nep-cba New Economics Papers
on Central Banking
Issue of 2015‒03‒05
27 papers chosen by
Maria Semenova
Higher School of Economics

  1. The Macroeconomic Effects of the Federal Reserve's Unconventional Monetary Policies By Engen, Eric M.; Laubach, Thomas; Reifschneider, David L.
  2. Dissecting the brains of central bankers: the case of the ECB's Governing Council members on reforms By Bennani, Hamza
  3. On the nature of shocks driving exchange rates in emerging economies By Galina V. Kolev
  4. On a tight leash: does bank organisational structure matter for macroprudential spillovers? By Danisewicz, Piotr; Reinhardt, Dennis; Sowerbutts, Rhiannon
  5. Time Consistency and the Duration of Government Debt: A Signalling Theory of Quantitative Easing By Gauti Eggertsson; Bulat Gafarov; Saroj Bhatarai
  6. International liquidity shocks and the European sovereign debt crisis: Was euro area unconventional monetary policy successful? By Mary M. Everett
  7. Macroeconomic Policy during a Credit Crunch By Nicolini, Juan Pablo
  8. Capital controls and the real exchange rate: Do controls promote disequilibria? By Montecino, Juan Antonio
  9. Monetary policy in the North, effects in the South By Gonzalo De Cadenas Santiago; Alicia Garcia-Herrero; Alvaro Ortiz Vidal-Abarca
  10. Sovereign Bailouts By Leonardo Martinez; Juan Hatchondo; Burhanettin Kuruscu; Bulent Guler
  11. Sovereign Default and Government’s Bailouts By Sandra Lizarazo; Horacio Sapriza; Javier Bianchi
  12. Sovereign Debt, Bail-Outs and Contagion in a Monetary Union By Eijffinger, Sylvester C W; Kobielarz, Michal L.; Uras, Rasim Burak
  13. The Effect of Campaign Contributions on State Banking Regulation and Bank Expansion in U.S. By Aggey Semenov; Hector Perez Saiz
  14. Endogenous volatility at the zero lower bound: implications for stabilization policy By Basu, Susanto; Bundick, Brent
  15. "Does Keynesian Theory Explain Indian Government Bond Yields?" By Tanweer Akram; Anupam Das
  16. Capital Control Measures: A New Dataset By Andrés Fernández; Michael W. Klein; Alessandro Rebucci; Martin Schindler; Martín Uribe
  17. Pick Your Poison: The Choices and Consequences of Policy Responses to Crises By Kristin J. Forbes; Michael W. Klein
  18. Policy-Development Monopolies: Adverse Consequences and Institutional Responses By Hirsch, Alexander V.; Shotts, Kenneth W.
  19. The Compelling Case for Stronger and More Effective Leverage Regulation in Banking By Admati, Anat R.
  20. Early warning indicators for banking crises: a conditional moments approach By Ferrari, Stijn; Pirovano, Mara
  21. Measures of Systemic Risk By Zachary Feinstein; Birgit Rudloff; Stefan Weber
  22. De Facto Exchange Rate Regime Classifications Are Better Than You Think By Michael Bleaney; Mo Tian; Lin Yin
  23. Testing for Identification in SVAR-GARCH Models: Reconsidering the Impact of Monetary Shocks on Exchange Rates By Helmut Lütkepohl; George Milunovich
  24. Financial Stability Policies for Shadow Banking By Adrian, Tobias
  25. Fast ML estimation of dynamic bifactor models: an application to European inflation By Fiorentini, Gabriele; Galesi, Alessandro; Sentana, Enrique
  26. Growing out of Crises and Recessions: Regulating Systemic Financial Institutions and Redefining Government Responsibilities By Marcel Boyer
  27. Equity Recourse Notes: Creating Counter-Cyclical Bank Capital By Bulow, Jeremy; Klemperer, Paul

  1. By: Engen, Eric M. (Board of Governors of the Federal Reserve System (U.S.)); Laubach, Thomas (Board of Governors of the Federal Reserve System (U.S.)); Reifschneider, David L. (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: After reaching the effective lower bound for the federal funds rate in late 2008, the Federal Reserve turned to two unconventional policy tools--quantitative easing and increasingly explicit and forward-leaning guidance for the future path of the federal funds rate--in order to provide additional monetary policy accommodation. We use survey data from the Blue Chip Economic Indicators to infer changes in private-sector perceptions of the implicit interest rate rule that the Federal Reserve would use following liftoff from the effective lower bound. Using our estimates of the changes over time in private expectations for the implicit policy rule, and estimates of the effects of the Federal Reserve's quantitative easing programs on term premiums derived from other studies, we simulate the FRB/US model to assess the actual economic stimulus provided by unconventional policy since early 2009. Our analysis suggests that the net stimulus to real activity and inflation was limited by the gradual nature of the changes in policy expectations and term premium effects, as well as by a persistent belief on the part of the public that the pace of recovery would be much faster than proved to be the case. Our analysis implies that the peak unemployment effect--subtracting 1-1/4 percentage points from the unemployment rate relative to what would have occurred in the absence of the unconventional policy actions--does not occur until early 2015, while the peak inflation effect--adding 1/2 percentage point to the inflation rate--is not anticipated until early 2016.
    Keywords: Monetary policy reaction function; federal funds rate; forward guidance; large-scale asset purchases; zero lower bound
    JEL: E50
    Date: 2015–01–14
  2. By: Bennani, Hamza
    Abstract: Since 2009, European central bankers have supported some reforms, in order to draw roadmaps to get out of the euro debt crisis. This paper tests whether the educational and professional background of European central bankers matter for the type of reforms each of them advocated. Through a textual analysis of public speeches delivered by the European central bankers, we draw a cognitive map for each of them and, thus, of the reforms they propose as ways out of the euro debt crisis. Our results show that their occupational background is an important determinant of their respective economic reform proposals.
    Keywords: European Central Bank, Monetary Policy, Euro debt crisis, Cognitive mapping
    JEL: E42 E52 E58 H12
    Date: 2015–01
  3. By: Galina V. Kolev
    Abstract: The paper analyzes the sources of exchange rate movements in emerging economies in the context of monetary tapering by the Federal Reserve. A structural vector autoregression framework with a long-run restriction is used to decompose the movements of nominal ex-change rates into two components: one component driven solely by the adjustment of the real exchange rate to permanent shocks and one resulting from transitory shocks such as monetary policy measures. Imposing the restriction that temporary shocks should not affect the real exchange rate in the long run, the analysis shows that the recent depreciation of the Russian ruble and the Turkish lira is largely driven by transitory shocks, like for instance monetary policy measures. Furthermore, the response of the lira to transitory shocks is sluggish and further depreciation is possible in the next months. In Brazil and India, on the contrary, nominal exchange rate behavior is mainly driven by permanent shocks. The recent depreciation is not caused by short-lived shocks but rather by changing long-term macroeconomic fundamentals. The foreign exchange interventions of the central bank to avoid large depreciation are therefore largely misplaced, especially in Brazil. They aggravate the use of nominal exchange rate flexibility as an efficient adjustment mechanism for real exchange rate changes, i.e. changes in relative prices across borders, and efficient allocation of resources.
    Keywords: Exchange rates, emerging economies, SVAR, monetary policy
    JEL: F31 E58
    Date: 2015–02
  4. By: Danisewicz, Piotr (Lancaster University); Reinhardt, Dennis (Bank of England); Sowerbutts, Rhiannon (Bank of England)
    Abstract: This paper examines whether cross-border spillovers of macroprudential regulation depend on the organisational structure of banks’ foreign affiliates. Our analysis compares the response of foreign banks’ branches versus subsidiaries in the United Kingdom to changes in macroprudential regulations in foreign banks’ home countries. By focusing on branches and subsidiaries of the same banking group, we are able to control for all the factors affecting parent banks’ decisions regarding the lending of their foreign affiliates. We document that there are important differences between the type of regulation and the type of lending. Following a tightening of capital regulation, branches of multinational banks reduce interbank lending growth by 6 percentage points more relative to subsidiaries of the same banking group. Lending to non-banks does not exhibit such differences. A tightening in lending standards or reserve requirements at home does not have differential effects on both interbank and non-bank lending in the United Kingdom.
    Keywords: Macro prudential regulation; cross-border lending; credit supply; foreign banks organisational structure
    JEL: E51 E58 G21 G28
    Date: 2015–02–20
  5. By: Gauti Eggertsson (Brown University); Bulat Gafarov (Pennsylvania State University); Saroj Bhatarai (Pennsylvania State University)
    Abstract: We present a signalling theory of quantitative easing in which open market operations that change the duration of outstanding nominal government debt a§ect the incentives of the central bank in determining the real interest rate. In a time consistent (Markov-perfect) equilibrium of a sticky-price model with coordinated monetary and fiscal policy, we show that shortening the duration of outstanding government debt provides an incentive to the central bank to keep short-term real interest rates low in future in order to avoid capital losses. In a liquidity trap situation then, where the current short-term nominal interest rate is up against the zero lower bound, quantitative easing can be effective to fight deflation and a negative output gap as it leads to lower real long-term interest rates by lowering future expected real short-term interest rates. We show illustrative numerical examples that suggest that the benefits of quantitative easing in a liquidity trap can be large in a way that is not fully captured by some recent empirical studies
    Date: 2014
  6. By: Mary M. Everett
    Abstract: Using novel data on individual euro area banks' balance sheets this paper shows that exposure to stressed European sovereigns manifested in a liquidity shock to their international funding through two channels: (i) a contraction in cross-border funding, and (ii) a contraction in US wholesale funding. The effectiveness of the ECB's unconventional monetary policy measures, in the form of the 3-year Long-Term Refinancing Operations (VLTROs), in mitigating effects of the European sovereign debt crisis on the supply of private sector credit is assessed. Controlling for banks' risk factors and credit demand, the first round of VLTROs in December 2011 is not found to have been successful in offsetting the decline in credit supply to Households and non-financial corporates. In contrast, the VLTROs in February 2012 are found to have mitigated the effect of the European sovereign debt crisis on credit supply. Moreover, a contraction in credit supply to non-financial corporates, but not households, is documented for euro area banks affected by the international liquidity shock and that drew on ECB liquidity under the VLTRO facilities.
    Keywords: European sovereign crisis, cross-border banking, sovereign debt, international transmission, non-standard measures, ECB liquidity
    JEL: G21 G15 H63
    Date: 2015–02
  7. By: Nicolini, Juan Pablo (Federal Reserve Bank of Minneapolis)
    Abstract: Most economic models used by central banks prior to the recent financial crisis omitted two fundamental elements: financial markets and liquidity measures. Those models therefore failed to foresee the crisis or understand the policy reaction that followed. In contrast to more orthodox models, we develop a theory in which credit markets and measures of liquidity are central. Our model emphasizes the role of collateral constraints on credit lines and the role of money in transactions, and it can be used to study the effects of alternative monetary policies during and after a financial crisis. A key insight from our approach is that a credit crisis characterized by tightened collateral constraints can cause a bout of deflation that exacerbates the constraints and reduces investment, productivity, employment and economic output. Policymakers can curb deflation and soften the recession by issuing more bonds and money, exactly as U.S. fiscal and monetary officials did in 2008. But our model also reveals an important trade-off in the aftermath of the crisis. Additional liquidity injections necessary to maintain low inflation will partially crowd out private investment and thereby slow economic recovery. The cost of curbing the recession’s depth is thus to extend its duration.
    Date: 2015–02–23
  8. By: Montecino, Juan Antonio (The University of Massachusetts at Amherst)
    Abstract: The consensus view is that capital controls can effectively lengthen the maturity composition of capital inflows and increase the independence of monetary policy but are not generally effective at reducing net inflows and influencing the real exchange rate. This paper presents empirical evidence that although capital controls may not directly affect the long-run equilibrium level of the real exchange rate, they may enable disequilibria to persist for an extended period of time relative to the absence of controls. Allowing the speed of adjustment to vary according to the intensity of restrictions on capital flows, it is shown that the real exchange rate converges to its long-run level at significantly slower rates in countries with capital controls. This result holds whether permanent or episodic controls are considered. The benchmark estimated half-lives for the speed of adjustment are around 3.5 years for countries with strict capital controls but as low as 2 years in countries with no restrictions on international capital flows. The paper also presents a stylized two-sector dynamic investment model with constraints on externally-funded investment to illustrate potential theoretical channels.
    Keywords: Capital Controls, Real Exchange Rates, Undervaluation.
    JEL: F2 F31 F36 F41
    Date: 2015
  9. By: Gonzalo De Cadenas Santiago; Alicia Garcia-Herrero; Alvaro Ortiz Vidal-Abarca
    Abstract: Portfolio flows across Emerging Markets (EMs) have been particularly volatile over the last years. Financial distress at the beginning of the crisis was followed by monetary policy reactions in developed economies and emerging countries triggering push and pull forces favourable for flow dynamics across Emerging Markets. Subsequent actions and discussion over the exit strategies of central banks in developed economies – particularly the Fed - were behind the various waves of risk-on/-off sentiment in financial markets. We propose a cross over approach (Dinamic Linear Model / Factor Augmented VAR) to disentangle the net effects of global shocks. This paper will focus on the effects of Monetary Policy in the North (more specifically, monetary policy normalization by the FED and the QE by the ECB) on cross border portfolio flows to the South (Emerging Markets) under six alternative plausible scenarios.
    Keywords: QE, tapering, emerging markets, monetary policy, porfolio flows
    JEL: C32 E32 F32 G12
    Date: 2014–10
  10. By: Leonardo Martinez (International Monetary Fund); Juan Hatchondo (Indiana University); Burhanettin Kuruscu (University of Toronto); Bulent Guler (Indiana University - Bloomington)
    Abstract: We extend the standard Eaton and Gersovitz (1981) sovereign default model to study bailout policies. In our setup a country that concentrates a significant fraction of bond holders decide on a period by period basis whether to bailout a debtor government. The combination of bailout policies and decentralized lending decisions give rise to a pecuniary externality.
    Date: 2014
  11. By: Sandra Lizarazo (Universidad Carlos III de Madrid); Horacio Sapriza (Federal Reserve Board); Javier Bianchi (University of Wisconsin)
    Abstract: This paper studies the link between banking crises, sovereign default and govern- ment guarantees. A banking crisis can lead to a domestic credit crunch, which can be mitigated by government guarantees. However, the provision of bailout guaran- tees exposes the government to potentially severe losses from a banking sector failure and a sharp rise in public debt, causing sovereign default risk, and thus sovereign spreads, to increase substantially. As a result, the value of government guarantees deteriorates, deepening the crisis in the financial sector. The recent bailout in Ireland clearly illustrates the relevance of such risk transmission mechanism. An additional important contribution of our paper is to determine under which circumstances it is desirable for the government to provide bailout guarantees to the financial sector of the economy. A calibrated version of our model can mimic some of the interaction dynamics between financial sector risks and sovereign risks observed in Ireland during the crisis.
    Date: 2014
  12. By: Eijffinger, Sylvester C W; Kobielarz, Michal L.; Uras, Rasim Burak
    Abstract: The European sovereign debt crisis is characterized by the simultaneous surge in borrowing costs in the GIPS countries after 2008. We present a theory, which can account for the behavior of sovereign bond spreads in Southern Europe between 1998 and 2012. Our key theoretical argument is related to the bail-out guarantee provided by a monetary union, which endogenously varies with the number of member countries in sovereign debt trouble. We incorporate this theoretical foundation in an otherwise standard small open economy DSGE model and explain (i) the convergence of interest rates on sovereign bonds following the European monetary integration in late 1990s, and (ii) - following the heightened default risk of Greece - the sudden surge in interest rates in countries with relatively sound economic and financial fundamentals. We calibrate the model to match the behavior of the Portuguese economy over the period of 1998 to 2012.
    Keywords: bail-out; contagion; interest rate spreads; sovereign debt crisis
    JEL: F33 F34 F36 F41
    Date: 2015–03
  13. By: Aggey Semenov (University of Ottawa); Hector Perez Saiz (Bank of Canada)
    Abstract: We use a unique detailed database with individual state campaign contributions made by banks in U.S. from 1998 to 2010 to understand how these contributions influence the regulation of the banking industry in that state, and in particular the approval of bank mergers by the state banking regulatory authority. We find that banks tend to contribute more to candidates that play a key role in appointing the head of the state banking regulator. In addition, we find that, after controlling for size or other key bank level variables, banks that are involved in a merger in the near future are more likely to contribute to elected senators and the governor, who play key roles in appointing the head of the state bank regulator that approves mergers which involve state banks. Our results help to understand better the role that campaign contributions have in the shaping of bank regulation in U.S. and the bank market structure in the last two decades.
    Date: 2014
  14. By: Basu, Susanto; Bundick, Brent (Federal Reserve Bank of Kansas City)
    Abstract: At the zero lower bound, the central bank's inability to offset shocks endogenously generates volatility. In this setting, an increase in uncertainty about future shocks causes significant contractions in the economy and may lead to non-existence of an equilibrium. The form of the monetary policy rule is crucial for avoiding catastrophic outcomes. State-contingent optimal monetary and fiscal policies can attenuate this endogenous volatility by stabilizing the distribution of future outcomes. Fluctuations in uncertainty and the zero lower bound help our model match the unconditional and stochastic volatility in the recent macroeconomic data.
    Keywords: Endogenous volatility; Zero lower bound; Optimal stabilization policy
    JEL: E32 E52
    Date: 2015–01–01
  15. By: Tanweer Akram; Anupam Das
    Abstract: John Maynard Keynes held that the central bank's actions determine long-term interest rates through short-term interest rates and various monetary policy measures. His conjectures about the determinants of long-term interest rates were made in the context of advanced capitalist economies, and were based on his views on ontological uncertainty and the formation of investors' expectations. Are these conjectures valid in emerging markets, such as India? This paper empirically investigates the determinants of changes in Indian government bonds' nominal yields. Changes in short-term interest rates, after controlling for other crucial variables such as changes in the rates of inflation and economic activity, take a lead role in driving changes in the nominal yields of Indian government bonds. This vindicates Keynes's theories, and suggests that his views on long-term interest rates are also applicable to emerging markets. Higher fiscal deficits do not appear to raise government bond yields in India. It is further argued that Keynes's conjectures about investors' outlooks, views, and expectations are fairly robust in a world of ontological uncertainty.
    Keywords: Government Bond Yields; India; Emerging Markets
    JEL: E43 E50 E60 O16
    Date: 2015–03
  16. By: Andrés Fernández; Michael W. Klein; Alessandro Rebucci; Martin Schindler; Martín Uribe
    Abstract: We present and describe a new dataset of capital control restrictions on both inflows and outflows of ten categories of assets for 100 countries over the period 1995 to 2013. Building on the data first presented in Martin Schindler (2009), and other datasets based on the analysis of the IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions, this dataset includes additional asset categories, more countries, and a longer time period. We discuss the manner in which we translate the information in the AREAER into a usable data set. We also characterize the data with respect to the prevalence of controls across asset categories, the correlation of controls across asset categories and between controls on inflows and controls on outflows, the aggregation of the separate categories into broader indicators, and the comparison of our dataset with other indicators of capital controls.
    JEL: F3
    Date: 2015–02
  17. By: Kristin J. Forbes; Michael W. Klein
    Abstract: Countries choose different strategies when responding to crises. An important challenge in assessing the impact of these policies is selection bias with respect to relatively time-invariant country characteristics, as well as time-varying values of outcome variables and other policy choices. This paper addresses this challenge by using propensity-score matching to estimate how major reserve sales, large currency depreciations, substantial changes in policy interest rates, and increased controls on capital outflows affect real GDP growth, unemployment, and inflation during two periods marked by crises, 1997 to 2001 and 2007 to 2011. We find that none of these policies yield significant improvements in growth, unemployment, and inflation. Instead, a large increase in interest rates and new capital controls are estimated to cause a significant decline in GDP growth. Sharp currency depreciations may raise GDP growth over time, but only with a lagged effect and after an initial contraction.
    JEL: F41
    Date: 2015–02
  18. By: Hirsch, Alexander V. (CA Institute of Technology); Shotts, Kenneth W. (Stanford University)
    Abstract: We analyze a model of policymaking in which only one actor, e.g., a bureaucratic agency or a well-funded interest group, has the capacity to develop high-quality policy proposals. By virtue of her skills, this actor has an effective monopoly on policy development and thus can craft proposals that are good for herself but provide few benefits to decisionmakers who enact policies. We then examine institutional responses that decisionmakers can use to induce a policy-development monopolist to develop more-appealing proposals: (i) establishing in-house policy development capacity, (ii) delegating authority to an agent who counterbalances the monopolist's preferences, and (iii) fostering competition by policy entrepreneurs with different preferences. We apply our model to a diverse set of contexts, including bureaucratic policymaking in Japan, lobbying in term-limited state legislatures, regulation of banking and financial services, and administrative procedures for rulemaking in U.S. federal bureaucracies.
    Date: 2014–06
  19. By: Admati, Anat R. (Stanford University)
    Abstract: Excessive leverage (indebtedness) in banking endangers the public and distorts the economy. Yet current and proposed regulations only tweak previous regulations that failed to provide financial stability. This paper discusses the forces that have led to this situation, some of which appear to be misunderstood. The benefits to society of requiring that financial institutions use significantly more equity funding than the status quo are large, while any costs are entirely private and due to banks' ability to shift some of their costs to others when they use debt. Without quantitative analysis, I outline improved regulations and how they can be implemented.
    Date: 2014–09
  20. By: Ferrari, Stijn; Pirovano, Mara
    Abstract: This paper presents a novel methodology to calculate thresholds in an early warning signalling framework for extracting signals useful to predict the occurrence of banking crises. The conditional moments based methodology does not rely on assumptions on an objective function trading off Type I and Type II errors and leads to the identification of zones corresponding to different intensities of the signal. The signalling performance of these signalling zones is similar to that of the traditional early warning method based on the optimisation of a policymaker’s loss function; our methodology in fact outperforms the latter for a number of indicators. The methodology is then extended to allow for country specificities, which leads to a substantial improvement of the signalling power. On average, across all indicators, the country-specific signalling zones outperform the pooled approach, resulting in a larger average true positive rate and a lower false alarms rate.
    Keywords: Early-warning indicators; banking crises; panel data; macro prudential policy
    JEL: C23 E58 G01
    Date: 2015–02
  21. By: Zachary Feinstein; Birgit Rudloff; Stefan Weber
    Abstract: Systemic risk refers to the risk that the financial system is susceptible to failures due to the characteristics of the system itself. The tremendous cost of this type of risk requires the design and implementation of tools for the efficient macroprudential regulation of financial institutions. The current paper proposes a novel approach to measuring systemic risk. Key to our construction is a rigorous derivation of systemic risk measures from the structure of the underlying system and the objectives of a financial regulator. The suggested systemic risk measures express systemic risk in terms of capital endowments of the financial firms. Their definition requires two ingredients: first, a cash flow or value model that assigns to the capital allocations of the entities in the system a relevant stochastic outcome. The second ingredient is an acceptability criterion, i.e. a set of random variables that identifies those outcomes that are acceptable from the point of view of a regulatory authority. Systemic risk is measured by the set of allocations of additional capital that lead to acceptable outcomes. The resulting systemic risk measures are set-valued and can be studied using methods from set-valued convex analysis. At the same time, they can easily be applied to the regulation of financial institutions in practice. We explain the conceptual framework and the definition of systemic risk measures, provide an algorithm for their computation, and illustrate their application in numerical case studies. We apply our methodology to systemic risk aggregation as described in Chen, Iyengar & Moallemi (2013) and to network models as suggested in the seminal paper of Eisenberg & Noe (2001), see also Cifuentes, Shin & Ferrucci (2005), Rogers & Veraart (2013), and Awiszus & Weber (2015).
    Date: 2015–02
  22. By: Michael Bleaney; Mo Tian; Lin Yin
    Abstract: Several de facto exchange rate regime classifications have been widely used in empirical research, but they are known to disagree with one another to a disturbing extent. We dissect the algorithms employed and argue that they can be significantly improved. We implement the improvements, and show that there is a far higher agreement rate between the modified classifications. We conclude that the current pessimism about de facto exchange rate regime classification schemes is unwarranted.
    Keywords: exchange rate regimes, trade, volatility JEL codes: F31
    Date: 2015–02
  23. By: Helmut Lütkepohl; George Milunovich
    Abstract: Changes in residual volatility in vector autoregressive (VAR) models can be used for identifying structural shocks in a structural VAR analysis. Testable conditions are given for full identification for the case where the volatility changes can be modelled by a multivariate GARCH process. Formal statistical tests are presented for identification and their small sample properties are investigated via a Monte Carlo study. The tests are applied to investigate the validity of the identification conditions in a study of the effects of U.S. monetary policy on exchange rates. It is found that the data do not support full identification in most of the models considered, and the implied problems for the interpretation of the results are discussed.
    Keywords: Structural vector autoregression, conditional heteroskedasticity, GARCH, identification via heteroskedasticity
    JEL: C32
    Date: 2015
  24. By: Adrian, Tobias
    Abstract: This paper explores financial stability policies for the shadow banking system. I tie policy options to economic mechanisms for shadow banking that have been documented in the literature. I then illustrate the role of shadow bank policies using three examples: agency mortgage real estate investment trusts, leveraged lending, and captive reinsurance affiliates. For each example, the economic mechanisms are explained, the potential risks emanating from the activities are described, and policy options to mitigate such risks are listed. The overarching theme of the analysis is that any policy prescription for the shadow banking system is highly specific relative to the particular activity.
    Keywords: financial intermediation; shadow bank policies; systemic risk
    JEL: E44 G00 G01 G28
    Date: 2015–03
  25. By: Fiorentini, Gabriele; Galesi, Alessandro; Sentana, Enrique
    Abstract: We generalise the spectral EM algorithm for dynamic factor models in Fiorentini, Galesi and Sentana (2014) to bifactor models with pervasive global factors complemented by regional ones. We exploit the sparsity of the loading matrices so that researchers can estimate those models by maximum likelihood with many series from multiple regions. We also derive convenient expressions for the spectral scores and information matrix, which allows us to switch to the scoring algorithm near the optimum. We explore the ability of a model with a global factor and three regional ones to capture inflation dynamics across 25 European countries over 1999-2014.
    Keywords: euro area; inflation convergence; spectral maximum likelihood; Wiener-Kolmogorov filter
    JEL: C32 C38 E37
    Date: 2015–03
  26. By: Marcel Boyer
    Abstract: I characterize and discuss the challenges and pitfalls we must face to grow out for good of recent and future financial crises and economic recessions. I propose a brief history of the 2008 crisis and insist on the loss of confidence within the banking and financial sector, which propagated later to the real sector. I discuss the factors underlying this loss of confidence: the failure of the Federal Reserve Board to abide by its mission; the ill-advised political interventions in mortgage markets; the leniency of (captured) financial regulators; the faulty risk management mechanisms in the banking sector; and the omnipresence of poorly designed compensation systems in the banking and financial sector. I also discuss the ways to rebuild confidence and move out of a bad and stable economic equilibrium. Considering data on gross job creation and loss in the US private sector, I challenge the sorcerer’s apprentices’ plan for reforming capitalism and I recall the key role played by creative destruction. I suggest that government deficits and economic growth are not good friends, offering a reference to the Canadian experience of the two decades 1985-2005. Finally, I discuss fiscal and regulatory reforms and propose a set of redefined roles for public/governmental and competitive/private sectors in generating a more prosperous economy. <P>Je caractérise les défis et écueils auxquels nous devons faire face pour sortir pour de bon des crises financières et récessions économiques. Je propose une brève histoire de la crise de 2008 et insiste sur la perte de confiance au sein du secteur bancaire et financier, qui s’est propagée plus tard au secteur réel. Je présente les facteurs-clés de la crise: la défaillance du Federal Reserve Board dans la poursuite de sa mission; les interventions politiciennes dans le marché hypothécaire; la complaisance des régulateurs; la faiblesse des mécanismes de gestion de risques au sein du système bancaire; et l’omniprésence dans le secteur bancaire et financier de systèmes de rémunération mal conçus. Je discute des moyens de rétablir la confiance et de se sortir d'un équilibre économique mauvais mais stable. Considérant les données brutes sur la création et la perte d'emplois dans le secteur privé américain, je nous mets en garde contre les apprentis-sorciers en mal de réformer le capitalisme et je rappelle le rôle-clé de la destruction créatrice. Je suggère que les déficits publics et la croissance économique ne sont pas de bons comparses, donnant en référence l'expérience canadienne de la période 1985-2005. Enfin, je discute des réformes fiscales et réglementaires et je propose des rôles renouvelés des secteurs public/gouvernemental et privé/concurrentiel dans le façonnement d’une économie plus prospère.
    Keywords: Financial crisis, confidence, creative destruction, fiscal reform, prudential systemic regulation, competitive social-democracy, Crise financière, confiance, destruction créatrice, réforme fiscale, réglementation systémique prudentielle, social-démocratie concurrentielle
    Date: 2015–01–01
  27. By: Bulow, Jeremy (Stanford University); Klemperer, Paul (University of Oxford)
    Abstract: We propose a new form of hybrid capital for banks, Equity Recourse Notes (ERNs), which ameliorate booms and bust by creating counter-cyclical incentives for banks to raise capital, and so encourage bank lending in bad times. They avoid the flaws of existing contingent convertible bonds (cocos)--in particular, they convert more credibly--so ERNs also help solve the too-big-to-fail problem: rather than forcing banks to increase equity, we should require the same or larger capital increase but permit it to be in the form of either equity or ERNs--this also gives some choice to those who claim (rightly or wrongly) that equity is more costly than debt. ERNs can be introduced within the current regulatory system, but also provide a way to reduce the existing system's heavy reliance on measures of regulatory-capital.
    Date: 2014–07

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