nep-cba New Economics Papers
on Central Banking
Issue of 2015‒01‒09
25 papers chosen by
Maria Semenova
Higher School of Economics

  1. Central Banks: Powerful, Political and Unaccountable? By Buiter, Willem H.
  2. Targeting core inflation in emerging market economies By Stan du Plessis
  3. Targeting Inflation from Below - How Do Inflation Expectations Behave? By Michael Ehrmann
  4. Re-Normalize, Don't New-Normalize Monetary Policy By John B. Taylor
  5. Exchange rate and price dynamics in a small open economy - the role of the zero lower bound and monetary policy regimes By Gregor Bäurle; Daniel Kaufmann
  6. Exchange Rate Flexibility under the Zero Lower Bound By Cook, David; Devereux, Michael B
  7. Large banks, loan rate markup and monetary policy By Vincenzo Cuciniello; Federico M. Signoretti
  8. Credit Spreads and Credit Policies By Correia, Isabel; De Fiore, Fiorella; Teles, Pedro; Tristani, Oreste
  9. An Empirical Assessment of Optimal Monetary Policy Delegation in the Euro Area By Xiaoshan Chen; Tatiana Kirsanova; Campbell Leith
  10. Bayesian Combination for Inflation Forecasts: The Effects of a Prior Based on Central Banks’ Estimates By Luis F. Melo Velandia; Rubén A. Loaiza Maya; Mauricio Villamizar-Villegas
  11. Liquidity Traps and Monetary Policy: Managing a Credit Crunch By Buera, Francisco J.; Nicolini, Juan Pablo
  12. Unprecedented Actions: The Federal Reserve’s Response to the Global Financial Crisis in Historical Perspective By Frederic S. Mishkin; Eugene N. White
  13. Are Central Bankers Inflation Nutters? - A Bayesian MCMC Estimator of the Long Memory Parameter in a State Space Model By Andersson, Fredrik N. G.; Li, Yushu
  14. Estimating the Preferences of Central Bankers : An Analysis of Four Voting Records By Eijffinger, S.C.W.; Mahieu, R.J.; Raes, L.B.D.
  15. Política Monetaria Estadounidense y Tipo De Cambio Real en México, 1996-2012 By Rodolfo Cermeño; Mario Negrete García
  16. Exiting from Low Interest Rates to Normality: An Historical Perspective By Michael D. Bordo
  17. Accounting for Post-Crisis Inflation and Employment: A Retro Analysis By Chiara Fratto; Harald Uhlig
  19. The Demand for Short-Term, Safe Assets and Financial Stability: Some Evidence and Implications for Central Bank Policies By Carlson, Mark A.; Duygan-Bump, Burcu; Natalucci, Fabio M.; Nelson, William R.; Ochoa, Marcelo; Stein, Jerome L.; Van den Heuvel, Skander J.
  20. Central Bank Communication and the Management of Market Confidence: Two Episodes in 2013 in the U.S. and Japan By Koichiro Kamada
  21. Heterogeneity in Inflation Expectations and Macroeconomic Stability under Satisficing Learning By Jaylson Jair da Silveira; Gilberto Tadeu Lima
  22. Regional Inflation and Financial Dollarization By Brown, M.; de Haas, R.; Sokolov, V.
  23. Sources of exchange rate fluctuation in Vietnam: an application of the SVAR model By Nguyen Van, Phuong
  24. Active Risk Management and Banking Stability By Silva Buston, C.F.
  25. Presentation of seven country studies on the impact of implementation of EU Directives on Banking and Finance on national regulatory systems By Jan A. Kregel; Mario Tonveronachi

  1. By: Buiter, Willem H.
    Abstract: Central banks’ economic and political importance has grown in advanced economies since the start of the Great Financial Crisis in 2007. An unwillingness or inability of governments to use countercyclical fiscal policy has made monetary policy the only stabilization tool in town. However, much of the enhanced significance of central banks is due to their lender-of-last-resort and market-maker-of-last-resort roles, providing liquidity to financially distressed and illiquid financial institutions and sovereigns. Supervisory and regulatory functions – often deeply political, have been heaped on central banks. Central bankers also increasingly throw their weight around in the public discussion of and even the design and implementation of fiscal policy and structural reforms - areas which are way beyond their mandates and competence. In this lecture I argue that the preservation of the central bank’s legitimacy requires that a clear line be drawn between the central bank’s provision of liquidity and the Treasury’s solvency support for systemically important financial institutions. All activities of the central bank that expose it to material credit risk should be guaranteed by the Treasury. In addition, central banks must become more accountable by increasing the transparency of their lender-of-last-resort and marketmaker-of-last resort activities. Central banks ought not to engage in quasi-fiscal activities. Finally, central banks should stick to their knitting and central bankers should not become participants in public debates and deeply political arguments about matters beyond their mandate and competence, including fiscal policy and structural reform.
    Keywords: accountability; independence,; legitimacy; monetary policy; quasi-fiscal; regulation; seigniorage,; supervision
    JEL: E02 E42 E52 E58 E61 E62 E63 G18 G28 H63
    Date: 2014–10
  2. By: Stan du Plessis (Department of Economics, University of Stellenbosch)
    Abstract: The pre-crisis monetary policy consensus has been challenged on a number of fronts. Even the nominal target, around which the modern consensus developed, has been called into question, with a vigorous recent debate ensuing about nominal income targeting as an alternative. This paper contributes to the controversy by arguing that one important reform of inflation-targeting regimes that deserves more attention is reformulating their targets explicitly in terms of core inflation. Core inflation targeting has a better theoretical grounding from both welfare economics and business cycle perspectives, holds practical advantages for inflation-targeting central banks, and has the promising feature of improving the frankness and accountability of monetary policy.
    Keywords: Inflation, Core inflation, Inflation-targeting, Monetary policy
    JEL: E31 E52 E58
    Date: 2014
  3. By: Michael Ehrmann
    Abstract: Inflation targeting (IT) had originally been introduced as a device to bring inflation down and stabilize it at low levels. Given the current environment of persistently weak inflation in many advanced economies, IT central banks must now bring inflation up to target. In this paper, the author tests to what extent inflation expectations are anchored in such circumstances, by comparing (i) IT and non-IT countries, and (ii) across periods when inflation is at normal levels, (persistently) high, or (persistently) weak. He finds that under low and persistently low inflation, some disanchoring can occur - inflation expectations are more dependent on lagged inflation; forecasters tend to disagree more; and inflation expectations get revised down in response to lower-than-expected inflation, but do not respond to higher-than-expected inflation. Since inflation expectations in IT countries are substantially better anchored than those in the control group, policy rates in IT countries need to react less to changes in inflation, making IT central banks considerably less likely to hit the zero lower bound.
    Keywords: Inflation and prices; Inflation targets
    JEL: E52 E58 E31 C53
    Date: 2014
  4. By: John B. Taylor
    Abstract: In this paper I argue that central banks should re-normalize monetary policy, including the de facto independence of policy, rather than new-normalize policy to some so called new normal. I explain his view and show that it follows from a review of the actual practice of monetary policy in recent years. I also consider some objections that might be raised to this position. I focus mainly on the United States and go back to the time before the recent financial crisis.
    Date: 2014–04
  5. By: Gregor Bäurle; Daniel Kaufmann
    Abstract: We analyse nominal exchange rate and price dynamics after risk premium shocks with short-term interest rates constrained by the zero lower bound (ZLB). In a small-open-economy DSGE model, temporary risk premium shocks lead to shifts of the exchange rate and the price level if a central bank implements an inflation target by means of a traditional Taylor rule. These shifts are strongly amplified and become more persistent once the ZLB is included in the model. We also provide empirical support for this finding. Using a Bayesian VAR for Switzerland, we find that responses of the exchange rate and the price level to a temporary risk premium shock are larger and more persistent when the ZLB is binding. Our theoretical discussion shows that alternative monetary policy rules that stabilise price-level expectations are able to dampen exchange rate and price fluctuations when the ZLB is binding. This stabilisation can be achieved by including either the price level or, alternatively, the nominal exchange rate in the policy rule.
    Keywords: Exchange rate and price dynamics, zero lower bound on short-term interest rates, small-open-economy DSGE model, monetary policy regimes, monetary transmission, Bayesian VAR, sign restrictions
    JEL: C11 C32 E31 E37 E52 E58 F31
    Date: 2014
  6. By: Cook, David; Devereux, Michael B
    Abstract: An independent currency and a flexible exchange rate generally helps a country in adjusting to macroeconomic shocks. But recently in many countries, interest rates have been pushed down close to the lower bound, limiting the ability of policy-makers to accommodate shocks, even in countries with flexible exchange rates. This paper argues that if the zero bound constraint is binding and policy lacks an effective `forward guidance' mechanism, a flexible exchange rate system may be inferior to a single currency area. With monetary policy constrained by the zero bound, under flexible exchange rates, the exchange rate exacerbates the impact of shocks. Remarkably, this may hold true even if only a subset of countries are constrained by the zero bound, and other countries freely adjust their interest rates under an optimal targeting rule. In a zero lower bound environment, in order for a regime of multiple currencies to dominate a single currency, it is necessary to have effective forward guidance in monetary policy.
    Keywords: Forward Guidance; Lower Bound; Monetary Policy; Optimal Currency Area
    JEL: E2 E5 E6
    Date: 2014–10
  7. By: Vincenzo Cuciniello (Bank of Italy); Federico M. Signoretti (Bank of Italy)
    Abstract: This paper studies the implications of introducing large monopolistic banks, which can affect macroeconomic outcomes and thus the response of monetary policy to inflation, in a model with a collateral constraint linking the borrowers� credit capacity to the value of their durable assets. First, we find that strategic interaction generates a countercyclical loan spread, which amplifies the impact of monetary and technology shocks on the real economy. This type of financial accelerator adds up to the one due to financial frictions and is crucially related to the existence of non-atomistic banks. Second, the level of the spread and the degree of amplification are positively related to the level of entrepreneurs� leverage, reflecting the fact that higher leverage implies greater elasticity of the policy rate to changes in loan rates, which in turn increases banks� market power. Third, we find that amplification is stronger the more aggressive the central bank�s response to inflation, as measured by the inflation coefficient in the Taylor rule.
    Keywords: large banks, bank markup, monetary policy
    JEL: E51 E52 G21
    Date: 2014–10
  8. By: Correia, Isabel; De Fiore, Fiorella; Teles, Pedro; Tristani, Oreste
    Abstract: How should monetary and fiscal policy react to adverse financial shocks? If monetary policy is constrained by the zero lower bound on the nominal interest rate, subsidising the interest rate on loans is the optimal policy. The subsidies can mimic movements in the interest rate and can therefore overcome the zero bound restriction. Credit subsidies are optimal irrespective of how they are financed. If debt is not state contingent, they result in a permanent increase in the level of public debt and future taxes, and in a permanent reduction in output.
    Keywords: banks; credit policies; credit subsidies; monetary policy; zero bound on interest rates
    JEL: E31 E40 E44 E52 E58 E62 E63
    Date: 2014–05
  9. By: Xiaoshan Chen; Tatiana Kirsanova; Campbell Leith
    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: Bayesian Estimation, Interest Rate Rules, Optimal Monetary Policy, Great Moderation, Commitment, Discretion, Zero Lower Bound, Financial Crisis, Great Recession
    JEL: E58 E32 C11 C51 C52 C54
    Date: 2014–11
  10. By: Luis F. Melo Velandia; Rubén A. Loaiza Maya; Mauricio Villamizar-Villegas
    Abstract: Typically, central banks use a variety of individual models (or a combination of models) when forecasting inflation rates. Most of these require excessive amounts of data, time, and computational power; all of which are scarce when monetary authorities meet to decide over policy interventions. In this paper we use a rolling Bayesian combination technique that considers inflation estimates by the staff of the Central Bank of Colombia during 2002-2011 as prior information. Our results show that: 1) the accuracy of individual models is improved by using a Bayesian shrinkage methodology, and 2) priors consisting of staff's estimates outperform all other priors that comprise equal or zero-vector weights. Consequently, our model provides readily available forecasts that exceed all individual models in terms of forecasting accuracy at every evaluated horizon.
    Keywords: Bayesian shrinkage, inflation forecast combination, internal forecasts, rolling window estimation
    JEL: C22 C53 C11 E31
    Date: 2014–11–20
  11. By: Buera, Francisco J. (Federal Reserve Bank of Chicago); Nicolini, Juan Pablo (Federal Reserve Bank of Minneapolis)
    Abstract: We study a model with heterogeneous producers that face collateral and cash in advance constraints. These two frictions give rise to a non-trivial financial market in a monetary economy. A tightening of the collateral constraint results in a credit-crunch generated recession. The model can suitable be used to study the effects on the main macroeconomic variables - and on welfare of each individual - of alternative monetary - and fiscal - policies following the credit crunch. The model reproduces several features of the recent financial crisis, like the persistent negative real interest rates, the prolonged period at the zero bound for the nominal interest rate, the collapse in investment and low inflation, in spite of the very large increases of liquidity adopted by the government. The policy implications are in sharp contrast with the prevalent view in most Central Banks, based on the New Keynesian explanation of the liquidity trap.
    Keywords: Liquidity; monetary policy; interest rate
    JEL: E12 E42 E43 E51
    Date: 2014–05–14
  12. By: Frederic S. Mishkin; Eugene N. White
    Abstract: Interventions by the Federal Reserve during the financial crisis of 2007-2009 were generally viewed as unprecedented and in violation of the rules—notably Bagehot’s rule—that a central bank should follow to avoid the time-inconsistency problem and moral hazard. Reviewing the evidence for central banks’ crisis management in the U.S., the U.K. and France from the late nineteenth century to the end of the twentieth century, we find that there were precedents for all of the unusual actions taken by the Fed. When these were successful interventions, they followed contingent and target rules that permitted pre-emptive actions to forestall worse crises but were combined with measures to mitigate moral hazard.
    JEL: E58 G01 N10 N20
    Date: 2014–12
  13. By: Andersson, Fredrik N. G. (Dept. of Economics, Lund University); Li, Yushu (Dept. of Business and Management Science, Norwegian School of Economics)
    Abstract: Several central banks have adopted inflation targets. The implementation of these targets is flexible; the central banks aim to meet the target over the long term but allow inflation to deviate from the target in the short-term in order to avoid unnecessary volatility in the real economy. In this paper, we propose modeling the degree of flexibility using an ARFIMA model. Under the assumption that the central bankers control the long-run inflation rates, the fractional integration order captures the flexibility of the inflation targets. A higher integration order is associated with a more flexible target. Several estimators of the fractional integration order have been proposed in the literature. Grassi and Magistris (2011) show that a state-based maximum likelihood estimator is superior to other estimators, but our simulations show that their finding is over-biased for a nearly non-stationary time series. We resolve this issue by using a Bayesian Monte Carlo Markov Chain (MCMC) estimator. Applying this estimator to inflation from six inflation-targeting countries for the period 1999M1 to 2013M3, we find that inflation is integrated of order 0.8 to 0.9 depending on the country. The inflation targets are thus implemented with a high degree of flexibility.
    Keywords: Fractional integration; inflation-targeting; state space model
    JEL: C10 C11 C15
    Date: 2014–11–28
  14. By: Eijffinger, S.C.W. (Tilburg University, Center For Economic Research); Mahieu, R.J. (Tilburg University, Center For Economic Research); Raes, L.B.D. (Tilburg University, Center For Economic Research)
    Abstract: Abstract: This paper analyzes the voting records of four central banks (Sweden, Hungary, Poland and the Czech Republic) with spatial models of voting. We infer the policy preferences of the monetary policy committee members and use these to analyze the evolution in preferences over time and the differences in preferences between member types and the position of the Governor in different monetary policy committees.
    Keywords: Ideal points; Voting records; Central Banking; NBP; CNB; MNB; Riksbank
    JEL: E58 E59 C11
    Date: 2013
  15. By: Rodolfo Cermeño (Division of Economics, CIDE); Mario Negrete García
    Abstract: This paper explores empirically the relationship between the Monetary Policy in the U.S. and the real exchange rate MXN/USD over the period 1996-2012 with monthly data. We consider a cointegration approach using a model of real exchange rate fundamentals as in Goldfajn and Valdes (1999), where the international interest rate is used as an indicator of the monetary policy in the U.S. We find evidence of cointegration and a negative long run elasticity of real exchange rate with respect to the international interest rate. On the other hand, the results from error correction estimates indicate that the adjustment process that follows a disequilibrium in the long run relationship of the real exchange rate and its fundamentals lasts approximately ten periods.
    Keywords: Monetary policy, real exchange rate, unit roots and cointegration
    JEL: C22 C32 E52 F31
    Date: 2013–11
  16. By: Michael D. Bordo (Rutgers University)
    Abstract: This paper examines the Federal Reserve's recent policy of quantitative easing by looking back at the experience of the 1930s and 1940s when the Fed, under Treasury control, kept interest rates at levels comparable to today and its balance sheet increased similarly. The paper also presents macroeconomic evidence based on the labor market, the growth of the money supply, and the behavior of real GDP and the unemployment rate in addition to a comparison of the Federal funds rate with the Taylor Rule rate and the shadow funds rate. Because of issues connected to its large balance sheet, the Fed may use tools other than the federal funds rate to tighten monetary policy. Returning to a higher (more normal) rate environment will remove some of the distortions that have accompanied the long period of abnormally low interest rates. But rising rates will also present problems for public finance and for the distribution of income that all but guarantees political rancor in the future.
    Date: 2014–11
  17. By: Chiara Fratto; Harald Uhlig
    Abstract: What accounts for inflation after 2008? We use the prominent pre-crisis Smets-Wouters (2007) model to address this question. We find that due to price markup shocks alone inflation would have been 1% higher than observed and 0.5% higher that the long-run average. Their standard deviation is similar to its pre-crisis level. Price markup shocks were also responsible for the slow recovery of employment, though not for the initial drop. Monetary policy shocks predict an inflation rate 0.5% below average. Government expenditure innovations do not contribute much either to inflation or to employment dynamics.
    JEL: E31 E32 E52
    Date: 2014–11
  18. By: Elisabetta Gualandri; Mario Noera
    Abstract: Understanding the nature of systemic risk and identifying the channels of diffusion of the shocks are the necessary prerequisite to anticipate and manage successfully the insurgence of financial crises. In order to prevent financial distress and manage instability, the macroprudential regulator needs to track and measure systemic risks ex-ante. The aim of the paper is twofold: on one side, it reviews the theoretical frameworks which allow to assess the different dimensions of systemic risk and, on the other, it classifies accordingly and analyzes the methodologies available to assess in advance the occurrence of systemic distress. The paper classifies the different definitions of systemic risk and discusses their significance during the 2007-08 crisis. It presents the tools available to extract real time information on market perception of risk from market prices of securities and derivatives (i.e. CDS and equity options). The analysis is extended to the methods focused on the measurement of the financial fragility due to the networks linkages within the financial system. On the basis of the available empirical research, the paper also reviews the capacity of the different methods to spot in advance the insurgence of the crisis prior to 2007-08 and draws some preliminary conclusions on the completeness and consistency of the toolkit available to policy makers.
    Keywords: systemic risk, financial crisis, prudential regulation, financial institutions
    JEL: G01 G18 G G28
    Date: 2014–11
  19. By: Carlson, Mark A. (Board of Governors of the Federal Reserve System (U.S.)); Duygan-Bump, Burcu (Board of Governors of the Federal Reserve System (U.S.)); Natalucci, Fabio M. (Board of Governors of the Federal Reserve System (U.S.)); Nelson, William R. (Board of Governors of the Federal Reserve System (U.S.)); Ochoa, Marcelo (Board of Governors of the Federal Reserve System (U.S.)); Stein, Jerome L. (Board of Governors of the Federal Reserve System (U.S.)); Van den Heuvel, Skander J. (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: A number of researchers have recently argued that the growth of the shadow banking system in the years preceding the recent U.S. financial crisis was driven by rising demand for "money-like" claims--short-term, safe instruments (STSI)--from institutional investors and nonfinancial firms. These instruments carry a money premium that lowers their yields. While government securities are an important part of the supply of STSI, financial intermediaries also take advantage of this money premium when they issue certain types of low-risk, short-term debt, such as asset-backed commercial paper or repo. In this paper, we take the demand for STSI as given and consider the extent to which central banks can improve financial stability and manage maturity transformation by the private sector through their ability to affect the public supply of STSI. The first part of the paper provides new evidence that complements the existing literature on two key ingredients that are necessary for there to be a role for policy: the extent to which public short-term debt and private short-term debt might be substitutes, and the relationship between the money premium and the supply of STSI. The second part of the paper then builds on this evidence and discusses potential ways a central bank could use its balance sheet and monetary policy implementation framework to affect the quantity and mix of short-term liquid assets that will be available to financial market participants.
    Keywords: Financial stability; safe assets; money-like instruments; central bank policies
    Date: 2014–11–25
  20. By: Koichiro Kamada (Bank of Japan)
    Abstract: Confidence has a strong influence on security prices and volatility, but has received little attention in mainstream macroeconomics. Kamada and Miura (2014) have recently revived this concept in their double-layered model of private and public information and shown how herding behavior emerges in sovereign bond markets. This article looks at two episodes that occurred in 2013 in the U.S. and Japan and uses their model to explain how the interest rate hikes and subsequent increase in volatility emerged. The analysis indicates that central bank communication is a promising policy tool to manage market confidence, but at the same time, could create unintended market turbulence.
    Keywords: Central bank; communication; market confidence; bond market; volatility
    JEL: D40 D83 E58 G12
    Date: 2014–12–01
  21. By: Jaylson Jair da Silveira; Gilberto Tadeu Lima
    Abstract: Drawing on a considerable empirical and experimental literature that finds persistent and endogenously time-varying heterogeneity in inflation expectations, this paper embeds two inflation forecasting strategies – one based on costly full rationality or perfect foresight, the second based on costless bounded rationality or adaptive foresight – in a basic macroeconomic model. Drawing in particular on the significant evidence that forecast errors have to pass some threshold before agents abandon their previously selected inflation forecasting strategy, we assume that agents switch between these forecasting strategies based on satisficing evolutionary dynamics. We find that convergence to a long-run equilibrium configuration consistent with output growth, unemployment and inflation at their natural levels is achieved even when heterogeneity in inflation expectations (with predominance of the adaptive foresight strategy) is an attractor of a noisy satisficing evolutionary dynamics. Therefore, in accordance with the empirical evidence, persistent heterogeneity in inflation expectations (with prevalence of bounded rational expectations) emerges as a long-run equilibrium outcome.
    Keywords: Heterogeneous inflation expectations; perfect foresight; adaptive foresight; noisy satisficing evolutionary dynamics
    JEL: E31 C62 C73
    Date: 2014–11–26
  22. By: Brown, M. (Tilburg University, Center For Economic Research); de Haas, R. (Tilburg University, Center For Economic Research); Sokolov, V.
    Abstract: Abstract: We exploit variation in consumer price inflation across 71 Russian regions to examine the relationship between the perceived stability of the local currency and financial dollarization. Our results show that regions with higher inflation experience an increase in the dollarization of household deposits and a decrease in the dollarization of (long-term) household credit. The negative impact of inflation on credit dollarization is weaker in regions with less-integrated banking markets, suggesting that the asset-liability management of banks constrains the currency-portfolio choices of households.
    Keywords: Financial dollarization; financial integration; regional inflation
    JEL: E31 E42 E44 F36 G21 P22 P24
    Date: 2013
  23. By: Nguyen Van, Phuong
    Abstract: Vietnam has been implementing the export-oriented economy, in which the central bank of Vietnam, well-known as the State Bank of Vietnam (SBV), adopted the managed float exchange rate regime in 1990. Therefore, the exchange rate movement plays an important role in stimulating the Vietnamese export activities. By applying the long-run SVAR model, pioneered by Blanchard and Quah (1989), this research examines how the real and nominal shocks impact the nominal and real exchange rate (USD/VND) in Vietnam. Based on monthly data concerning USD/VND exchange rate and, the price levels in Vietnam and the United States from May 1995 to December 2013, our empirical results reveal that: the real shock primarily leads the real and nominal exchange rate (USD/VND) to fluctuate over time. Meanwhile, the nominal shock has a temporary effect on the movement in the real exchange rate in Vietnam. Our research also finds that the long-run Purchasing Power Parity (PPP) does not hold in Vietnam.
    Keywords: State Bank of Vietnam, the exchange rate, unit root test, SVAR
    JEL: E50 E58 E60 E69
    Date: 2014–12–12
  24. By: Silva Buston, C.F. (Tilburg University, Center For Economic Research)
    Abstract: Abstract: This paper analyzes the net impact of two opposing effects of active risk management at banks on their stability: higher risk-taking incentives and better isolation of credit supply from varying economic conditions. We present a model where banks actively manage their portfolio risk by buying and selling credit protection. We show that anticipation of future risk management opportunities allows banks to operate with riskier balance sheets. However, since they are better insulated from shocks than banks without active risk management, they are less prone to insolvency. Empirical evidence from US bank holding companies broadly supports the theoretical predictions. In particular, we fi nd that active risk management banks were less likely to become insolvent during the crisis of 2007-2009, even though their balance sheets displayed higher risktaking. These results provide an important message for bank regulation, which has mainly focused on balance-sheet risks when assessing fi nancial stability.
    Keywords: Financial innovation; credit derivatives; financial stability; financial crisis
    Date: 2013
  25. By: Jan A. Kregel (Tallinn University of Technology); Mario Tonveronachi (Tallinn University of Technology)
    Abstract: This Report provides an introduction to the seven country studies on the implementation of the European Directives on Banking and Finance in the period from the introduction of the Single European Act to the 2007/8 Global financial crisis and the additional national measures that have been taken in response to the crisis. Each of the country studies provides a narrative of the domestic financial regulatory structure at the beginning of the period, defined as the date of the Single European Act, as well the means by which the EU Directives have been introduced into domestic legislation and the impact on the financial structure of the economy. In particular, the studies highlight how the Directives have been modified to meet the then existing domestic conditions and financial structure as well as how they have modified that structure. To provide a roadmap to these legislative changes, each country study is accompanied by a grid noting the dates and relevant national legislation implementing the Directives. To aid in cross-country comparison, a grid presenting the legislation for each country for the major Directives is also included. Since each country has complied with national insertion of the various Directives, and since each faced particular national circumstances, this summary will simply highlight for the individual countries those particular characteristics of more general importance for potential modification of the way regulations are introduced into the member states’ jurisprudence
    Keywords: financial regulation, European Single Market
    JEL: G18 G28
    Date: 2014–10–01

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