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on Central Banking |
| By: | Clemens Bonner; Paul Hilbers |
| Abstract: | The purpose of this paper is to assess the history of global liquidity regulation until the revised Basel III proposals in 2013 and to analyze the interaction of capital regulation and banks' liquidity buffers. Our analysis suggests that regulating capital is associated with declining liquidity uffers. The interaction of liquidity regulation and monetary policy as well as the view that regulating capital also addresses liquidity risks were important factors hampering harmonized liquidity regulation. It appears that crisis-related supervisory momentum is an important factor behind most agreements on regulatory harmonization. In line with that, the drying up of funding and the subsequent liquidity problems during the 2007-08 financial crisis played a large role in the development of the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR). |
| Keywords: | Regulation; Policy; Liquidity; Banks |
| JEL: | G18 G21 E42 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:455&r=cba |
| By: | Georgiadis, Georgios (European Central Bank); Mehl, Arnaud (European Central Bank) |
| Abstract: | We investigate whether the classic Mundell-Flemming "trilemma" has morphed into a "dilemma" due to financial globalisation. According to the dilemma hypothesis, global financial cycles determine domestic financial conditions regardless of an economy's exchange rate regime and monetary policy autonomy is possible only if capital mobility is restricted. We find that global financial cycles indeed reduce domestic monetary policy effectiveness in more financially integrated economies. However, we also find that another salient feature of financial globalisation has the opposite effect and amplifies monetary policy effectiveness. Economies increasingly net long in foreign currency experience larger valuation effects on their external balance sheets in response to exchange rate movements triggered by monetary policy impluses. Overall, we find that the net effect of financial globalisation since the 1990s has been to amplify monetary policy effectiveness in the typical advanced and emerging market economy. Specifically, our results suggest that the output effect of a tightening in monetary policy has been stronger by 40% due to financial globalisation. Insofar as valuation effects can only play out if an economy's exchange rate is flexible, the choice of the exchange rate regime remains critical for monetary policy autonomy under capital mobility and in the presence of global financial cycles. Thus, our results suggest that the classic trilemma remains valid. |
| JEL: | E52 F30 F41 |
| Date: | 2015–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:222&r=cba |
| By: | Arnoud Stevens (Research Department, NBB) |
| Abstract: | Should the central bank seek to identify the underlying causes of oil price hikes in determining appropriate policy responses to them? Most likely not. Within a calibrated new-Keynesian model of Oil-Importing and Oil-Producing Countries, I derive the Ramsey policy and analyze optimal monetary policy responses to different sources of oil price fluctuations. I find that oil-specific demand and supply shocks call for similar policy responses, given the low substitutability of oil in production and the incompleteness of international asset markets. |
| Keywords: | Oil Prices, Optimal Monetary Policy, Ramsey Approach,Welfare Analysis |
| JEL: | E52 E61 Q43 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:201501-277&r=cba |
| By: | Gieck, Jana |
| Abstract: | The impact of unconventional monetary policies on exchange rates and its spillovers to other economies is not yet fully understood. In this paper I develop a two-country DSGE model with interbank markets and endogenous default probabilities to analyze the cross-border impacts of unconventional monetary policy. I examine the impact of two unconventional measures commonly used: central bank liquidity injections and asset swaps. I find that liquidity injections lead to a short run appreciation of domestic currency, but a mild long run depreciation. In contrast, asset swaps cause a short run depreciation of domestic currency, but a long run appreciation. Lastly, when both countries coordinate on the implementation of unconventional policies, the model yields the following results: Non-coordinated liquidity injections lead to higher increases with respect to output and inflation variation, but have negative spillovers on the other economy in terms of lower growth. By contrast, coordinating asset swaps leads to higher increases in output and lower fluctuation in inflation in both countries. The results of this paper suggest that coordination in unconventional monetary policy may not always yield an optimal outcome, and macroeconomic outcomes in both countries depend crucially on the choice of instrument. |
| Keywords: | Unconventional Monetary Policy,Quantitative Easing,Asset Swaps,Open Economy DSGE,Currency Wars,Policy Coordination |
| JEL: | E02 E44 E52 G21 G28 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:412014&r=cba |
| By: | Kawai, Masahiro (Asian Development Bank Institute) |
| Abstract: | This paper assesses the impact of unconventional United States (US) and Japanese monetary policies on emerging economies, and explores policy coordination issues to promote macroeconomic and financial stability in developed and emerging economies. The paper first considers a theoretical framework that allows us to analyze the impact of one country's monetary policy on other economies. There are two important theoretical predictions. One is that the greater the positive impact of monetary policy easing on a country's real output, the less its beggar-thy-neighbor impact on other countries. The other is that news on future changes in monetary policy can affect exchange rates and stock prices today as financial markets are inherently forward looking. The paper then examines the impact of the US Fed's QE policy on emerging economies, including the introduction of QE, the expectation of its tapering, and the anticipation of an eventual hike in the interest rate. It also discusses the implications of "Abenomics," particularly qualitative and quantitative easing (QQE) by the Bank of Japan (BOJ), for Asian emerging economies. It finds that the impact of BOJ QQE has been positive and, in contrast to US QE1, has not created negative consequences for emerging economies. The paper finally explores policy implications for both developed and emerging economies and suggests policies to be adopted at the country, regional and global levels, emphasizing the importance of communication among central banks and with the market and the need to strengthen global financial safety nets. |
| Keywords: | monetary policy; quantitative and qualitative easing; monetary policy spillover and coordination; us federal reserve; bank of japan |
| JEL: | E52 E58 F41 F42 |
| Date: | 2015–01–23 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0512&r=cba |
| By: | Stephen Hansen; Michael McMahon; Andrea Prat |
| Abstract: | How does transparency, a key feature of central bank design, affect the deliberation of monetary policymakers? We exploit a natural experiment in the Federal Open Market Committee in 1993 together with computational linguistic models (particularly Latent Dirichlet Allocation) to measure the effect of increased transparency on debate. Commentators have hypothesized both a beneficial discipline effect and a detrimental conformity effect. A difference-in-differences approach inspired by the career concerns literature uncovers evidence for both effects. However, the net effect of increased transparency appears to be a more informative deliberation process. |
| Keywords: | monetary policy; deliberation; FOMC; transparency; career concerns |
| JEL: | D78 E52 E58 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:58072&r=cba |
| By: | Andrej Drygalla |
| Abstract: | This paper analyzes changes in the monetary policy in the Czech Republic, Hungary, and Poland following the policy shift from exchange rate targeting to inflation targeting around the turn of the millennium. Applying a Markovswitching dynamic stochastic general equilibrium model, switches in the policy parameters and the volatilities of shocks hitting the economies are estimated and quantified. Results indicate the presence of regimes of weak and strong responses of the central banks to exchange rate movements as well as periods of high and low volatility. Whereas all three economies switched to a less volatile regime over time, findings on changes in the policy parameters reveal a lower reaction to exchange rate movements in the Czech Republic and Poland, but an increased attention to it in Hungary. Simulations for the Czech Republic and Poland also suggest their respective central banks, rather than a sound macroeconomic environment, being accountable for reducing volatility in variables like inflation and output. In Hungary, their favorable developments can be attributed to a larger extent to the reduction in the size of external disturbances. |
| Keywords: | Trade facilitation, Export diversification, International trade agreements, WTO |
| JEL: | F13 F14 F17 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:wsr:wpaper:y:2015:i:139&r=cba |
| By: | Guillaume Plantin (Sciences Po Paris and Centre for Economic Policy Research and Hong Kong Institute for Monetary Research) |
| Abstract: | Banks are subject to capital requirements because their privately optimal leverage is higher than the socially optimal one. This is in turn because banks fail to internalize all the costs that their insolvency creates for the non-financial agents using their money-like liabilities to settle transactions. If banks can bypass capital regulation in an opaque shadow-banking system, it may be optimal to relax capital requirements so that liquidity dries up in the shadow-banking system. Tightening capital requirements may spur a surge in shadow-banking activity that leads to an overall larger risk on the money-like liabilities of the formal and shadow banking institutions. |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:322014&r=cba |
| By: | Carmen Reinhart; M. Belen Sbrancia |
| Abstract: | High public debt often produces the drama of default and restructuring. But debt is also reduced through financial repression, a tax on bondholders and savers via negative or belowmarket real interest rates. After WWII, capital controls and regulatory restrictions created a captive audience for government debt, limiting tax-base erosion. Financial repression is most successful in liquidating debt when accompanied by inflation. For the advanced economies, real interest rates were negative ½ of the time during 1945–1980. Average annual interest expense savings for a 12—country sample range from about 1 to 5 percent of GDP for the full 1945–1980 period. We suggest that, once again, financial repression may be part of the toolkit deployed to cope with the most recent surge in public debt in advanced economies. |
| Keywords: | Public debt;Real interest rates;Negative interest rates;Interest rate ceilings;Debt reduction;Developed countries;deleveraging, inflation, financial repression, public debt |
| Date: | 2015–01–21 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:15/7&r=cba |
| By: | Tito Nícias Teixeira da Silva Filho; Francisco Marcos Rodrigues Figueiredo |
| Abstract: | Intuitively core inflation is understood as a measure of inflation where noisy price movements are avoided. This is typically achieved by either excluding or downplaying the importance of the most volatile items. However, some of those items show high persistence, and one certainly does not want to disregard persistent price changes. The non-equivalence between volatility and (the lack of) persistence implies that when one excludes volatile items relevant information is likely to be discarded. Therefore, we propose a new type of core inflation measure, one that takes simultaneously into account both volatility and persistence. The evidence shows that such measures far outperform those based on either volatility or persistence. The latter have been advocated in the literature in recent years. |
| Keywords: | Inflation persistence;Oil prices;Commodity price fluctuations;Consumer price indexes;Brazil;Inflation measurement;Econometric models;Core inflation, inflation, persistence, volatility, triple weighted |
| Date: | 2015–01–21 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:15/8&r=cba |
| By: | Clerc, Laurent; Derviz, Alexis; Mendicino, Caterina; Moyen, Stéphane; Nikolov, Kalin; Stracca, Livio; Suarez, Javier; Vardoulakis, Alexandros |
| Abstract: | We develop a dynamic general equilibrium model for the positive and normative analysis of macroprudential policies. Optimizing financial intermediaries allocate their scarce net worth together with funds raised from saving households across two lending activities, mortgage and corporate lending. For all borrowers (households, firms, and banks) external financing takes the form of debt which is subject to default risk. This "3D model" shows the interplay between three interconnected net worth channels that cause financial amplification and the distortions due to deposit insurance. We apply it to the analysis of capital regulation. |
| Keywords: | Default risk; Financial frictions; Macroprudential policy |
| JEL: | E3 E44 G01 G21 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10316&r=cba |
| By: | Radhika Pandey; Gurnain Pasricha; Ila Patnaik; Ajay Shah |
| Abstract: | We assess the motivations for changing capital controls and their effectiveness in India, a country with extensive and long-standing controls. We focus on the controls on foreign borrowing that can, in principle, be motivated by macroprudential concerns. We construct a fine-grained data set on capital control actions on foreign borrowing in India. Using event study methodology, we assess the factors that influence these capital control actions, the main factor being the exchange rate. Capital controls are tightened after appreciation, and eased after depreciation, of the exchange rate. Macroprudential concerns, measured by variables that capture systemic risk buildups, do not seem to be a factor shaping the use of capital controls. To assess the impact of controls, we use both event study and propensity score matching methodologies. Event study methodology suggests no impact of capital controls on most variables evaluated, but reveals limited evidence that capital controls relieve currency pressures in the short term. However, even this limited evidence disappears once selection bias is controlled for. |
| Keywords: | International topics; Financial stability; Exchange rate regimes; Financial system regulation and policies |
| JEL: | F32 G15 G18 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:15-5&r=cba |
| By: | Efrem Castelnuovo (University of Padova); Luca Fanelli (University of Bologna) |
| Abstract: | We propose a novel identification-robust test for the null hypothesis that an estimated new-Keynesian model has a reduced form consistent with the unique stable solution against the alternative of sunspot-driven multiple equilibria. Our strategy is designed to handle identification failures as well as the misspecification of the relevant propagation mechanisms. We invert a likelihood ratio test for the cross-equation restrictions (CER) that the new Keynesian system places on its reduced form solution under determinacy. If the CER are not rejected, sunspot-driven expectations can be ruled out from the model equilibrium and we accept the structural model. Otherwise, we move to a second-step and invert an Anderson and Rubin-type test for the orthogonality restrictions (OR) implied by the system of Euler equations. The hypothesis of indeterminacy and the structural model are accepted if the OR are not rejected. We investigate the finite sample performance of the suggested identification-robust two-steps testing strategy by some Monte Carlo experiments and then apply it to a new-Keynesian AD/AS model estimated with actual U.S. data. In spite of some evidence of weak identification as for the ÒGreat ModerationÓ period, our results offer formal support to the hypothesis of a switch from indeterminacy to a scenario consistent with uniqueness occurred in the late 1970s. Our identification-robust full-information confidence set for the structural parameters computed on the ÒGreat ModerationÓ regime turn out to be more precise than the intervals previously reported in the literature through Òlimited informationÓ methods. |
| Keywords: | Confidence set, Determinacy, Identification failures, Indeterminacy, Misspecification, new-Keynesian business cycle model, VAR system. |
| JEL: | C31 C22 E31 E52 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:pad:wpaper:0183&r=cba |
| By: | Eric Dor (IESEG School of Management (LEM-CNRS)) |
| Abstract: | The exposures of all the euro area countries to Greece are computed and detailed. The larger components of these exposures are due to the participation to the different mechanisms of the support programmes, in the form of loans or guarantees. Other components are the implicit shares of the claims of the Eurosystem on Greece or its central bank. They are related to TARGE2 or the securities market programme. Germany has the largest share of this claim accumulation. |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:ies:wpaper:e201501&r=cba |
| By: | Cussen, Mary (Central Bank of Ireland); O'Brien, Martin; Onorante, Luca (Central Bank of Ireland); O'Reilly, Gerard (Central Bank of Ireland; Central Bank of Ireland) |
| Abstract: | This Letter attempts to assess the potential impact of implementing the recently proposed proportionate loan-to-value ratio on the wider housing market. Using a dual micro and macro simulation strategy, we find evidence for some moderate negative impacts of the LTV cap on house prices and mortgage interest rates, with a proportionately larger impact on housing supply. These can, however, be considered to be close to the maximum possible impacts given the conservative assumptions and empirical strategies underlying our analysis. |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:ecolet:03/el/15&r=cba |
| By: | Luca Papi; Andrea Presbitero; Alberto Zazzaro |
| Abstract: | This paper looks at the effects of International Monetary Fund (IMF) lending programs on banking crises in a large sample of developing countries, over the period 1970-2010. The endogeneity of the IMF intervention is addressed by adopting an instrumental variable strategy and a propensity score matching estimator. Controlling for the standard determinants of banking crises, our results indicate that countries participating in IMF-supported lending programs are significantly less likely to experience a future banking crisis than nonborrowing countries. We also provide evidence suggesting that compliance with conditionality and loan size matter. |
| Date: | 2015–01–26 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:15/19&r=cba |