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

  1. Does Basel III bring anything new? A comparison between capital accords Basel II and Basel III By Max Kubat
  2. How Cyclical Is Bank Capital? By Haubrich, Joseph G.
  3. THE MONETARY STABILITY AFTER THE FINANCIAL CRISIS* By Diana Raluca Diaconescu; Hortensia Paula Botezatu
  4. Escaping Expectations-Driven Liquidity Traps: Experimental Evidence By Luba Petersen; Jasmina Arifovic
  5. Effectiveness of Monetary Policy In Economies in Democratic Transition: Evidence from Tunisia By Guizani, Brahim
  6. Monetary Policy Responses to Foreign Financial Market Shocks: Application of a Modified Open-Economy Taylor Rule By Parinaz Ezzati
  8. Measuring financial stress – A country specific stress index for Finland By Huotari , Jarkko
  9. Exchange Rate Dynamics and Forecast Errors about Persistently Trending Fundamentals By Josh R. Stillwagon
  10. The Zero Lower Bound: Implications for Modelling the Interest Rate By Joshua C.C. Chan; Rodney Strachan
  11. Macroeconomic imbalances and institutional reforms in the EMU By Stefan Ederer
  12. Real Effective Exchange Rate Imbalances and Macroeconomic Adjustments: evidence from the CEMAC zone By Asongu, Simplice
  13. Financial Liberalization in the Developing Countries and Its Effect on Banking Systems and Banking Crises By Mehmet Okan TaÅŸar; SavaÅŸ Çevik
  14. Fisher Effect in Austria Causality Approach By Sami Taban; Tayfur Bayat; Ferit Önder
  15. Do Precious Metal Prices Help in Forecasting South African Inflation? By Mehmet Balcilar; Nico Katzke; Rangan Gupta
  16. Measuring Systemic Risk: Robust Ranking Techniques Approach By Amirhossein Sadoghi
  17. Real Exchange Rate Determination and the China Puzzle By Rod Tyers; Ying Zhang

  1. By: Max Kubat (University of Economics, Prague)
    Abstract: Basel Accords represent the most important documents of banking supervision. Basel II came into force almost at the same time as the financial crisis set in. Relatively soon after this, the work on the new capital accord known as Basel III was initiated. The question is whether the new agreement brings something really principally different from Basel II, or whether it is just a tool to reassure the public and markets with some form of stricter requirements. Basel Committee is based on G-20 countries representation. Introduction contains a brief explanation of how the Basel capital accords are reflected in European law. The first part of the article explains core principles of Basel II with several possible explanations of its failure. The second part clarifies the main principles of Basel III and compares them with Basel II. The criterion for comparison is search for fundamental distinctions between the introduced tools. From five monitored areas (definition of capital, capital requirements, risk coverage, leverage ratio, liquidity management) three of them meet this criterion. The redefinition of capital means only better clarification and unification of definitions. The risk coverage part focuses on technical issues, but no new risks are perceived. There is a significant change about new capital requirements. Two new buffers are requested. While previous capital requirement were based on direct connection with risks, the connection between capital conservation buffer and countercyclical buffer is only indirect to measured risks. Also the leverage ratio and liquidity management bring new tools and thus principle change. There is a significant change in leverage ratio that brings a new tool which is not based on risk. It makes the calculation easier and should avoid cheating in capital manipulation. Liquidity management is a completely new part of banking regulation measures, therefore there is nothing to compare with Basel II.
    Keywords: Basel capital accords; Basel II; Basel III; capital requirements; capital adequacy
    JEL: L51 F02 G28
    Date: 2014–05
  2. By: Haubrich, Joseph G. (Federal Reserve Bank of Cleveland)
    Abstract: The alleged pro-cyclicality of bank capital (high in good times, low in bad) has received some blame for the recent financial crisis. Others blame the countercyclicality of capital regulations: too low in high times and too high in bad. To address this problem, Basel III has introduced countercyclical capital buffers for large banks. But just how cyclical is bank capital? We look at the question from several vantage points, using both detailed recent data on risk-weighted assets and several sources of annual data going back to 1834. To help understand the historical data, we provide a short summary of capital concepts and regulation from early America to the present.
    JEL: E32 G21 G28 N20
    Date: 2015–03–19
  3. By: Diana Raluca Diaconescu (West University of Timisoara, Faculty of Economics and Businesses Administration); Hortensia Paula Botezatu (West University of Timisoara, Faculty of Economics and Businesses Administration)
    Abstract: Great inflation observed during the period 1965-1984 is the event final monetary (monetary climate the event) in the twentieth century (Meltzer, 2005). Three types of explanations have been developed - all highlighting the importance of monetary policy:• Defects in the institutional and governance at origin sitting temporal incoherence (Barro – Gordon model);• Monetary policy errors committed in an unconscious: it would have been too lax, or because the authorities have overestimated potential output growth (Orphanides, 2003) or because there has been insufficient attention to anchor expected inflation (Clarida , Gali and Gertler, 1999); However, combined with a sharp drop in productivity undoubtedly led to accelerating inflation persistence (Collard and Dallas, 2007);• Monetary policy errors committed in a conscious, namely the adoption by the authorities of a non-monetary approach to inflation; this is the result of an analysis of the experience of the United Kingdom and the United States (Nelson, 2005; DiCecio and Nelson, 2009).Inflation dynamics has seen a change in the early eighties, with the change that had profound monetary policy. After the Volcker experience, central bank reaction to inflation shocks became more aggressive. In this context, central banks have not hesitated to increase real interest rates to prevent triggering an inflationary spiral and the emergence of second round effects. For example, a sudden drop in inflation in the United States in the early eighties could be explained by EDF aggressive response to inflation shocks combined with lesser technological shocks (Carlström, and Paustian Fuerst, 2009).
    Keywords: Monetary stability, financial stability, supervision, macro prudential policies
    JEL: E52 E50 E49
    Date: 2014–10
  4. By: Luba Petersen (Simon Fraser University); Jasmina Arifovic (Simon Fraser University)
    Abstract: Can monetary or fiscal policy stabilize expectations in a liquidity trap? We study expectation formation near the zero lower bound using a learning-to-forecast laboratory experiment. Monetary policy targets inflation around a constant or state-dependent target. Subjects’ expectations significantly over-react to stochastic aggregate demand shocks and historical information leading many economies to experience severe deflationary traps. Neither quantitative nor qualitative communication of inflation targets reduce the duration or severity of economic crises. A stronger initial recovery of fundamentals or supplementary anticipated fiscal stimulus stabilizes expectations and increases the speed of macroeconomic recovery.
    Keywords: experimental macroeconomics, monetary policy, expectations, zero lower bound, learning to forecast, communication
    JEL: C92 E2 E52 D50 D91
    Date: 2015–03–14
  5. By: Guizani, Brahim
    Abstract: This paper aims to contribute to the meager literature on monetary policy effectiveness in Tunisia especially after the revolution of January 2011; a period during which the country entered a delicate democratization transition. On the basis of a monthly data of several macroeconomic variables during the period from 2000 through 2013 a Vector Error Correction (VEC) model is estimated. The VEC-generated impulse response functions show that the monetary policy stance, as measured by the short-term interest rate, has become increasingly more effective on real output and prices during the post-revolution period; i.e., (2011 – 2013) than the previous period; i.e., (2000 – 2010). The variance decomposition analysis not only confirms these findings but also it points out an increasing role to the real output in price variation during the political transitional period. This might be attributed to the increasing volatile environment that characterized this period, which perturbed the aggregate supply and exacerbated the aggregate demand. Another no less important finding uncovered by the model is the amplification and acceleration of the exchange rate pass-through during the transitional period with respect the pre-revolution period.
    Keywords: monetary policy, Vector Error Correction Model, impulse response function, variance decomposition, Exchange rate Pass-Through.
    JEL: E52 E58
    Date: 2015–03–20
  6. By: Parinaz Ezzati (Business School, University of Western Australia)
    Abstract: With world economies facing increasing financial liberalization and financial crisis, the question raised is whether and how monetary authorities in various economies have responded to foreign financial shocks? In this paper, the focus of the question is directed at Iran, which will be examined through a modified open-economy Taylor Rule that considers foreign financial shocks from Saudi Arabia and Kuwait, representing the Middle East, and the U.S., Germany, and Japan, representing the rest of the world. Results suggest that although Iran’s monetary policy does not fit the Taylor Rule, it has responded to some foreign financial level and volatility shocks over the period of study, 1997-2013. Findings in this paper, following earlier findings in Ezzati (2013a) and (2013b), indicate that Iran’s monetary policy has not been completely based on economic changes and macroeconomic influences, but has been based more on controversial political concerns.
    Date: 2014
  7. By: Lucian Ciprian Crisan (Faculty of Economics and Business Administration)
    Abstract: Stress testing has become an essential and very prominent tool in the analysis of financial sector stability and development of financial sector policy. Starting with 2010 stress test led by the Committee of European Banking Supervisors (CEBS), and reinforced by 2011 stress test and the bank recapitalization exercise led by the European Banking Authority (EBA), the output of EU wide stress tests has been viewed as essential information on the health of the system.The purpose of this paper is to highlight the main elements considered by the EBA and European Central Bank (ECB) in creating the model of the stress test. At the same time it will highlight how the recent financial crisis has influenced the introduction of these decisions in order to stabilize the banking system. The vision of a future banking union will reshape and resize the entire European system profile. Applying stress test will lead to a healthy and robust banking system even if a new potential crises will come.
    Keywords: Banking Union, Stress test, financial crisis, Challenge, Basel philosophy
    JEL: E60 F50
    Date: 2014–10
  8. By: Huotari , Jarkko (Aalto University)
    Abstract: I propose a financial stress index (FSI) for the Finnish financial system that aims to reflect the functionality of the financial system and provide an aggregate measure of financial stress in the money, bond, equity and foreign exchange markets and the banking sector. The FSI is a composite index that combines information from these markets and provides a measure of stress in the financial system as a whole. The FSI has obvious benefits for all participants in the financial markets who need a tool for monitoring the functioning of the financial markets, as it provides information on systemic stress events which are not as easily captured with the stress measures of individual markets or sectors. The ESRB recommendation (ESRB, 2014a) also states that national or international FSIs could be used when making a decision about the release of the counter-cyclical capital buffer. Hence, the index can also be used to support the macro-prudential policy decision making in Finland.
    Keywords: financial stress index; counter-cyclical capital buffer; macro-prudential policy
    JEL: C43 G01 G28
    Date: 2015–03–11
  9. By: Josh R. Stillwagon (Department of Economics, Trinity College)
    Abstract: This paper offers and tests a unique explanation for the exchange rate determination puzzle. It is not that exchange rates are unrelated to fundamentals, but rather when fundamentals undergo persistent changes it becomes important to measure their effect in terms of how they change relative to what was expected. This result is demonstrated with a simple present discounted value model of the exchange rate and then tested for four USD exchange rates using interest rate forecast data from nearly 50 major banks. Using the polynomially cointegrated VAR, or I(2) CVAR, the interest rate forecast errors are found to have a large and statistically significant impact on the exchange rate even independent of the level and change in the relative interest rate (with t-values in the double digits for all four samples). Further, this effect is greater in the samples with stronger evidence of persistent changes in the interest rate differential.
    Keywords: Exchange Rates, Determination Puzzle, Survey Data, Forecast Errors, I(2) Cointegration
    JEL: F31 G12 G15
    Date: 2015–02
  10. By: Joshua C.C. Chan (Research School of Economics, and Centre for Applied Macroeconomic Analysis, Australian National University); Rodney Strachan (School of Economics, and Centre for Applied Macroeconomic Analysis, University of Queensland; The Rimini Centre for Economic Analysis, Italy)
    Abstract: The time-varying parameter vector autoregressive (TVP-VAR) model has been used to successfully model interest rates and other variables. As many short interest rates are now near their zero lower bound (ZLB), a feature not included in the standard TVP-VAR specification, this model is no longer appropriate. However, there remain good reasons to include short interest rates in macro models, such as to study the effect of a credit shock. We propose a TVP-VAR that accounts for the ZLB and study algorithms for computing this model that are less computationally burdensome than others yet handle many states well. To illustrate the proposed approach, we investigate the effect of the zero lower bound of interest rate on transmission of a monetary shock.
    Date: 2014–12
  11. By: Stefan Ederer
    Abstract: The paper summarises the channels and mechanisms which lead to the emergence of macroeconomic imbalances in the EMU before, in and after the crisis of 2008/09. It focuses on the role of the specific institutional setting of the EMU in these developments and outlines the key reforms which are necessary to eliminate the imbalances and prevent them from re-emerging.
    Keywords: EMU, macroeconomic imbalances, European economic policy
    JEL: E02 E52 E62 F32 F33 F42
    Date: 2015–03
  12. By: Asongu, Simplice
    Abstract: We assess the behavior of real effective exchange rates (REERs) of members of the CEMAC zone with respect to their long-term equilibrium paths. A reduced form of the fundamental equilibrium exchange rate (FEER) model is estimated and associated misalignments are derived for the period 1980 to 2009. Our findings suggest that for majority of countries, macroeconomic fundamentals have the expected associations with the exchange rate fluctuations. The analysis also reveals that, only the REER adjustments of Cameroon and Gabon are significant in restoring the long-term equilibrium in event of a shock. The Cameroonian economic fundamentals of terms of trade, government expenditure and openness have different long-term relations with the REER in comparison to those of other member states. Ultimately, there is no need for an adjustment in the level of the peg based on the present quantitative analysis of REER paths.
    Keywords: Exchange rate; Macroeconomic impact; CEMAC zone
    JEL: F31 F33 F42 O55
    Date: 2014–01–14
  13. By: Mehmet Okan TaÅŸar (Selcuk University, Faculty of Economics and Administrative Sciences); SavaÅŸ Çevik (Selcuk University, Faculty of Economics and Administrative Sciences)
    Abstract: Financial deregulations or financial liberalization can be referred to a variety of changes in the law which allows financial institutions more freedom in how they compete. Whether deregulations are beneficial or harmful to the economy has been widely debated.This paper investigates the effect of financial globalization on the incidence of systemic bank crises in developing countries by using measures of the financial openness. The liberalization trend in the global scale starting with the Washington Consensus has been influential on financial markets and the banking sector. Financial liberalization and uncontrolled expansion of international capital movements has led to the diversification and acceleration of the global financial crisis. Thus, “financial deregulations†which offered as a solution to the debt crisis experienced in the 1980s has led to a new financial crisis in 2010's. An increase in foreign debt liabilities contributes to an increase in the incidence of crises, but foreign direct investment and portfolio equity liabilities have also the opposite effect. This paper discusses how financial liberalization could contribute to financal crises and macroeconomic instabilitiy in the developing countries. For this aim, we analyze empirically a database from developing countries to test the effect of financial openness on macroeconomic indicators. As the dependent variable, we use a variable which take the value of one in the year of a banking crisis. To estimate the indicators of financial crises, main explanatory variables which are employed in the specifications are financial openness, current account balances, exchange rate regime, inflation, trade openness and percent change in GDP. In the introduction to this paper examines the process of liberalization. Second part; banking system and its features are analyzed during the Global financial Crisis. In the third section the historical development of financial crisis and measure of financial liberalization are discussed.In the final part of the paper of financial liberalization and financial crisis the relationship between macro-economic indicators are examined.
    Keywords: Financial deregulations, financial openness, banking crisis, global financial crisis,
    JEL: G01 F43 E44
    Date: 2014–10
  14. By: Sami Taban (Osmangazi University); Tayfur Bayat (İnönü University); Ferit Önder (KahramanmaraÅŸ Sütçü İmam University)
    Abstract: In this study, we aim to investigate relationship between interest rate and consumer price index in Austria by using quarterly data belonging 1990:Q1 to 2013:Q4.period in the context of Fisher (1930) hypothesis. We employ linear unit root test and causality tests. according to linear Granger causality test, there is no causal relationship between the variables in Austria. So the time domain causality analyses imply that Fisher’s hypothesis is not valid in Austria. Forth, frequency domain causality test results imply bi-directional causality while the Fisher effect is valid in the short run. Also the causality runs from inflation rate to interest rate in the long run. At the end of analysis, results imply that Fisher effect is not validity for Austria in this period.
    Keywords: Fisher Effect, Interest Rate, Inflation Rate, Causality
    JEL: C22 E43 E58
    Date: 2014–07
  15. By: Mehmet Balcilar (Department of Economics, Eastern Mediterranean University); Nico Katzke (Department of Economics, University of Stellenbosch); Rangan Gupta (Department of Economics, University of Pretoria)
    Abstract: In this paper we test whether the key metals prices of gold and platinum significantly improve inflation forecasts for the South African economy. We also test whether controlling for conditional correlations in a dynamic setup, using bivariate Bayesian-Dynamic Conditional Correlation (B-DCC) models, improves inflation forecasts. To achieve this we compare out-of-sample forecast estimates of the B-DCC model to Random Walk, Autoregressive and Bayesian VAR models. We find that for both the BVAR and BDCC models, improving point forecasts of the Autoregressive model of inflation remains an elusive exercise. This, we argue, is of less importance relative to the more informative density forecasts. For this we find improved forecasts of inflation for the B-DCC models at all forecasting horizons tested. We thus conclude that including metals price series as inputs to inflation models leads to improved density forecasts, while controlling for the dynamic relationship between the included price series and inflation similarly leads to significantly improved density forecasts.
    Keywords: Bayesian VAR, Dynamic Conditional Correlation, Density forecasting, Random Walk, Autoregressive model
    JEL: C11 C15 E17
    Date: 2015
  16. By: Amirhossein Sadoghi
    Abstract: The recent economic crisis has raised a wide awareness that the financial system should be considered as a complex network with financial institutions and financial dependencies respectively as nodes and links between these nodes. Systemic risk is defined as the risk of default of a large portion of financial exposures among institution in the network. Indeed, the structure of this network is an important element to measure systemic risk and there is no widely accepted methodology to determine the systemically important nodes in a large financial network. In this research, we introduce a metric for systemic risk measurement with taking into account both common idiosyncratic shocks as well as contagion through counterparty exposures. Our focus is on application of eigenvalue problems, as a robust approach to the ranking techniques, to measure systemic risk. Recently, the efficient algorithm has been developed for robust eigenvector problem to reduce to a nonsmooth convex optimization problem. We applied this technique and studied the performance and convergence behavior of the algorithm with different structure of the financial network.
    Date: 2015–03
  17. By: Rod Tyers (Business School, University of Western Australia); Ying Zhang (Business School, University of Western Australia)
    Abstract: While there is much controversy over exchange rates, particularly between the large, advanced economic regions, arguably more important real exchange rates receive comparatively little attention. Traditionally, these are seen to be influenced in the long run by forces that return economies to purchasing power parity (PPP) and by differences in productivity growth across sectors and across regions, as per the Balassa-Samuelson Hypothesis (BSH). Minor and realistic relaxations of the assumptions underlying the BSH greatly generalise the set of possible influences over real exchange rates, however. This paper surveys the literature on real exchange rate determination, as well as that addressing the puzzles over the trends in China’s real exchange rate. While this was widely expected to appreciate against the advanced economies after China’s first growth surge in the mid-1990s, it actually depreciated slightly until the early 2000s. Then, after 2005, its rate of appreciation was more rapid than expected. These puzzles are resolved by accounting for the effects of the trade liberalisations associated with WTO accession, China’s excess saving and the tightening of rural labour markets.
    Date: 2014

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