nep-cba New Economics Papers
on Central Banking
Issue of 2015‒04‒11
thirty-one papers chosen by
Maria Semenova
Higher School of Economics

  1. What Should Central Banks Target? Evidence on the Impact of Monetary Policy Regimes on Economic Growth By Chong, Terence Tai Leung; Wong, Kin Ming
  2. Bubbles and Central Banks: Historical Perspectives By Brunnermeier, Markus K; Schnabel, Isabel
  3. Does Monetary Policy Matter For Trade? By Chong, Terence Tai Leung; Wong, Kin Ming
  4. Inflation targeting and the global financial crisis: successes and challenges By Williams, John C.
  5. Effects of a Quantitative Easing Monetary Policy Exit Strategy on East Asian Currencies By OGAWA Eiji; WANG Zhiqian
  6. Monetary Policy with Diverse Private Expectations By Mordecai Kurz; Maurizio Motolese; Giulia Piccillo; Howei Wu
  7. Central Bank Asset Puchases I: The Theory By Carolin Raab; Philipp König; Kerstin Bernoth
  8. Financial stress indices and financial crises By Robert Vermeulen; Marco Hoeberichtsa; Borek Vašícekb; Diana Žigraiová; Katerina Šmídková; Jakob de Haan
  9. A Monetary Analysis of the Liquidity Trap By João Braz Pinto; João Sousa Andrade
  10. Capital Regulation in a Macroeconomic Model with Three Layers of Default By Laurent Clerc; Alexis Derviz; Caterina Mendicino; Stephane Moyen; Kalin Nikolov; Livio Stracca; Javier Suarez; Alexandro Vardulakis
  11. Monetary News Shocks By Nadav Ben Zeev; Christopher M. Gunn; Hashmat U. Khan
  12. "Unconventional Monetary Policy and its External Effects: Evidence from Japan’s Exports" By Shin-ichi Fukuda; Tsutomu Doita
  13. Maintaining Financial Stability in the People's Republic of China during Financial Liberalization By Nicholas Borst; Nicholas Lardy
  14. Adjustments of Capital Account Restrictions and Exchange Rate Regimes in East Asia By Yoshino, Naoyuki; Kaji, Sahoko; Asonuma, Tamon
  15. Optimal Volatility, Covenants and Cost of Capital Under Basel III Bail-in By Kenjiro Hori; Jorge Martin Ceron
  16. A New Liquidity Risk Measure for the Chilean Banking Sector By Sebastián Becerra; Gregory Claeys; Juan Francisco Martínez
  17. The political economy of bank bailouts By Behn, Markus; Haselmann, Rainer; Kick, Thomas; Vig, Vikrant
  18. Exchange rate misalignments and the external balance under a pegged currency system By Blaise Gnimassoun
  19. The Outlook for the Economy and Monetary Policy Communications By Mester, Loretta J.
  20. Recent Developments in U.S. Monetary Policy: From Extraordinary Back to Ordinary By Mester, Loretta J.
  21. The Economic Outlook, Monetary Policy, and Getting Back to Normal By Mester, Loretta J.
  22. The Outlook for the Economy and Bank Regulation By Mester, Loretta J.
  23. The Nexus of Macroprudential Supervision, Monetary Policy, and Financial Stability By Mester, Loretta J.
  24. Forward Guidance and Communications in U.S. Monetary Policy By Mester, Loretta J.
  25. The Economic Outlook, Monetary Policy, and Communications: Progress on Multiple Journeys By Mester, Loretta J.
  26. Monetary Union with a Single Currency and Imperfect Credit Market Integration By Vincent Bignon; Régis Breton; Mariana Rojas Breu
  27. Do the International Monetary and Financial Systems Need More than Short-Term Cosmetics Reforms? By Sau, Lino
  28. Long term funding and regulation: facilitating financial stability and development (low income developing countries) By Marianne, Ojo
  29. Assessing Asian Equilibrium Exchange Rates as Policy Instruments By MASUJIMA Yuki
  30. The Joint Dynamics of Sovereign Ratings and Government Bond Yields By Makram El-Shagi; Gregor von Schweinitz
  31. CORE INFLATION INDICATORS FOR SAUDI ARABIA By William Barnett; Ryadh M. Alkhareif

  1. By: Chong, Terence Tai Leung; Wong, Kin Ming
    Abstract: Economists and policy-makers have long sought the ideal framework for monetary policy as it is arguably one of the most important tools for government to influence the economy. Exchange rate and inflation are believed to be the most appealing anchors for providing guidance to the conduct of monetary policy and are thus widely used in the real world. Most existing studies on the effect of exchange-rate arrangements and inflation targeting on economic growth suffer from the absence of a clear counterfactual, rendering it difficult to interpret their results. Based on a new classification scheme on monetary policy regimes, this paper helps to fill that gap by investigating the effect of monetary policy regimes on growth. Our results consistently support that an inflation targeting regime has a positive impact on economic growth when compared with an exchange-rate targeting regime.
    Keywords: Monetary Policy Regimes; Inflation Targeting; Exchange-rate Targeting; Economic Growth
    JEL: E42 E52 E58 F43
    Date: 2015–04–07
  2. By: Brunnermeier, Markus K; Schnabel, Isabel
    Abstract: This paper reviews some of the most prominent asset price bubbles from the past 400 years and documents how central banks (or other institutions) reacted to those bubbles. The historical evidence suggests that the emergence of bubbles is often preceded or accompanied by an expansionary monetary policy, lending booms, capital inflows, and financial innovation or deregulation. We find that the severity of the economic crisis following the bursting of a bubble is less linked to the type of asset than to the financing of the bubble—crises are most severe when accompanied by a lending boom and high leverage of market players, and when financial institutions themselves are participating in the buying frenzy. Past experience also suggests that a purely passive “cleaning up the mess” stance toward the buildup of bubbles is, in many cases, costly. Monetary policy and macroprudential measures that lean against inflating bubbles can and sometimes have helped deflate bubbles and mitigate the associated economic crises. However, the correct implementation of such proactive policy approaches remains fraught with difficulties.
    Keywords: bubbles; capital flows; credit; macroprudential policy; monetary policy
    JEL: E44 E52 F34 G01 N10
    Date: 2015–04
  3. By: Chong, Terence Tai Leung; Wong, Kin Ming
    Abstract: There is a large literature on the effect of exchange rate arrangements on trade. The monetary policy used in the floating exchange rate regime, however, is usually ignored and unidentified in the empirical studies. This makes the effect of alternative monetary policy regimes on trade remains largely unknown. This paper sheds light on this area by examining the effect of two well-defined monetary policy regimes, namely exchange-rate targeting and inflation targeting regimes, on bilateral and multilateral trade. Our result suggests a moderate positive effect of inflation targeting policy on bilateral trades between two inflation targeting countries. This effect of inflation targeting, even much moderate than the effect of currency union and a fixed exchange rate at the bilateral level, could exist in the bilateral trades with a large number of trading partners under the same regime. This implies that inflation targeting regime may not have a lower level of multilateral trade than exchange-rate targeting regime. We further support this view with an analysis of multilateral trade.
    Keywords: Monetary Policy Regimes; Inflation Targeting; Exchange-rate Targeting; Gravity Model; Trade
    JEL: E42 E52 E58 F14
    Date: 2015–04–12
  4. By: Williams, John C. (Federal Reserve Bank of San Francisco)
    Abstract: Essay presentation to the South African Reserve Bank Conference on Fourteen Years of Inflation Targeting in South Africa and the Challenge of a Changing Mandate
    Date: 2014–10–31
  5. By: OGAWA Eiji; WANG Zhiqian
    Abstract: The Federal Reserve Board (FRB) of the United States has decided to end its quantitative easing monetary policy as the global financial crisis is subsiding there. It is expected that it will raise the federal funds (FF) rate from almost zero in the near future. Large amounts of money which flowed from the United States into emerging market countries are beginning to flow back to it. As a result, the emerging market countries are beginning to face depreciation of their home currencies and drops in stock prices. Based on this situation in the global economy, we consider the effects of changes in the monetary policy, especially the effects of raising the interest rates in the United States on East Asian currencies in this paper. Specifically, we use data on interest rates as a monetary policy instrument to investigate how changes in the interest rates in the United States affect interest rates, exchange rates, and capital flows in the East Asian emerging market countries. Given the analytical results, we conclude that East Asian countries would face capital outflows that depreciate their home currencies while having upward pressure against their own interest rates if the FRB adopts a quantitative easing monetary policy exit strategy and raises the interest rates.
    Date: 2015–03
  6. By: Mordecai Kurz (Stanford University); Maurizio Motolese (Università Cattolica di Milano); Giulia Piccillo (Utrecht University); Howei Wu (Shanghai University of Finance and Economics)
    Abstract: We study the impact of diverse beliefs on conduct of monetary policy. Individual belief is modeled by a state variable that defines an individual’s perceived laws of motion. We use a New Keynesian Model that is solved with a quadratic approximation hence individual decisions are quadratic functions. Aggregation renders the belief distribution an aggregate state variable. Although the model has standard technology and policy shocks, diverse expectations change materially standard results about a smooth trade-off between inflation volatility and output volatility. Our main results are summed up as follows:<br> (i) The policy space contains a curve of singularity which is a collection of policy parameters that divides the space into two sub-regions. Some trade-off between output and inflation volatilities exists within each region and some across regions. (ii) The singularity causes volatility of variables to be non monotone in policy parameters. Policy-makers cannot assume a more aggressive policy will change outcomes in a predictable manner. (iii) When beliefs are diverse a central bank must also consider the volatility of individual consumption and the related volatility of financial markets. We show aggressive anti-inflation policy increases consumption volatility and aggressive output stabilization policy entails rising inflation volatility. Efficient central bank policy must therefore be moderate. (iv) High optimism about the future typically lowers aggregate output and increases inflation. This “stagflation†effect is stronger the stickier prices are. Policy response is muted since the effects of higher inflation and lower output on interest rates partially cancel each other. Effective policy requires targeting exuberance directly or its effects in asset markets. Central banks already do so with short term interventions. (v) The observed high serial correlation of 0.80 in policy shocks contributes greatly to market volatility and we show that a reduction in persistence of central bank’s deviations from a fixed rule will contribute to stability. (vi) Belief dispersion is measured by cross sectional standard deviation of individual beliefs. An increased belief diversity is found to make policy coordination harder and results in lower aggregate output and lower rate of inflation. Bank policy can lower belief dispersion by being more transparent.
    Keywords: New Keynesian Model; heterogenous beliefs; market state of belief; Rational Beliefs; monetary policy rule
    JEL: C53 D8 D84 E27 E42 E52 G12 G14
    Date: 2015–03
  7. By: Carolin Raab; Philipp König; Kerstin Bernoth
    Abstract: In the face of interest rates having hit their zero lower bound in major economies, large-scale asset purchases have become an important weapon of central banks in recent years. It is, however, not clear whether and under which circumstances such policy measures produce the desired effects. This round-up provides a selective overview of theoretical research that has been devoted to understand under what conditions central bank asset purchases lead to reductions in longer-term interest rates and produce stimulating effects on the overall economy.
    Date: 2015
  8. By: Robert Vermeulen; Marco Hoeberichtsa; Borek Vašícekb; Diana Žigraiová; Katerina Šmídková; Jakob de Haan
    Abstract: This paper develops a Financial Stress Index (FSI) for 28 OECD countries and examines its relationship to crises using a novel database for financial crises. A stress index measures the current state of stress in the financial system and summarizes it in a single statistic. Our results suggest that even though our FSI is clearly related to the occurrence of crises, there is only a weak relationship between the FSI and the onset of a crisis, notably the onset of a banking crisis. Policymakers should therefore be aware of the limited usefulness of FSIs as an early warning indicator.
    Keywords: financial stress index; financial crises; developed countries; early warning indicators
    JEL: E5 G10
    Date: 2015–03
  9. By: João Braz Pinto (Deloitte Touche Tohmatsu Limited, Portugal); João Sousa Andrade (Faculty of Economics, University of Coimbra and GEMF, Portugal)
    Abstract: Keynes has emphasized a particular situation in which the liquidity preference becomes absolute, leading to monetary policy ineffectiveness: the near zero nominal rate of interest does not allow negative values of the real interest rate. This situation is termed liquidity trap (LT) and although popularized by the IS-LM Hicks-Hansen framework it was authored by Robertson. It was also elected as the Keynesian case against the classical one. In 1998 Krugman recovered the name by applying it to the Japanese episode of the 1990's. The “lowflation” environment in USA and Europe brought again the LT to the forefront. The quantitative easing monetary policy was followed in Japan and is now applied in the USA and EMU as a solution to overcome the LT. But the LT has been erroneously considered as a money demand problem and at the same time denied as a “banking problem” in the words of Krugman. We contend that the current situation should be interpreted as a “banking problem” that impedes the transformation of the monetary base into money supply. In order to prove our thesis we study the behavior of the USA money multiplier and the income velocity of money before the beginning of the current crisis and during the crisis and by forecasting and estimating a VAR and a VECM model we compare the normal situation of monetary policy efficiency with the situation of LT monetary policy inefficiency.
    Keywords: Liquidity Trap, Money Supply, Monetary Base Multiplier, ARIMA, VAR and VECM models.
    JEL: E12 E3 E4 E51 E6
    Date: 2015–03
  10. By: Laurent Clerc; Alexis Derviz; Caterina Mendicino; Stephane Moyen; Kalin Nikolov; Livio Stracca; Javier Suarez; Alexandro Vardulakis
    Abstract: We develop a dynamic general equilibrium model for the positive and normativeanalysis of macroprudential policies. Optimizing financial intermediaries allocate theirscarce net worth together with funds raised from saving households across two lendingactivities, mortgage and corporate lending. For all borrowers (households, firms, andbanks) external financing takes the form of debt which is subject to default risk. This“3D model” shows the interplay between three interconnected net worth channels thatcause financial amplification and the distortions due to deposit insurance. We apply itto the analysis of capital regulation.
    JEL: E3 E44 G01 G21
    Date: 2015
  11. By: Nadav Ben Zeev (Ben-Gurion University of the Negev); Christopher M. Gunn; Hashmat U. Khan (Department of Economics, Carleton University)
    JEL: E32 E52 E58
    Date: 2015–03–17
  12. By: Shin-ichi Fukuda (Faculty of Economics, The University of Tokyo); Tsutomu Doita (Graduate School of Economics, The University of Tokyo)
    Abstract: In this paper, we explore whether unconventional monetary policy in Japan had a negative spillover effect on the rest of the world. After Prime Minister Abe advocated the new policy regime, the Japanese yen depreciated substantially which raised a concern that it would have a beggar-thy-neighbor effect in the region. However, despite the yen’s depreciation, Japan’s exports did not show significant improvement. To explain why the exports did not increase, this paper focuses on weak external demand and increased overseas production. Our theoretical model shows that a small change of the exchange rate has no effect on exports because of fixed costs when shifting the plant location across the countries. However, it also implies that a change of the exchange rate has a significant effect on the exports either when the exchange rate depreciation coincides with strong external demand or when the appreciation coincides with weak external demand. In the latter part of the paper, we examine the validity of these theoretical implications through estimating a simple export function in Japan and through calibrating our export function. In both of the experiments, we confirm that the model can track Japan’s exports reasonably well especially after the new policy regime started. --
    Date: 2015–03
  13. By: Nicholas Borst (Federal Reserve Bank of San Francisco); Nicholas Lardy (Peterson Institute for International Economics)
    Abstract: The banking system of the People's Republic of China (PRC) is now the largest in the world, and its capital markets are rapidly approaching the size of those in the advanced economies. This paper traces the evolution of the PRC's financial system away from a traditional bank-dominated and state-directed financial system toward a more complex, market-based system and analyzes the optimal sequence of financial reforms needed to manage the new risks accompanying this evolution.
    Keywords: financial development, government policy and regulation
    JEL: G18 G21
    Date: 2015–03
  14. By: Yoshino, Naoyuki (Asian Development Bank Institute); Kaji, Sahoko (Asian Development Bank Institute); Asonuma, Tamon (Asian Development Bank Institute)
    Abstract: This paper discusses adjustments of capital account restrictions and exchange rate regimes in East Asia. Monetary authorities have two options for these adjustments: gradual adjustments or rapid adjustments. We analyze the costs and benefits for both adjustment options in each area, i.e., capital account restrictions and exchange rate regime. The paper provides prominent country cases for each adjustment option to emphasize the benefits for policymakers. We then propose four transition policy options for East Asian countries aiming to relax capital account restrictions and increase flexibility in exchange rates from fixed regimes with capital account controls.
    Keywords: exchange rate transition; east asia; capital account controls; exchange rate transition policies
    JEL: F33 F41 F42
    Date: 2015–04–03
  15. By: Kenjiro Hori (Department of Economics, Mathematics & Statistics, Birkbeck); Jorge Martin Ceron (Department of Economics, Mathematics & Statistics, Birkbeck)
    Abstract: This paper investigates three consequences of the new financial regulation: the agency costs, the monitoring costs and the effect on banks’ cost of capital. For the first, the shareholders’ behaviour is analysed as a trade-off between the value of the bank and its volatility by using an indifference curve model of the bank’s choice of optimal risk. While the first-best optimal risk maximises the value of the bank, the shareholders select suboptimally high risks under bail-in structures. This leads to both the wealth transfer and the value destruction agency costs. For the second, as a result of these consequences of the DAPR (Deviation from the Absolute Priority Rule) the bondholders are forced to closely monitor the bank behaviour. Requiring higher rate of return for higher risk, reflecting the costs of monitoring, is shown to alleviate the agency problems. Different types of covenants are proposed as an efficient way of implementing this solution. For the third, the impact of the new bail-in structure and the monitoring costs on the WACC of 16 largest European banks is estimated, and is shown to increase the cost of capital by between 75% and 110%.
    Keywords: Indifference curves, CoCo, Bail-in, Covenants, WACC.
    JEL: D82 G21 G28 G32
    Date: 2015–03
  16. By: Sebastián Becerra; Gregory Claeys; Juan Francisco Martínez
    Abstract: The objective of this work is to construct an appropriate measure of liquidity risk for Chilean banks. There are already several measures of liquidity risk in the literature. Most of these metrics are based on specific assumptions and expert opinion. In order to overcome the potential problems associated with discretionary assumptions, and to exploit the information available, similar to the work of Drehman and Nikolaou (2012), we propose a metric based on the behavior of banks in the procurement operations Chilean open market (OMO). Due to the particularities of the implementation of monetary policy of the Chilean economy, we introduce an adaptation of the original metric. We calculate the liquidity indicator at an aggregate level and for a sample of groups of banks in a period that includes the recent crisis in the sub-prime. After that, we compare this indicator with a variety of standard metrics proposed in the literature. We find that our metric reasonably captures episodes of liquidity crises and therefore can be used as a complementary tool in the assessment of systemic risks.
    Date: 2015–02
  17. By: Behn, Markus; Haselmann, Rainer; Kick, Thomas; Vig, Vikrant
    Abstract: In this paper, we examine how the institutional design affects the outcome of bank bailout decisions. In the German savings bank sector, distress events can be resolved by local politicians or a state-level association. We show that decisions by local politicians with close links to the bank are distorted by personal considerations: While distress events per se are not related to the electoral cycle, the probability of local politicians injecting taxpayers' money into a bank in distress is 30 percent lower in the year directly preceding an election. Using the electoral cycle as an instrument, we show that banks that are bailed out by local politicians experience less restructuring and perform considerably worse than banks that are supported by the savings bank association. Our findings illustrate that larger distance between banks and decision makers reduces distortions in the decision making process, which has implications for the design of bank regulation and supervision.
    Keywords: political economy,bailouts,state-owned enterprises,elections
    JEL: G21 G28 D72 D73
    Date: 2015
  18. By: Blaise Gnimassoun
    Abstract: This paper analyzes the link between the exchange rate misalignments and the external balance under a pegged currency system focusing on the CFA zone. Having discussed and chosen an appropriate analytical framework, it addresses the issue of model uncertainty regarding the equilibrium exchange rate model before estimating currency misalignments. The results show that misalignments have a negative and asymmetric impact on the current account. While overvaluation of the CFA franc deteriorates the current account in the CFA zone, undervaluation does not improve it. Finally, our results highlight that the export concentration tends to exacerbate the overall negative impact of currency misalignments on the external balance. Thus, greater economic diversification is needed in an environment in which countries face both uncertainty in the terms of trade and uncertainty in the nominal exchange rate to conduct a proactive exchange rate policy.
    Keywords: Currency peg, Exchange rate misalignments, Current account, concentration of exports, Bayesian model averaging.
    JEL: F31 F32 C11
    Date: 2015
  19. By: Mester, Loretta J. (Federal Reserve Bank of Cleveland)
    Date: 2015–03–30
  20. By: Mester, Loretta J. (Federal Reserve Bank of Cleveland)
    Abstract: GIC Central Banking Series: New Policies for the Post-Crisis Era, Banque de France, Paris, France, March 23, 2015 Good morning. It is a privilege to join you at this event organized by the Global Interdependence Center and the Banque de France. I am proud to say that I have had an association with the GIC for many years. I have always valued the insights I’ve gleaned from attending GIC events, and I am very grateful that David Kotok, John Silvia, and their colleagues have invited me to participate in today’s program, which is part of the GIC’s Central Banking Series.
    Date: 2015–03–30
  21. By: Mester, Loretta J. (Federal Reserve Bank of Cleveland)
    Date: 2015–03–30
  22. By: Mester, Loretta J. (Federal Reserve Bank of Cleveland)
    Abstract: Good afternoon. I thank the Ohio Bankers League for inviting me to participate in this year’s economic summit. It is a pleasure to have the opportunity to speak with so many leaders from the state’s banking community. I’m glad to be here with my colleague Steve Jenkins, whom many of you know well and who will be speaking later today. It is also great to be in Columbus, where it seems as if the euphoria from The Ohio State University’s national championship isn’t going to wear off any time soon. Today, I will share my views on the outlook for the U.S. economy and monetary policy in 2015. Given the important role financial institutions play in the economy, I also want to offer some perspectives on banking supervision and regulation. Of course, the views I’ll present today are my own and not necessarily those of the Federal Reserve System or my colleagues on the Federal Open Market Committee.
    Date: 2015–03–30
  23. By: Mester, Loretta J. (Federal Reserve Bank of Cleveland)
    Abstract: Good morning. I am very pleased to participate in this conference co-organized by the Federal Reserve Bank of Cleveland and the Office of Financial Research. I want to thank Stephen Ong and Joe Haubrich from the Cleveland Fed and Mark Flood and Greg Feldberg from the OFR for putting together such an interesting program. I also thank the editors of the Journal of Financial Stability, which will be publishing a special volume of the journal with some of the papers from the conference. This is the second in what I hope is a series of conferences co-sponsored by the Cleveland Fed and the OFR. I very much value the collaboration between our institutions, which share a similar mission of fostering financial stability in our nation. I believe avenues such as this conference, which bring together researchers, financial sector supervisors, and policymakers from around the globe, provide important ways for us to share different perspectives on the complex subject of financial stability. This dialogue can lead to a better understanding of what we know and what we still need to learn, a crucial step on the road to more effective policymaking.
    Date: 2015–03–30
  24. By: Mester, Loretta J. (Federal Reserve Bank of Cleveland)
    Abstract: Good evening and thank you very much for the invitation to speak in the Imperial Business Insights Series. I have learned that this successful series is now in its third year and it has brought speakers to the podium to discuss a wide range of topics in the major themes of finance, innovation, and entrepreneurship. Tonight I will speak about forward guidance and monetary policy communications. I think it is clear that this topic is related to finance, but I submit that it is also related to the two other themes of your series: innovation and entrepreneurship. Since the onset of the 2008 financial crisis, policymakers have had to be quite innovative in addressing the challenges facing the global economy. They have had to be entrepreneurial in developing new economic models and monetary policy tools to help navigate the uncharted waters of the past six years. Tonight, I’ll give my views on one of those tools, forward guidance, and the role it plays as a part of the broader communications provided by monetary policymakers. Of course, my remarks will reflect my own views and not necessarily those of the Federal Reserve System or my colleagues on the Federal Open Market Committee.
    Date: 2015–03–30
  25. By: Mester, Loretta J. (Federal Reserve Bank of Cleveland)
    Abstract: It is a real pleasure to be here today and to address the Economic Club of Pittsburgh, the CFA Society Pittsburgh, and the Pittsburgh Society of Investment Professionals. I have been on quite a journey during my first three months on the job as the new president of the Cleveland Fed. Not only have I attended my first two Federal Open Market Committee meetings in Washington as a voting member, but I have been getting to know the Fourth Federal Reserve District, which includes Ohio, western Pennsylvania, the northern panhandle of West Virginia, and eastern Kentucky. One of my first stops was to Pittsburgh, and it is wonderful to be back here today for my first public speech since becoming president in June. The economy and monetary policy have been on journeys of their own. Today, I want to share my views on both. But before I continue, let me note that these are my own views and not necessarily those of the Federal Reserve System or my colleagues on the Federal Open Market Committee.
    Date: 2015–03–30
  26. By: Vincent Bignon; Régis Breton; Mariana Rojas Breu
    Abstract: This paper shows that currency arrangements impact on credit available through default incentives. To this end we build a symmetric two-country model with money and imperfect credit market integration. With the Euro Area context in mind, we capture differences in credit market integration by variations in the cost for banks to grant credit for cross-border purchases. We show that for a high enough level of this cost, currency integration may magnify default incentives, leading to more stringent credit rationing and lower welfare than in a regime of two currencies. The integration of credit markets restores the optimality of the currency union.
    Keywords: banks, currency union, monetary union, credit, default
    JEL: E50 F3 G21
    Date: 2015–03
  27. By: Sau, Lino (University of Turin)
    Abstract: The storm that has rocked our world has opened an interesting debate among economists and policy makers concerning with the need of a new international monetary and financial architecture. The monetary and financial regime that has been in force since the collapse of Bretton Woods (B-W), encourages indeed the persistence of unsustainable dynamics which spawn increasingly serious crises and it is unable of imparting an acceptable macro-economic discipline device to the world's economy. It became apparent that the global role of a key currency along with the deregulation of financial markets (neo-liberal paradigm) have acted as underlying conditions for the US financial crisis up to present situation and the following contagion to Europe. In this paper I point out the inadequacy of the institutional arrangements underlying the international monetary and financial regimes and I outline the relevance to the current debate of Keynes original plan, suggested rightly 70 years ago, that never born.
    Date: 2014–10
  28. By: Marianne, Ojo
    Abstract: Basic and fundamental issues which link financing and funding activities to financial regulation involve the problems of systemic risks and asymmetric information. In addition to addressing these issues, this paper will also consider other issues related to long term funding, which affect financial stability and development in Low Income Developing Countries (LIDCs) - namely inadequate regulatory frameworks, as well as constraints and accessibility to long term funding. By considering the recent developments with the Basel framework, it will seek to illustrate, by way of reference to studies, why low income developing countries, as well as selected emerging economies are still lagging behind in terms of the implementation of regulatory standards. It will also aim to demonstrate how these countries would largely benefit from effective implementation of these standards. Whilst aiming to facilitate means whereby sources of longer term funding could be enhanced, it will also consider the disadvantages and risks associated with longer term funding, challenges imposed by debt sustainability and propose alternative sources of funding. Transparency and disclosure, it will be highlighted, continue to generate severe obstacles to financial development and growth, as will be reflected from results of certain investigations.
    Keywords: liquidity risk; long term funding; financial stability; Low Income Countries (LICs);information disclosure
    JEL: E6 F3 G2 G28 K2 M4
    Date: 2015–02–23
  29. By: MASUJIMA Yuki
    Abstract: This paper attempts to estimate the quarterly equilibrium exchange rates (EER) of nine Asian currencies (Japan, China, Korea, Hong Kong, Singapore, Thailand, Indonesia, Malaysia, and Philippines) with the Behavioral Equilibrium Exchange Rates (BEER) from 2006 to 2014. The BEER was compared with the Fundamental Equilibrium Exchange Rates (FEER) published biannually by the Peterson Institute for International Economics. While four Asian currencies tend to be undervalued in the Peterson's FEER approach, the assessment of Asian currencies changed over time in this paper's BEER approach, which captures the Crowther's theory about the development of balance of payments over the long term. Results imply that the BEER approach is imperative for the assessment of Asian currencies, while the equilibrium level of BEER is sometimes sensible for the change of a sample period. Lessons from the results indicate that the EER of countries that shift to a more matured stage, such as Japan and emerging Asia, needs to be frequently assessed by a multi-method so that policy makers can implement appropriate coordination of exchange rate policies for the integration of Asian economies.
    Date: 2015–03
  30. By: Makram El-Shagi; Gregor von Schweinitz
    Abstract: In the present paper, we build a bivariate semiparametric dynamic panel model to repro-duce the joint dynamics of sovereign ratings and government bond yields. While the individual equations resemble Pesaran-type cointegration models, we allow for different long-run relationships in both equations, nonlinearities in the level effect of ratings, and asymmetric effects in changes of ratings and yields. We find that the interest rate equation and the rating equation imply significantly different long-run relationships. While the high persistence in both interest rates and ratings might lead to the misconception that they follow a unit root process, the joint analysis reveals that they converge slowly to a joint equilibrium. While this indicates that there is no vicious cycle driving countries into default, the persistence of ratings is high enough that a rating shock can have substantial costs. Generally, the interest rate adjusts rather quickly to the risk premium that is in line with the rating. For most ratings, this risk premium is only marginal. However, it becomes substantial when ratings are downgraded to highly speculative (a rating of B) or lower. Rating shocks that drive the rating below this threshold can increase the interest rate sharply, and for a long time. Yet, simulation studies based on our estimations show that it is highly improbable that rating agencies can be made responsible for the most dramatic spikes in interest rates.
    Keywords: sovereign risk, rating agencies, semiparametric model, nonlinearities
    JEL: C14 C25 F34 G24
    Date: 2015–03
  31. By: William Barnett (Department of Economics, The University of Kansas; Center for Financial Stability, New York City; IC2 Institute, University of Texas at Austin); Ryadh M. Alkhareif (Economic Research Department, Saudi Arabian Monetary Agency)
    Abstract: This paper constructs and analyzes core inflation indicators for Saudi Arabia for the period of March 2012 to May 2014 using two alternative approaches: the Exclusion Method (ex food and housing/rent) and the Statistical Method. The findings of the analysis suggest that the ex food and housing/rent inflation is more volatile than the overall CPI inflation over the sample period. In contrast, the statistical core inflation is relatively more stable and less volatile. Moreover, the ex food and housing/rent inflation is only weakly correlated with headline inflation, whereas the statistical core inflation exhibits a stronger correlation. This combination of lower volatility and higher correlation with headline inflation makes the statistical method a much better choice for policymakers. From a monetary policy standpoint, using a bundle of core inflation measures, including both properly constructed Exclusion and Statistical methods, is more desirable, especially when variation across measures is widespread, as is the case in Saudi Arabia.
    Keywords: consumer price index, core inflation, generalized dynamic factor model, monetary policy.
    JEL: C51 E31 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.