nep-cba New Economics Papers
on Central Banking
Issue of 2015‒01‒31
25 papers chosen by
Maria Semenova
Higher School of Economics

  1. Monetary Policy and Global Equilibria in an Economy with Capital By Tim Hursey ; Alexander Wolman ; Andreas Hornstein
  2. The Optimal Degree of Monetary-Discretion in a New Keynesian Model with Private Information By WAKI Yuichiro ; Richard DENNIS ; FUJIWARA Ippei
  3. Credit policy in times of financial distress By Costas Azariadis
  4. Monetary policy and banks in the euro area: the tale of two crises By Lucrezia Reichlin
  5. Spillovers of US unconventional monetary policy to Asia: the role of long-term interest rates By Ken Miyajima ; Madhusudan Mohanty ; James Yetman
  6. Can Inflation Forecast and Monetary Policy Path be Really Useful? The Case of Czech Republic By Magdalena Szyszko ; Karolina Tura
  7. Conservatism and Liquidity Traps By Nakata, Taisuke ; Schmidt, Sebastian
  8. Global dollar credit: links to US monetary policy and leverage By Robert N McCauley ; Patrick McGuire ; Vladyslav Sushko
  9. Central banks as lender of last resort: experiences during the 2007-2010 crisis and lessons for the future By Domanski, Dietrich ; Moessner, Richhild ; Nelson, William R.
  10. The inflation targeting policy in Tunisia? Between perception and reality By Kadria, Mohamed ; Ben Aissa, Mohamed Safouane
  11. The Possible Trinity: Optimal interest rate,exchange rate, and taxes on capital flows in a DSGE model for a Small Open Economy By Guillermo Escudé
  12. Introducing a New Early Warning System Indicator (EWSI) of banking crises By Alvaro Ortiz Vidal-Abarca ; Alfonso Ugarte Ruiz
  13. Is There a Trade-off between Exchange Rate and Interest Rate Volatility? Evidence from an M-GARCH Model By António Portugal Duarte ; João Sousa Andrade ; Adelaide Duarte
  14. Exploring the Nexus Between Macro-Prudential Policies and Monetary Policy Measures: Evidence from an Estimated DSGE Model for the Euro Area By Giacomo Carboni ; Christoffer Kok ; Matthieu Darrak Paries
  15. A Survey on the Effects of Sterilized Foreign Exchange Intervention By Mauricio Villamizar-Villegas ; David Perez-Reyna
  16. Effects of the U.S. quantitative easing on the Peruvian economy By Carrera, César ; Pérez-Forero, Fernando ; Ramírez-Rondán, Nelson
  17. The unintended consequences and challenges of the Basel III Leverage Ratio: supplementary leverage ratios By Ojo, Marianne
  18. Exchange rate risk and local currency sovereign bond yields in emerging markets By Blaise Gadanecz ; Ken Miyajima ; Chang Shu
  19. Taxing banks: An evaluation of the German bank levy By Buch, Claudia M. ; Hilberg, Björn ; Tonzer, Lena
  20. Estimating Dual Deposit Insurance Premium Rates and Forecasting Non-performing Loans: Two New Models By Yoshino, Naoyuki ; Taghizadeh-Hesary, Farhad ; Nili, Farhad
  21. Monetary dialogue 2009–2014 : Looking backward, looking forward By Eijffinger, S.C.W.
  22. Fighting the Last War: Economists on the Lender of Last Resort By Richard S. Grossman ; Hugh Rockoff
  23. Nominal Idiosyncratic Shocks and Optimal Monetary Policy By Eisei Ohtaki
  24. The European Crisis and the role of the financial system By Vitor Constancio
  25. Monetary Integration in SADC: Assessment of Policy Coordination and Real Effective Exchange Rate Stability By Mulatu F. Zerihun, Marthinus C. Breitenbach and Francis Kemegue

  1. By: Tim Hursey (University of Pennsylvania ); Alexander Wolman (Federal Reserve Bank of Richmond ); Andreas Hornstein (Federal Reserve Bank of Richmond )
    Abstract: Short-term interest rates in the United States have been near their lower bound since late 2008. Treasury rates out to a two-year maturity have been close to zero since mid-2011, and over this same period, inflation has been declining. This combination of low interest rates and declining inflation has lead some observers to point to the "perils of Taylor rules," for example, Bullard (2010), when a monetary policy that actively targets a positive inflation rate leads to an outcome with much lower inflation, and possibly even deflation. The possibility of equilibria with persistent deviations of inflation from the target set by the policy maker has been investigated for model economies without state variables. Quantitative representations of the U.S. economy as embodied by DSGE models include as an essential element capital accumulation. In this paper we study the possibility for persistent low inflation outcomes for a monetary model with capital.
    Date: 2014
  2. By: WAKI Yuichiro ; Richard DENNIS ; FUJIWARA Ippei
    Abstract: This paper considers the optimal degree of discretion in monetary policy when the central bank conducts policy based on its private information about the state of the economy and is unable to commit. Society seeks to maximize social welfare by imposing restrictions on the central bank's actions over time, and the central bank takes these restrictions and the New Keynesian Phillips curve as constraints. By solving a dynamic mechanism design problem we find that it is optimal to grant "constrained discretion" to the central bank by imposing both upper and lower bounds on permissible inflation, and that these bounds must be set in a history-dependent way. The optimal degree of discretion varies over time with the severity of the time-inconsistency problem, and, although no discretion is optimal when the time-inconsistency problem is very severe, our numerical experiment suggests that no-discretion is a transient phenomenon, and that some discretion is granted eventually.
    Date: 2015–01
  3. By: Costas Azariadis (Washington University and Federal Reserve Bank of St. Louis )
    Abstract: This essay evaluates two central bank policy tools, capital requirements and lending of last resort, designed to avert financial panics in the context of endowment economics with complete markets and limited borrower commitment. Credit panics are self-fulfilling shocks to expected credit conditions which cause transitions from an optimal but fragile steady state to a suboptimal state with zero unsecured credit. The main findings are: (i) Countercyclical reserve policies protect the optimum equilibrium against modest shocks but are powerless against large shocks. (ii) If we ignore private information and central banks inefficiencies, this class of models bears out Bagehot’s 1873 claim in Lombard Street: panics are averted if central banks stand ready to lend at a rate somewhat above the one associated with the optimal state.
    Keywords: bank panics; last resort; capital requirements; credit conditions
    JEL: E52 E58 E44
    Date: 2013–07
  4. By: Lucrezia Reichlin (London Business School and CEPR )
    Abstract: The paper is a narrative on monetary policy and the banking sector during the two recent euro area recessions. It shows that while in the two episodes of recession and financial stress the ECB acted aggressively providing liquidity to the banking sector, the second recession, unlike the first, has been characterized by an abnormal decline of loans with respect to both real economic activity and the monetary aggregates. It conjectures that this fact is explained by the postponement of the adjustment in the banking sector by showing that banks, over the 2008-2012 period, did not change neither the capital to asset ratio nor the size of their balance sheet relative to GDP and kept them at the pre-crisis level. The paper also describes other aspects of banks’ balance sheet adjustment during the two crises.
    Keywords: Economic recessions; Financial system; ECB policies; Bank behavior
    JEL: E44 E58 G21
    Date: 2013–07
  5. By: Ken Miyajima ; Madhusudan Mohanty ; James Yetman
    Abstract: This paper reviews the role of long-term interest rates in international monetary transmission and related policy challenges in the wake of exceptionally easy US monetary policy. It employs a panel VAR model to examine the impact of a very low US term premium on relatively small open Asian economies. The results show that unconventional US monetary policy spills over to Asia mainly through low domestic bond yields and rapid growth of domestic bank credit. Financial integration does not appear to reduce the control of national monetary authorities over short-term policy rates. However, it does compromise control over long-term rates that are key determinants of economic activity. In light of the results, the paper reviews potential policy options to deal with volatile term and risk premiums.
    Keywords: Asian economies, international monetary transmission, long term interest rates, monetary policy, risk premium
    Date: 2014–12
  6. By: Magdalena Szyszko (Wyzsza Szkola Bankowa w Poznaniu, Poland ); Karolina Tura (Uniwersytet Ekonomiczny w Poznaniu, Poland )
    Abstract: Producing and revealing inflation forecasts is believed to be the best way of implementing a forward-looking monetary policy. The article focuses on inflation forecast targeting (IFT) at the Czech National Bank (CNB) in terms of its efficiency in shaping consumers’ inflation expectations. The goal of the study is to verify accuracy of the inflation forecasts, and their influence on inflation expectations. The research is divided into four stages. At the first stage central bank credibility is examined. At the second stage – accuracy of the inflation forecasts. The next step covers a qualitative analysis of IFT implementation. Finally the existence of the interdependences of inflation forecast, optimal policy paths and inflation expectations are analyzed. Credibility of the central bank, accuracy of the forecast and decision-making procedures are the premises for the existence of relationship between forecasts and expectations. The research covers July 2002 - end of 2013. Its methodology includes the qualitative analysis of decision-making of the CNB, quantitative methods (Kia and Patron formula, MAE forecasts errors, quantification of expectations, non-parametric statistics). The results show the existence of interdependences between inflation forecasts and expectations of moderate strength. The preconditions of such interdependences are partially fulfilled. The research opens the field for cross-country comparisons and for quantification of IFT implementation.
    Keywords: inflation forecasts, inflation forecast targeting, policy path, inflation expectations
    JEL: E52 E58 E61
    Date: 2014–12
  7. By: Nakata, Taisuke (Board of Governors of the Federal Reserve System (U.S.) ); Schmidt, Sebastian (European Central Bank )
    Abstract: Appointing Rogoff's (1985) conservative central banker improves welfare if the economy is subject to large contractionary shocks and the policy rate occasionally falls to the zero lower bound (ZLB). In an economy with occasionally binding ZLB constraints, the anticipation of future ZLB episodes creates a trade-off between inflation and output stabilization. As a consequence, inflation systematically falls below target even when the policy rate is above zero. A conservative central banker mitigates this deflationary bias away from the ZLB, improving allocations both at and away from the ZLB through expectations.
    Keywords: Discretion; inflation conservatism; inflation targeting; liquidity traps; zero lower bound
    JEL: E52 E62
    Date: 2014–11–12
  8. By: Robert N McCauley ; Patrick McGuire ; Vladyslav Sushko
    Abstract: Banks and bond investors have extended $9 trillion of US dollar credit to non-bank borrowers outside the United States. This has relevance for the discussion of global liquidity and global monetary policy transmission. This paper contributes to this policy discussion by analysing the links between US monetary policy, including unconventional monetary policy, leverage and flows into bond funds, on the one hand, and dollar credit extended to non-US borrowers, on the other. We find that prior to the crisis, banks drew on low funding rates and low-cost leverage to extend dollar credit to non-US orrowers. After the Federal Reserve announced its large-scale bond purchases in 2008, however, bond investors responded to compressed long-term rates by buying dollar bonds from non-US borrowers. The balance of dollar credit transmission has shifted from global banks to global bond investors.
    Keywords: US dollar, offshore credit, interest rate differentials, leverage, bond fund flows, policy rates, term premium, unconventional monetary policy
    Date: 2015–01
  9. By: Domanski, Dietrich (Bank for International Settlements ); Moessner, Richhild (Bank for International Sentiments ); Nelson, William R. (Board of Governors of the Federal Reserve System (U.S.) )
    Abstract: During the 2007-2010 financial crisis, central banks accumulated a vast amount of experience in acting as lender of last resort. This paper reviews the various ways that central banks provided emergency liquidity assistance (ELA) during the crisis, and discusses issues for the design of ELA arising from that experience. In a number of ways, the emergency liquidity assistance since 2007 has largely adhered to Bagehot's dictums of lending freely against good collateral to solvent institutions at a penalty rate. But there were many exceptions to these rules. Those exceptions illuminate the situations where the lender of last resort role of central banks is most difficult. They also highlight key challenges in designing lender of last resort policies going forward.
    Keywords: Banking crisis; central bank liquidity; lender of last resort
    JEL: E58 F31 N10
    Date: 2014–05–14
  10. By: Kadria, Mohamed ; Ben Aissa, Mohamed Safouane
    Abstract: In this paper, we tried to examine and provide a clear answer on the possibility of the Central Bank of Tunisia to adopt the inflation targeting (IT) monetary policy. But the transition to the new optimum monetary framework remains a challenge in itself and requires the filling of certain pre-conditions. To do this, we first started by clarifying the conduct of monetary policy in Tunisia and the institutional and structural pre-requisites progress to make in adoption view of this new strategy, which allows more inflation mastering in a context of crisis and post-revolution. Regarding the transmission mechanisms, we conducted an empirical study of dynamic structural VAR models to conclude whether there is a stable and predictable relationship between monetary policy instruments and inflation, which is considered as a strong technical condition in favor of IT.
    Keywords: Inflation targeting, transmission mechanisms, structural VAR, Tunisia.
    JEL: C3 E5
    Date: 2014
  11. By: Guillermo Escudé (Central Bank of Argentina )
    Abstract: A traditional way of thinking about the exchange rate (XR) regime and capital account openness has been framed in terms of the "impossible trinity" or "trilemma", in which policymakers can only have 2 of 3 possible outcomes: open capital markets, monetary independence and pegged XRs. This paper is an extension of Escudé (2012), which focused on interest rate and XR policies, since it introduces the third vertex of the "trinity" in the form of taxes on private foreign debt. These affect the risk-adjusted uncovered interest parity equation and hence influence the SOE´s international financial flows. A useful way to illustrate the range of policy alternatives is to associate them with the faces of a triangle. Each of 3 possible government intervention policies taken individually (in the domestic currency bond market, in the FX market, and in the foreign currency bonds market) corresponds to one of the vertices of the triangle, each of the 3 possible pairs of intervention policies correspond to one of its 3 edges, and the 3 simultaneous intervention policies taken jointly correspond to its interior. This paper shows that this interior, or "possible trinity" is quite generally not only possible but optimal, since the CB obtains a lower loss when it implements a policy with all three interventions.
    Keywords: DSGE models, Small Open Economy, monetary and exchange rate policy, capital controls, optimal policy
    JEL: E58 O24
    Date: 2014–08
  12. By: Alvaro Ortiz Vidal-Abarca ; Alfonso Ugarte Ruiz
    Abstract: In this paper we develop a new Early Warning System (EWS) of Banking Crises based on a new estimated indicator of the gap between the observed private credit ratio and its long-term structural level.
    Keywords: bayesian method, credit gap, early warning indicators, macroprudential measures
    JEL: C33 E44 E51 E58 F47 E61 G01 G21
    Date: 2015–01
  13. By: António Portugal Duarte (Faculty of Economics, University of Coimbra and GEMF, Portugal ); João Sousa Andrade (Faculty of Economics, University of Coimbra and GEMF, Portugal ); Adelaide Duarte (Faculty of Economics, University of Coimbra and GEMF, Portugal )
    Abstract: One of the main implications of the basic target zone model developed by Krugman (1991) is that there is a trade-off between exchange rate volatility and interest rate differential volatility. Using an M-GARCH model we find evidence that such a trade-off existed, prior to the introduction of the euro, between the exchange rate and the interest rate differential among Portugal and Germany. This result reflects the increased credibility of the Portuguese monetary policy, due mainly to the modernisation of the banking and financial system and to the progress made in the disinflation process under an exchange rate target zone.
    Keywords: Credibility, disinflation, M-GARCH, volatility and target zones.
    JEL: C32 C51 F31 F41 G15
    Date: 2015–01
  14. By: Giacomo Carboni ; Christoffer Kok (European Central Bank ); Matthieu Darrak Paries
    Abstract: The financial crisis highlighted the importance of systemic risks and of policies that can be employed to prevent and mitigate them. Several recent initiatives aim at establishing institutional frameworks for macro-prudential policy. As this process advances further, substantial uncertainties remain regarding the transmission channels of macro-prudential instruments as well as the interactions with other policy functions, and monetary policy in particular. This paper provides an overview and some illustrative model simulations using an estimated DSGE model for the euro area of the macroeconomic interdependence between macro-prudential instruments and monetary policy.
    Date: 2014
  15. By: Mauricio Villamizar-Villegas ; David Perez-Reyna
    Abstract: In this paper we survey prominent theories that have shaped the literature on sterilized foreign exchange interventions. We identify three main strands of literature: 1) that which advocates the use of sterilized interventions; 2) that which deems sterilized interventions futile; and 3) that which requires some market friction in order for sterilized interventions to be effective. We contribute to the literature in three important ways. First, by reviewing new theoretical models that have surfaced within the last decade. Second, by further penetrating into the theory of interventions in order to analyze the key features that make each model distinct. And third, by only focusing on sterilized operations, which allows us to sidestep the effects induced by changes in the stock of money supply. Additionally, the models that we present comprise both a macro and micro-structure approach so as to provide a comprehensive view of the theory behind exchange rate intervention. Classification JEL: E52, E58, F31.
    Date: 2015–01
  16. By: Carrera, César (Banco Central de Reserva del Perú ); Pérez-Forero, Fernando (Banco Central de Reserva del Perú ); Ramírez-Rondán, Nelson (Banco Central de Reserva del Perú )
    Abstract: Emerging economies were largely affected because of FED's quantitative easing (QE) policies. This paper assesses the impact of these measures in terms of key macroeconomic variables for a small open economy (SOE) such as Peru. We identify QE policy shocks in a SVAR with Block Exogeneity (Zha, 1999) and we impose a mixture of zero and sign restrictions (Arias et al., 2014). In addition, following Pesaran and Smith (2014), we implement a counterfactual exercise in order to gauge the differences between two scenarios: with and without QE policies. Overall, we find that QE policies had significant effects over financial variables such as aggregate credit and the exchange rate. On the other hand, we find small but significant effects over inflation and output in the medium run.
    Keywords: Quantitative Easing, Structural Vector Autoregressions, Sign Restrictions, Counterfactual analysis
    JEL: E43 E51 E52 E58
    Date: 2014–12
  17. By: Ojo, Marianne
    Abstract: The U.S standard leverage ratio, which is not as stringent as the U.S Supplementary Leverage Ratio, did not include Off Balance Sheet exposures - unlike the Basel leverage ratio. Hence the 3% Supplementary Leverage Ratio was established as part of measures to facilitate the inclusion of Off Balance Sheet exposures in July 2013 - even though many still consider the scope of such inclusion as not being extensive enough - since Secured Financing Transaction Exposures are still excluded. Furthermore, the Enhanced Supplementary Leverage Ratio increased the 3% leverage ratio to 5% (a 2% buffer) for globally systemic important banks (GSIBs) bank holding companies and 6 % for their banking subsidiaries. In respect of securities financing transaction exposures, however, U.S banks are considered to enjoy competitive advantage, since the exclusion of such exposures still persist - even though it is also argued that recent liquidity coverage and net stable funding ratio provisions should serve to address these exposures - this also being in line with the complementary functions of liquidity standards and leverage ratios within the risk-based capital adequacy framework. As well as contributing to the extant literature on supplementary leverage ratios, this paper will seek to illustrate why calibration between the risk capital adequacy framework, liquidity standards, and Basel leverage ratio is even more important than merely a focus on the relationship between the risk capital adequacy framework and the Basel leverage ratio. Meanwhile as regards Europe, there are also concerns relating to sovereign credit risks and the “inadequate pricing” of such risks which results in under capitalisation of banks, as well as potential consequences relating to serious distortions in financial stability whose effects could have repercussions extending beyond the Euro zone and globally. This paper considers two headings which have generated controversial discussions - particularly in respect of Basel III leverage ratio implementation, namely, under capitalisation of banks and the issue of calibration. It aims to illustrate why these constitute areas which are still in need of redress - even though tremendous efforts have been made to align the Basel III Leverage Ratio with the Supplementary Leverage Ratios. The paper will also demonstrate that whilst there are concerns related to the issue of calibration, certain jurisdictions such as the UK, have also introduced supplementary leverage ratios - as well as considered alternatives to the Basel leverage ratio.
    Keywords: supplementary leverage ratios; short term funding; financial stability; OBS exposures; Standardised Approach to Counterparty Credit Risk (SA-CCR); credit conversion factors (CCF)
    JEL: E6 G14 G2 G28 K2
    Date: 2015–01–15
  18. By: Blaise Gadanecz ; Ken Miyajima ; Chang Shu
    Abstract: In this paper we consider the role of exchange rate risk in influencing local currency sovereign bond yields in emerging market economies (EMEs). We explicitly account for exchange rate expectations and uncertainty around them, as measured by exchange rate volatility. The analysis points to an important influence of exchange rate risk: when exchange rate volatility increases, investors require a larger yield compensation for holding EME local currency sovereign bonds. The impact of exchange rate volatility has become more important since May 2013, when investors realised that the Federal Reserve may reduce the scale of its asset purchases sooner than previously expected.
    Keywords: emerging markets, exchange rate risk, local currency sovereign bond yields
    Date: 2014–12
  19. By: Buch, Claudia M. ; Hilberg, Björn ; Tonzer, Lena
    Abstract: Bank distress can have severe negative consequences for the stability of the financial system, the real economy, and for public finances. Regimes for the restructuring and resolution of banks, financed by bank levies and fiscal backstops, seek to reduce these costs. Bank levies attempt to internalize systemic risk and to increase the costs of leverage. This paper evaluates the effects of the German bank levy implemented in 2011 as part of the German Bank Restructuring Act. Our analysis offers three main insights. First, revenues raised through the bank levy are lower than expected, because of low tax rates and high thresholds for tax exemptions. Second, the bulk of the payments were contributed by large commercial banks and by the central institutions of savings banks and credit unions. Third, for the banks affected by the levy, we find evidence for a reduction in lending and higher deposit rates.
    Keywords: bank levy,bank lending,interest rates,German banks
    JEL: G21 G28 C21
    Date: 2014
  20. By: Yoshino, Naoyuki (Asian Development Bank Institute ); Taghizadeh-Hesary, Farhad (Asian Development Bank Institute ); Nili, Farhad (Asian Development Bank Institute )
    Abstract: Risky banks that endanger the stability of the financial system should pay higher deposit insurance premiums than healthy banks and other financial institutions that have shown good financial performance. It is necessary, therefore, to have at least a dual fair premium rate system. In this paper, we develop a model for calculating dual fair premium rates. Our definition of a fair premium rate in this paper is a rate that could cover the operational expenditures of the deposit insuring organization, provides it with sufficient funds to enable it to pay a certain percentage share of deposit amounts to depositors in case of bank default, and provides it with sufficient funds as precautionary reserves. To identify and classify healthier and more stable banks, we use credit rating methods that employ two major dimensional reduction techniques. For forecasting non-performing loans (NPLs), we develop a model that can capture both macro shocks and idiosyncratic shocks to financial institutions in a vector error correction setting. The response of NPLs/loans to macro shocks and idiosyncratic innovations shows that using a model with macro variables only is insufficient, as it is possible that under favorable economic conditions some banks show negative performance or vice versa. Our final results show that stable banks should pay lower deposit insurance premium rates.
    Keywords: dual deposit insurance premium rates; non-performing loans; idiosyncratic shocks; fair premium rates
    JEL: E44 G21 G28
    Date: 2015–01–15
  21. By: Eijffinger, S.C.W. (Tilburg University, School of Economics and Management )
    Abstract: When comparing the transparency of the ECB now with the transparency of the ECB about one decade ago, we notice that transparency still can be improved in a few ways. In particular the disclosure related to the ways decisions are reached and the disclosure on its policy (what is the envisioned path of policy?) could be improved. We call for action and in particular we suggest to release minutes and voting records, while also engaging in more explicit and concrete forward guidance. At the same time, we call for a reflection on the institutional setup of the ECB. This is less urgent than the reform with respect to transparency, but in the medium term a necessary exercise. We believe that also in the 8th term of the European Parliament, the Monetary Dialogue will have a role in spurring the debate and possibly influencing the ECB, as it has done in the past.
    Date: 2015
  22. By: Richard S. Grossman ; Hugh Rockoff
    Abstract: In this paper we trace the evolution of the lender of last resort doctrine—and its implementation—from the nineteenth century through the panic of 2008. We find that typically the most influential economists “fight the last war”: formulating policy guidelines that would have dealt effectively with the last crisis or in some cases the last two or three. This applies even to the still supreme voice among lender-of-last-resort theorists, Walter Bagehot, who wrestled with the how to deal with the financial crises that hit Britain between the end of the Napoleonic Wars and the panic of 1866. Fighting the last war may leave economists unprepared for meeting effectively the challenge of the next war.
    JEL: B0 N2
    Date: 2015–01
  23. By: Eisei Ohtaki
    Abstract: This article considers an overlapping generations model with nominal idiosyncratic shocks. Such shocks are described as if they are exogenous nominal taxes/subsidies and cause nondegenerate ex-post distributions of money. We then show that the optimal money growth rate exists and is greater than one.
  24. By: Vitor Constancio (European Central Bank )
    Abstract: The paper aims to provide a deep rationale for banking union in the Euro Area. It shows that the banking sectors of core and peripheral countries were responsible for financing the credit boom that created the imbalances and vulnerabilities that later were at the centre of the crisis. The increase of debt ratios in the periphery until 2007 was more significant for the private sector than for the public sector. The crisis has been as much a banking crisis as a sovereign debt crisis and to avoid similar future risks a European Supervisor and a Resolution Authority are essential.
    Keywords: European crisis; banking union; fiscal and macroeconomic imbalances
    JEL: H63 E52 F36 G01
    Date: 2013–07
  25. By: Mulatu F. Zerihun, Marthinus C. Breitenbach and Francis Kemegue
    Abstract: This paper evaluates the strength of policy coordination in Southern African Development Community (SADC) as well as real effective exchange rate stability as indicative of sensible monetary integration. The underlying hypothesis goes with the assertion that countries meeting OCA conditions face more stable exchange rates. The quantitative analysis encompasses 12 SADC member states over the period 1995-2012. Correlation matrixes, dynamic pooled mean group (PMG) and mean group (MG) estimators, and real effective exchange rate (REER) equilibrium and misalignment analysis are carried out to arrive at the conclusions. The PMG model shows that there are common policy variables that influence REERs in the region. However, the REER equilibrium misalignment analysis reveals that SADC economies are characterised by persistent overvaluation at least in the short term. This calls for further improvement of policy coordination in the region. The findings in this paper have important policy implications for economic stability and policy coordination as SADC proceeds with monetary integration.
    Keywords: Real Effective Exchange Rate, Monetary Integration, Policy Coordination, SADC
    JEL: C23 E63 F15 F31
    Date: 2014

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