nep-cba New Economics Papers
on Central Banking
Issue of 2015‒01‒19
nineteen papers chosen by
Maria Semenova
Higher School of Economics

  1. An Overview of Macroprudential Policy Tools By Stijn Claessens
  2. Monetary Policy, Financial Conditions, and Financial Stability By Tobias Adrian; Nellie Liang
  3. Liquidity regulation and bank behavior By Bonner, C.
  4. Inflation Targeting In Emerging Markets: The Global Experience By John B. Taylor
  5. Unprecedented actions: the Federal Reserve’s response to the global financial crisis in historical perspective By Mishkin, Frederic S.; White, Eugene
  6. Effectiveness and transmission of the ECB’s balance sheet policies By Jef Boeckx; Maarten Dossche; Gert Peersman
  7. Constrained Discretion and Central Bank Transparency By Bianchi, Francesco; Melosi, Leonardo
  8. Commodity price shocks and inflation within an optimal monetary policy framework: the case of Colombia By Luis Eduardo Arango; Ximena Chavarro; Eliana González
  9. Enhancing prudential standards in financial regulations By Allen, Franklin; Goldstein, Itay; Jagtiani, Julapa; Lang, William W.
  10. Optimal Financial Repression By Olga A. Norkina; Sergey E. Pekarski
  11. Competition and Bank Opacity By Liangliang Jiang; Ross Levine; Chen Lin
  12. A macro stress testing framework for assessing systemic risks in the banking sector By Henry, Jérôme; Kok, Christoffer; Amzallag, Adrien; Baudino, Patrizia; Cabral, Inês; Grodzicki, Maciej; Gross, Marco; Halaj, Grzegorz; Kolb, Markus; Leber, Miha; Pancaro, Cosimo; Sydow, Matthias; Vouldis, Angelos; Zimmermann, Maik; Zochowski, Dawid
  13. Post-Crisis Slow Recovery and Monetary Policy By Daisuke Ikeda; Takushi Kurozumi
  14. Inflation Experience and Inflation Expectations: Spatial Evidence By Refet Gürkaynak; Gulserim Ozcan; Marcel Fratzscher
  15. The role of central banks in meeting the development and employment challenges : the case of Mozambique By Chatani, Kazutoshi; Pedro, Oluwaseun Olufemi
  16. On the effectiveness of devaluations in emerging and developing countries By Carl Grekou
  17. The international monetary and financial system: a capital account perspective By Borio, Claudio; James, Harold; Shin, Hyun Song
  18. The Analytical Framework For Identifying And Benchmarking Systemically Important Financial Institutions In Europe By Renata Karkowska
  19. Is Europe Overbanked? By Marco Pagano; ESRB Advisory Scientific Committee

  1. By: Stijn Claessens
    Abstract: Macroprudential policies – caps on loan to value ratios, limits on credit growth and other balance sheets restrictions, (countercyclical) capital and reserve requirements and surcharges, and Pigouvian levies – have become part of the policy paradigm in emerging markets and advanced countries alike. But knowledge is still limited on these tools. Macroprudential policies ought to be motivated by market failures and externalities, but these can be hard to identify. They can also interact with various other policies, such as monetary and microprudential, raising coordination issues. Some countries, especially emerging markets, have used these tools and analyses suggest that some can reduce procyclicality and crisis risks. Yet, much remains to be studied, including tools’ costs ? by adversely affecting resource allocations; how to best adapt tools to country circumstances; and preferred institutional designs, including how to address political economy risks. As such, policy makers should move carefully in adopting tools.
    Keywords: Macroprudential policies and financial stability;Monetary policy;Procyclicality of financial system;Financial intermediation;Other systemic risk tools;Financial stability, financial intermediation, externalities, market failures, procyclicality, systemic risks
    Date: 2014–12–11
  2. By: Tobias Adrian (Federal Reserve Bank of New York (E-mail:; Nellie Liang (Board of Governors of the Federal Reserve System (E-mail:
    Abstract: In the conduct of monetary policy, there exists a risk-return tradeoff between financial conditions and financial stability, which complements the traditional inflation-real activity tradeoff of monetary policy. The tradeoff exists even if monetary policy does not target financial stability considerations independently of its inflation and real activity goals, as the buildup of financial vulnerabilities from persistent accommodative monetary policy when the economy is close to potential increases risks to future financial stability. We review monetary policy transmission channels and financial frictions that give rise to this tradeoff between financial conditions and financial stability, within a monitoring program across asset markets, banking firms, shadow banking, and the nonfinancial sector. We focus on vulnerabilities that affect monetary policies' risk- return tradeoff including (i) pricing of risk, (ii) leverage, (iii) maturity and liquidity mismatch, and (iv) interconnectedness and complexity. We also discuss the extent to which structural and time-varying macroprudential policies can counteract the buildup of vulnerabilities, thus mitigating monetary policy's risk-return tradeoff.
    Keywords: risk taking channel of monetary policy, monetary policy transmission, monetary policy rules, financial stability, financial conditions, macroprudential policy
    JEL: E52 G01 G28
    Date: 2014–12
  3. By: Bonner, C.
    Abstract: In response to the 2007-08 financial crisis, the Basel Committee on Banking Supervision proposed two liquidity standards to reinforce banks’ resilience to liquidity risks. The purpose of this thesis is to analyze the impact of liquidity regulation on bank behavior. The first of four main chapters analyzes the development of global liquidity standards, their objectives as well as their interaction with capital standards. The analysis suggests that regulating capital is associated with declining liquidity buffers. The interaction of liquidity regulation and monetary policy, the view that regulating capital also addresses liquidity risks as well as a lack of supervisory momentum were important factors hampering the harmonization of liquidity regulation. Chapter 3 takes a wide view on the impact of liquidity regulation on banks' liquidity management. The key question is whether the presence of liquidity regulation substitutes banks' incentives to hold liquid assets. The cross-country analysis suggests that most bank-specific and country-specific determinants of banks’ liquidity buffers are substituted by liquidity regulation while a bank's disclosure requirements become more important. The complementary nature of disclosure and liquidity requirements provides a strong rationale for considering them jointly in the design of regulation. Chapter 4 zooms in on one of the key questions regarding the interaction of the LCR with monetary policy transmission. The analysis shows that a liquidity requirement causes short-term and long-term interest rates as well as demand for long-term loans to increase. However, banks do not seem able to pass on the increased funding costs in the interbank market to their private sector clients. Rather, a liquidity requirement seems to decrease banks' interest margins, which might require central banks to use a representative real economy interest rate as additional target for monetary policy implementation. Chapter 5 is motivated by the European sovereign debt crisis and analyzes the impact of preferential regulatory treatment on banks’ demand for government bonds. The analysis suggests that preferential treatment in liquidity and capital regulation increases banks' demand for government bonds beyond their own risk appetite. Liquidity and capital regulation also seem to incentivize banks to substitute other bonds with government bonds. The thesis concludes with an epilogue on liquidity stress testing.
    Date: 2014
  4. By: John B. Taylor (Stanford University)
    Abstract: This paper assesses the emerging market experience with inflation targeting in recent years. It places this experience in the broader context of global monetary policy. It shows that a shift away from rules based policy by many developed country central banks has adversely affected the inflation targeting performance of the emerging market countries. First, it has created direct economic spillovers, which have blurred the good effects of inflation targeting. Second, it has led to policy spillovers in which emerging market central banks have been driven to deviate from their inflation targeting rules. The implication of this research is that emerging market countries should stick to the type of inflation targeting they adopted a decade or more ago with macroprudential policy simply focused on getting the overall risk environment right.
    Date: 2014–10
  5. By: Mishkin, Frederic S. (Columbia University); White, Eugene (Rutgers University)
    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- tive actions to forestall worse crises but were combined with measures to mitigate moral hazard.
    JEL: E58 G01 N10 N20
    Date: 2014–10–01
  6. By: Jef Boeckx (Research Department, NBB); Maarten Dossche (Research Department, NBB, ECB); Gert Peersman (Ghent University)
    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 turn out to be 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 blance sheet, euro area, VAR
    JEL: C32 E30 E44 E51 E52
    Date: 2014–12
  7. By: Bianchi, Francesco (Duke University); Melosi, Leonardo (Federal Reserve Bank of Chicago)
    Abstract: We develop and estimate a general equilibrium model in which monetary policy can deviate from active inflation stabilization and agents face uncertainty about the nature of these deviations. When observing a deviation, agents conduct Bayesian learning to infer its likely duration. Under constrained discretion, only short deviations occur: Agents are confident about a prompt return to the active regime, macroeconomic uncertainty is low, welfare is high. However, if a deviation persists, agents’ beliefs start drifting, uncertainty accelerates, and welfare declines. If the duration of the deviations is announced, uncertainty follows a reverse path. For the U.S. transparency lowers uncertainty and increases welfare.
    Keywords: Bayesian learning; reputation; uncertainty; expectations; Markov-switching models; impulse response
    JEL: C11 D83 E52
    Date: 2014–07–01
  8. By: Luis Eduardo Arango; Ximena Chavarro; Eliana González
    Abstract: A small open macroeconomic model, in which an optimal interest rate rule emerges to drive the inflation behavior, is used to model inflation within an inflation targeting framework. This set up is used to estimate the relationship between commodity prices shocks and the inflation process in a country that both export and import commodities. We found evidence of a positive, yet small, impact from food international price shocks to inflation. However, these effects are no longer observable once the sample is split in the periods before and after the boom. The lack of effect from oil and energy price shocks we obtain supports the recent findings in the literature of a substantial decrease in the pass-through from oil prices to headline inflation. Thus, our interpretation is that monetary authority has faced rightly the shocks to commodity prices. Inflation expectations are the main determinant of inflation during the inflation targeting regime. Commodity prices movements are to a great extent included in the information set to form expectations. Classification JEL: E43, E58.
    Date: 2014–12
  9. By: Allen, Franklin (The Wharton School of the University of Pennsylvania and Imperial College London); Goldstein, Itay (The Wharton School of the University of Pennsylvania); Jagtiani, Julapa (Federal Reserve Bank of Philadelphia); Lang, William W. (Federal Reserve Bank of Philadelphia)
    Abstract: The financial crisis has generated fundamental reforms in the financial regulatory system in the U.S. and internationally. Much of this reform was in direct response to the weaknesses revealed in the precrisis system. The new “macroprudential” approach to financial regulations focuses on risks arising in financial markets broadly, as well as the potential impact on the financial system that may arise from financial distress at systemically important financial institutions. Systemic risk is the key factor in financial stability, but our current understanding of systemic risk is rather limited. While the goal of using regulation to maintain financial stability is clear, it is not obvious how to design an effective regulatory framework that achieves the financial stability objective while also promoting financial innovations. This paper discusses academic research and expert opinions on this vital subject of financial stability and regulatory reforms. Specifically, among other issues, it discusses the impact of increasing public disclosure of supervisory information, the effectiveness of bank stress testing as a tool to enhance financial stability, whether the financial crisis was caused by too big to fail (TBTF), and whether the Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA) resolution regime would be effective in achieving financial stability and ending TBTF.
    Keywords: Financial stability; Financial regulations; Systemic risk; Too Big To Fail; Stress testing; Resolution plan; Mortgage finance
    JEL: G01 G18 G21 G23 G28
    Date: 2014–12–03
  10. By: Olga A. Norkina (National Research University Higher School of Economics); Sergey E. Pekarski (National Research University Higher School of Economics)
    Abstract: Modern financial repression in advanced economies does not rely on increasing seigniorage revenue, but mostly rests upon regulatory measures to enlarge the demand for public debt that delivers extremely low or negative real interest rate. In this paper we propose the extension of the overlapping generations model to question the optimality of financial repression in the form of non-market placement of the public debt in the captive pension fund. We show that financial repression and capital income taxation are not perfect substitutes. The optimal degree of financial repression depends on the growth rate of population. Moreover, the benevolent government makes a decision to confiscate some part of the pension wealth
    Keywords: financial repression; fully-funded pension system; public debt; overlapping generations.
    JEL: E62 G28 H21 H55 H63
    Date: 2014
  11. By: Liangliang Jiang; Ross Levine; Chen Lin
    Abstract: Did regulatory reforms that lowered barriers to competition among U.S. banks increase or decrease the quality of information that banks disclose to the public and regulators? We find that an intensification of competition reduced abnormal accruals of loan loss provisions and the frequency with which banks restate financial statements. The results indicate that competition reduces bank opacity, enhancing the ability of markets and regulators to monitor banks.
    JEL: D22 D4 G21 G28 G38
    Date: 2014–12
  12. By: Henry, Jérôme; Kok, Christoffer; Amzallag, Adrien; Baudino, Patrizia; Cabral, Inês; Grodzicki, Maciej; Gross, Marco; Halaj, Grzegorz; Kolb, Markus; Leber, Miha; Pancaro, Cosimo; Sydow, Matthias; Vouldis, Angelos; Zimmermann, Maik; Zochowski, Dawid
    Abstract: The use of macro stress tests to assess bank solvency has developed rapidly over the past few years. This development was reinforced by the financial crisis, which resulted in substantial losses for banks and created general uncertainty about the banking sector's loss-bearing capacity. Macro stress testing has proved a useful instrument to help identify potential vulnerabilities within the banking sector and to gauge its resilience to adverse developments. To support its contribution to safeguarding financial stability and its financial sector-related work in the context of EU/IMF Financial Assistance Programmes, and looking ahead to the establishment of the Single Supervisory Mechanism (SSM), the ECB has developed a top-down macro stress testing framework that is used regularly for forward-looking bank solvency assessments. This paper comprehensively presents the main features of this framework and illustrates how it can be employed for various policy analysis purposes. JEL Classification: C32, E60, H62
    Keywords: banking sector, financial crisis, macro stress test, macro-prudential policy, Systemic risk
    Date: 2013–10
  13. By: Daisuke Ikeda (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Takushi Kurozumi (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: In the aftermath of the recent financial crisis and subsequent recession, slow recoveries have been observed and slowdowns in total factor productivity (TFP) growth have been measured in many economies. This paper develops a model that can describe a slow recovery resulting from an adverse financial shock in the presence of an endogenous mechanism of TFP growth, and examines how monetary policy should react to the financial shock in terms of social welfare. It is shown that in the face of the financial shocks, a welfare-maximizing monetary policy rule features a strong response to output, and the welfare gain from output stabilization is much more substantial than in the model where TFP growth is exogenously given. Moreover, compared with the welfare-maximizing rule, a strict inflation or price-level targeting rule induces a sizable welfare loss because it has no response to output, whereas a nominal GDP growth or level targeting rule performs well, although it causes high interest-rate volatility. In the presence of the endogenous TFP growth mechanism, it is crucial to take into account a welfare loss from a permanent decline in consumption caused by a slowdown in TFP growth.
    Keywords: Financial shock, Endogenous TFP growth, Slow recovery, Monetary policy, Welfare cost of business cycle
    JEL: E52 O33
    Date: 2014–12
  14. By: Refet Gürkaynak (Bilkent University); Gulserim Ozcan (Bilkent University); Marcel Fratzscher
    Abstract: Understanding inflation expectations is an integral part of understanding asset pricing and real economic decisions. We study the role of inflation experience in the formation of inflation expectations by investigating whether and to what extent inflation expectations of different forecasters are affected by the inflation they observe in the area they are residing in. In particular, we focus on the expectations of professional forecasters from different countries of euro area inflation and ask whether their forecast errors are correlated with the observed inflation in the forecaster’s country at the time the expectation was formed. We find that forecasters perceive the world to be more spatially correlated than it actually is: higher inflation in the home country leads to abnormally—in the rational expectations sense--higher expectations of future euro area inflation that result in more pronounced and forecastable forecast errors. This has important implications for asset pricing in internationally diversified portfolios and correlations of international asset prices.
    Date: 2014
  15. By: Chatani, Kazutoshi; Pedro, Oluwaseun Olufemi
    Abstract: The paper urges that Mozambique would need to develop a more competitive and inclusive financial system, address the failure of the market to make credit available for SMEs and farmers, and establish credit guarantee schemes to channel credit to priority sectors and disadvantaged groups.
    Keywords: employment creation, bank, social development, financial system, access to credit, Mozambique, création d'emploi, banque, développement social, système financier, accès au crédit, Mozambique, creación de empleos, banco, desarrollo social, sistema financiero, acceso a créditos, Mozambique
    Date: 2014
  16. By: Carl Grekou
    Abstract: In this paper, we address the issue of devaluations' effectiveness by investigating to what extent a nominal devaluation leads to a real depreciation. Beyond the traditional factors identified by the literature, we pay particular attention to the size of the nominal devaluation and to the initial misalignment of the real exchange rate. Using a sample of 57 devaluation episodes (in 40 developing and emerging countries) and relying on panel data techniques, we evidence that the existence of a sizeable overvaluation of the real exchange rate is a prerequisite to ensure that nominal devaluations will have an expected effect in terms of real depreciations. Furthermore, our results put forward a potential nonlinear relationship between the size of the devaluation and the effectiveness of the nominal adjustment: devaluations operate more efficiently when the magnitude of the nominal adjustment is lower.
    Keywords: Bayesian model averaging; Currency devaluations; Macroeconomic policies; Real exchange rates’ misalignments.
    JEL: C1 E6 F3 F41
    Date: 2014
  17. By: Borio, Claudio (Bank of International Settlements); James, Harold (Princeton University); Shin, Hyun Song (Bank of International Settlements)
    Abstract: In analysing the performance of the international monetary and financial system (IMFS), too much attention has been paid to the current account and far too little to the capital account. This is true of both formal analytical models and historical narratives. This approach may be reasonable when financial markets are highly segmented. But it is badly inadequate when they are closely integrated, as they have been most of the time since at least the second half of the 19th century. Zeroing on the capital account shifts the focus from the goods markets to asset markets and balance sheets. Seen through this lens, the IMFS looks quite different. Its main weakness is its propensity to amplify financial surges and collapses that generate costly financial crises – its “excess financial elasticity”. And assessing the vulnerabilities it hides requires going beyond the residence/non-resident distinction that underpins the balance of payments to look at the consolidated balance sheets of the decision units that straddle national borders, be these banks or non-financial companies. We illustrate these points by revisiting two defining historical phases in which financial meltdowns figured prominently, the interwar years and the more recent Great Financial Crisis.
    JEL: E40 E43 E44 E50 E52 F30 F40
    Date: 2014–10–01
  18. By: Renata Karkowska (University of Warsaw, Faculty of Management)
    Abstract: The aim of this article is to identify systemically important banks on a European scale, in accordance with the criteria proposed by the supervisory authorities. In this study we discuss the analytical framework for identifying and benchmarking systemically important financial institutions. An attempt to define systemically important institutions is specified their characteristics under the existing and proposed regulations. In a selected group of the largest banks in Europe the following indicators ie.: leverage, liquidity, capital ratio, asset quality and profitability are analyzed as a source of systemic risk. These figures will be confronted with the average value obtained in the whole group of commercial banks in Europe. It should help finding the answer to the question, whether the size of the institution generates higher systemic risk? The survey will be conducted on the basis of the financial statements of commercial banks in 2007 and 2010 with the available statistical tools, which should reveal the variability of risk indicators over time. We find that the largest European banks were characterized by relative safety and without excessive risk in their activities. Therefore, a fundamental feature of increased regulatory limiting systemic risk should understand the nature and sources of instability, and mobilizing financial institutions (large and small) to change their risk profile and business models in a way that reduces the instability of the financial system globally.Length: 32 pages
    Keywords: banking, Systematically Important Financial Institutions, SIFI, systemic risk, liquidity, leverage, profitability
    JEL: C1 F36 G21 G32 G33
    Date: 2014–09
  19. By: Marco Pagano; ESRB Advisory Scientific Committee
    Abstract: This paper is after a difficult question: has banking grown too much in Europe? The difficultly of the question lies in the words “too much”, which require a normative answer. The authors took a stance on how much is “too much”, based on the needs of the real economy in Europe. To tackle the question, they take an approach similar to that of a doctor treating a patient who seems overweight. They were not the first doctors that the European banking system has consulted in recent years. Their patient had just taken a potent medicine (the CRD IV package) and had prescriptions for more (BRRD, SSM, SRM, and possibly structural reform). Indeed, the patient has grown tired of this medicinal onslaught: he has “therapy fatigue”. But, in the authors' view, more is needed. Some therapies could have a higher dosage; others have not been tried at all. Pagano et al. thought that a course of new treatments will brighten the prognosis: helping the European banking system to make a speedy and lasting recovery from its current bloated state. This publication was originally published by ESRB – European Systemic Risk Board as Reports of the Advisory Scientific Committee No. 4/June 2014 “Is Europe Overbanked?”. It was presented during the mBank-CASE Seminar no 132 "Is Europe overbanked?". This report was written by a group of the ESRB’s Advisory Scientific Committee, chaired by Marco Pagano and assisted by Sam Langfield. In addition, the ASC group comprised Viral Acharya, Arnoud Boot, Markus Brunnermeier, Claudia Buch, Martin Hellwig, Andr´e Sapir and Ieke van den Burg.
    Keywords: Money Supply, Credit, Money multipliers, Central Banks and Their Policies, Mergers; Acquisitions, Restructuring, Corporate governance
    JEL: E51 E58 G34
    Date: 2014–11

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