nep-cba New Economics Papers
on Central Banking
Issue of 2015‒05‒02
thirty-one papers chosen by
Maria Semenova
Higher School of Economics

  1. Government Guarantees and Financial Stability By Allen, Franklin; Carletti, Elena; Goldstein, Itay; Leonello, Agnese
  2. The International Transmission of U.S. Monetary Policy: New Evidence from Trade Data By Shu Lin; Haichun Ye
  3. Is deflation good or bad? Just mind the inflation gap By Marco Casiraghi; Giuseppe Ferrero
  4. Banking Union and the governance of credit institutions: A legal perspective By Binder, Jens-Hinrich
  5. Structural and cyclical determinants of bank interest rate pass-through in Eurozone By Aurélien Leroy; Yannick Lucotte
  6. The bank lending channel of unconventional monetary policy: the impact of the VLTROs on credit supply in Spain By Miguel García-Posada; Marcos Marchetti
  7. The stability of short-term interest rates pass-through in the euro area during the financial market and sovereign debt crises. By S. Avouyi-Dovi; G. Horny; P. Sevestre
  8. Does Foreign Bank Entry Affect Monetary Policy Effectiveness?: Exploring the Interest Rate Pass-Through Channel By Sasidaran Gopalan; Ramikishen S. Rajan
  9. Banking Contagion under Different Exchange Rate Regimes in CEE By Kutasi, Gábor
  10. The effects of contingent convertible (CoCo) bonds on insurers' capital requirements under Solvency II By Niedrig, Tobias; Gründl, Helmut
  11. Macroeconomic policy regime in Poland By Milka Kazandziska
  12. An holistic approach to ECB asset purchases, the Investment Plan and CMU By Natacha Valla; Jesper Berg; Laurent Clerc; Olivier Garnier; Erik Nielsen
  13. On the welfare properties of fractional reserve banking By Sanches, Daniel R.
  14. The U.S. monetary policy outlook and its global implications By Dudley, William
  15. Fiscal Policy, Interest Rate Spreads, and the Zero Lower Bound By Bredemeier, Christian; Juessen, Falko; Schabert, Andreas
  16. Business and Financial Cycles: an estimation of cycles’ length focusing on Macroprudential Policy By Rodrigo Barbone Gonzalez; Joaquim Lima; Leonardo Marinho
  17. Optimal Rules for Monetary Policy in Brazil By Joaquim Pinto de Andrade; José Angelo C. A. Divino
  18. The legal framework for the European System of Central Banks By Siekmann, Helmut
  19. Measuring Monetary Policy Stance in Brazil By Brisne J. V. Céspedes; Elcyon C. R. Lima; Alexis Maka; Mário J. C. Mendonça
  20. The Demand and Supply of Money Under High Inflation: Brazil 1974/94 By Octávio A. F. Tourinho
  21. Countercyclical Capital Buffers: bayesian estimates and alternatives focusing on credit growth By Rodrigo Barbone Gonzalez; Joaquim Lima; Leonardo Marinho
  22. An Adaptive Approach to Forecasting Three Key Macroeconomic Variables for Transitional China By Linlin Niu; Xiu Xu; Ying Chen;
  23. The Sticky Information Phillips Curve: Evidence for Australia By Christian Gillitzer
  24. The Impact of the Chinese Exchange Policy on Foreign Trade with the European Union By Ana Cardoso; António Portugal Duarte
  25. Funding Liquidity Risk From a Regulatory Perspective By Gouriéroux, Christian; Héam, Jean-Cyprien
  26. Monetary Policy, Inflation and the Level of Economic Activity in Brasil after the Real Plan: Stylized Facts from SVAR Models By Brisne J. V. Céspedes; Elcyon C. R. Lima; Alexis Maka
  27. Robustness and Stabilization Properties of Monetary Policy Rules in Brazil By Ajax R. B. Moreira; Marco A. F. H. Cavalcanti
  28. The legal framework for the European system of central banks By Siekmann, Helmut
  29. A theory of the boundaries of banks with implications for financial integration and regulation By Fecht, Falko; Inderst, Roman; Pfeil, Sebastian
  30. The Variance of Inflation and the Stability of the Demand for Money in Brazil: a Bayesian Approach By Elcyon Caiado Rocha Lima; Ricardo Sandes Ehlers
  31. Introducing a New Database of Sovereign Defaults By David Beers; Jean-Sébastien Nadeau

  1. By: Allen, Franklin; Carletti, Elena; Goldstein, Itay; Leonello, Agnese
    Abstract: Government guarantees to financial institutions are intended to reduce the likelihood of runs and bank failures, but are also usually associated with distortions in banks’ risk taking decisions. We build a model to analyze these trade-offs based on the global-games literature and its application to bank runs. We derive several results, some of which against common wisdom. First, guarantees reduce the probability of a run, taking as given the amount of bank risk taking, but lead banks to take more risk, which in turn might lead to an increase in the probability of a run. Second, guarantees against fundamental-based failures and panic-based runs may lead to more efficiency than guarantees against panic-based runs alone. Finally, there are cases where following the introduction of guarantees banks take less risk than would be optimal.
    Keywords: bank moral hazard; fundamental runs; government guarantees; panic runs
    JEL: G21 G28
    Date: 2015–04
  2. By: Shu Lin (Fudan University and Hong Kong Institute for Monetary Research); Haichun Ye (Shanghai University of Finance and Economics)
    Abstract: We make the first attempt in the literature to empirically examine the spillover effects of U.S. monetary policy on trade in other countries. In a large sector-level bilateral trade dataset of 137 countries for the years 1970-2000, we find strong and robust evidence supporting an international credit channel of U.S. monetary policy transmission. We show that: 1) financially more constrained sectors have a more negative exposure of their trade to a tight U.S. monetary policy; 2) this international credit channel works mainly during significant U.S. monetary tightening periods (e.g., a large increase in interest rates); 3) the negative impact of a tight U.S. policy is significantly stronger in financially less developed countries or countries with no monetary autonomy.
    Keywords: International Transmission of U.S. Monetary Policy, Trade, Credit Constraints, Credit Channel
    JEL: E52 E44 F14 F33 F42
    Date: 2015–04
  3. By: Marco Casiraghi (Bank of Italy); Giuseppe Ferrero (Bank of Italy)
    Abstract: We explain why the macroeconomic effects of shocks to inflation of the same size, but opposite sign, are not necessarily symmetric. All in all, the costs of deflation and disinflation tend to exceed those of inflation due to the presence of constraints in the economy, namely the zero lower bound on nominal interest rates, downward nominal wage rigidity and borrowing limits. When these constraints are binding, they can prevent monetary policy from closing the inflation gap, labor market from clearing and agents from deleveraging. The impact of a disinflationary shock on the tightness of these constraints depends on the cyclical and structural conditions of the economy. We argue that it would be a mistake to assume that perverse effects can arise only with actual deflation and thus that the classification of deflationary episodes into good (supply-driven) and bad ones (demand-driven) is not only incorrect, but also misleading in terms of policy implications. Empirical evidence for the euro area suggests that the three constraints have become increasingly tight recently.
    Keywords: monetary policy, unconventional monetary measures
    JEL: E31 E52 E58
    Date: 2015–04
  4. By: Binder, Jens-Hinrich
    Abstract: The creation of the Banking Union is likely to come with substantial implications for the governance of Eurozone banks. The European Central Bank, in its capacity as supervisory authority for systemically important banks, as well as the Single Resolution Board, under the EU Regulations establishing the Single Supervisory Mechanism and the Single Resolution Mechanism, have been provided with a broad mandate and corresponding powers that allow for far-reaching interference with the relevant institutions' organisational and business decisions. Starting with an overview of the relevant powers, the present paper explores how these could - and should - be exercised against the backdrop of the fundamental policy objectives of the Banking Union. The relevant aspects directly relate to a fundamental question associated with the reallocation of the supervisory landscape, namely: Will the centralisation of supervisory powers, over time, also lead to the streamlining of business models, corporate and group structures of banks across the Eurozone?
    Keywords: Banking Union,Single Supervisory Mechanism,Single Resolution Mechanism,Banking Regulation,Bank Corporate Governance
    JEL: G15 G21 G28 K22 K23
    Date: 2015
  5. By: Aurélien Leroy; Yannick Lucotte
    Abstract: This paper empirically investigates the evolution and the sources of interest rate pass-through heterogeneity in the Eurozone for a sample of 11 euro area countries over the period 2003M1-2011M12. Considering two harmonized bank retail rates, we first estimate single equation error correction models (ECM) and find an important pass-through heterogeneity, both for household and firm rates, even if results suggest that heterogeneity is not a new phenomenon. On the basis of this result, we then extend our analysis by studying the role played by a large number of structural and cyclical factors on monetary policy transmission. Findings based on a panel ECM approach and a panel interaction VAR framework indicate that financial tensions and fragile economic activity following the crisis are not the only factors that explain the heterogeneous monetary transmission in the euro. The differences of financial market structures across countries, in terms of banking competition and financial market development, also explain a part of this heterogeneity. In terms of policy implications, this means that future reforms promoting a more efficient and homogeneous monetary policy transmission should not only focus on risk factors, but also try to consolidate financial integration.
    Keywords: Interest rate pass-through; Monetary policy transmission; Eurozone; Error correction model; Interacted panel VAR
    JEL: C23 D40 E43 E44 E58
    Date: 2015
  6. By: Miguel García-Posada (Banco de España); Marcos Marchetti (Banco de España)
    Abstract: We assess the impact on the credit supply to non-financial corporations of the two verylong-term refinancing operations (VLTROs) conducted by the Eurosystem in December 2011 and February 2012 for the case of Spain. To do so we use bank-firm level information from a sample of more than one million lending relationships over two years. Our methodology tackles the two main identification challenges: (i) how to disentangle credit supply from demand; and (ii) the endogeneity of VLTRO bids, as banks with more deteriorated funding conditions were more likely both to ask for a large amount of funds and to restrict credit supply. First, we exploit the fact that many firms simultaneously borrow from several banks to effectively control for firm-specific credit demand. Second, we exhaustively control for banks’ funding difficulties by constructing several measures of balance-sheet strength and by including bank fixed effects. Our findings suggest that the VLTROs had a positive moderately-sized effect on the supply of bank credit to firms, providing evidence of a bank lending channel in the context of unconventional monetary policy. We also find that the effect was greater for illiquid banks and that it was driven by credit to SMEs, as there was no impact on loans to large firms.
    Keywords: unconventional monetary policy, VLTRO, credit supply, bank lending channel.
    JEL: E52 E58 G21
    Date: 2015–04
  7. By: S. Avouyi-Dovi; G. Horny; P. Sevestre
    Abstract: We analyse the dynamics of the pass-through of banks’ marginal cost to bank lending rates over the 2008 crisis and the euro area sovereign debt crisis in France, Germany, Greece, Italy, Portugal and Spain. We measure banks’ marginal cost by their rate on new deposits, contrary to the literature that focuses on money market rates. This allows us to account for banks’ risks. We focus on the interest rate on new short-term loans granted to non-financial corporations in these countries. Our analysis is based on an error-correction approach that we extend to handle the time-varying long-run relationship between banks’ lending rates and banks’ marginal cost, as well as stochastic volatility. Our empirical results are based on a harmonised monthly database from January 2003 to October 2014. We estimate the model within a Bayesian framework, using Markov Chain Monte Carlo methods (MCMC).We reject the view that the transmission mechanism is time invariant. The long-run relationship moved with the sovereign debt crises to a new one, with a slower pass-through and higher bank lending rates. Its developments are heterogeneous from one country to the other. Impediments to the transmission of monetary rates depend on the heterogeneity in banks marginal costs and therefore, its risks. We also find that rates to small firms increase compared to large firms in a few countries. Using a VAR model, we show that overall, the effect of a shock on the rate of new deposits on the unexpected variances of new loans has been less important since 2010. These results confirm the slowdown in the transmission mechanism.
    Keywords: bank interest rates, error-correction model, structural breaks, stochastic volatility, Bayesian econometrics.
    JEL: E43 G21
    Date: 2015
  8. By: Sasidaran Gopalan (Institute for Emerging Market Studies, Hong Kong University of Science and Technology); Ramikishen S. Rajan (School of Policy, Government and International Affairs (SPGIA), George Mason University)
    Abstract: This paper explores the impact of foreign bank entry on interest-rate-pass-through for a panel of 57 emerging and developing economies over 1995-2009. The paper tests for possible thresholds in terms of foreign bank presence that differentially impact interest-rate passthrough. The empirical results suggest that there are strong threshold effects in that foreign bank entry tends to enhance interest rate pass-through only in countries with greater degree of foreign bank presence compared to those with limited entry. The paper also finds that when foreign bank entry leads to greater banking concentration, it significantly lowers the extent of interest rate transmission.
    Keywords: foreign bank entry, financial liberalization, financial inclusion, financial development, banking concentration, interest rates
    JEL: F21 G00 G21 O16
    Date: 2015–02
  9. By: Kutasi, Gábor
    Abstract: The global crisis of 2008 caused both liquidity shortage and increasing insolvency in the banking system. The study focuses on credit default contagion in the Central and Eastern European (CEE) region, which originated in bank runs generated by non-performing loans granted to non-financial clients. In terms of methodology, the paper relies on one hand on review of the literature, and on the other hand on a data survey with comparative and regression analysis. To uncover credit default contagion, the research focuses on the combined impact of foreign exchange rates and foreign private indebtedness.
    Keywords: financial contagion, banking, Central and Eastern Europe, foreign exchange rate, non-performing loan
    JEL: F31 F37 G17 G21 G33
    Date: 2015
  10. By: Niedrig, Tobias; Gründl, Helmut
    Abstract: The Liikanen Group proposes contingent convertible (CoCo) bonds as a potential mechanism to enhance financial stability in the banking industry. Especially life insurance companies could serve as CoCo bond holders as they are already the largest purchasers of bank bonds in Europe. We develop a stylized model with a direct financial connection between banking and insurance and study the effects of various types of bonds such as non-convertible bonds, write-down bonds and CoCos on banks' and insurers' risk situations. In addition, we compare insurers' capital requirements under the proposed Solvency II standard model as well as under an internal model that ex-ante anticipates additional risks due to possible conversion of the CoCo bond into bank shares. In order to check the robustness of our findings, we consider different CoCo designs (write-down factor, trigger value, holding time of bank shares) and compare the resulting capital requirements with those for holding nonconvertible bonds. We identify situations in which insurers benefit from buying CoCo bonds due to lower capital requirements and higher coupon rates. Our results highlight how the Solvency II standard model can mislead insurers in their CoCo investment decision due to economically irrational incentives.
    Keywords: Contingent Convertible Capital,CoCo Bond,Basel III,Solvency II,Life Insurance,Interconnectedness
    JEL: G11 G21 G22 G28 G32
    Date: 2015
  11. By: Milka Kazandziska (Berlin School of Economics and Law, Carl von Ossietzky University Oldenburg in Germany)
    Abstract: The goal of this paper is to analyse the economic development of Poland using the concept of macroeconomic policy regimes (MPRs). Six elements of a MPR will be identified: foreign economic policy, industrial policy, the financial system, wage policy, monetary policy and fiscal policy. Examining the functionality of the development of these elements applied to Poland is a further aim of this paper. The functionality of the development of the MPR elements will be analysed on the basis of the fulfilment of the objectives, as well as the use of the proposed instruments and strategy assigned to every element of MPR. Due to space limits, we are going to focus on the former in this paper. Taking into consideration that Poland is an emerging and a relatively open economy, foreign economic policy and industrial policy play very significant roles in restructuring of the economy towards production and exports of high value-added products, which would enable the country to follow a growth path consistent with an external balance. The financial needs of the manufacturing sector and particularly of the producers and/or exporters of high-end products need to be satisfied by the financial system, whose stability needs to be secured with the help of monetary policy. The latter is, moreover, in charge of providing low-cost finance and maintaining the stability of the exchange rate. Stabilising the inflation rate would be given to wage policy. Fiscal policy’s main tasks would be to correct aggregate demand shocks and reduce income inequality.
    Keywords: Macroeconomic regime; open economy policies; emerging countries; industrial policy; Poland
    JEL: E02 E58 E61 F41 F43
    Date: 2015–04
  12. By: Natacha Valla; Jesper Berg; Laurent Clerc; Olivier Garnier; Erik Nielsen
    Abstract: To stimulate and finance investment in Europe the three “policy stars” of Europe need to be aligned: the Capital Markets Union initiative, the €315bn Investment Plan, and the ECB’s €1,100bn asset purchase scheme. They jointly face a unique set of issues. First, the resilience and the cyclical performance of the European bank based system needs to be improved. Second, the “right” markets need to be developed for banks to outsource risks without jeopardising financial stability. Third, cross-border risk-sharing urgently needs to be rebalanced, because it has become, in the wake of the Great Recession, overly reliant on debt instruments as opposed to equity. We argue that to achieve alignment between initiatives, an overall strategic vision could: ? Set an explicit, holistic strategy, ensuring that the instruments in the Investment Plan receive appropriate regulatory treatment within the CMU, and are eligible to the ECB’s purchase programme and collateral. ? Set a strategic objective for the euro area financial structure. It could be a “spare wheel” model where (i) banks would remain predominant (with capital markets as a countercyclical “spare wheel”), and (ii) banks would outsource risk through covered bonds (with untranched securitisation acting as the “spare wheel”). ? Proactively promote equity instruments in all three policy initiatives for more sustainable cross border risk sharing. ? Promote a new business model for “credit assessment” with a value chain featuring the credit information collected by commercial and central banks. ? Re-orientate the ECB’s purchases away from sovereign debt instruments towards the instruments that will finance the Investment Plan, those of the so-called “agencies”, and private sector assets. ? Formally involve NPBs in the Investment Plan, preferably in the equity of the EFSI Fund. ? Improve the governance of public investment ex ante via independent, supra-national investment committees, and ex post via strict disciplinary measures. ? Be pragmatic but tangible in the objectives set for the Capital Markets Union (focus on cross-border insolvencies and improve national business environments).
    Keywords: ECB;Capital Markets Union;cross-border capital flows;policy strategy;securitization;covered bonds;financial structure;Quantitative Easing
    JEL: E42 E44 E52 E58 E61
    Date: 2015–04
  13. By: Sanches, Daniel R. (Federal Reserve Bank of Philadelphia)
    Abstract: Supersedes Working Paper 13-32/R. Monetary economists have long recognized a tension between the benefits of fractional reserve banking, such as the ability to undertake more profitable (long-term) investment opportunities, and the difficulties associated with it, such as the risk of in-solvency for each bank and the associated losses to bank liability holders. I show that a specific banking arrangement (a joint-liability scheme) provides an effective mechanism for ensuring the ex-post transfer of reserves from liquid banks to illiquid banks, so it is possible to select a socially efficient reserve ratio in the banking system that preserves the safety of bank liabilities as a store of value and maximizes the rate of return paid to bank liability holders.
    Keywords: Fractional reserve banking; Reserve management; Risk sharing
    JEL: E42 G21
    Date: 2015–04–14
  14. By: Dudley, William (Federal Reserve Bank of New York)
    Abstract: Remarks at the Bloomberg Americas Monetary Summit, New York City.
    Keywords: emerging market economies (EMEs); economic growth; taper tantrum; personal consumption expenditures (PCE) deflator; interest on excess reserves (IOER); normalization
    JEL: E52
    Date: 2015–04–20
  15. By: Bredemeier, Christian (University of Cologne); Juessen, Falko (University of Wuppertal); Schabert, Andreas (University of Cologne)
    Abstract: This paper questions unconventional fiscal policy effects when the monetary policy rate is at the zero lower bound. We provide evidence for the US that the spread between the policy rate and the US-LIBOR, which is more relevant for private sector transactions, increases with government expenditures. We introduce a corresponding spread into an otherwise standard macroeconomic model which reproduces this observation. The model predicts that the fiscal multiplier takes conventional values, regardless of whether the policy rate follows a standard feedback rule or is at its zero lower bound. Likewise, labor tax increases exert contractionary effects in both cases.
    Keywords: fiscal multiplier, tax policy, interest rate spreads, zero lower bound, liquidity premium
    JEL: E32 E42 E63
    Date: 2015–04
  16. By: Rodrigo Barbone Gonzalez; Joaquim Lima; Leonardo Marinho
    Abstract: Business and financial cycles are important to Monetary and Macroprudential Policies. The Countercyclical Capital Buffer (CCB) proposed by the Basel Committee on Banking Supervision (BCBS) assumes that the financial cycle is four times longer than the business one with direct impacts over its main indicator, the credit-to-GDP gap. This paper addresses the issue of estimating credit and business cycles’ length using Bayesian Structural Time Series Models (STM) and Singular Spectrum Analysis (SSA) followed by Fourier-based Spectral Analysis. The results, considering 28 countries, suggest that financial cycles, measured by the credit-to-GDP, could indeed be longer than the business one, but definitely shorter than the one implied in the cut-off frequency used by the BCBS. We find that most countries in the sample have financial cycles between 13 and 20 years, but there is a smaller group of countries whose estimates are close to those of the business cycle, i.e., 3 to 7 years. Finally, we estimate q-ratios objectively using STM and find that a HP smoothing factor that closely relates to the gain functions of our estimated state space form is in the trend component of HP(150) and not in the gap of HP(400k)
    Date: 2015–04
  17. By: Joaquim Pinto de Andrade; José Angelo C. A. Divino
    Abstract: This paper presents optimal rules for monetary policy in Brazil derived from a backward looking expectation model consisting of a Keynesian IS function and an Augmented Phillips Curve (IS-AS). The IS function displays a high sensitivity of aggregate demand to the real interest rate and the Phillips Curve is accelerationist. The optimal monetary rules show low interest rate volatility with reaction coefficients lower than the ones suggested by Taylor (1993a,b). Reaction functions estimated through ADL and SUR models suggest that monetary policy has not been optimal and has aimed to product rather than inflation stabilization. Este trabalho apresenta regras ótimas de política monetária no Brasil derivadas de um modelo que consiste de uma função keinesiana IS e uma Curva de Phillips Aumentada (IS-AS) e com expectativas voltadas para trás. A função IS revela alta sensibilidade da demanda agregada à taxa de juros e a Curva de Phillips é aceleracionista. A regra ótima de política monetária mostra reduzida volatilidade da taxa de juros com coeficientes de reação menores do que os sugeridos por Taylor (1993a e b). Funções de reação estimadas através de modelos ADL e SUR sugerem que a política monetária não tem sido ótima e tem buscado estabilizar o produto em lugar da inflação.
    Date: 2015–01
  18. By: Siekmann, Helmut
    Abstract: The paper traces the developments from the formation of the European Economic and Monetary Union to this date. It discusses the fact that the primary mandate of the European System of Central Banks (ESCB) is confined to safeguarding price stability and does not include general economic policy. Finally, the paper contributes to the discussion on whether the primary law of the European Union would support a eurozone exit. The Treaty of Maastricht imposed the strict obligation on the European Union (EU) to establish an economic and monetary union, now Article 3(4) TEU. This economic and monetary union is, however, not designed as a separate entity but as an integral part of the EU. The single currency was to become the currency of the EU and to be the legal tender in all Member States unless an exemption was explicitly granted in the primary law of the EU, as in the case of the UK and Denmark. The newly admitted Member States are obliged to introduce the euro as their currency as soon as they fulfil the admission criteria. Technically, this has been achieved by transferring the exclusive competence for the monetary policy of the Member States whose currency is the euro on the EU, Article 3(1)(c) TFEU and by bestowing the euro with the quality of legal tender, the only legal tender in the EU, Article 128(1) sentence 3 TFEU.
    Keywords: economic and monetary union,euro,monetary policy,economic policy
    Date: 2015
  19. By: Brisne J. V. Céspedes; Elcyon C. R. Lima; Alexis Maka; Mário J. C. Mendonça
    Abstract: In this article we use the theory of conditional forecasts to develop a new Monetary Conditions Index (MCI) for Brazil and compare it to the ones constructed using the methodologies suggested by Bernanke and Mihov (1998) and Batini and Turnbull (2002). We use Sims and Zha (1999) and Waggoner and Zha (1999) approaches to develop and compute Bayesian error bands for the MCIs. The new indicator we develop is called the Conditional Monetary Conditions Index (CMCI) and is constructed using, alternatively, Structural Vector Autoregressions (SVARs) and Forward-Looking (FL) models. The CMCI is the forecasted output gap, conditioned on observed values of the nominal interest rate (the Selic rate) and of the real exchange rate. We show that the CMCI, when compared to the MCI developed by Batini and Turnbull (2002), is a better measure of monetary policy stance because it takes into account the endogeneity of variables involved in the analysis. The CMCI and the Bernanke and Mihov MCI (BMCI), despite conceptual differences, show similarities in their chronology of the stance of monetary policy in Brazil. The CMCI is a smoother version of the BMCI, possibly because the impact of changes in the observed values of the Selic rate is partially compensated by changes in the value of the real exchange rate. The Brazilian monetary policy, in the 2000:9- 2005:4 period and according to the last two indicators, has been expansionary near election months. Neste artigo utiliza-se a teoria das previsões condicionais para o desenvolvimento de um novo Índice de Condições Monetárias [Monetary Conditions Index (MCI)] para o Brasil, comparando-o com os índices obtidos seguindo as metodologias sugeridas por Bernanke e Mihov (1998) e Batini e Turnbull (2002). Adicionalmente, desenvolvem-se e calculam-se intervalos de confiança bayesianos para os MCIs, empregando-se a abordagem proposta por Sims e Zha (1999) e Waggoner e Zha (1999). O novo indicador desenvolvido é chamado de Índice de Condições Monetárias Condicional [Conditional Monetary Conditionals Index (CMCI)], e é construído utilizando-se alternativamente os modelos de Auto-regressão Vetorial Estrutural [Structural Vector Autoregressions (SVARs) e Antecipativo [Forward-Looking (FL). O CMCI é a previsão do hiato do produto, condicionada aos valores observados da taxa de juros nominal (taxa Selic) e da taxa de câmbio real. Mostra-se que o CMCI, comparado ao MCI desenvolvido por Batini e Turnbull (2002), é um melhor indicador do estado da política monetária porque leva em consideração a endogeneidade das variáveis envolvidas na análise. O CMCI e o MCI Bernanke-Mihov (BMCI), apesar das diferenças conceituais, estabelecem uma cronologia semelhante para o estado da política monetária no Brasil. O CMCI é uma versão suavizada do BMCI, provavelmente porque o impacto de mudanças nos valores observados da taxa Selic é parcialmente compensado por mudanças no valor da taxa de câmbio real. De acordo com o CMCI e o BMCI, no período entre setembro de 2000 e abril de 2005, a política monetária brasileira tem sido expansionista nos meses próximos às eleições.
    Date: 2015–01
  20. By: Octávio A. F. Tourinho
    Abstract: A specification for the demand for money in economies where inflation is high and stochastic is presented. It uses a generalized functional form and includes the variance of the inflation rate as an explanatory variable, and is estimated for Brazil in the period 1974/94 under the assumption that the monetary policy is passive and that expectations are adaptive. The supply of money is then specified as a generalization to a stochastic environment of the rule proposed by Sargent and Wallace (1973). The money demand and supply equations are then estimated simultaneously, under rational expectations, by using the Johansen (1991) (VEC) procedure and interpreting the two cointegrating vectors which arise as the supply and demand equations. The restrictions suggested by the hypothesized theoretical models for the money market equilibrium in high inflation processes are tested and accepted for this data. Apresenta-se neste artigo uma especificação para o equilíbrio monetário em uma economia onde a taxa de inflação é elevada e estocástica. A equação de demanda por moeda utiliza a forma funcional generalizada de Box-Cox e inclui a variância da inflação como uma variável explicativa. A oferta de moeda é especificada como uma generalização para o ambiente estocástico da regra proposta por Sargent e Wallace. O sistema de equações é estimado para os dados brasileiros do período 1974/94 de dois modos. Primeiro, a sua forma reduzida é estimada sob a hipótese de que a política monetária é passiva e de que as expectativas são adaptativas Em seguida, ele é estimado em sua forma estrutural, sob a hipótese de que as expectativas são racionais, usando o procedimento VEC de Johansen. Argumenta-se que os dois vetores de cointegração que são obtidos podem ser interpretados como representações das equações de oferta e demanda de moeda. Finalmente, as restrições extraídas dos modelos teóricos apresentados na primeira parte do artigo para caracterizar o equilíbrio de mercado sob condições de inflação elevada são aceitas no teste empírico do modelo para estes dados.
    Date: 2015–01
  21. By: Rodrigo Barbone Gonzalez; Joaquim Lima; Leonardo Marinho
    Abstract: We re-evaluate the proposed framework of the Basel Committee on Banking Supervision (BCBS) to look into the credit-to-GDP gap as a leading indicator related to the Countercyclical Capital Buffer (CCB) and propose an alternative approach focusing at credit-to-GDP growth. We follow earlier work that the Hodrick-Prescott (HP) filter, especially with the proposed smoothing factor calibration, HP(400k), could possibly create spurious cycles. Moreover, it would not properly fit short credit series. With that in mind, we estimate Bayesian STMs for 34 countries and evaluate on-line (one-sided) estimates of their state components as well as other variables derived from their joint posterior distributions to anticipate crisis. The probabilities associated with the slope of the credit-to-GDP estimated using a one-sided STM have lower noise-to-signal ratios (NS) than the credit-to-GDP gap, especially considering a robustness exercise comprise of short series. The slope of the one-sided HP(150), which is simpler but closely related to our STM in its gain function, also performs better in anticipating crisis both in short and long series when compared to the credit-to-GDP gap. Finally, we put forward an exercise of CCB using the last available data point and our five leading indicators in all 34 countries
    Date: 2015–04
  22. By: Linlin Niu; Xiu Xu; Ying Chen;
    Abstract: We propose the use of a local autoregressive (LAR) model for adaptive estimation and forecasting of three of China’s key macroeconomic variables: GDP growth, inflation and the 7-day interbank lending rate. The approach takes into account possible structural changes in the data-generating process to select a local homogeneous interval for model estimation, and is particularly well-suited to a transition economy experiencing ongoing shifts in policy and structural adjustment. Our results indicate that the proposed method outperforms alternative models and forecast methods, especially for forecast horizons of 3 to 12 months. Our 1-quarter ahead adaptive forecasts even match the performance of the well-known CMRC Langrun survey forecast. The selected homogeneous intervals indicate gradual changes in growth of industrial production driven by constant evolution of the real economy in China, as well as abrupt changes in interestrate and inflation dynamics that capture monetary policy shifts.
    Keywords: Chinese economy, local parametric models, forecasting
    JEL: E43 E47
    Date: 2015–04
  23. By: Christian Gillitzer (Reserve Bank of Australia)
    Abstract: The Sticky Information Phillips Curve (SIPC) provides a theoretically appealing alternative to the sticky-price New-Keynesian Phillips curve (NKPC). This paper assesses the empirical performance of the SIPC for Australia. There is only weak evidence in favour of the SIPC over the low-inflation period. Parameter estimates are sensitive to inflation measures and sample periods, and are theoretically inconsistent for several specifications. The apparent poor performance of the SIPC in part reflects the fact that inflation has become difficult to model since the introduction of inflation targeting. Over sample periods including the early 1990s disinflation, the SIPC appears to fit the data better.
    Keywords: sticky information; Phillips curve; inflation; Australia
    JEL: E3 E31
    Date: 2015–04
  24. By: Ana Cardoso (Faculty of Economics, University of Coimbra, Portugal); António Portugal Duarte (Faculty of Economics, University of Coimbra and GEMF, Portugal)
    Abstract: The aim of this paper is to analyze the impact of the Chinese foreign exchange policy on foreign trade with the European Union. After describing the importance of the exchange rate in an open economy and some of the methodologies employed to calculate its equilibrium value, we examine whether the Chinese competitiveness is due to the existence of misalignment (undervaluation) of its exchange rate, or rather, to other sources of competitiveness. For this purpose, we use a Vector Error Correction (VEC) model to estimate a long-run exports equation. The empirical results indicate that over the past few years, Chinese exports have benefited from an ‘unfair’ competitive advantage resulting from the manipulation of its currency value.
    Keywords: Competitiveness, China, European Union, foreign trade, misalignments, real exchange rate.
    JEL: C39 F10 O24
    Date: 2015–04
  25. By: Gouriéroux, Christian; Héam, Jean-Cyprien
    Abstract: In the Basel regulation the required capital of a financial institution is based on conditional measures of the risk of its future equity value such as Value-at-Risk, or Expected Shortfall. In Basel 2 the uncertainty on this equity value is captured by means of changes in asset prices (market risk) and default of borrowers (credit risk), and mainly concerns the asset component of the balance-sheet. Our paper extends this analysis by taking also into account the funding and market liquidity risks. The latter risks are consequences of changes in customers or investors’ behaviors and usu- ally concern the liability component of the balance sheet. In this respect our analysis is in the spirit of the most recent Basel 3 and Solvency 2 regulations. Our analysis highlights the role of the different types of risks in the total required capital. Our analysis leads to clearly distinguish defaults due to liquidity shortage and defaults due to a lack of solvency and, in a regulatory perspective, to introduce two reserve accounts, one for liquidity risk, another one for solvency risk. We explain how to fix the associated required capitals.
    Keywords: Regulation; Funding Liquidity Risk; Liquidity Shortage; Solvency 2; Value-at-Risk; Asset/Liability Management;
    JEL: D81 G32
    Date: 2014–07
  26. By: Brisne J. V. Céspedes; Elcyon C. R. Lima; Alexis Maka
    Abstract: This article investigates the stochastic and dynamic relationship of a group of Brazilian macroeconomic variables (price and industrial production indexes, nominal exchange rate, short and medium-run nominal interest rates) for the period after the Real Plan (1996-2004). We adopt, as has become usual in the literature, several SVAR (structural VAR) models to uncover stylized facts for the short-run impacts of the identified exogenous sources of fluctuations of this selected set of variables. A distinctive feature of this article is the employment of Directed Acyclic Graphs (DAG) to obtain the contemporaneous causal order of the variables used to identify the SVAR models. Another distinguishing characteristic is the careful attention paid to monetary policy developments after the Real Plan when splitting our sample in two subsamples (1996/07-1998/08 and 1999/03-2004/12). The main results are: a) in response to a positive short run interest rate innovation, during the 1999-2004 subperiod, the output and the price level decrease—however, the output response is faster and the price level responds with a lag of near four months; b) for the 1996-1998 subperiod, the most likely effect of a positive short run interest rate innovation is the reduction of the price level (also with a four months lag), even though there is a large uncertainty in this response, and the reduction of output; c)short run interest rate innovations are one of the most important sources of temporary fluctuations in the level of economic activity for both subsamples; and d) exogenous shocks to the exchange rate and to the medium term interest rate are for the 1999-2004 period, the most important sources of inflation rate fluctuation. Este artigo investiga as relações estocásticas e dinâmicas de um grupo de variáveis macroeconômicas brasileiras (índices de preços, produção industrial, taxa de câmbio nominal, taxas de juros de curto e médio prazo, e M1) para o período após o Plano Real (1996-2004). Adota, como é usual na literatura, vários modelos SVARs (VAR estruturais) para determinar os fatos estilizados relativos aos impactos de curto prazo das fontes exógenas de flutuação identificadas para esse grupo de variáveis. O artigo inova ao empregar Grafos Acíclicos Direcionados (DAG) na obtenção das relações causais contemporâneas entre as variáveis e ao considerar que as alterações da política monetária, ocorridas após o Plano Real, tornam essencial a divisão da nossa amostra em dois subperíodos (1996/07-1998/08 e 1999/03-2004/12). Os resultados principais são: a) em resposta a uma inovação positiva na taxa de juros de curto prazo (Selic), durante o subperíodo 1999-2004, a produção e o nível de preços caem — porém, a resposta da produção é mais rápida que a do nível de preços, que só acontece com uma defasagem de aproximadamente quatro meses; b) para o período 1996-1998, o efeito mais provável de uma inovação positiva na taxa de juros de curto prazo é a redução do nível de preços  também com uma defasagem de quatro meses, embora haja uma grande incerteza em relação a essa resposta  e da produção; c) as inovações na taxa de juros de curto prazo (Selic) estão entre as fontes mais importantes da flutuação do nível de atividade econômica em ambos os subperíodos; e d) os choques exógenos na taxa de câmbio e na taxa de juros de médio prazo (Swap Pré x CDI) são, para o período 1999-2004, as fontes mais importantes da flutuação da taxa de inflação.
    Date: 2015–01
  27. By: Ajax R. B. Moreira; Marco A. F. H. Cavalcanti
    Abstract: Based on three versions of a small macroeconomic model for Brazil, this paper presents empirical evidence on the effects of parameter uncertainty on monetary policy rules and on the robustness of optimal and simple rules over different model specifications. By comparing the optimal policy rule under parameter uncertainty with the rule calculated under purely additive uncertainty, we find that parameter uncertainty should make policymakers react less aggressively to the economy’s state variables, as suggested by Brainard’s “conservatism principle”, although this effect seems to be relatively small. We then informally investigate each rule’s robustness by analyzing the performance of policy rules derived from each model under each one of the alternative models. We find that optimal rules derived from each model perform very poorly under alternative models, whereas a simple Taylor rule is relatively robust. We also find that even within a specific model, the Taylor rule may perform better than the optimal rule under particularly unfavorable realizations from the policymaker’s loss distribution function. Este texto analisa a robustez e as propriedades de estabilização de regras de política monetária no contexto de um pequeno modelo macroeconométrico para o Brasil. Estimam-se três versões do modelo “padrão” da literatura recente sobre regras de política monetária. Em cada caso, a regra ótima de política é calculada sob incerteza puramente aditiva e sob incerteza multiplicativa. Observa-se que a incerteza sobre os parâmetros do modelo atenua os coeficientes da função de reação ótima das autoridades, conforme sugerido pelo “princípio do conservadorismo” de Brainard — ainda que esse efeito seja relativamente pequeno. A robustez das regras de política é investigada informalmente por intermédio da análise do desempenho da regra ótima de cada modelo no contexto de cada um dos modelos alternativos. Os resultados mostram que as regras ótimas derivadas de um modelo específico tendem a apresentar desempenho muito fraco sob os demais modelos, em contraste com uma regra de Taylor simples, que se revela relativamente robusta. Finalmente, mostra-se que, mesmo no contexto de um modelo específico, a regra de Taylor pode ter desempenho superior à regra ótima, sob realizações particularmente desfavoráveis da distribuição de probabilidade da função de perda das autoridades.
    Date: 2015–01
  28. By: Siekmann, Helmut
    Abstract: The Treaty of Maastricht imposed the strict obligation on the European Union (EU) to establish an economic and monetary union, now Article 3(4) TEU. This economic and monetary union is, however, not designed as a separate entity but as an integral part of the EU. The single currency was to become the currency of the EU and to be the legal tender in all Member States unless an exemption was explicitly granted in the primary law of the EU, as in the case of the UK and Denmark. The newly admitted Member States are obliged to introduce the euro as their currency as soon as they fulfil the admission criteria. Technically, this has been achieved by transferring the exclusive competence for the monetary policy of the Member States whose currency is the euro on the EU, Article 3(1)(c) TFEU and by bestowing the euro with the quality of legal tender, the only legal tender in the EU, Article 128(1) sentence 3 TFEU.
    Date: 2015
  29. By: Fecht, Falko; Inderst, Roman; Pfeil, Sebastian
    Abstract: We offer a theory of the "boundary of the firm" that is tailored to banking, as it builds on a single inefficiency arising from risk-shifting and as it takes into account both interbank lending as an alternative to integration and the role of possibly insured deposit funding. Amongst others, it explains both why deeper economic integration should cause also greater financial integration through both bank mergers and interbank lending, albeit this typically remains inefficiently incomplete, and why economic disintegration (or "desychronization"), as currently witnessed in the European Union, should cause less interbank exposure. It also suggests that recent policy measures such as the preferential treatment of retail deposits, the extension of deposit insurance, or penalties on "connectedness" could all lead to substantial welfare losses.
    Date: 2015
  30. By: Elcyon Caiado Rocha Lima; Ricardo Sandes Ehlers
    Abstract: When analyzing the demand for money in high inflation processes it has been suggested [Tourinho (1995)] that we should consider not only the effects of changes in the expected inflation rate but also changes in the expected variability of inflation. The model in Lima & Ehlers (1993) is extended here to deal more accurately with the uncertainty produced by the variability of inflation: a term proportional to the expected quadratic error in forecasting inflation is included in the demand for money equation. The problem of what estimate to use for the expected variance of inflation, is addressed by a Bayesian estimation procedure. Model parameters are allowed to vary slowly over time and Bayesian monitoring and intervention procedures are then used to cater for structural changes. We estimate the model with data ranging from first quarter of 1973 to fourth quarter of 1995, thus taking into account many stabilization plans for the Brazilian economy. We find that the presence of variance of inflation in our money demand equation is important in two ways: a) it prevents the monitor from signaling again in 1990 after an intervention period in 1986 and b) its effect turns out to be significant after 1986 when many stabilization plans contributed to increase uncertainty. Em trabalho recente Tourinho (1995) sugeriu que, em processos de inflação elevada, deve ser considerada não somente a esperança da taxa de inflação mas também a variância esperada da taxa de inflação O modelo apresentado em Lima & Ehlers (1993) é aqui estendido para lidar com a incerteza produzida pela variabilidade da taxa de inflação : um termo proporcional à esperança do erro quadrático médio, na previsão da taxa de inflação, é incluído na equação de demanda por moeda. O problema de que estimativa utilizar, para a variância esperada da taxa de inflação, é resolvido através de um procedimento de estimação Bayesiano. É permitida a alteração dos parâmetros do modelo ao longo do tempo e são adotados procedimentos de monitoramento e intervenção Bayesianos para detectar-se mudanças estruturais. O modelo foi estimado com dados trimestrais entre o primeiro trimestre de 1973 e o quarto trimestre de 1995, e portanto considerando-se os diversos planos recentes de estabilização da economia Brasileira. Nós concluímos que a presença da variância esperada da taxa de inflação, na equação de demanda por moeda, é importante por duas razões principais: a) ela impede que o monitor sinalize em 1990 após uma intervenção no modelo em 1986 e b) o seu efeito se torna significante depois de 1986 quando diversos planos de estabilização contribuíram para aumentar a incerteza a respeito da taxa de inflação.
    Date: 2015–01
  31. By: David Beers; Jean-Sébastien Nadeau
    Abstract: Until recently, there have been few efforts to systematically measure and aggregate the nominal value of the different types of sovereign government debt in default. To help fill this gap, the Bank of Canada’s Credit Rating Assessment Group (CRAG) has developed a comprehensive database of sovereign defaults posted on the Bank of Canada’s website. Our database draws on previously published data sets compiled by various official and private sector sources. It combines elements of these, together with new information, to develop estimates of stocks of government obligations in default, including bonds and other marketable securities, bank loans, and official loans in default, valued in U.S. dollars, for the years 1975 to 2013 on both a country-by-country and a global basis. CRAG’s new database, and subsequent updates, will be useful to researchers analyzing the economic and financial effects of individual sovereign defaults and, importantly, the impact on global financial stability of episodes involving multiple sovereign defaults.
    Keywords: Debt Management; Development economics; Financial stability; International financial markets
    JEL: F34 G10 G14 G15
    Date: 2014

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