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on Central Banking |
| By: | Quint, Dominic |
| Abstract: | The ECB's one size monetary policy is unlikely to fit all euro area members, which raises a discussion about how much monetary policy stress this causes at the national level. We measure monetary policy stress as the difference between actual ECB interest rates and Taylor-rule implied optimal rates at the member state level. Optimal rates explicitly take into account the natural rate of interest to capture changes in trend growth. We find that monetary policy stress within the euro area has been steadily decreasing prior to the recent financial crisis. Current stress levels are not only lower today than in the late 1990s, they are also in line with what is commonly observed among U.S. states or pre-euro German L nder. |
| JEL: | E58 E52 C22 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc14:100341&r=cba |
| By: | Rieth, Malte; Fratzscher, Marcel |
| Abstract: | The paper analyses the empirical relationship between bank risk and sovereign credit risk in the euro area. Using structural VAR with daily financial markets data for 2003-13, the analysis confirms two-way causality between shocks to sovereign risk and bank risk, with the former being overall more important in explaining bank risk, than vice versa. The paper focuses specifically on the impact of non-standard monetary policy measures by the European Central Bank and on the effects of bank bailout policies by national governments. Testing specific hypotheses formulated in the literature, we find that bank bailout policies have reduced solvency risk in the banking sector mostly at the expense of raising the credit risk of sovereigns. By contrast, monetary policy was in most, but not all cases effective in lowering credit risk among both sovereigns and banks. Finally, we find spillover effects in particular from sovereigns in the euro area periphery to the core countries. |
| JEL: | E52 G10 E60 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc14:100277&r=cba |
| By: | Eric Leeper (Indiana University); James Nason (North Carolina State University) |
| Keywords: | Financial frictions, incomplete markets, crises, new Keynesian, natural rate, monetary transmission mechanism |
| JEL: | E3 E4 E5 E6 G2 N12 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:inu:caeprp:2014-003&r=cba |
| By: | Acharya, Viral V.; Steffen, Sascha |
| Abstract: | The European Central Bank (ECB) has finalized its comprehensive assessment of the solvency of the largest banks in the euro area and on October 26 disclosed the results of this assessment. In the present paper, Acharya and Steffen compare the outcomes of the ECB's assessment to their own benchmark stress tests conducted for 39 publically listed financial institutions that are also included in the ECB's regulatory review. The authors identify a negative correlation between their benchmark estimates for capital shortfalls and the regulatory capital shortfall, but a positive correlation between their benchmark estimates for losses under stress both in the banking book and in the trading book. They conclude that the regulatory stress test outcomes are potentially heavily affected by discretion of national regulators in measuring what is capital, and especially the use of risk-weighted assets in calculating the prudential capital requirement. |
| Keywords: | Asset Quality Review,Single Supervisy Mechanism,European Central Bankor |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safepl:32&r=cba |
| By: | Schabert, Andreas |
| Abstract: | We examine how borrowing constraints affect monetary transmission and the trade-off of a welfare maximizing central bank. We develop a sticky price model where money serves as the means of payment and ex-ante identical agents borrow/lend among each other. The credit market is distorted as borrowing is constrained by available collateral, while the distortion is amplified under higher nominal interest rates. We show that the central bank cannot implement first best and that optimal monetary policy mainly aims at stabilizing prices. We further demonstrate that central bank purchases of loans can alleviate the borrowing constraint and enhance social welfare. |
| JEL: | E44 E52 E32 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc14:100619&r=cba |
| By: | Gasteiger, Emanuel |
| Abstract: | The design and analysis of optimal monetary policy is usually guided by the paradigm of homogeneous rational expectations. Instead, we examine the dynamic consequences of implementation strategies, when the actual economy features expectational heterogeneity. Agents have either rational or adaptive expectations. Consequently the central bank's ability to achieve price-stability under heterogeneous expectations depends on its objective and implementation strategy. An expectations-based reaction function, which appropriately conditions on private sector expectations, performs exceptionally well. However, once the objective introduces policy inertia, popular strategies can fail. These results call for new implementation strategies under interest rate stabilization. |
| JEL: | E52 D84 D83 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc14:100555&r=cba |
| By: | Debortoli, Davide; Kim, Jinill; Lindé, Jesper; Nunes, Ricardo |
| Abstract: | Yes, it makes a lot of sense. Using the Smets and Wouters (2007) model of the U.S. economy, we find that the role of the output gap should be equal to or even more important than that of inflation when designing a simple loss function to represent household welfare. Moreover, we document that a loss function with nominal wage inflation and the hours gap provides an even better approximation of the true welfare function than a standard objective based on inflation and the output gap. Our results hold up when we introduce interest rate smoothing in the simple mandate to capture the observed gradualism in policy behavior and to ensure that the probability of the federal funds rate hitting the zero lower bound is negligible. |
| Keywords: | central banks' objectives; household welfare; linear-quadratic approximation; monetary policy design; simple loss function; Smets-Wouters model |
| JEL: | C32 E58 E61 |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10409&r=cba |
| By: | Belke, Ansgar; Beckmann, Joscha; Dreger, Christian |
| Abstract: | Abstract. Deviations of policy interest rates from the levels implied by the Taylor rule have been persistent after the turn of the century even before the financial crisis. These deviations could be due to lower real interest rates, as stated by the savings glut hypothesis as well as the apparent success of monetary policy in combating inflation. Alternatively, they might reflect the omission of relevant variables in the standard rule, such as international dependencies in the interest rate setting of central banks. By using a smooth transition regression approach for three major central banks, this paper provides evidence for nonlinear threshold dynamics. In fact, the foreign interest rate is well-suited to improve standard Taylor-Rules. |
| JEL: | E43 E52 E42 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc14:100450&r=cba |
| By: | Tillmann, Peter; Meinusch, Annette |
| Abstract: | With the Federal Funds rate approaching the zero lower bound, the U.S. Federal Reserve adopted a range of unconventional monetary policy measures known as Quantitative Easing (QE). Quantifying the impact QE has on the real economy, however, is not straightforward as standard tools such as VAR models cannot easily be applied. In this paper we use the Qual VAR model (Dueker, 2005) to combine binary information about QE announcements with an otherwise standard monetary policy VAR. The model filters an unobservable propensity to QE out of the observable data and delivers impulse responses to a QE shocks. In contrast to other empirical approaches, QE is endogenously depending on the business cycle, can easily be studied in terms of unexpected policy shocks and its dynamic effects can be compared to a conventional monetary easing. We show that QE shocks have a large impact on real and nominal interest rates and financial conditions and a smaller impact on real activity. |
| JEL: | E32 E44 E52 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc14:100331&r=cba |
| By: | Niehof, Britta; Hayo, Bernd |
| Abstract: | We develop a dynamic stochastic full equilibrium New Keynesian model of two open economies based on stochastic differential equations to analyse the interdependence between monetary policy and financial markets in the context of the recent financial crisis. The effect of bubbles on stock and housing markets and their transmission to the domestic real economy and the contagious effects on foreign markets are studied. We simulate adjustment paths for the economies under two monetary policy rules: an open-economy Taylor rule and a modified Taylor rule, which takes into account stabilisation of financial markets as a monetary policy objective. We find that for the price of a strong hike in inflation a severe economic recession can be avoided under the modified rule. Using Bayesian estimation techniques, we calibrate the model to the case of the United States and Canada and find that the resulting |
| JEL: | C02 E44 F41 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc14:100410&r=cba |
| By: | Charles Engel |
| Abstract: | The paper explicates the issues raised for macroprudential regulation in a global economy with high capital mobility. The study surveys the recent literature and aims to translate the academic rationale for such policies, in which market imperfections lead to external effects that require policy interventions. The new economics of capital controls is addressed, in which capital controls may be introduced to reduce financial market distortions or to help stabilize exchange rate movements in the face of other market distortions. The empirical literature on the effectiveness of such policies is surveyed. |
| JEL: | F33 F36 F42 |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20951&r=cba |
| By: | Philipp König; David Pothier |
| Abstract: | The question of whether monetary policy should target asset prices remains a contentious issue. Prior to the 2007/08 financial crisis, central banks opted for a wait-and-see approach, remaining passive during the build-up of asset price bubbles but actively seeking to stabilize prices and output after they burst. The macroeconomic and financial turbulence that followed the subprime housing bubble has led to a renewed debate concerning monetary policy’s role in maintaining financial stability. This Round-Up provides a brief overview of this topic. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwrup:55en&r=cba |
| By: | Mirdala, Rajmund |
| Abstract: | European transition economies are still suffering from negative implications of economic crisis. Significant decrease in the key interest rates was followed by reduced maneuverability of central banks in providing incentives into real economies. Low interest rate environment together with effects of quantitative easing induced economists to examine sources of interest rates volatility. Responsiveness of short-term interest rates to the structural shocks provides unique platform to investigate sources of their unexpected volatility and associated effects on monetary policy decision making. Moreover, sources of interest rates volatility may help to reveal side effects of the exchange rate regime choice. Empirical investigation of interest rates determination under different exchange rate regimes highlights substantial implications of relative exchange rate diversity and its importance during the crisis period. In the paper we analyze sources of the short-term nominal interest rates volatility in ten European transition economies by employing SVAR methodology. We observed unique patterns of the short-term interest rates responsiveness in countries with different exchange rate arrangements that contributes to the fixed versus flexible exchange rate dilemma. |
| Keywords: | interest rates, structural shocks, exchange rate arrangements, economic crisis, VAR, impulse-response function |
| JEL: | C32 E43 F41 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:62031&r=cba |
| By: | James Bullard; Jacek Suda (Banque de France); Aarti Singh (University of Sydney); Costas Azariadis (Washington University in St Louis) |
| Abstract: | We study a theory in which households borrow during the first half of a 241-period life cycle as part of a DSGE. Households confront a persistent regime-switching process on aggregate labor productivity growth. When the economy switches to the high growth regime, there is more borrowing based on expectations of higher future income. When the economy switches back to the low growth regime, some households will have borrowed "too much" given contemporaneous income levels–the hallmark of debt overhang. A powerful central bank can intervene in private credit markets to influence real yields. If the central bank does intervene to keep real rates lower, consumption will be reallocated relative to a laissez faire case. The reallocation will generally be away from those households saving for retirement and possibly away from those households that are heavy users of money to smooth income fluctuations. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:948&r=cba |
| By: | Mordecai Kurz; Maurizio Motolese (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore); Giulia Piccillo; Howei Wu |
| Abstract: | We study the impact of diverse beliefs on conduct of monetary policy. Individual belief is modeled by a state variable that defines an individual’s perceived laws of motion. We use a New Keynesian Model that is solved with a quadratic approximation hence individual decisions are quadratic functions. Aggregation renders the belief distribution an aggregate state variable. Although the model has standard technology and policy shocks, diverse expectations change materially standard results about a smooth trade-off between inflation volatility and output volatility. Our main results are summed up as follows: (i) The policy space contains a curve of singularity which is a collection of policy parameters that divides the space into two sub-regions. Some trade-off between output and inflation volatilities exists within each region and some across regions. (ii) The singularity causes volatility of variables to be non monotone in policy parameters. Policymakers cannot assume a more aggressive policy will change outcomes in a predictable manner. (iii) When beliefs are diverse a central bank must also consider the volatility of individual consumption and the related volatility of financial markets. We show aggressive anti-inflation policy increases consumption volatility and aggressive output stabilization policy entails rising inflation volatility. Efficient central bank policy must therefore be moderate. (iv) High optimism about the future typically lowers aggregate output and increases inflation. This “stagflation” effect is stronger the stickier prices are. Policy response is muted since the effects of higher inflation and lower output on interest rates partially cancel each other. Effective policy requires targeting exuberance directly or its effects in asset markets. Central banks already do so with short term interventions. (v) The observed high serial correlation of 0.80 in policy shocks contributes greatly to market volatility and we show that a reduction in persistence of central bank’s deviations from a fixed rule will contribute to stability. (vi) Belief dispersion is measured by cross sectional standard deviation of individual beliefs. An increased belief diversity is found to make policy coordination harder and results in lower aggregate output and lower rate of inflation. Bank policy can lower belief dispersion by being more transparent. |
| Keywords: | New Keynesian Model; heterogenous beliefs; market state of belief; Rational Beliefs; monetary policy rule |
| JEL: | C53 D8 D84 E27 E42 E52 G12 G14 |
| URL: | http://d.repec.org/n?u=RePEc:ctc:serie1:def022&r=cba |
| By: | Schliephake, Eva |
| Abstract: | Minimum capital requirement regulation forces banks to refund a substantial amount of their investments with equity. This creates a buffer against losses, but also in- creases the cost of funding. If higher refunding costs translate into higher loan interest rates, then borrowers are likely to become more risky, which may destabilize the lending bank. This paper argues that, in addition to the buffer and cost effect of capital regulation, there is a strategic effect. A binding capital requirement regulation restricts the lending capacity of banks, and therefore reduces the intensity of loan interest rate competition and increases the banks price setting power as shown in Schliephake and Kirstein (2013). This paper discusses the impact of this indirect effect from capital regulation on the stability of the banking sector. It is shown that the enhanced price setting power can reverse the net effect that capital requirements have under perfect competition. |
| JEL: | G21 K23 L13 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc14:100458&r=cba |
| By: | Hugonnier, Julien; Morellec, Erwan |
| Abstract: | We develop a dynamic model to assess the effects of liquidity and leverage requirements on banks' insolvency risk. The model features endogenous capital structure, liquid asset holdings, payout, and default decisions. In the model, banks face taxation, flotation costs of securities, and default costs. They are financed with equity, insured deposits, and risky debt. Using the model, we show that liquidity requirements have no long-run effects on default risk but may increase it in the short-run; leverage requirements reduce default risk but may significantly reduce bank value; mispriced deposit insurance fuels default risk while depositor preference in default decreases it. |
| Keywords: | banks; capital structure; insolvency risk; liquidity buffers; regulation |
| JEL: | G21 G28 G32 G33 |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10378&r=cba |
| By: | Chris Redl |
| Abstract: | I study the implications of learning by doing in production for optimal monetary policy using a basic New Keynesian model. Learning-by-doing is modeled as a stock of skills that accumulates based on past employment. The presence of this learning-by-doing externality breaks the ’divine coincidence’ result, that by stabilising inflation the output gap will automatically be closed, for a variety of shocks that are important in explaining the buseiness cycle. In this context, the policy maker must consider the impact on future productivity of any trade-off between output and inflation today. The appropriate inflation-output trade off is between inflation today and the present value of deviations in the output gap. The approach to optimal monetary policy follows Woodford (2010) permitting a study of variations in key parameters and steady states which is uncommon in the literature that relies on a quadratic approximation to the utility function. Exploiting this variation I find that learning induces a small increase in the importance of the output gap under a cost-push shock for the (more realistic case) of a distorted steady state. The welfare costs of business cycles are shown to be significantly larger even under the optimal policy. |
| Keywords: | Monetary policy, Labor Productivity, Inflation |
| JEL: | E52 J24 E31 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:490&r=cba |
| By: | Woll, Cornelia |
| Abstract: | One of the motivations for establishing a European banking union was the desire to break the ties with between national regulators and domestic financial institutions in order to prevent regulatory capture. However, supervisory authority over the financial sector at the national level can also have valuable public benefits. The aim of this policy letter is to detail these public benefits in order to counter discussions that focus only on conflicts of interest. It is informed by an analysis of how financial institutions interacted with policy-makers in the design of national bank rescue schemes in response to the banking crisis of 2008. Using this information, it discusses the possible benefits of close cooperation between financial institutions and regulators and analyzes these in the wake of a European banking union. |
| Keywords: | public-private relations,capture,collective action,social relations |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safepl:27&r=cba |
| By: | Singh, Sunny Kumar; Rao, D. Tripati |
| Abstract: | This paper analyzes the effect of monetary policy shock on the aggregate as well as on the sectoral output of Indian economy using reduced form vector auto regression (VAR) model. We find that the impact of a monetary policy shock at the sectoral level is heterogeneous. Sectors such as, mining and quarrying, manufacturing, construction and trade, hotel, transport and communications seems to decline more sharply than aggregate output in response to a monetary tightening. We also augment the basic VAR by including three channels- credit channel, exchange rate channel and asset price channel of the monetary policy, and analyze the sector specific importance of each of the channel. The channels through which monetary policy is transmitted to the real economy are found to be different for every sector. In most of the cases, multiple channels are responsible for the changes in the aggregate and sectoral output to the monetary policy shock. These results clearly indicate the need for a sector specific monetary policy in India. |
| Keywords: | Monetary transmission mechanism, Sectoral output, VAR, Credit channel, Exchange rate channel, Asset price channel |
| JEL: | E5 |
| Date: | 2014–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:62069&r=cba |
| By: | Steve Ambler (CIRPÉE, UQAM, C.D. Howe Institute; The Rimini Centre for Economic Analysis, Italy); Jean-Paul Lam (Department of Economics, University of Waterloo; The Rimini Centre for Economic Analysis, Italy) |
| Abstract: | We compare inflation targeting and price-level targeting in the canonical New Keynesian model, with particular attention to multiple steady-states, indeterminacy, and global stability. Under price-level targeting we show the following: 1) the well-known problem of multiple steady-state equilibria under inflation targeting is absent; 2) the model’s dynamics close to the steady state are determinate for a much wider range of parameter values; 3) the model is globally saddlepoint stable. These results provide additional arguments in favour of price-level targeting as a monetary policy framework. |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:15-03&r=cba |
| By: | Colavecchio, Roberta; Amisano, Gianni; Fagan, Gabriel |
| Abstract: | We employ a money-based early warning model in order to analyse the risk of a low inflation regime in the Euro Area, Japan and the US. The model specification allows for three different inflation regimes: "Low", "Medium" and "High" inflation, while state transition probabilities vary over time as a function of monetary variables. Using Bayesian techniques, we estimate the model with data from the mid 1970s up to the present. Our analysis suggests that the risks of a "Low" inflation regime in the Euro Area have been increasing in the course of the last six quarters of the estimation sample; moreover, money growth plays a significant role in the assessment of such risks. Evidence for Japan and the US shows that for both countries the inclusion of an indicator variable does not substantially change the assessment of the risk of a "Low" inflation regime. |
| JEL: | C11 C53 E31 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc14:100595&r=cba |
| By: | Thomas Conlon (UCD School of Business, University College Dublin); John Cotter (UCD School of Business, University College Dublin) |
| Abstract: | The European Union has recently introduced the Single Resolution Mechanism (SRM) to provide a consistent set of rules concerning Eurozone bank resolution. In this study, we retrospectively examine the implications of the SRM for Euro- zone banks during the global nancial crisis. Empirical results indicate that large, systemically important Eurozone banks would have exclusively required equity writedowns to cover impairment losses. However, to ensure adequate capitaliza- tion post bail-in, the majority of large, listed banks would have required conversion to equity for all subordinated and some senior debt creditors. Depositors would not have experienced writedowns in any of the banks examined. Given the subjec- tive nature of resolution triggers outlined in the SRM, we also study the potential benets of market and balance sheet dependent triggers. While our ndings sug- gest some weak evidence of a capacity to dierentiate between failed and surviving banks, the results are indicative of the diculties in mandating predened quan- titative resolution triggers. |
| Date: | 2015–02–05 |
| URL: | http://d.repec.org/n?u=RePEc:ucd:wpaper:201501&r=cba |
| By: | Rohloff, Sebastian; Pierdzioch, Christian; Risse, Marian |
| Abstract: | Economic theory predicts that, in a small open economy, the dynamics of the real price of gold should be linked to real interest rates and the rate of change of the real exchange rate. Using data for Australia, we use a real-time forecasting approach to analyze whether real interest rates and the rate of change of the real exchange rate help to forecast out-ofsample the rate of change of the real price of gold. We study the economic value-added of out-of-sample forecasts using a behavioral-finance approach that takes into account that a forecaster may have an asymmetric loss function. |
| JEL: | C53 E44 G12 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc14:100429&r=cba |
| By: | Podlich, Natalia |
| Abstract: | In this paper, I analyze the impact of the extension of the ECB s collateral framework on securities sales. In addition, I evaluate the impact of different macroeconomic and bank-specific characteristics on banks selling behavior. At this, I distinguish between healthy banks and banks rescued from the German government hypothesizing that distressed banks manage sales of their assets differently. My analysis is based on quantile regressions for panel data containing securities holdings of 27 German banks, which allows an assessment of extremely large sales. Such selling behavior could cause a collapse of prices and lead to fire sales adversely impacting other financial institutions. I find clear evidence that the ECB s collateral framework has a stabilizing impact on sales of assets, especially for impaired banks and during the crisis the relationship is significant. |
| JEL: | B26 C21 E58 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc14:100510&r=cba |
| By: | Mitchener, Kris; Weidenmier, Marc |
| Abstract: | We use a standard metric from international finance, the currency risk premium, to assess the credibility of fixed exchange rates during the classical gold standard era. Theory suggests that a completely credible and permanent commitment to join the gold standard would have zero currency risk or no expectation of devaluation. We find that, even five years after a typical emerging-market country joined the gold standard, the currency risk premium averaged at least 220 basis points. Fixed- effects, panel-regression estimates that control for a variety of borrower-specific factors also show large and positive currency risk premia. In contrast to core gold standard countries, such as France and Germany, the persistence of large premia, long after gold standard adoption, suggest that financial markets did not view the pegs in emerging markets as credible and expected devaluation. |
| Keywords: | currency risk; fixed exchange rates; gold standard; sovereign borrowing |
| JEL: | F22 F33 F36 F41 N10 N20 |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10388&r=cba |
| By: | Hott, Christian |
| Abstract: | We develop a theoretical model of mortgage loss rates that evaluates their main underlying risk factors. Following the model, loss rates are positively influenced by the house price level, the loan-to-value of mortgages, interest rates, and the unemployment rate. They are negatively influenced by the growth of house prices and the income level. The calibration of the model for the US and Switzerland demonstrates that it is able to describe the overall development of actual mortgage loss rates. In addition, we show potential applications of the model for different macroprudential instruments: stress tests, countercyclical buffer, and setting risk weights for mortgages with different loan-to-value and loan-to-income ratios. |
| JEL: | E51 G21 G28 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc14:100553&r=cba |
| By: | Hollmayr, Josef; Matthes, Christian |
| Abstract: | The interaction between monetary and fiscal policy and the associated uncertainty about this interaction have been put on center stage by the recent financial crisis and the associated recession. In our model agents learn about both fiscal and monetary policy rules via the Kalman Filter. In particular, we study how an economy populated with agents acting as econometricians reacts to discrete changes in the actual policy rules. |
| JEL: | E32 D83 E62 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc14:100609&r=cba |
| By: | Eling, Martin; Pankoke, David |
| Abstract: | We empirically analyze the costs and benefits of financial regulation based on a survey of 76 insurers from Austria, Germany and Switzerland. Our analysis includes both established and new empirical measures for regulatory costs and benefits. This is the first paper that tries to take costs and benefits combined into account using a latent class regression with covariates. Another feature of this paper is that it analyzes regulatory costs and benefits not only on an industry level, but also at the company level. This allows us to empirically test fundamental principles of financial regulation such as proportionality: the intensity of regulation should reflect the firm-specific amount and complexity of the risk taken. Our empirical findings do not support the proportionality principle; for example, regulatory costs cannot be explained by differences in business complexity. One potential policy implication is that the proportionality principle needs to be more carefully applied to financial regulation. |
| Keywords: | Insurance, Regulation, Cost-Benefit Analysis, Proportionality Principle |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:usg:sfwpfi:2014:20&r=cba |