that there is wide variation in the response of bank lending rates to a monetary policy innovation across countries. Monetary policy shocks are more likely to affect bank lending rates in the theoretically expected direction in countries that have better institutional frameworks, more developed financial structures, and less concentrated banking systems. Low-income countries score poorly along all of these dimensions, and we find that such countries indeed exhibit much weaker transmission of monetary policy shocks to bank lending rates than do advanced and emerging economies
    Keywords: bank lending; monetary policy; structural panel VAR
    JEL: E5 O11 O16
    Date: 2014–11
  5. By: Del Negro, Marco (Federal Reserve Bank of New York); Sims, Christopher A.
    Abstract: Using a simple general equilibrium model, we argue that it would be appropriate for a central bank with a large balance sheet composed of long-duration nominal assets to have access to, and be willing to ask for, support for its balance sheet by the fiscal authority. Otherwise its ability to control inflation may be at risk. This need for balance sheet support—a within-government transaction—is distinct from the need for fiscal backing of inflation policy that arises even in models where the central bank’s balance sheet is merged with that of the rest of the government.
    Keywords: central bank’s balance sheet; solvency; monetary policy
    JEL: E58 E59
    Date: 2014–11–01
  6. By: Michal Brzoza-Brzezina (Narodowy Bank Polski and Warsaw School of Economics); Paolo Gelain (Norges Bank (Central Bank of Norway) and BI Norwegian Business School); Marcin Kolasa (Narodowy Bank Polski and Warsaw School of Economics)
    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 possibility for the collateral constraint to become slack - to an otherwise standard DSGE model with housing and financial intermediaries. Our general finding is that multiperiodicity affects the working of both policies, though in substantially different ways. We show that multiperiod contracts make the monetary policy less effective, but only under fixed rate mortgages, and do not generate significant asymmetry to its transmission. In contrast, the effects of macroprudential policy do not depend much on the type of interest payments, but exhibit strong asymmetries, with tightening having stronger effects than easening, especially for short and medium maturities.
    Keywords: Multi-period contracts, Monetary policy, Macroprudential policy
    JEL: E44 E51 E52
    Date: 2014–11–27
  7. By: Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick
    Abstract: This paper gives money a role in providing cheap collateral in a model of banking; this means that, besides the Taylor Rule, monetary policy can affect the risk-premium on bank lending to firms by varying the supply of M0 in open market operations, so that even when the zero bound prevails monetary policy is still effective; and fiscal policy under the zero bound still crowds out investment via the risk-premium. A simple rule for making M0 respond to credit conditions can substantially enhance the economy's stability. Both price-level and nominal GDP targeting rules for interest rates would combine with this to stabilise the economy further. With these rules for monetary control, aggressive and distortionary regulation of banks' balance sheets becomes redundant.
    Keywords: crises; DSGE model; financial frictions; fiscal multiplier; indirect inference; monetary policy; money supply; QE; zero bound
    JEL: C1 E3 E44 E52
    Date: 2014–11
  8. By: Chen, Xiaoshan; Kirsanova, Tatiana; Leith, Campbell
    Abstract: We estimate a New Keynesian DSGE model for the Euro area under alternative descriptions of monetary policy (discretion, commitment or a simple rule) after allowing for Markov switching in policy maker preferences and shock volatilities. This reveals that there have been several changes in Euro area policy making, with a strengthening of the anti-inflation stance in the early years of the ERM, which was then lost around the time of German reunification and only recovered following the turnoil in the ERM in 1992. The ECB does not appear to have been as conservative as aggregate Euro-area policy was under Bundesbank leadership, and its response to the financial crisis has been muted. The estimates also suggest that the most appropriate description of policy is that of discretion, with no evidence of commitment in the Euro-area. As a result although both ‘good luck' and ‘good policy' played a role in the moderation of inflation and output volatility in the Euro-area, the welfare gains would have been substantially higher had policy makers been able to commit. We consider a range of delegation schemes as devices to improve upon the discretionary outcome, and conclude that price level targeting would have achieved welfare levels close to those attained under commitment, even after accounting for the existence of the Zero Lower Bound on nominal interest rates.
    Keywords: Great Recession; Financial Crisis; Zero Lower Bound; Discretion; Commitment; Great Moderation; Optimal Monetary Policy; Interest Rate Rules; Bayesian Estimation
    Date: 2014–11
  9. By: Hakenes, Hendrik; Schnabel, Isabel
    Abstract: One explanation for the poor performance of regulation in the recent financial crisis is that regulators had been captured by the financial sector. We present a micro-founded model with rational agents in which banks capture regulators by their sophistication. Banks can search for arguments of differing complexity against tighter regulation. Finding such arguments is more difficult for weaker banks, which the regulator wants to regulate more strictly. However, the more sophisticated a bank is, the more easily it can produce arguments that a regulator does not understand. Reputational concerns prevent regulators from admitting this, hence they rubber-stamp weak banks, which leads to inefficiently low levels of regulation. Bank sophistication and reputational concerns of regulators lead to capture, and thus to worse regulatory decisions.
    Keywords: banking regulation; complexity; financial stability; regulatory capture; reputational concerns; sophistication; special interests
    JEL: G21 G28 L51 P16
    Date: 2014–08
  10. By: Pill, Huw; Reichlin, Lucrezia
    Abstract: This paper provides an appraisal of European Central Bank (ECB) policy from the beginning of the financial crisis to the summer of 2014. It argues that, as the crisis unfolded, ECB policy can be characterized as an attempt at finding a middle way between “monetary dominance” embedded in the Treaty and “fiscal dominance”. This middle course was pragmatic response to the challenges being faced but it failed to offer a stable solution to the underlying solvency issues, while permitting (or even creating) a damaging set of dislocations, notably a fragmentation of Euro financial markets, with damaging consequences on the real economy. We argue that since Draghi’s pledge to do “whatever it takes” to sustain the euro in July 2012, the ECB has attempted to construct a new institutional framework. We conclude that, although there are promising developments in some areas such as banking union, without a “new bargain” on how to deal with the debt overhang which is the legacy of the crisis, the euro area is under threat.
    JEL: E5
    Date: 2014–10
    Abstract: We estimate the effects of exogenous innovations to the balance sheet of the ECB since the start of the financial crisis within a structural VAR framework. An expansionary balance sheet shock stimulates bank lending, stabilizes financial markets, and has a positive impact on economic activity and prices. The effects on bank lending and output are smaller in the member countries that have been more affected by the financial crisis, in particular those countries where the banking system is less well-capitalized.
    Keywords: unconventional monetary policy, ECB balance sheet, euro area, VAR
    JEL: C32 E30 E44 E51 E52
    Date: 2014–07
  12. By: F. Bec; A. De Gaye
    Abstract: This paper proposes an empirical investigation of the impact of oil price forecast errors on inflation forecast errors for two different sets of recent forecasts data: the median of SPF inflation forecasts for the U.S. and the Central Bank inflation forecasts for France. Mainly two salient points emerge from our results. First, there is a significant contribution of oil price forecast errors to the explanation of inflation forecast errors, whatever the country or the period considered. Second, the pass-through of oil price forecast errors to inflation forecast errors is multiplied by around 2 when the oil price volatility is large.
    Keywords: Forecast errors, Inflation rate, Oil price, Threshold model.
    JEL: C22 E31 E37
    Date: 2014
  13. By: Behn, Markus; Haselmann, Rainer; Wachtel, Paul
    Abstract: We use a quasi-experimental research design to examine the effect of model-based capital regulation introduced under the Basel II agreement on the pro-cyclicality of bank lending and firms' access to funds during a recession. In response to an exogenous shock to credit risk in the German economy, loans subject to modelbased, time-varying capital charges were reduced by 3.5 percent more than loans under the traditional approach to capital regulation. The effect is even stronger when we examine aggregate firm borrowing, suggesting that the pro-cyclical effect of model-based capital charges is not offset by substitution to other banks which use the traditional approach.
    Keywords: capital regulation,credit crunch,financial crisis
    JEL: G01 G21 G28
    Date: 2014
  14. By: Marek Rutkowski; Silvio Tarca
    Abstract: The Basel II internal ratings-based (IRB) approach to capital adequacy for credit risk plays an important role in protecting the Australian banking sector against insolvency. We outline the mathematical foundations of regulatory capital for credit risk, and extend the model specification of the IRB approach to a more general setting than the usual Gaussian case. It rests on the proposition that quantiles of the distribution of conditional expectation of portfolio percentage loss may be substituted for quantiles of the portfolio loss distribution. We present a more economical proof of this proposition under weaker assumptions. Then, constructing a portfolio that is representative of credit exposures of the Australian banking sector, we measure the rate of convergence, in terms of number of obligors, of empirical loss distributions to the asymptotic (infinitely fine-grained) portfolio loss distribution. Moreover, we evaluate the sensitivity of credit risk capital to dependence structure as modelled by asset correlations and elliptical copulas. Access to internal bank data collected by the prudential regulator distinguishes our research from other empirical studies on the IRB approach.
    Date: 2014–12
  15. By: filippo gori (IHEID, The Graduate Institute of International and Development Studies, Geneva)
    Abstract: This paper investigates the role of banks’ foreign asset holdings in transmitting credit risk internationally. Foreign exposure in risky assets might severely affect the solvability of credit institutions. Credit risk, in turn, transfers from banks to public accounts as a consequence of implicit or explicit bailout guarantees to distressed banking systems. This paper articulates this mechanism with a simple model where governments choose to fill banks' capital gaps to self-protect from the severe economic consequence of a banking sector default. Referring to the existing literature on the determinants of sovereign yield spreads in the second part of the paper, I present empirical evidence of the link between banks’ foreign claims and countries' credit risk. Results for the eurozone identify banks' foreign exposure as a major determinant of sovereign default probability. Also, governments' vulnerability to credit risk spill over decreases with banks' capitalisation and sovereigns' fiscal solvability of credit institutions. Credit risk, in turn, transfers from banks to public accounts as a consequence of implicit or explicit bailout guarantees to distressed banking systems. This paper articulates this mechanism with a simple model where governments choose to fill banks' capital gaps to self-protect from the severe economic consequence of a banking sector default. Referring to the existing literature on the determinants of sovereign yield spreads in the second part of the paper, I present empirical evidence of the link between banks’ foreign claims and countries' credit risk. Results for the eurozone identify banks' foreign exposure as a major determinant of sovereign default probability. Also, governments' vulnerability to credit risk spill over decreases with banks' capitalisation and sovereigns' fiscal soundness.undness.
    Keywords: Banks, Sovereign Credit Risk,International Spillover
    JEL: G15 F36 G28
    Date: 2012–11–05
  16. By: Altavilla, Carlo; Giannone, Domenico
    Abstract: We assess the perception of professional forecasters regarding the effectiveness of unconventional monetary policy measures undertaken by the U.S. Federal Reserve after the collapse of Lehman Brothers. Using individual survey data, we analyse the changes in forecasting of bond yields around the announcement and implementation dates of non-standard monetary policies. The results indicate that bond yields are expected to drop significantly for at least one year after the announcement and the implementation of accommodative policies.
    Keywords: Forward Guidance; Large Scale Asset Purchases; Operation Twist; Quantitative Easing; Survey of Professional Forecasters; Tapering
    JEL: E58 E65
    Date: 2014–06
  17. By: Acharya, Viral V; Eisert, Tim; Eufinger, Christian; Hirsch, Christian
    Abstract: This paper shows that the sovereign debt crisis and the resulting credit crunch in the periphery of the Eurozone lead to negative real effects for borrowing firms. Using a hand matched sample of loan information from Dealscan and accounting information from Amadeus, we show that firms with a higher exposure to banks affected by the sovereign debt crisis become financially constrained during the crisis. As a result, these firms have significantly lower employment growth, capital expenditures, and sales growth rates. We show that our results are not driven by country or industry-specific macroeconomic shocks or a change in the demand for credit of borrowing firms. Thus, the high interdependence of bank and sovereign health and the resulting credit crunch is one important contributor to the severe economic downturn in the southern European countries during the sovereign debt crisis.
    Keywords: credit contraction; European sovereign debt crisis; financing constraints; real effects
    JEL: E44 G21 G28
    Date: 2014–08
  18. By: Scott Davis (Hong Kong Institute for Monetary Research and Federal Reserve Bank of Dallas); Adrienne Mack (Federal Reserve Bank of Dallas); Wesley Phoa (The Capital Group Companies); Anne Vandenabeele (The Capital Group Companies)
    Abstract: A number of papers have shown that rapid growth in private sector credit is a strong predictor of a banking crisis. This paper will ask if credit growth is itself the cause of a crisis, or is it the combination of credit growth and external deficits? This paper estimates a probabilistic model to find the marginal effect of private sector credit growth on the probability of a banking crisis. The model contains an interaction term between credit growth and the level of the current account, so the marginal effect of private sector credit growth may itself be a function of the level of the current account. We find that the marginal effect of rising private sector debt levels depends on an economy's external position. When the current account is in balance, the marginal effect of an increase in debt is rather small. However, when the economy is running a sizable current account deficit, implying that any increase in the debt ratio is financed through foreign borrowing, this marginal effect is large.
    Keywords: Banking Crises, Credit Booms, Current Account
    JEL: E51 F32 F40
    Date: 2014–11

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