nep-cba New Economics Papers
on Central Banking
Issue of 2015‒03‒22
thirty-two papers chosen by
Maria Semenova
Higher School of Economics

  1. Uncertainty and the Signaling Channel of Monetary Policy By Jenny Tang
  2. Monetary Policy with Ambiguity Averse Agents By Riccardo M. Masolo; Francesca Monti
  3. The Limits of Monetary Policy Under Imperfect Knowledge By Marc Giannoni; Bruce Preston; Stefano Eusepi
  4. Bank Equity and Macroprudential Policy By Keqing Liu
  5. A critique of full reserve banking By Sheila Dow; Guðrún Johnsen; Alberto Montagnoli
  6. Comparison of monetary policy effects on lending channel in EMU and non-EMU countries: Evidence from period 1999-2012 By Tomáš Heryán; Iveta PaleÄková; Nemanja Radić
  7. Contemporary monetary policy in China: A move towards price-based policy? By Nuutilainen, Riikka
  8. Can the Provision of Long-Term Liquidity Help to Avoid a Credit Crunch? Evidence from the Eurosystem's LTROs. By P. Andrade; C. Cahn; H. Fraisse; J-S. Mésonnier
  9. Empirical Properties of Inflation Expectations and the Zero Lower Bound By Mirko Wiederholt
  10. Monetary policy transmission in China: A DSGE model with parallel shadow banking and interest rate control By Funke, Michael; Mihaylovski, Petar; Zhu, Haibin
  11. Target Controllability and Time Consistency: Complement to the Tinbergen Rule By Huiping Yuan; Stephen M. Miller
  12. 'Sudden Floods, Macroprudential Regulation and Stability in an Open Economy' By Pierre-Richard Agénor; K. Alper; L. Pereira da Silva
  13. Revisiting Bank of Japan’s Policy Duration Commitment: Impact, Consequences and Challenges By Tomohiro Kinoshita
  14. Sovereign Debt, Bail-Outs and Contagion in a Monetary Union By Eijffinger, S.C.W.; Kobielarz, M.L.; Uras, R.B.
  15. How insurers differ from banks: a primer on systemic regulation By Christian Thimann
  16. Euro-Dollar Polarixation and Heterogeneity in Exchange Rate Pass-Throughs Within the Euro Zone By Mariarosaria Comunale
  17. New Evidence on the Impact of Financial Crises in Advanced Countries By Christina D. Romer; David H. Romer
  18. Effect of bank capital requirements on economic growth By Natalya Martynova
  19. The Flattening of the Phillips Curve and the Learning Problem of the Central Bank By Jean-Paul L'Huillier; William R. Zame
  20. Evolution of the Monetary Transmission Mechanism in the US: The Role of Asset Returns By Beatrice D. Simo-Kengne; Stephen M. Miller; Rangan Gupta
  21. Dynamic Effect of a Change in the Exchange Rate System: From a Fixed Regime to a Basket-Peg or a Floating Regime By Yoshino, Naoyuki; Kaji, Sahoko; Asonuma, Tamon
  22. Gambling for Redemption and Self-Fulfilling Debt Crises By Juan Carlos Conesa; Timothy J. Kehoe
  23. Oil price shocks and domestic inflation in Thailand By Jiranyakul, Komain
  24. Prolonged Reserves Accumulation, Credit Booms, Asset Prices and Monetary Policy in Asia By Andrew J. Filardo, Pierre L. Siklos
  25. Financial Frictions and Reaction of Stock Prices to Monetary Policy Shocks By Ali Ozdagli
  26. The Reserve Bank's method of estimating "potential output" By Ashley Lienert; David Gillmore
  27. The Changing Role of the Exchange Rate for Macroeconomic Adjustment By Patrice Ollivaud; Elena Rusticelli; Cyrille Schwellnus
  28. U.S. macroeconomic and regulatory developments and emerging market economies By Musalem, Alberto G.
  29. European Central Bank quantitative easing: the detailed manual By Grégory Claeys; Alvaro Leandro; Allison Mandra
  30. Capital Flows and Domestic and International Order: Trilemmas from Macroeconomics to Political Economy and International Relations By Michael Bordo; Harold James
  31. Assessing the Evidence of Macro- Forecaster Herding: Forecasts of Inflation and Output Growth By Michael P Clements
  32. Central bank intervention in large value payment systems: An experimental approach By Peter Heemeijer; Ronald Heijmans

  1. By: Jenny Tang (Harvard University)
    Abstract: This paper studies optimal monetary policy in an environment where policy actions provide a signal of economic fundamentals to imperfectly informed agents. I derive the optimal discretionary policy in closed form and show that, in contrast to the perfect information case, the signaling channel leads the policymaker to be tougher on inflation. The strength of the signaling effect of policy depends on relative uncertainty levels. As the signaling effect strengthens, the optimal policy under discretion approaches that under commitment to a forward-looking linear rule, thereby decreasing the stabilization bias. This contributes to the central bank finding it optimal to withhold its additional information from private agents. Under a general linear policy rule, inflation and output forecasts can respond positively to a positive interest rate surprise when the signaling channel is strong. This positive response is the opposite of what standard perfect information New Keynesian models predict and it matches empirical patterns found by Romer and Romer (2000) and Campbell, Evans, Fisher, and Justiniano (2012). In addition, I substantiate the existence of a signaling channel by providing new empirical evidence supporting the predicted interaction between uncertainty and the responses of inflation forecasts to interest rate surprises.
    Date: 2014
  2. By: Riccardo M. Masolo (Bank of England); Francesca Monti (Bank of England; Centre for Macroeconomics (CFM))
    Abstract: We study a prototypical new-Keynesian model in which agents are averse to ambiguity, and where the ambiguity regards the monetary policy rule. We show that ambiguity has important effects even in steady state, as uncertainty about the policymaker’s response function affects the rest of the model via the consumption-saving decision. A reduction in ambiguity - e.g. due to credible monetary policy actions and communications - results in a fall in inflation and the policy rate, and an increase in welfare. Moreover while, absent ambiguity, the policymaker’s actual responsiveness to inflation does not matter as long as the Taylor principle is satisfied, in the face of ambiguity the exact degree to which the central bank responds to inflation regains importance. Indeed, a high degree of responsiveness to inflation mitigates the welfare costs of ambiguity. We also present various results regarding the optimal choice of an inflation target, both when ambiguity is given and when assuming the policymaker can affect ambiguity with increased transparency and communications.
    Keywords: Ambiguity, aversion, monetary policy
    JEL: D84 E31 E43 E52 E58
    Date: 2015–03
  3. By: Marc Giannoni (Federal Reserve Bank of New York); Bruce Preston (Monash University); Stefano Eusepi (Federal Reserve Bank of New York)
    Abstract: The modern theory of monetary policy emphasizes the management of expectations. In New Keynesian models frequently used for policy evaluation it is well understood that it is not so much the current interest rate, but instead anticipated movements in future interest rates that are central to aggregate demand management. Movements in current and future expected interest rates are linked through arbitrage relationships. Through the appropriate choice of current interest rates, good policy seeks to have these expectations evolve in a way that achieves the most desirable short-run trade-off between inflation and the output gap. <P> An important question then is whether the efficacy of monetary policy is compromised when current interest-rate movements are not efficiently transmitted to various longer-term interest rates relevant to spending and pricing plans of agents in the economy. Is the potency of monetary policy diminished when there is imprecise control of interest-rate expectations? <P> The central focus of this paper are the consequences of imperfect knowledge for monetary control. Under rational expectations, optimal policy prescribes that the nominal interest rate should track the evolution of the natural rate of interest, which in our framework embeds (exogenous) fluctuations in productivity, propensity to work and government spending. Importantly, optimal policy under perfect knowledge can fully stabilize output gap and inflation (the well known divine coincidence). The key result of the paper is that under imperfect knowledge and learning the efficacy of monetary policy can be drastically reduced. It is shown that imperfect knowledge prevents full stabilization of output gap and inflation, even for optimal monetary policy that accounts for imperfect knowledge. More precisely, a policy-maker who knows the structure of the economy and has full information about private agents' expectations formation process will not be able to achieve full economic stability. Optimal monetary policy has the property that the evolution of beliefs is managed in exactly the right way to ensure a bounded equilibrium consistent with maximization of households' welfare. In this sense the economy is stable: it has unique bounded state-contingent evolution for all endogenous variables given bounded stochastic disturbance processes. But this does not necessarily imply that drifting beliefs are not problematic for the transmission of monetary policy. <P> Under imperfect knowledge optimal policy prescribes slow adjustments in current interest-rate policy in response to evolving macroeconomic conditions to limit excess volatility in long-term rates. Changes in current interest rates lead to revisions of beliefs about future interest rates, albeit with a lag due to learning dynamics. The revisions in beliefs in turn feedback on the state of aggregate demand in subsequent periods. Aggressive adjustment of current interest rates, which would promote full stabilization under perfect knowledge, cause excessive movements in long-rates and macroeconomic volatility. Potential instability in long-term interest rates constrains the degree to which current monetary policy can respond to evolving economic conditions. In other words the link between short-term interest setting, and the evolution of long-term interest rates is much weaker under imperfect knowledge than under rational expectations. <P> The results in the paper have two main implications for current monetary policy debate. First, the past recession is widely believed to be caused by a `demand' shock, lowering both the output-gap and inflation. However, despite the monetary stimulus provided by central banks in the form low interest rates from conventional and unconventional policies, the recovery in US and in other countries remains sluggish. Consequently monetary authorities have been criticized for `not doing enough'. This paper suggests that the observed gradual adjustment is not inconsistent with policy being set optimally once we take into account of market participants' uncertainty about economic fundamentals. Second, the paper offers an alternative rationale for gradualism in monetary policy even in normal times, as reflected by high interest smoothing coefficients that are usually found in estimated Taylor rules.
    Date: 2014
  4. By: Keqing Liu (Department of Economics, University of Exeter)
    Abstract: We investigate a new macroprudential policy in a DSGE model with fi?nancial frictions. As Gertler, Kiyotaki and Queralto (2012), we propose to subsidize bank equities. However, our tax rate is different from their policy. The tax rate in our macroprudential policy is proportional to capital ratio gap while it is proportional to the shadow price of bank deposit in Gertler et al. (2012). Our policy has two advantages: Firstly, because bank?s balance sheet structure is observable target for central bank, our policy is more applicable for practical policy design. Secondly, our policy makes individual banks choose to raise more capital. While it tightens the moral hazard constraint, the policy could raise the future value of investment and it shows the modi?fied policy is welfare dominant.
    Keywords: Macroprudential policy, Bank equity, Capital ratio, DSGE model
    JEL: C61 E61 G28
    Date: 2015
  5. By: Sheila Dow (Department of Economics, University of Stirling & University of Victoria); Guðrún Johnsen (University of Iceland); Alberto Montagnoli (Department of Economics, University of Sheffield)
    Abstract: Proposals for full reserve banking have been put forward as a radical way of preventing further financial crises. They rest on the argument that crises are caused by excessive money supply growth brought about by inadequately controlled bank credit creation. Our aim is to provide a critique of the theoretical assumptions underlying the plans for full reserve banking. In particular some of the plans rely on the view that the money supply is a key causal variable and that it is feasible for central banks to identify and enforce an optimal quantity. Second, the plans all rely on an unsupported confidence in the efficiency of financial markets outside the centrally controlled banking system. Third, by removing profit-making opportunities from banks, the proposals may unduly tip the balance further in favour of shadow banking. Finally, as the case of 95% liquidity requirements on Kaupthing, Singer and Friedlander in the wake of the Great Financial Crash shows that modern financial engineering makes such policy-making difficult to execute. A Minskyan analysis rather emphasises the inherent instability of the financial system such that it is subject to systemic crises and the indeterminacy of demand for liquidity, while also emphasising the contribution prudent banking can make to financing economic activity and providing a safe money asset. While a return to a traditional separation of retail banking (regulated and supported by the central bank) from investment banking (regulated differently but not supported) would contribute to financial stability, it is argued that the full reserve banking proposals go too far.
    Keywords: bank regulation, full reserve banking
    JEL: E5 G21 G28
    Date: 2015–03
  6. By: Tomáš Heryán (Department of Finance and Accounting, School of Business Administration, Silesian University); Iveta PaleÄková (Department of Finance and Accounting, School of Business Administration, Silesian University); Nemanja Radić (The Business School, Middlesex University, The Burroughs, London NW4 4BT)
    Abstract: Current study has focused on the bank lending channel of monetary transmission in EU countries. The aim of the paper is to carry out an empirical investigation of the bank lending channel of monetary transmission in EMU and non-EMU countries. As estimation method we use GMM model with pooled annual data as it was used in previous studies. Our estimation period is from 1999 to 2012. Contribution of the study is in three major ways: (i) we investigated independently panel of EMU and non-EMU countries; (ii) we examined the interaction terms between the bank characteristics and both monetary policy indicators, shortterm interest rates and monetary aggregate M2; (iii) we discussed about possible quantitative easing by the European Central Bank. We have proved some differences between the bank lending channels of monetary transmission of both, the EMU and non-EMU. It has also been proved a higher impact of M2 development than a development of short-term interest rates. Finally, there are definitely some monetary policy implications, too.
    Keywords: monetary policy, bank landing channel, EMU countries, non-EMU countries, GMM
    JEL: E52 C51
    Date: 2015–03–17
  7. By: Nuutilainen, Riikka (BOFIT)
    Abstract: This paper focuses on monetary policy in China. A set of different specifications for the monetary policy reaction function are empirically evaluated using monthly data for 1999––2012. Variation is allowed both in the policy targets as well as in the monetary policy instrument itself. Overall, the performance of the estimated policy rules is surprisingly good. Chinese monetary policy displays countercyclical reactions to inflation and leaning-against-the-wind behaviour. The paper shows that there is a notable increase in the overall responsiveness of Chinese monetary policy over the course of the estimation period. The central bank interest rate is irresponsive to economic conditions during the earlier years of the sample but does respond in the later years. This finding supports the view that the monetary policy settings of the People's Bank of China have come to place more weight on price-based instruments. A time-varying estimation procedure suggests that the two monetary policy objectives are assigned to different instruments. The money supply instrument is utilised to control the price level and (after 2008) the interest rate instrument has been used to achieve the targeted output growth.
    Keywords: China; Monetary policy; Taylor rule; McCallum rule
    JEL: E52 E58
    Date: 2015–03–12
  8. By: P. Andrade; C. Cahn; H. Fraisse; J-S. Mésonnier
    Abstract: We exploit the Eurosystem’s longer-term refinancing operations (LTROs) of 2011-2012 to analyze the effects that a large provision of central bank liquidity to banks has on the credit supply to firms. We control for credit demand by examining firms that borrow from several banks, in addition to controlling for banks’ risk. We find that LTROs enhanced loan supply in France. Nevertheless, the transmission took place mostly with the first operation of December 2011, in which constrained banks bid more, and larger borrowers benefited more. The opportunity to substitute long-term central bank borrowing for short-term borrowing was instrumental in this transmission.
    Keywords: unconventional monetary policy, bank lending channel, euro area, LTRO, credit supply.
    JEL: C21 E51 G21 G28
    Date: 2015
  9. By: Mirko Wiederholt (Goethe University Frankfurt)
    Abstract: Survey data on expectations shows that households have heterogeneous inflation expectations and their inflation expectations respond sluggishly to realized shocks to future inflation. By contrast, in models with a zero bound on the nominal interest rate currently used for monetary and fiscal policy analysis, households' inflation expectations are not heterogeneous and not sticky. This paper solves a New Keynesian model with a zero lower bound in which households have dispersed information. Households' inflation expectations are heterogeneous and sticky. The main properties of the model are: (1) the deflationary spiral in bad states of the world is less severe than under perfect information, (2) central bank communication (without a change in current or future policy) affects consumption and the sign of this effect depends on whether the zero lower bound is binding, i.e., an announcement that increases consumption when the zero lower bound is not binding reduces consumption when the zero lower bound is binding, (3) a commitment to future inflation can reduce consumption, (4) the government spending multiplier can be negative, and (5) shocks to uncertainty can have first-order effects.
    Date: 2014
  10. By: Funke, Michael (BOFIT); Mihaylovski, Petar (BOFIT); Zhu, Haibin (BOFIT)
    Abstract: The paper sheds light on the interplay between monetary policy, the commercial banking sector and the shadow banking sector in mainland China by means of a nonlinear stochastic general equilibrium (DSGE) model with occasionally binding constraints. In particular, we analyze the impacts of interest rate liberalization on monetary policy transmission as well as the dynamics of the parallel shadow banking sector. Comparison of various interest rate liberalization scenarios reveals that monetary policy results in increased feed-through to the lending and investment under complete liberalization. Furthermore, tighter regulation of interest rates in the commercial banking sector in China leads to an increase in loans provided by the shadow banking sector.
    Keywords: DSGE model; monetary policy; financial market reform; shadow banking; China
    JEL: E32 E42 E52 E58
    Date: 2015–03–09
  11. By: Huiping Yuan (Department of Finance, Xiamen University); Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas)
    Abstract: The Tinbergen Rule states that achieving the desired targets requires an equal number of instruments. This paper shows that time inconsistency does not exist in the case of an equal number of instruments and targets. Target uncontrollability and time inconsistency, however, emerge as problems in the case of fewer instruments than targets. In this case, we obtain a necessary and sufficient condition for joint asymptotic controllability of target values, which complements the Tinbergen rule. The condition is identical under commitment and under discretion. If the condition does not hold, the steady-state values of target variables regress to their respective target values. The paper solves both problems by determining the central bank’s target values of inflation and output as well as the relative weight between stabilizing inflation and output. Intuitively, a proper target value trade-off solves target uncontrollability, whereas a proper relative weight achieves optimal target variability trade-off and solves time inconsistency. As a result, target values are controllable, establishing monetary policy credibility. Discretionary policy under the designed loss function, which replicates optimal policy under the social loss function, proves time-consistent. In addition, we identify two situations where the delegated weight equals the social weight, providing additional insight into time inconsistency.
    Keywords: Target controllability; Time inconsistency; Optimal policy; Discretionary policy; Trade-off
    JEL: E52 E58
    Date: 2014–12
  12. By: Pierre-Richard Agénor; K. Alper; L. Pereira da Silva
    Abstract: The performance of a countercyclical reserve requirement rule is studied in a dynamic stochastic model of a small open economy with financial frictions, imperfect capital mobility, a managed float regime, and sterilized foreign exchange market intervention. Bank funding sources, domestic and foreign, are imperfect substitutes. The model is calibrated and used to study the effects of a temporary drop in the world risk-free interest rate. Consistent with stylized facts, the shock triggers an expansion in domestic credit and activity, asset price pressures, and a real appreciation. A credit-based reserve requirement rule helps to mitigate both macroeconomic and financial volatility, with the latter defined both in terms of a narrow measure based on the credit-to-output ratio, the ratio of capital flows to output, and interest rate spreads, and a broader measure that includes real asset prices as well. An optimal rule, based on minimizing a composite loss function, is also derived. Sensitivity tests, related to the intensity of sterilization, the degree of exchange rate smoothing, and the rule used by the central bank to set the cost of bank borrowing, are also performed, both in terms of the transmission process and the optimal rule.
    Date: 2015
  13. By: Tomohiro Kinoshita (National Graduate Institute for Policy Studies)
    Abstract: Forward guidance or more specifically policy duration commitment invented and developed by the Bank of Japan has become an essential part of unconventional monetary policy instruments employed by modern central banks. This paper’s simple empirical analysis finds that the market believes or perceives Bank of Japan’s policy duration commitment to be credible, which has in turn helped the Bank to manage expectations of future interest rates and control the level and shape of the yield curve at an extraordinarily low range. The suppressed yield curve has contributed to reduction of financing costs for businesses and households and has supported macroeconomic growth through the conventional interest rate channel of policy transmission. However, forward guidance including policy duration commitment does have difficulties. The magnitude of its impact has been time-variant, which appears to depend on evolution in policy frameworks and communication skills. More importantly, this paper projects that the extraordinarily low and flattened yield curve coupled with maturity extension of the Bank assets could pose threats to the future income of the central bank in the event of policy normalization, which could have unintended fiscal implications.
    Date: 2015–03
  14. By: Eijffinger, S.C.W. (Tilburg University, Center For Economic Research); Kobielarz, M.L. (Tilburg University, Center For Economic Research); Uras, R.B. (Tilburg University, Center For Economic Research)
    Abstract: 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<br/>economy over the period of 1998 to 2012.
    Keywords: EMU; sovereign debt crisis; contagion; bail-out; interest rate spread
    JEL: F33 F34 F36 F41
    Date: 2015
  15. By: Christian Thimann
    Abstract: This paper aims at providing a conceptual distinction between banking and insurance with regard to systemic regulation. It discusses key differences and similarities as to how both sectors interact with the financial system. Insurers interact as financial intermediaries and through financial market investments, but do not share the features of banking that give rise to particular systemic risk in that sector, such as the institutional interconnectedness through the interbank market, the maturity transformation combined with leverage, the prevalence of liquidity risk and the operation of the payment system. The paper also draws attention to three salient features in insurance that need to be taken account in systemic regulation: the quasi-absence of leverage, the fundamentally different role of capital and the ‘built-in bail-in’ of a significant part of insurance liabilities through policy-holder participation. Based on these considerations, the paper argues that if certain activities were to give rise to concerns about systemic risk in the case of insurers, regulatory responses other than capital surcharges may be more appropriate.
    JEL: F3 G3
    Date: 2014–07–23
  16. By: Mariarosaria Comunale (Economics Department, Bank of Lithuania)
    Abstract: This paper provides an empirical study of the asymmetrical spillovers of the euro-US dollar exchange rate on the inflation in the euro zone, dividing the sample in two groups of countries: core and periphery. Then we test if the euro-US dollar exchange rate is still able to give a different impact on the groups’ performance as in the past US dollar-deutschmark polarization phenomenon studying the intra-euro area differences in exchange rate passthrough (ERPT), as an important element of inflation dynamics. Using a dynamic panel data framework based on an exchange rate pass-through model, we estimate the elasticities of the two groups by system IV-GMM and the common correlated effects mean group estimator, which deals with the presence of cross-sectional dependence. We conclude that the euro-US dollar is still an important factor, but not the only key factor, in determining the asymmetry in HICP inflation between core and periphery. The nominal effective exchange rate instead is an important driver for the inflation, but only considering the euro zone as a whole. The EMU seems to not have insulated enough some member countries from nominal external shocks. The nominal effective exchange rate is also a factor to take into account in order to analyze the recent low inflation in the euro zone, even if the size of the ERPT is relatively small.
    Keywords: Exchange Rate Pass-Through, Dynamic Panel Data, Inflation, Exchange Rates, European Monetary Union, Cross-sectional dependence
    JEL: C33 E31 F31 F36 F41
    Date: 2015–03–13
  17. By: Christina D. Romer; David H. Romer
    Abstract: This paper examines the aftermath of financial crises in advanced countries in the four decades before the Great Recession. We construct a new series on financial distress in 24 OECD countries for the period 1967–2007. The series is based on assessments of the health of countries’ financial systems from a consistent, real-time narrative source; and it classifies financial distress on a relatively fine scale, rather than treating it as a 0-1 variable. We find that output declines following financial crises in modern advanced countries are highly variable, on average only moderate, and often temporary. One important driver of the variation in outcomes across crises appears to be the severity and persistence of the financial distress itself.
    JEL: E32 E44 G01 N10 N20
    Date: 2015–03
  18. By: Natalya Martynova
    Abstract: This paper reviews studies exploring how higher bank capital requirements affect economic growth. There is little evidence of a direct effect; research focuses on the indirect effects of capital requirements on credit supply, bank asset risk, and cost of bank capital, which in turn can affect economic growth. Banks facing higher capital requirements can reduce credit supply as well as decrease credit demand by raising lending rates which may slow down economic growth. However, having better-capitalized banks enhances financial stability by reducing bank risk-taking incentives and increasing banks' buffers against losses.
    Keywords: bank capital requirement; credit growth; financial stability; economic growth; cost of equity
    JEL: G21 G28
    Date: 2015–03
  19. By: Jean-Paul L'Huillier (EIEF); William R. Zame (University of California, Los Angeles)
    Abstract: We illustrate an intuitive channel through which price stickiness limits the ability of a central bank to improve welfare through stabilization policy. If the central bank uses infl ation to obtain information about nominal spending, sticky prices impair the learning ability of the central bank and hence its ability to implement the right stabilization policy. Infl ation targeting makes prices stickier, and worsens this learning problem. The key is a microfounded information-based model for price stickiness: taking into account how agents react to the adoption of infl ation targeting makes explicit a basic confl ict between in flation targeting and stabilization policy.
    Date: 2015
  20. By: Beatrice D. Simo-Kengne (Department of Economics, University of Pretoria); Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas); Rangan Gupta (Department of Economics, University of Pretoria)
    Abstract: This paper investigates whether changes in the monetary transmission mechanism as captured by the interest rate respond to variations in asset returns. We distinguish between low-volatility (bull) and high-volatility (bear) markets and employ a TVP-VAR approach with stochastic volatility to assess the evolution of the interest rate in relation to housing and stock returns. We measure the relative importance of housing and stock returns in the movements of the interest rate and their possible feedback effects over both time and horizon and across regimes. Empirical results from annual data on the US spanning the period from 1890 to 2012 indicate that the interest rate responds more strongly to asset returns during low-volatility (bull) regimes. While the bigger interest-rate effect of stock-return shocks occurs prior to the 1970s, the interest rate appears to respond more strongly to housing-return than stock return shocks after the 1970s. Similarly, a higher interest rate exerts a larger effect on both asset categories during low-volatility (bull) markets. Particularly, larger negative responses of housing return to interest-rate shocks occur after the 1980s, corresponding to the low-volatility (bull) regime in the housing market. Conversely, the stock-return effect of interest-rate shocks dominates before the 1980s, where stock-market booms achieved more importance.
    Keywords: Asset Prices, Monetary policy, housing return, stock return, TVP-VAR
    JEL: C32 E52 G10
    Date: 2014–12
  21. By: Yoshino, Naoyuki (Asian Development Bank Institute); Kaji, Sahoko (Asian Development Bank Institute); Asonuma, Tamon (Asian Development Bank Institute)
    Abstract: This paper theoretically evaluates the dynamic effects of a shift in an exchange rate system from a fixed regime to a basket peg, or to a floating regime, and obtains transition paths for the shift based on a dynamic stochastic general equilibrium model of a small open economy. We apply quantitative analysis using data from the People's Republic of China and Thailand and find that a small open country would be better off shifting to a basket peg or to a floating regime than maintaining a dollar-peg regime with capital controls over the long run. Furthermore, due to the welfare losses associated with volatility in nominal interest rates, the longer the transition period, the larger the benefits of shifting suddenly to a basket-peg regime from a dollar-peg regime than proceeding gradually. Regarding sudden shifts to desired regimes, the welfare gains are higher under a shift to a basket peg if the exchange rate fluctuates significantly. Finally, shifting to a managed-floating regime is less attractive than moving to a basket peg, as the interventions necessary to maintain the exchange rate for certain periods result in higher losses and the authority lacks monetary policy autonomy.
    Keywords: basket peg; floating regime; exchange rate transition; peoples republic of china; thailand; monetary policy; Finance
    JEL: F33 F41 F42
    Date: 2015–03–09
  22. By: Juan Carlos Conesa; Timothy J. Kehoe
    Abstract: We develop a model for analyzing the sovereign debt crises of 2010–2013 in the Eurozone. The government sets its expenditure-debt policy optimally. The need to sell large quantities of bonds every period leaves the government vulnerable to self-fulfilling crises in which investors, anticipating a crisis, are unwilling to buy the bonds, thereby provoking the crisis. In this situation, the optimal policy of the government is to reduce its debt to a level where crises are not possible. If, however, the economy is in a recession where there is a positive probability of recovery in fiscal revenues, the government may optimally choose to “gamble for redemption,” running deficits and increasing its debt, thereby increasing its vulnerability to crises.
    JEL: F34 G01
    Date: 2015–03
  23. By: Jiranyakul, Komain
    Abstract: This paper employ monthly data to examine the empirical relationship between oil price shocks and domestic inflation rate during 1993 and 2013. The results show that oil price, domestic or international, does not have the long-run impact on consumer prices. However, oil price shocks cause inflation to increase while oil price uncertainty does not cause an increase in inflation. Furthermore, inflation itself causes inflation uncertainty. The findings of this study encourage the monetary authorities to formulate a more accommodative policy to respond to oil price shocks.
    Keywords: Oil shocks, inflation, bivariate GARCH, causality
    JEL: E31 Q43
    Date: 2015–03
  24. By: Andrew J. Filardo, Pierre L. Siklos (Wilfrid Laurier University)
    Abstract: This paper examines past evidence of prolonged periods of foreign exchange reserves accumulation in the Asia-Pacific region. Several proxies for this unobserved variable are considered, including a newly proposed one based on a factor model. We focus on identifying periods of prolonged interventions and identify its key macro-financial determinants. Two broad conclusions emerge from the stylized facts and the econometric evidence. First, the best protection against costly reserves accumulation is a more flexible exchange rate. Second, the necessity to accumulate reserves as a bulwark against goods price inflation is misplaced. Instead, there is a strong link between asset price movements and the likelihood of accumulating foreign exchange reserves that are costly. Policy implications are also drawn.
    Keywords: foreign exchange reserves accumulation, monetary and financial stability
    JEL: F41 F32 E44 D52
    Date: 2015–02–01
  25. By: Ali Ozdagli (Federal Reserve Bank of Boston)
    Abstract: This paper reveals a new theoretical implication of the credit channel of monetary policy: the stock prices of financially more constrained firms are less responsive to monetary policy shocks. In order to study this implication, we use Enron scandal as an exogenous variation in the monitoring cost of the Arthur Andersen clients relative to other firms in a difference in differences framework. We find that Arthur Andersen clients have responded about 40 to 50 basis points less than other firms to a 10 basis point surprise reduction in federal funds target rate in the final days of the scandal, which is in line with the new implication of the credit channel.
    Date: 2014
  26. By: Ashley Lienert; David Gillmore (Reserve Bank of New Zealand)
    Abstract: Estimates of the "output gap" play a significant role in the thinking of inflation- targeting central banks. This note outlines how the Reserve Bank estimates the level of potential output and the output gap.facing small advanced economies, such as New Zealand.
    Date: 2015–03
  27. By: Patrice Ollivaud; Elena Rusticelli; Cyrille Schwellnus
    Abstract: Recent episodes of large exchange rate movements, such as for Japan or the United Kingdom, have typically not been associated with large changes in trade balances and despite the polarisation of international investment positions large currency fluctuations during the global crisis of 2008-09 did not cause significant financial dislocations. This paper presents empirical evidence that for a number of OECD countries firms’ increasing participation in global value chains may have contributed to reducing exchange rate pass-through to the terms of trade, which may in turn have contributed to reducing the response of trade balances to exchange rate changes. Further empirical evidence suggests that over the past two decades large net external debtor countries, including emerging market economies, have reduced net aggregate foreign currency exposures, thereby limiting direct financial effects of exchange rate fluctuations through the valuation of external assets and liabilities. However, sizable increases in foreign currency borrowing for a number of emerging market economies in the wake of the global crisis of 2008-09, including by non-financial corporations, suggest that large exchange rate movements may nonetheless cause financial stress for exposed sectors and entities that may percolate through the financial system despite limited aggregate exposures.<P>Changement du rôle du taux de change pour l'ajustement macroéconomique<BR>Les épisodes récents de mouvements importants du taux de change, comme pour le Japon ou le Royaume-Uni, n’ont pas été associés à des évolutions importantes des balances commerciales ; et malgré la polarisation des positions extérieures globales, les fluctuations importantes des monnaies durant la crise mondiale de 2008-2009 n’ont pas généré de perturbations financières significatives. Ce papier présente des éléments empiriques qui permettent de mettre en évidence que pour un certain nombre de pays de l’OCDE, la participation grandissante des entreprises aux chaines de valeurs mondiales semble avoir contribué à réduire le degré de transmission des taux de change aux termes de l’échange, ce qui pourrait avoir dans un second temps contribué à réduire la réponse des balances commerciales aux évolutions du taux de change. Les données empiriques suggèrent également que sur les deux dernières décennies, les pays avec une dette extérieure importante, y compris les économies de marché émergentes, ont réduit leurs expositions agrégées nettes aux monnaies étrangères, ce qui a par conséquent limité l’effet direct financier des fluctuations de taux de change qui passe par la valorisation des créances et engagements extérieurs. Cependant, des augmentations significatives des emprunts en monnaie étrangère pour un certain nombre d’économies de marché émergentes à la suite de la crise mondiale de 2008-2009, y compris de la part d’entreprises non financières, suggèrent que des mouvements importants de taux de change peuvent néanmoins provoquer des tensions financières pour des secteurs et des entités exposés, qui peuvent ensuite se propager à travers le système financier malgré une exposition totale limitée.
    Keywords: exchange rates, current account, financial account, currency mismatches, asymétrie des devises, compte courant, taux de change, compte financier
    JEL: F31 F32 F40
    Date: 2015–03–12
  28. By: Musalem, Alberto G. (Federal Reserve Bank of New York)
    Abstract: Remarks at the International Financial Conference Annual Meeting, Cartagena, Colombia.
    Keywords: patient; Taper Tantrum; emerging market economies (EMEs); Basel III; enhanced prudential standards
    JEL: E20 E52 F30
    Date: 2015–03–09
  29. By: Grégory Claeys; Alvaro Leandro; Allison Mandra
    Abstract: â?¢ The European quantitative easing programme, the Public Sector Purchase Programme (PSPP), started on 9 March 2015 and will last at least until September 2016. Purchases will be composed of sovereign bonds and securities from European institutions and national agencies. â?¢ The European Central Bank Governing Council imposed limits to ensure that the Eurosystem will not breach the prohibition on monetary financing. However, these limits will constrain the size and duration of the programme, especially if it is sustained after September 2016. The possibility for national central banks to also buy national agency securities could alleviate this, but the small number of eligible agencies could limit their role as a back-up purchase. â?¢ The Eurosystem should find other eligible agencies, especially in countries in which public debt is small, or waive the limits for countries respecting the investment grade eligibility criteria. The same issue arises with European institutions: their number and outstanding debt securities are limited. The waiver of the limits proposed for sovereigns should be applied to institutions with high ratings. â?¢ The PSPP profits that will ultimately be repatriated to national treasuries will be small. This was to be expected, given current very low yields. Profits will also come from the major increase in reserves resulting from the implementation of QE, combined with the negative deposit rates on excess reserves at the ECB.
    Date: 2015–03
  30. By: Michael Bordo; Harold James
    Abstract: This paper explains the problem of adjustment to the challenges of globalization in terms of the logic underpinning four distinct policy constraints or trilemmas, and their interrelationship, and in particular the disturbances that arise from capital flows. The analysis of a policy trilemma was developed first as a diagnosis of exchange rate problems (the incompatibility of free capital flows with monetary policy autonomy and a fixed exchange rate regime); but the approach can be extended. The second trilemma we describe is the incompatibility between financial stability, capital mobility and fixed exchange rates. The third example extends the analysis to politics, and looks at the strains in reconciling democratic politics with monetary autonomy and capital movements. Finally we examine the security aspect and look at the interactions of democracy with capital flows and international order. The trilemmas in short depict the way that domestic monetary, financial, economic and political systems are interconnected with the international. They can be described as the impossible policy choices at the heart of globalization. Frequently, the trilemmas conjure up countervailing anti-globalization tendencies and trends.
    JEL: E4 E6 N1
    Date: 2015–03
  31. By: Michael P Clements (ICMA Centre, Henley Business School, University of Reading)
    Abstract: We consider a number of ways of testing whether macroeconomic forecasters herd or anti-herd, i.e., whether they shade their forecasts towards those of others or purpose- fully exaggerate their differences. When applied to survey respondents expectations of inflation and output growth the tests indicate conflicting behaviour. We show that this can be explained in terms of a simple model in which differences between forecasters are primarily due to idiosyncratic factors or reporting errors rather than imitative behaviour. Models of forecaster heterogeneity that stress informational rigidities will also falsely indicate imitative behaviour.
    Date: 2014–10
  32. By: Peter Heemeijer; Ronald Heijmans
    Abstract: This experimental study investigates the behavior of banks in a large value payment system. More specifically, we look at 1) the reactions of banks to disruptions in the payment system and 2) the way banks behavior changes to incentives of the central bank. The game used in this experiment is a stylized version of a model of Bech and Garratt (2006) in which each bank can choose between paying in the morning (efficient) or in the afternoon (inefficient) and builds on the game by Abbink et al. (2010). The results show that a positive (bail out) or negative (punishment) incentive steers payments to the inefficient or efficient equilibrium, respectively. In contrast to our expectation, providing detailed information on disruptions steers payments towards the inefficient equilibrium.
    Keywords: payment systems; financial stability; experiment; decision making; central bank intervention
    JEL: C92 D70 D78 E58
    Date: 2015–03

This nep-cba issue is ©2015 by Maria Semenova. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.