|
on Central Banking |
| By: | Bonga-Bonga, Lumengo; Kabundi, Alain |
| Abstract: | Since the adoption of inflation rate targeting policy, there has been a great concern on the effectiveness of monetary policy to curb inflation in South Africa. The effectiveness of the repo rate as a policy instrument to control the level of inflation has been widely criticised not only in the South African context but also internationally. With the critics pointing out from a substantial lag for monetary policy changes to affect inflation to the inability of the policy instrument to effectively affect inflation level. In assessing the effectiveness of the monetary policy in South Africa, this paper makes use of the structural vector error correction model (SVECM) to characterise the dynamics of inflation to monetary policy shocks. The results of the impulse response function obtained from the SVECM found that while positive shocks to monetary policy decrease output but do not decrease credit demand and inflation in South Africa. |
| Keywords: | Inflation rate targeting, Policy instruments, Structural Vector Error Correction Model. |
| JEL: | C22 E52 |
| Date: | 2015–04–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:63731&r=cba |
| By: | Carlson, Mark A. (Board of Governors of the Federal Reserve System (U.S.)); Duygan-Bump, Burcu (Board of Governors of the Federal Reserve System (U.S.)); Nelson, William R. (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | During the 2007-09 financial crisis, there were severe reductions in the liquidity of financial markets, runs on the shadow banking system, and destabilizing defaults and near-defaults of major financial institutions. In response, the Federal Reserve, in its role as lender of last resort (LOLR), injected extraordinary amounts of liquidity. In the aftermath, lawmakers and regulators have taken steps to reduce the likelihood that such lending would be required in the future, including the introduction of liquidity regulations. These changes were motivated in part by the argument that central bank lending entails extremely high costs and should be made unnecessary by liquidity regulations. By contrast, some have argued that the loss of liquidity was the result of market failures, and that central banks can solve such failures by lending, making liquidity regulations unnecessary. In this paper, we argue that LOLR lending and liquidity regulations are complementary tools. Liquidity shortfalls can arise for two very different reasons: First, sound institutions can face runs or a deterioration in the liquidity of markets they depend on for funding. Second, solvency concerns can cause creditors to pull away from troubled institutions. Using examples from the recent crisis, we argue that central bank lending is the best response in the former situation, while orderly resolution (by the institution as it gets through the problem on its own or via a controlled failure) is the best response in the second situation. We also contend that liquidity regulations are a necessary tool in both situations: They help ensure that the authorities will have time to assess the nature of the shortfall and arrange the appropriate response, and they provide an incentive for banks to internalize the externalities associated with any liquidity risks. |
| Keywords: | Lender of last resort; central banks; financial crises; liquidity regulation |
| JEL: | E58 G01 G28 |
| Date: | 2015–02–10 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2015-11&r=cba |
| By: | Sweder van Wijnbergen (University of Amsterdam); Timotej Homar (University of Amsterdam) |
| Abstract: | Systemic banking crises often continue into recessions with large output losses (Reinhart & Rogoff 2009a). In this paper we ask whether the way Governments intervene in the financial sector has an impact on the economy's subsequent performance. Our theoretical analysis focuses on bank incentives to manage bad loans. We show that interventions involving bank restructuring provide banks with incentives to restructure bad loans and free up resources for new economic activity. Other interventions lead banks to roll over bad loans, tying up resources in distressed firms. Our analysis suggests that zombie banks are a drag on economic recovery. We then analyze 65 systemic banking crises from the period 1980-2012, of which 25 are part of the recent global financial crisis, to answer the question: how effective are intervention measures from the macro perspective, in particular how do they affect recession duration? We find that bank restructuring, which includes bank recapitalizations, significantly reduces recession duration. The effect of liquidity support on the probability of recovery is positive but smaller. Blanket guarantees on bank liabilities and monetary policy do not have a significant effect. |
| Keywords: | Financial crises, intervention policies, zombie banks, economic recovery, bank restructuring, bank recapitalization |
| JEL: | E44 E58 G21 G28 |
| Date: | 2013–03–04 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20130039&r=cba |
| By: | Christian Bauer; Matthias Neuenkirch |
| Abstract: | In this paper, we derive a modification of a forward-looking Taylor rule, which integrates two variables measuring the uncertainty of inflation and GDP growth forecasts into an otherwise standard New Keynesian model. We show that certainty-equivalence in New Keynesian models is a consequence of log-linearization and that a second-order Taylor approximation leads to a reaction function which includes the uncertainty of macroeconomic expectations. To test the model empirically, we use the standard deviation of individual forecasts around the median Consensus Forecast as proxy for forecast uncertainty. Our sample covers the euro area, Sweden, and the United Kingdom and the period 1992Q4-2014Q2. We find that while all three central banks react significantly to inflation forecast uncertainty by reducing their policy rates in times of higher inflation expectation uncertainty with an average effect of more than 25 basis points, they do not have significant reactions to GDP growth forecast uncertainty. We conclude with some implications for optimal monetary policy rules and central bank watchers. |
| Keywords: | Certainty-Equivalence, Consensus Forecasts, Forecast Uncertainty, Global Financial Crisis, Optimal Monetary Policy, Taylor Rule |
| JEL: | E52 E58 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:trr:wpaper:201505&r=cba |
| By: | Na, Seunghoon (Columbia University); Schmitt-Grohe, Stephanie (Columbia University, CEPR, and NBER); Uribe, Martin (Columbia University and NBER); Yue, Vivian Z. (Emory University and Federal Reserve Bank of Atlanta) |
| Abstract: | This paper characterizes jointly optimal default and exchange-rate policy in a small open economy with limited enforcement of debt contracts and downward nominal wage rigidity. Under optimal policy, default occurs during contractions and is accompanied by large devaluations. The latter inflate away real wages, thereby avoiding massive unemployment. Thus, the Twin Ds phenomenon emerges endogenously as the optimal outcome. In contrast, under fixed exchange rates, optimal default takes place in the context of large involuntary unemployment. Fixed-exchange-rate economies are shown to have stronger default incentives and therefore support less external debt than economies with optimally floating rates. |
| Keywords: | sovereign default; exchange rates; optimal monetary policy; capital controls; downward nominal wage rigidity; currency pegs |
| JEL: | E43 E52 F31 F34 F41 |
| Date: | 2015–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedacq:2015-01&r=cba |
| By: | Dennis Bonam (VU University Amsterdam, The Netherlands); Jasper Lukkezen (Utrecht University, Utrecht, and CPB Netherlands Bureau for Economic Policy Analysis, The Hague, The Netherlands) |
| Abstract: | In standard macroeconomic models, debt sustainability and price level determinacy are achieved when fiscal policy avoids explosive debt and monetary policy controls inflation, irrespective of the relative strengths of each policy stance. We examine how these policy requirements for equilibrium stability and determinacy change in the presence of sovereign risk. An increase in sovereign risk reduces lender's willingness to hold government debt and raises consumption and inflation. Therefore, inflation and debt dynamics are determined jointly. To ensure stable macroeconomic conditions, both the fiscal and monetary stance must shift to offset debt sustainability concerns. We find that the adoption of a deficit target helps alleviate such concerns and raises the scope for macroeconomic stability. |
| Keywords: | Fiscal and monetary policy coordination, equilibrium determinacy and stability, sovereign risk, policy rules |
| JEL: | E52 E62 E63 |
| Date: | 2014–01–07 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20140006&r=cba |
| By: | Pitrou, Cyril |
| Abstract: | A graph representation of the financial relations in a given monetary structure is proposed. It is argued that the graph of debt-liability relations is naturally organized and simplified into a tree structure, around banks and a central bank. Indeed, this optimal graph allows to perform payments very easily as it amounts to the suppression of loops introduced by pending payments. Using this language of graphs to analyze the monetary system, we first examine the systems based on commodity money and show their incompatibility with credit. After dealing with the role of the state via its ability to spend and raise taxes, we discuss the chartalist systems based on pure fiat money, which are the current systems. We argue that in those cases, the Treasury and the central bank can be meaningfully consolidated. After describing the interactions of various autonomous currencies, we argue that fixed exchanged rates can never be maintained, and we discuss the controversial role of the IMF in international financial relations. We finally use graph representations to give our interpretation on open problems, such as the monetary aggregates, the sectoral financial balances and the endogenous nature of money. Indeed, once appropriately consolidated, graphs of financial relations allow to formulate easily unambiguous statements about the monetary arrangements. |
| Keywords: | monetary theory; graph theory; chartalism; endogenous money; central bank; sectoral financial balances; budgetary policy; monetary policy |
| JEL: | E42 E50 E52 E58 F33 F34 |
| Date: | 2015–04–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:63662&r=cba |
| By: | Frost, Joshua (Federal Reserve Bank of New York); Logan, Lorie (Federal Reserve Bank of New York); Martin, Antoine (Federal Reserve Bank of New York); McCabe, Patrick E. (Board of Governors of the Federal Reserve System (U.S.)); Natalucci, Fabio M. (Board of Governors of the Federal Reserve System (U.S.)); Remache, Julie (http://www.federalreserve.gov/econresdata/fabio-m-natalucci.htm) |
| Abstract: | We review recent changes in monetary policy that have led to development and testing of an overnight reverse repurchase agreement (ON RRP) facility, an innovative tool for implementing monetary policy during the normalization process. Making ON RRPs available to a broad set of investors, including nonbank institutions that are significant lenders in money markets, could complement the use of the interest on excess reserves (IOER) and help control short-term interest rates. We examine some potentially important secondary effects of an ON RRP facility, both positive and negative, including impacts on the structure of short-term funding markets and financial stability. We also investigate design features of an ON RRP facility that could mitigate secondary effects deemed undesirable. Finally, we discuss tradeoffs that policymakers may face in designing an ON RRP facility, as they seek to balance the objectives of setting an effective floor on money market rates during t he normalization process and limiting any adverse secondary effects. |
| Keywords: | Federal Reserve Board and Federal Reserve System; monetary policy; interest on excess reserves; money market funds; overnight RRP; repo; reverse repo |
| JEL: | E52 E58 G21 G23 |
| Date: | 2015–02–19 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2015-10&r=cba |
| By: | Choi, Dong Boem (Federal Reserve Bank of New York); Eisenbach, Thomas M. (Federal Reserve Bank of New York); Yorulmazer, Tanju |
| Abstract: | We build a general equilibrium model with financial frictions that impede the effectiveness of monetary policy in stimulating output. Agents with heterogeneous productivity can increase investment by levering up, but this increases interim liquidity risk. In equilibrium, the more productive agents choose higher leverage, invest more, and take on higher liquidity risk. Therefore, these agents respond less than the agents with lower productivity to monetary policy that reduces the equilibrium interest rate. Overall quality of investment deteriorates, which can generate a negative spiral, dampening the effect of a monetary stimulus: Worse overall quality leads to lower liquidation values, increasing the cost of liquidity risk. This reduces the demand for loanable funds, further decreasing the interest rate, which then leads to further quality deterioration. When this feedback is strong, monetary policy can lose its effectiveness in stimulating aggregate output even if it leads to significant drops in the interest rate. |
| Keywords: | monetary policy transmission; financial frictions; heterogeneous agents; financial intermediaries |
| JEL: | E52 E58 G20 |
| Date: | 2015–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:724&r=cba |
| By: | Kuper, Gerard; Veurink, Jan Hessel (Groningen University) |
| Abstract: | This paper investigates whether political pressure from incumbent<br/>presidents influences the Fed?s monetary policy during the period that Alan Greenspan was the chairman of the United States Federal Reserve Board. A modified Taylor rule - featuring the inflation rate and the unemployment<br/>gap rather than the output gap - with time-varying coefficients will be used to test well-known political-economic theories of Nordhaus (1975) and Hibbs (1987). This novel approach addresses some of the disadvantages of Ordinary Least Squares, and has the additional benefit of allowing the use of mixed frequency data. Our findings suggest that the Fed under Greenspan did not create election driven monetary cycles, but was less inflation avers<br/>with a Democratic president. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:gro:rugsom:14020-eef&r=cba |
| By: | Emmanuel Farhi; Ivan Werning |
| Abstract: | Abstract We provide a unifying foundation for monetary policy and macroprudential policies in financial markets for economies with nominal rigidities in goods and labor markets and constraints on monetary policy such as the zero lower bound or fixed exchange rates. Macroprudential interventions in financial markets are beneficial because of an aggregate demand externality. Ex post, the distribution of wealth across agents affects aggregate demand and output through Keynesian channels. However, ex ante, these effects are not privately internalized in the financial decisions agents make. We obtain a simple formula that characterizes the size and direction for optimal financial market interventions as a function of a small number of empirically measurable sufficient statistics. We also characterize optimal monetary policy. We then show how to extend our framework to also incorporate financial markets frictions giving rise to pecuniary externalities. Finally, we provide a number of relevant concrete applications of our general theory. |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:qsh:wpaper:95131&r=cba |
| By: | Benjamin Eden (Vanderbilt University) |
| Abstract: | I use the Baumol-Tobin approach to examine the following propositions: (a) The optimal supply of liquidity requires a government loan program in addition to paying interest on reserves held by banks, (b) The adoption of the optimal policy will crowd out private credit arrangement and will thus shrink the financial sector and (c) regulations aimed at eliminating money substitutes may be redundant if the optimal policy is adopted but otherwise may improve welfare. |
| JEL: | E0 E5 |
| Date: | 2014–01–10 |
| URL: | http://d.repec.org/n?u=RePEc:van:wpaper:vuecon-14-00001&r=cba |
| By: | Franz R. Hahn (WIFO) |
| Abstract: | The prevailing view in the banking industry is that increased bank capital requirements drag down bank lending. This is because capital is assumed to impose higher funding costs on banks than debts. The leading scholarly view in finance maintains the contrary. We are able to present microeconometric evidence in support of the theoretical proposition that the bank capital-bank lending linkage remains positive under a minimum capital requirement regime. Most importantly, the empirical analysis indicates that this finding may hold well in both short and long run. |
| Keywords: | Bank capital, Credit crunch, Minimum capital requirement |
| Date: | 2015–04–16 |
| URL: | http://d.repec.org/n?u=RePEc:wfo:wpaper:y:2015:i:498&r=cba |
| By: | Andrea Vaona (Department of Economics (University of Verona)) |
| Abstract: | By means of structural VARs we investigate the long-run nexus between inflation and output in the Eurozone under different identification schemes and model specifications. The Eurozone is an interesting case study due to its very low inflation rate and to the official adherence of its monetary authority to the classical dichotomy. We find a strong positive long-run connection between inflation and output, supporting recent theoretical models arguing that this might exist at low long-run inflation rates. |
| Keywords: | long-run, non-vertical Phillips curve, empirical evidence |
| JEL: | E31 E40 E50 J64 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:ver:wpaper:20/2015&r=cba |
| By: | Patty Duijm (Duisenberg School of Finance, De Nederlandsche Bank, Amsterdam, the Netherlands); Peter Wierts (De Nederlandsche Bank, Amsterdam, the Netherlands) |
| Abstract: | Under Basel III rules, banks become subject to a liquidity coverage ratio (LCR) from 2015 onwards, to promote short-term resilience. We investigate the effects of such liquidity regulation on bank liquid assets and liabilities. Results indicate co-integration of liquid assets and liabilities, to maintain a minimum short-term liquidity buffer. Still, microprudential regulation has not prevented an aggregate liquidity cycle characterised by a pro-cyclical pattern in the size of balance sheets and risk taking. Our error correction regressions indicate that adjustment in the liquidity ratio is balanced towards the liability side, especially when the liquidity ratio is below its long-term equilibrium. This finding contrasts established wisdom that the LCR is mainly driven by changes in liquid assets. Policy implications focus on the need to complement microprudential regulation with a macroprudential approach. This involves monitoring of aggregate liquid assets and liabilities and addressing pro-cyclical behaviour by restricting leverage. |
| Keywords: | market liquidity, funding liquidity, liquidity regulation, liquidity coverage ratio, Basel III, banks, microprudential, macroprudential, co-integration, error correction models |
| JEL: | E44 G21 G28 |
| Date: | 2014–02–06 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20140018&r=cba |
| By: | Geert Mesters (VU University Amsterdam, the Netherlands); Bernd Schwaab (European Central Bank); Siem Jan Koopman (VU University Amsterdam, the Netherlands) |
| Abstract: | We develop an econometric methodology for the study of the yield curve and its interactions with measures of non-standard monetary policy during possibly turbulent times. The yield curve is modeled by the dynamic Nelson-Siegel model while the monetary policy measurements are modeled as non-Gaussian variables that interact with latent dynamic factors, including the yield factors of level and slope. Yield developments during the financial and sovereign debt crises require the yield curve model to be extended with stochastic volatility and heavy tailed disturbances. We develop a flexible estimation method for the model parameters with a novel implementation of the importance sampling technique. We empirically investigate how the yields in Germany, France, Italy and Spain have been affected by monetary policy measures of the European Central Bank. We model the euro area interbank lending rate EONIA by a log-normal distribution and the bond market purchases within the ECB's Securities Markets Programme by a Poisson distribution. We find evidence that the bond market interventions had a direct and temporary effect on the yield curve lasting up to ten weeks, and find limited evidence that purchases changed the relationship between the EONIA rate and the term structure factors. |
| Keywords: | dynamic Nelson-Siegel models, Central bank asset purchases, non-Gaussian, state space methods, importance sampling, European Central Bank |
| JEL: | C32 C33 E52 E58 |
| Date: | 2014–06–17 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20140071&r=cba |
| By: | Carapella, Francesca (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | This paper develops a framework to study the interaction between banking, price dynamics, and monetary policy. Deposit contracts are written in nominal terms: if prices unexpectedly fall, the real value of banks' existing obligations increases. Banks default, panics precipitate, economic activity declines. If banks default, aggregate demand for cash increases because financial intermediation provided by banks disappears. When money supply is unchanged, the price level drops, thereby providing incentives for banks to default. Active monetary policy prevents banks from failing and output from falling. Deposit insurance can achieve the same goal but amplifies business cycle fluctuations by inducing moral hazard. |
| Keywords: | banking panics; deflation; deposit insurance |
| JEL: | E53 E58 G21 N12 |
| Date: | 2015–03–04 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2015-18&r=cba |
| By: | Bullard, James B. (Federal Reserve Bank of St. Louis) |
| Date: | 2015–03–26 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlps:243&r=cba |
| By: | Bullard, James B. (Federal Reserve Bank of St. Louis) |
| Abstract: | St. Louis Fed President James Bullard discussed factors that are weighing on the decision to begin normalizing U.S. monetary policy and the recent removal of the word “patient” from the FOMC statement, during the 24th Annual Hyman P. Minsky Conference, in Washington, D.C. He said that now may be a good time to begin normalizing monetary policy so that it is set appropriately for an improving economy over the next two years. |
| Date: | 2015–04–15 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlps:244&r=cba |
| By: | Stephanie Chan (University of Amsterdam); Sweder van Wijnbergen (University of Amsterdam, the Netherlands) |
| Abstract: | CoCo’s (contingent convertible capital) are designed to convert from debt to equity when banks need it most. Using a Diamond-Dybvig model cast in a global games framework, we show that while the CoCo conversion of the issuing bank may bring the bank back into compliance with capital requirements, it will nevertheless raise the probability of the bank being run, because conversion is a negative signal to depositors about asset quality. Moreover, conversion imposes a negative externality on other banks in the system in the likely case of correlated asset returns, so bank runs elsewhere in the banking system become more probable too and systemic risk will actually go up after conversion. CoCo’s thus lead to a direct conflict between micro- and macroprudential objectives. We also highlight that ex ante incentives to raise capital to stave off conversion depend critically on CoCo design. In many currently popular CoCo designs, wealth transfers after conversion actually flow from debt holders to equity holders, destroying the latter’s incentives to provide additional capital in times of stress. Finally the link between CoCo conversion and systemic risk highlights the tradeoffs that a regulator faces in deciding to convert CoCo’s, providing a possible explanation of regulatory forbearance. |
| Keywords: | Contingent Convertible Capital, Contagion, Systemic Risk, Bank Runs, Global Games |
| JEL: | G01 G21 G32 |
| Date: | 2014–08–21 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20140110&r=cba |
| By: | Nyborg, Kjell G. (Dept. of Business and Management Science, Norwegian School of Economics) |
| Abstract: | The financial turmoil that we have been living with since August 2007 has left central banks, regulators, politicians, and economists with two big, overriding questions: How do we best get out of the crisis and how should banks be regulated and markets organized to avoid such crises in the future. This paper deals with the second question. Specifically, the paper deals with the third pillar of Bank supervision under Basel II, namely market discipline. The idea of this pillar, as summarized by Emmons, Gilbert, and Vaughan (2001), is for supervisors and regulators to make use of information about the financial health of banks that is contained in securities prices. In particular, as explained by Emmons et al: “The recent market discipline discussion centers on proposals to require some banks to issue a standardized form of subordinated debt.” Flannery (1998) discusses this more broadly and reviews the evidence on the effectiveness of using market information in prudential supervision. My proposal here is that the market discipline approach could usefully look for information about banks’ financial health outside of the securities markets. The market that I would suggest is especially valuable is the market for liquidity. This is motivated by the simple observation that the financial crisis of 07/08 has manifested itself in -- and rippled outwards from -- this market. Below, I briefly outline some features of the market for liquidity during the crisis and draw some comparisons to times of normalcy, before turning to my proposal. Some of what we see during the crisis period arguably can be explained by imperfections such as adverse selection, leading to credit rationing and relatively high unsecured rates. There are also imperfections present in the market for liquidity during times of normalcy (see, e.g., Bindseil, Nyborg, and Strebulaev~(2008)). Thus, as new regulation gets shaped in the wake of the crisis, it would appear that it is valuable to put measures in place to control these imperfections so that they do not flare up again. The suggestions I make in this paper are motivated by this concern. |
| Keywords: | Bank Supervision; Financial Crisis; Market for Liquidity |
| JEL: | E58 G00 G21 |
| Date: | 2015–04–10 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nhhfms:2015_014&r=cba |
| By: | Bocola, Luigi (Federal Reserve Bank of Minneapolis) |
| Abstract: | This paper examines the macroeconomic implications of sovereign credit risk in a business cycle model where banks are exposed to domestic government debt. The news of a future sovereign default hampers financial intermediation. First, it tightens the funding constraints of banks, reducing their available resources to finance firms (liquidity channel). Second, it generates a precautionary motive for banks to deleverage (risk channel). I estimate the model using Italian data, finding that i) sovereign credit risk was recessionary and that ii) the risk channel was sizable. I then use the model to evaluate the effects of subsidized long term loans to banks, calibrated to the ECB’s longer-term refinancing operations. The presence of strong precautionary motives at the time of policy enactment implies that bank lending to firms is not very sensitive to these credit market interventions. |
| Keywords: | Sovereign debt crises; Financial constraints; Risk; Credit policies |
| JEL: | E32 E44 G01 G21 |
| Date: | 2015–04–16 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:722&r=cba |
| By: | Gilchrist, Simon (Boston University); Schoenle, Raphael (Brandeis University); Sim, Jae W. (Board of Governors of the Federal Reserve System (U.S.)); Zakrajsek, Egon (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | Firms with limited internal liquidity significantly increased prices in 2008, while their liquidity unconstrained counterparts slashed prices. Differences in the firms' price-setting behavior were concentrated in sectors likely characterized by customer markets. We develop a model, in which firms face financial frictions, while setting prices in a customer-markets setting. Financial distortions create an incentive for firms to raise prices in response to adverse demand or financial shocks. These results reflect the firms' reaction to preserve internal liquidity and avoid accessing external finance, factors that strengthen the countercyclical behavior of markups and attenuate the response of inflation to fluctuations in output. |
| JEL: | E31 E32 E44 E51 |
| Date: | 2015–03–03 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2015-12&r=cba |
| By: | Sweder van Wijnbergen (University of Amsterdam); Christiaan van der Kwaak (University of Amsterdam) |
| Abstract: | We investigate the effectiveness of `Keynesian' fiscal stimuli when government deficits and debt rollovers are (possibly partially) financed by balance sheet constrained financial intermediaries. Because financial intermediaries operate under a leverage constraint, deficit financing of fiscal stimulus packages will cause interest rates to rise as private loans are crowded out by government debt in the credit provision channel. This lowers investment and (future) capital stocks, which affects output negatively for a prolonged period. Anticipations of these future consequences cause the price of capital and bonds to drop immediately when the policy is announced, inflicting capital losses on banks which leads to further tightening of leverage constraints and credit market conditions. This balance sheet effect triggers a negative amplification cycle further lowe ring the fiscal multiplier. Longer maturity debt leads to larger capital losses and lower Keynesian multipliers. When in addition sovereign default risk is introduced, additional capital losses may occur and outcomes deteriorate further after a deficit financed stimulus package, eventually implying a cumulative Keynesian multiplier close to zero or even negative. We do not argue that multipliers are always negative; but financial fragility and sovereign risk problems may severely lower them, possibly to the point of becoming negative. |
| Keywords: | Financial Intermediation, Macrofinancial Fragility, Fiscal Policy, Sovereign Default Risk |
| JEL: | E44 E62 H30 |
| Date: | 2014–01–14 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20140004&r=cba |
| By: | Sartaj Rasool Rather (Madras School of Economics); Sunil Paul (Madras School of Economics); S. Raja Sethu Durai (Madras School of Economics) |
| Abstract: | This study shows that replacing the traditional measure of asymmetry that is skewness in the inflation forecasting model with an alternative asymmetry measure that captures the joint influence of both skewness and variance on inflation significantly improves the forecast at various horizons. The empirical evidence suggests that it is more appropriate to use such measure of asymmetry in inflation forecast model as it has edge over simple measure of skewness in predicting inflation. These findings are consistent with the prediction of menu cost model that the variance of cross sectional distribution of relative price changes amplifies the impact of skewness on inflation. |
| Keywords: | skewness, relative price changes, asymmetry, inflation forecasting |
| JEL: | E30 E31 E52 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:mad:wpaper:2015-099&r=cba |
| By: | David Allen (University of South Australia, and University of Sydney, Australia); Michael McAleer (National Tsing Hua University Taiwan,) |
| Abstract: | In this paper, we develop a new capital adequacy buffer model (CABM) which is sensitive to dynamic economic circumstances. The model, which measures additional bank capital required to compensate for fluctuating credit risk, is a novel combination of the Merton structural model which measures distance to default and the timeless capital asset pricing model (CAPM) which measures additional returns to compensate for additional share price risk. |
| Keywords: | Credit risk, Capital buffer, Distance to default, Conditional value at risk, Capital adequacy buffer model |
| JEL: | G01 G21 G28 |
| Date: | 2013–10–15 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20130168&r=cba |
| By: | Nalan Basturk (Erasmus University Rotterdam); Cem Cakmakli (University of Amsterdam, Koc University); Pinar Ceyhan (Erasmus University Rotterdam); Herman K. van Dijk (Erasmus University Rotterdam, VU University Amsterdam) |
| Abstract: | This discussion paper resulted in a publication in the <A href="http://onlinelibrary.wiley.com/doi/10.1002/jae.2411/full">'Journal of Applied Econometrics'</A>, 2014, 29(7), 1164-1182.<P> Changing time series properties of US inflation and economic activity, measured as marginal costs, are modeled within a set of extended Phillips Curve (PC) models. It is shown that mechanical removal or modeling of simple low frequency movements in the data may yield poor predictive results which depend on the model specification used. Basic PC models are extended to include structural time series models that describe typical time varying patterns in levels and volatilities. Forward as well as backward looking expectation mechanisms for inflation are incorporated and their relative importance evaluated. Survey data on expected inflation are introduced to strengthen the information in the likelihood. Use is made of simulation based Bayesian techniques for the empirical analysis. No credible evidence is found on endogeneity and long run stability between inflation and marginal costs. Backward-looking inflation appears stronger than forward-looking one. Levels and volatilities of inflation are estimated more precisely using rich PC models. Estimated inflation expectations track nicely the observed long run inflation from the survey data. The extended PC structures compare favorably with existing basic Bayesian Vector Autoregressive and Stochastic Volatility models in terms of fit and prediction. Tails of the complete predictive distributions indicate an increase in the probability of disinflation in recent years. |
| Keywords: | New Keynesian Phillips curve, unobserved components, time varying parameters, level shifts, inflation expectations, survey data |
| JEL: | C11 C32 E31 E37 |
| Date: | 2013–07–16 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20130090&r=cba |
| By: | Sweder van Wijnbergen (University of Amsterdam); Christiaan van der Kwaak (University of Amsterdam) |
| Abstract: | This paper resulted in a publication in the <A href="https://apps.webofknowledge.com/full_record.do?product=UA&search_mode=GeneralSearch&qid=4&SID=T2lPmvB33HytcbnHQmV&page=1&doc=1">'Journal of Economic Dynamics and Control'</A>, 2014, 43, 218-240.<P> We analyse the poisonous interaction between bank rescues, financial fragility and sovereign debt discounts. In our model balance sheet constrained financial intermediaries finance both capital expenditure of intermediate goods producers and government deficits. The financial intermediaries face the risk of a (partial) default of the government on its debt obligations. We analyse the impact of a financial crisis, first under full government credibility and then with an endogenous sovereign debt discount. We introduce long term government debt, which gives rise to the possibility of capital losses on bank balance sheets. The negative feedback effects from falling bond prices on the economy are shown to increase with the average duration of the government bonds, as higher interest rates on new debt lead to capital losses on banks' holding of existing long term (government) debt. The associated increase in credit tightness leads to a negative amplification effect, significantly increasing output losses and declines in investment after a financial crisis. We introduce sovereign default risk through the existence of a maximum sustainable level of debt, derived from the maximum level of taxation that is politically feasible. When close to this limit, sovereign discounts emerge reflecting potential defaults on debt, creating a strong link between sovereign default risk and financial fragility emerges. A debt-financed recapitalisation of the financial intermediaries causes bond prices to drop triggering capital losses at the bank under intervention. This mechanism shows the limits to conventional bank bail-outs in countries with fragile public creditworthiness, limits that became very visible during the Great Recession in Southern Europe. |
| Keywords: | Financial Intermediation; Macrofinancial Fragility; Fiscal Policy; Sovereign Default Risk |
| JEL: | E44 E62 H30 |
| Date: | 2013–10–25 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20130179&r=cba |
| By: | BLANCHETON Bertrand |
| Abstract: | A stubborn myth presents this Act as a conspiracy, allegedly giving the Banque de France solid independence and stymieing any subsequent allegiance to the Government. The State would have been forced to turn to the markets for financing, leading to an increase in the public debt. For the far left, the nationalist right-wing and also for M. Rocard or J Attali, this Act would mark a break in the financial relations between the bank and the government, blocking the possibility to mint money in order to finance public spending and obtain the Bank’s cooperation at zero cost. In reality, article 19 of the Act upholds the possibility for the Government to obtain advances and loans… The Act of 1973 very clearly protects the possibility for the Government to obtain finance from the Banque de France – even at no cost – and keeps it under strict guardianship |
| Keywords: | Banque de France, public debt, central bank independence. |
| JEL: | G20 N10 N20 N40 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:grt:wpegrt:2015-03&r=cba |
| By: | Potter, Simon M. (Federal Reserve Bank of New York) |
| Abstract: | Remarks at the Money Marketeers of New York University, New York City. |
| Keywords: | policy normalization: System Open Market Account (SOMA); Open Market Trading Desk; overnight reverse repurchase agreement (ON RRP); interest on excess reserve balances (IOER); desk; flexibility; investment capacity; testing; data collection; liftoff |
| JEL: | E52 |
| Date: | 2015–04–15 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsp:164&r=cba |