nep-cba New Economics Papers
on Central Banking
Issue of 2015‒05‒09
35 papers chosen by
Maria Semenova
Higher School of Economics

  1. The Optimal Inflation Rate under Schumpeterian Growth By Koki Oikawa; Kozo Ueda
  2. State-Dependent Pricing and Optimal Monetary Policy By Lie, Denny
  3. Designing a simple loss function for the Fed: does the dual mandate make sense? By Debortoli, Davide; Kim, Jinill; Linde, Jesper; Nunes, Ricardo
  4. Credibility and monetary policy under inflation targeting By mhamdi, ghrissi; aguir, abdelkader; farhani, ramzi
  5. Interest Rate Pass-Through and Asymmetries in Retail Deposit and Lending Rates: An Analysis using Data from Colombian Banks By Mark J. Holmes; Ana Maria Iregui; Jesús Otero
  6. The Eurosystem’s asset purchase programmes for monetary policy purposes By Pietro Cova; Giuseppe Ferrero
  7. Bank risks, monetary shocks and the credit channel in Brazil: identification and evidence from panel data. By J. Ramos-Tallada
  8. Monetary Policy and the Independence Dilemma By Williams, John C.
  9. The Systematic Component of Monetary Policy in SVARs: An Agnostic Identification Procedure By Arias, Jonas E.; Caldara, Dario; Rubio-Ramirez, Juan F.
  10. Quantitative and Qualitative Monetary Easing: Assessment of Its Effects in the Two Years since Its Introduction By Monetary Affairs Department
  11. Inflation Expectations and Recovery from the Depression in 1933: Evidence from the Narrative Record By Jalil, Andrew; Rua, Gisela
  12. Monetary Policy, Trend Inflation and the Great Moderation: An Alternative Interpretation - Comment By Arias, Jonas E.; Ascari, Guido; Branzoli, Nicola; Castelnuovo, Efrem
  13. Euro Area Government Bonds - Integration and Fragmentation during the Sovereign Debt Crisis By Michael Ehrmann; Marcel Fratzscher
  15. The View from Here: The Economic Outlook and Its Implications for Monetary Policy By Williams, John C.
  16. The stability of short-term interest rates pass-through in the euro area during the financial market and sovereign debt crises By Avouyi-Dovi, Sanvi; Horny, Guillaume; Sevestre, Patrick
  17. Clearinghouse Loan Certificates as a Lender of Last Resort By Christopher Hoag
  18. Monetary Policy Spillovers and the Trilemma in the New Normal: Periphery Country Sensitivity to Core Country Conditions By Joshua Aizenman; Menzie D. Chinn; Hiro Ito
  19. The problem with government interventions: The wrong banks, inadequate strategies, or ineffective measures? By Hryckiewicz, Aneta
  20. High versus Low Inflation: Implications for Price-Level Convergence By M. Ege Yazgan; Hakan Yilmazkuday
  21. Has Trend Inflation Shifted?: An Empirical Analysis with a Regime-Switching Model By Sohei Kaihatsu; Jouchi Nakajima
  22. Nonbank Financial Intermediation, Financial Stability, and the Road Forward : a speech at the "Central Banking in the Shadows: Monetary Policy and Financial Stability Postcrisis," 20th Annual Financial Markets Conference sponsored by the Federal Reserve Bank of Atlanta, Stone Mountain, Georgia, March 30, 2015 By Fischer, Stanley
  23. Normalizing Monetary Policy: Prospects and Perspectives : a speech at the "The New Normal Monetary Policy," a research conference sponsored by the Federal Reserve Bank of San Francisco, San Francisco, California, March 27, 2015 By Yellen, Janet L.
  24. Advancing Macroprudential Policy Objectives : a speech At the Office of Financial Research and Financial Stability Oversight Council's 4th Annual Conference on Evaluating Macroprudential Tools: Complementarities and Conflicts, Arlington, Virginia, January 30, 2015 By Tarullo, Daniel K.
  25. The Economic Outlook and Monetary Policy Loretta J Mester-President and CEO-Federal Reserve Bank of Cleveland-The Forecasters Club of New York-New York, NY-April 16, 2015 By Mester, Loretta J.
  26. Conducting Monetary Policy with a Large Balance Sheet : a speech at the 2015 U.S. Monetary Policy Forum, Sponsored by the University of Chicago Booth School of Business, New York, New York, February 27, 2015 By Fischer, Stanley
  27. Monitoring financial stability in developing and emerging economies : practical guidance for conducting macroprudential analysis By Dijkman,Miquel
  28. Challenges for Systemic Risk Assessment in Low-Income Countries By Catalan, Mario; Demekas, Dimitri
  29. The formation of European inflation expectations: One learning rule does not fit all By Christina Strobach; Carin van der Cruijsen
  30. A compelling case for Chinese monetary easing By Guonan Ma
  31. A Liquidity-Based Resolution of the Uncovered Interest Parity Puzzle By Jung, Kuk Mo; Lee, Seungduck
  32. Estonian banking regulation as a “world of ‘dead letters’” – the interplay of Europeanization process and national idiosyncrasies By Egert Juuse
  33. The role of lenders' trust in determining borrowing conditions for sovereign debt: An analysis of one-period government bonds with default risk By Guo, Yanling
  34. Monetary Policy Lessons and the Way Ahead : a speech at the Economic Club of New York, New York, New York, March 23, 2015 By Fischer, Stanley
  35. Government Debt and its Macroeconomic Determinants – An Empirical Investigation By Swamy, Vighneswara

  1. By: Koki Oikawa; Kozo Ueda
    Abstract: In this study, we analyze the relationship between inflation and economic growth. To this end, we construct a model of endogenous growth with creative destruction, incorporating sticky prices due to menu costs. Inflation and deflation reduce the reward for innovation via menu cost payments and, thus, lower the frequency of creative destruction. Central banks can maximize the rate of economic growth by setting their target inflation rate at the negative of a fundamental growth rate that would be realized without price stickiness. The optimal inflation rate, however, may differ from the growth-maximizing inflation rate because of overinvestment in R&D and indeterminacy. Both mechanisms indicate a higher optimal inflation rate than the negative of a fundamental growth rate. Our calibrated model shows that the optimal inflation rate is close to the growth-maximizing inflation rate and that a deviation from the optimal level has sizable impacts on economic growth.
    Keywords: creative destruction, menu cost, new Keynesian, monetary policy
    JEL: E31 E58 O33 O41
    Date: 2015–05
  2. By: Lie, Denny
    Abstract: This paper studies optimal monetary policy under precommitment in a state-dependent pricing (SDP) environment, in contrast to the standard assumption of time-dependent pricing(TDP). I show that the endogenous timing of price adjustment under SDP importantly alters the policy tradeoffs faced by the monetary authority, due to lower cost of inflation variation on the relative-price distortion. It is thus desirable under SDP for the monetary authority to put less weight on inflation stabilization, relative to other stabilization goals. The optimal Ramsey policy under SDP delivers a 24 percent higher standard deviation of inflation, but with 26 percent and 6 percent lower standard deviations of output gap and nominal interest rate, respectively. Within a simple, Taylor-like policy rule, the change in the policy tradeoffs is manifested in higher feedback response coefficients on the output gap and the lagged nominal interest rate deviation under SDP. Additionally, this paper studies the optimal policy start-up problem related to the cost of adopting the timeless perspective policy instead of the true Ramsey policy. The SDP assumption leads to different start-up dynamics compared to the dynamics under the TDP assumption in several important ways. In particular, the change in the policy tradeoffs gives rise to much higher start-up inflation under SDP.
    Keywords: optimal monetary policy, state-dependent pricing, start-up problem, policy tradeoff, Ramsey policy, simple policy rule
    Date: 2015–04
  3. By: Debortoli, Davide (Universitat Pompeu Fabra); Kim, Jinill (Korea University); Linde, Jesper (Sveriges Riksbank); Nunes, Ricardo (Federal Reserve Bank of Boston)
    Abstract: Variable and high rates of price inflation in the 1970s and 1980s led many countries to delegate the conduct of monetary policy to "instrument-independent" central banks and to give their central banks a clear mandate to pursue price stability and instrument independence to achieve it. Advances in academic research supported a strong focus on price stability as a means to enhance the independence and credibility of monetary policymakers. An overwhelming majority of these central banks also adopted an explicit inflation target to further strengthen credibility and facilitate accountability. One exception is the U.S. Federal Reserve, which since 1977 has been assigned the so-called "dual mandate," which requires it to "promote maximum employment in a context of price stability." Although the Fed has established credibility for the long-run inflation target, an important question is whether its heavy focus on resource utilization can be justified. The authors' reading of the academic literature is that resource utilization should be assigned a small weight relative to inflation under the reasonable assumption that the underlying objective of monetary policy is to maximize the welfare of households inhabiting the economy. Woodford (1998) showed that the objective function of households in a basic New Keynesian sticky-price model could be approximated as a (purely) quadratic function in inflation and the output gap, with the weights determined by the specific features of the economy. A potential drawback with the large literature that followed is that it focused on relatively simple calibrated (or partially estimated) models. In this paper the authors revisit this issue within the context of an estimated medium-scale model of the U.S. economy, specifically the Smets and Wouters (2007) model.
    Keywords: central banks’ objectives; simple loss function; monetary policy design; Smets-Wouters model
    JEL: C32 E58 E61
    Date: 2015–03–10
  4. By: mhamdi, ghrissi; aguir, abdelkader; farhani, ramzi
    Abstract: After more than two decades of inflation targeting in the world, it is important to evaluate if the adoption of this regime in a relevant developing country contributed to the creation of a better environment for the process of entrepreneurs' expectations formation. Brazil is part of an important group of developing countries and represents a potential laboratory experiment in which the effects of an adoption of inflation targeting after more than a decade can be evaluated. Not enough is known about the consequences of inflation targeting credibility on both monetary policy and monetary policy transmission channels in developing countries that adopted inflation targeting. Emphasizing the role of transparency and the credibility of monetary policy as a performance criterion that motivate any country wishing to adopt an inflation targeting regime, this study leads to the fact that these two basic principles toward which a inflation targeting regime cannot be achieved without respect for certain pre namely institutional and technical conditions
    Keywords: Credibility, Inflation targeting, Investment, Employment, Central bank, Interest rate.
    JEL: E5
    Date: 2015–01
  5. By: Mark J. Holmes (University of Waikato); Ana Maria Iregui (Banco de la República); Jesús Otero (Universidad del Rosario)
    Abstract: Using a sample of Colombian banks, we examine retail interest rate adjustment in response to changes in wholesale interest rates. Interest rate pass-through running from wholesale to retail rates is found to be both partial and heterogeneous across banks. This suggests that the effectiveness of monetary policy is limited. Further investigation reveals that the behaviour of retail deposit rates appears consistent with collusive behaviour between banks insofar as interest rates are more rapidly adjusted downwards than upwards. In the case of retail lending rates, it appears that banks more rapidly reduce than increase rates. This suggests that expansionary monetary policy in Colombia may be relatively more effective than contractionary policy.
    Keywords: interest rate pass-through; asymmetries; M/TAR model
    JEL: C33 E43
    Date: 2015–04–30
  6. By: Pietro Cova (Bank of Italy); Giuseppe Ferrero (Bank of Italy)
    Abstract: This paper analyzes the operation of the Eurosystem’s public and private assets purchases programmes for monetary policy purposes, quantifying the potential effect on the Italian economy. First we give an exhaustive account of the main transmission channels by which the purchases can be expected to affect economic activity and inflation. Then we assess the effects on the main channels of transmission to the economy and measure the impact on the main macroeconomic variables, applying the Bank of Italy’s quarterly model. For 2015-16 the purchase programme can be expected to make a significant contribution to the growth of output and of prices, of more than 1 percentage point in both cases. Among the channels examined, the largest contribution is judged to come through the depreciation of the euro and the reduction in the interest rates on government securities and bank loans. These effects are comparable in magnitude to those found by studies on the securities purchase programmes conducted in the United States and the United Kingdom.
    Keywords: unconventional monetary policy, quantitative easing, transmission mechanism
    JEL: E51 E52 E58
    Date: 2015–04
  7. By: J. Ramos-Tallada
    Abstract: Using a large database of bank financial statements, this paper investigates the determinants of the bank lending channel (BLC) of monetary transmission in Brazil between 1995 and 2012. I extend the standard empirical approach in two main ways. First, I apply a micro-founded strategy for disentangling demand from supply shifts in credit. Using this identification scheme, I show that lending supply is negatively correlated with the short-term market interest rate over the long period. The sensitivity of credit supply to monetary shocks is not related to the bank characteristics generally used in the empirical literature, whereas a proxy of the individual bank external finance premium (EFP) tends to capture financial constraints better than size, liquid assets or capitalization ratios. However, the patterns of the BLC have changed since the onset of the global financial crisis. In the post-crisis period, the money market rate does not affect the lending supply of the average bank anymore, while small banks and those lacking access to long-term funds appear more sensitive to monetary shocks in some estimations. Second, I check whether several types of uncertainty may drive the BLC, beyond liquidity risk. Over the long period, I find evidence that higher market risk borne by banks' securities portfolios (captured by a longer duration of public debt bonds) and lower uncertainty in the money market (captured by a lower volatility of rates) appear to consistently enhance the effectiveness of monetary policy through the BLC.
    Keywords: Risks, Monetary policy transmission, Bank lending channel, Identification of supply shifts, Panel data, Brazil.
    JEL: E44 E52 F4 G21
    Date: 2015
  8. By: Williams, John C. (Federal Reserve Bank of San Francisco)
    Abstract: Presentation to Chapman University, Orange, California , May 1, 2015
    Date: 2015–05–01
  9. By: Arias, Jonas E. (Board of Governors of the Federal Reserve System (U.S.)); Caldara, Dario (Board of Governors of the Federal Reserve System (U.S.)); Rubio-Ramirez, Juan F. (Duke University)
    Abstract: Following Leeper, Sims, and Zha (1996), we identify monetary policy shocks in SVARs by restricting the systematic component of monetary policy. In particular, we impose sign and zero restrictions only on the monetary policy equation. Since we do not restrict the response of output to a monetary policy shock, we are agnostic in Uhlig's (2005) sense. But, in contrast to Uhlig (2005), our results support the conventional view that a monetary policy shock leads to a decline in output. Hence, our results show that the contractionary effects of monetary policy shocks do not hinge on questionable exclusion restrictions.
    Keywords: SVARs; Monetary policy shocks; Systematic component of monetary policy
    JEL: C51 E52
    Date: 2015–03–12
  10. By: Monetary Affairs Department (Bank of Japan)
    Abstract: Two years have passed since the Bank of Japan introduced quantitative and qualitative monetary easing (QQE) in April 2013. This article considers attempts to assess the effects of QQE on Japan's economic and financial developments during this period. The start of the transmission mechanism of QQE is as follows: (1) inflation expectations will be raised through a strong and clear commitment to the price stability target of 2 percent and large-scale monetary expansion to underpin the commitment; and concurrently, (2) downward pressure will be put on the entire yield curve through the Bank's massive purchases of Japanese government bonds (JGBs); thereby (3) decreasing real interest rates. On that basis, the assessment of QQE's effects was made in the following two stages: in the first stage, the degree of the decline in real interest rates was gauged; and in the second stage, the extent to which the decline in real interest rates affected economic activity and prices was assessed. The results of the assessment could be judged to be that (a) QQE lowered real interest rates by slightly less than 1 percentage point and (b) the actual improvement in economic activity and prices was mostly in line with the mechanism anticipated by QQE. Recently, however, the year-on-year rate of increase in the consumer price index slowed, mainly due to the effects of the decline in crude oil prices. Looking ahead, due attention needs to be paid to how the decline in the actual inflation rate will affect inflation expectation formation.
    Keywords: Monetary policy; real interest rate; inflation expectations
    JEL: E52 E44 E37 E47
    Date: 2015–05–01
  11. By: Jalil, Andrew (Occidental College); Rua, Gisela (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: This paper uses the historical narrative record to determine whether inflation expectations shifted during the second quarter of 1933, precisely as the recovery from the Great Depression took hold. First, by examining the historical news record and the forecasts of contemporary business analysts, we show that inflation expectations increased dramatically. Second, using an event-studies approach, we identify the impact on financial markets of the key events that shifted inflation expectations. Third, we gather new evidence--both quantitative and narrative--that indicates that the shift in inflation expectations played a causal role in stimulating the recovery.
    Keywords: Great Depression; inflation expectations; liquidity trap; narrative evidence; regime change
    JEL: E31 E32 E42 N12
    Date: 2015–04–22
  12. By: Arias, Jonas E. (Board of Governors of the Federal Reserve System (U.S.)); Ascari, Guido (University of Oxford); Branzoli, Nicola (Bank of Italy); Castelnuovo, Efrem (University of Melbourne)
    Abstract: Working with a small-scale calibrated New-Keynesian model, Coibion and Gorodnichenko (2011) find that the reduction in trend inflation during Volcker's mandate was a key factor behind the Great Moderation. We revisit this finding with an estimated New-Keynesian model with trend inflation and no indexation based on Christiano, Eichenbaum and Evans (2005). First, our simulations confirm Coibion and Gorodnichenko's (2011) main finding. Second, we show that a trend inflation-immune Taylor rule based on economic theory can avoid indeterminacy even at high levels of trend inflation such as those observed in the 1970s.
    Keywords: Trend inflation; determinacy; and monetary policy
    JEL: C22 E30 E52
    Date: 2014–10–29
  13. By: Michael Ehrmann; Marcel Fratzscher
    Abstract: The paper analyzes the integration of euro area sovereign bond markets during the European sovereign debt crisis. It tests for contagion (i.e., an intensification in the transmission of shocks across countries), fragmentation (a reduction in spillovers) and flight-to-quality patterns, exploiting the heteroskedasticity of intraday changes in bond yields for identification. The paper finds that euro area government bond markets were well integrated prior to the crisis, but saw a substantialfragmentation from 2010 onward. Flight to quality was present at the height of the crisis, but has largely dissipated after the European Central Bank’s (ECB’s) announcement of its Outright Monetary Transactions (OMT) program in 2012. At the same time, Italy and Spain became more interdependent after the OMT announcement, providing our only evidence of contagion. While this suggests that countries have been effectively ring-fenced, and Italy and Spain benefited from the joint reduction in yields following the OMT announcement, the high current degree of fragmentation poses difficult challenges for policy-makers, since it leads to an unequal transmission of the ECB’s monetary policy to the various countries.
    Keywords: Sovereign debt, European crisis, integration, fragmentation, contagion, policy, ECB, high-frequency data, identification
    JEL: F3 E5 G15
    Date: 2015
  14. By: Nguyen Van Phuong
    Abstract: Vietnam has been implementing the export-oriented economy, in which the central bank of Vietnam, well-known as the State Bank of Vietnam (SBV), adopted the managed float exchange rate regime in 1990. Therefore, the exchange rate movement plays an important role in stimulating the Vietnamese export activities. By applying the long-run SVAR model, pioneered by Blanchard and Quah (1989), this research examines how the real and nominal shocks impact the nominal and real exchange rate (USD/VND) in Vietnam. Based on monthly data concerning USD/VND exchange rate and, the price levels in Vietnam and the United States from May 1995 to December 2013, our empirical results reveal that: the real shock primarily leads the real and nominal exchange rate (USD/VND) to fluctuate over time. Meanwhile, the nominal shock has a temporary effect on the movement in the real exchange rate in Vietnam. Our research also finds that the long-run Purchasing Power Parity (PPP) does not hold in Vietnam.
    Keywords: The State Bank of Vietnam, the exchange rate, unit root test, SVAR.
    JEL: E60 E69
    Date: 2015–04–01
  15. By: Williams, John C. (Federal Reserve Bank of San Francisco)
    Abstract: Presentation to CFA Society Hawaii - Annual Economic Forecast Dinner , Honolulu, Hawaii, March 5, 2015
    Date: 2015–03–05
  16. By: Avouyi-Dovi, Sanvi; Horny, Guillaume; Sevestre, Patrick
    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 w ell as stochastic volatility . Our empirical results are based on a harmoni s ed monthly database from January 2003 to October 201 4 . We estimate the model within a Bayesian framework, using Markov Chain Monte Carlo methods (MCMC). We reject the view that the t ransmission 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 effec t 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; Taux bancaires; modèle à correction d’erreur; ruptures structurelles; volatilité stochastique; économétrie bayésienne;
    JEL: E43 G21
    Date: 2015–04
  17. By: Christopher Hoag (Department of Economics, Trinity College)
    Abstract: Which banks borrow from a lender of last resort? Looking across multiple panics of the nineteenth century, this paper treats borrowing of clearinghouse loan certificates as borrowing from a lender of last resort. We evaluate individual bank use of clearinghouse loan certificates in New York City using bank balance sheet data. Bank capital ratios do not predict borrowing. Lower pre-panic reserve ratios and greater reserve losses during the crisis increased the probability of positive net borrowing from a lender of last resort.
    Keywords: bank, lender of last resort, loan certificates
    JEL: G21 G28 N21
    Date: 2015–04
  18. By: Joshua Aizenman; Menzie D. Chinn; Hiro Ito
    Abstract: We investigate why and how the financial conditions of developing and emerging market countries (peripheral countries) can be affected by the movements in the center economies - the U.S., Japan, the Eurozone, and China. We apply a two-step approach. First, we estimate the sensitivity of countries’ financial variables to the center economies, controlling for global and domestic factors. Next, we examine the association of the estimated sensitivity coefficients with the macroeconomic conditions, policies, real and financial linkages with the center economies, and the level of institutional development. In the last two decades, for most financial variables, the strength of the links with the center economies have been the dominant factor. While certain macroeconomic and institutional variables are important, the arrangement of open macro policies such as the exchange rate regime and financial openness are also found to have direct influence on the sensitivity to the center economies. We also find, among other results, that an economy that pursues greater exchange rate stability and financial openness faces a stronger link with the center economies. Nonetheless, exchange rate regimes have mostly indirect effects on the strength of financial linkages. We conclude the trilemma remains relevant.
    JEL: F33 F41
    Date: 2015–04
  19. By: Hryckiewicz, Aneta
    Abstract: The most recent crisis prompted regulatory authorities to implement directives prescribing actions to resolve systemic banking crises. Recent findings show that government intervention results in only a small proportion of bank recoveries. This study examines the reasons for this failure and evaluates the effectiveness of regulatory instruments, demonstrating that weaker banks are more likely to receive government support, that the support extended addresses banks’ specific issues, and that supported banks are more likely to face bankruptcy than non-supported banks. Therefore, government interventions must be sufficiently large, and an optimal banking recovery program must include a deep restructuring process.
    Keywords: Bank risk, business models, bank regulation, financial crisis, banking stability
    JEL: E58 G15 G21 G32
    Date: 2014–06–18
  20. By: M. Ege Yazgan (Department of Economics, Kadir Has University); Hakan Yilmazkuday (Department of Economics, Florida International University)
    Abstract: This paper investigates the relationship between the level of inflation and regional price-level convergence utilizing micro-level price data from Turkey during two clearly distinguishable periods of high and low inflation. The results indicate that higher persistence and slower convergence of price levels are evident during the low-inflation period, which corresponds to the inflation-targeting (IT) regime that was successful in lowering and maintaining inflation at acceptable levels. During this low-inflation IT regime, it is also shown that inflation convergence across regions appears to occur more quickly and may be responsible for the slower pace of convergence in price levels.
    Keywords: Price Convergence, Inflation Convergence, Micro-level Prices, Turkey
    JEL: E31 F41
    Date: 2015–05
  21. By: Sohei Kaihatsu (Bank of Japan); Jouchi Nakajima (Bank of Japan)
    Abstract: This paper proposes a new econometric framework for estimating trend inflation and the slope of the Phillips curve with a regime-switching model. As a unique aspect of our approach, we assume regimes for the trend inflation at one-percent intervals, and estimate the probability of the trend inflation being in each regime. The trend inflation described in the discrete manner provides for an easily interpretable explanation of estimation results as well as a robust estimate. An empirical result indicates that Japan's trend inflation stayed at zero percent for about 15 years after the late 1990s, and then shifted away from zero percent after the introduction of the price stability target and the quantitative and qualitative monetary easing. The U.S. result shows a considerably stable trend inflation at two percent since the late 1990s.
    Keywords: Phillips curve; Regime-switching model; Trend inflation
    JEL: C22 E31 E42 E52 E58
    Date: 2015–05–01
  22. By: Fischer, Stanley (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2015–03–30
  23. By: Yellen, Janet L. (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2015–03–27
  24. By: Tarullo, Daniel K. (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2015–01–30
  25. By: Mester, Loretta J. (Federal Reserve Bank of Cleveland)
    Abstract: Good afternoon. I would like to start by thanking Charlie Steindel and the Forecasters Club of New York for their invitation to speak today. It is a particular pleasure for me to address your group: first, because I have known Charlie for many years – we both grew up as economists in the Federal Reserve System – but also because I know I won’t have to explain to you what a difficult task economic forecasting can be, even in the best of times. Still, forecasting is something economists and policymakers must do, so today I will discuss my outlook for the economy and monetary policy. As always, the views I’ll present are my own and not necessarily those of the Federal Reserve System or my colleagues on the Federal Open Market Committee.
    Date: 2015–04–29
  26. By: Fischer, Stanley (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2015–02–27
  27. By: Dijkman,Miquel
    Abstract: In the aftermath of the global financial crisis, interest in systemic risk has surged among academics and policy makers. The mitigation of systemic risk is now widely accepted as the fundamental underlying concept for the design of the post-crisis regulatory agenda. Effective mitigation requires the presence of a well-developed analytical methodology for monitoring systemic risk, so that policy makers can make informed policy choices. This remains a challenging area, particularly in developing and emerging economies characterized by rapid structural changes and gaps in data availability. This working paper aims to provide policy makers in developing and emerging economies with practical tools for the analysis of systemic risk, focusing on the identification of domestic, systemically important banks; analyzing interconnectedness within the financial In the aftermath of the global financial crisis, interest in systemic risk has surged among academics and policy makers. The mitigation of systemic risk is now widely accepted as the fundamental underlying concept for the design of the post-crisis regulatory agenda. Effective mitigation requires the presence of a well-developed analytical methodology for monitoring systemic risk, so that policy makers can make informed policy choices. This remains a challenging area, particularly in developing and emerging economies characterized by rapid structural changes and gaps in data availability. This working paper aims to provide policy makers in developing and emerging economies with practical tools for the analysis of systemic risk, focusing on the identification of domestic, systemically important banks; analyzing interconnectedness within the financial system; and analyzing the cyclical component of systemic risk. system; and analyzing the cyclical component of systemic risk.
    Keywords: Access to Finance,Debt Markets,Bankruptcy and Resolution of Financial Distress,Banks&Banking Reform,Emerging Markets
    Date: 2015–04–23
  28. By: Catalan, Mario; Demekas, Dimitri
    Abstract: Assessing and monitoring systemic risk is a challenge for policy makers and supervisors in all countries. It is particularly challenging in low-income countries (LICs), owing to a number of characteristics shared to a greater or lesser extent by most of them. This paper discusses these common characteristics and how they shape the nature of systemic risk in LICs, and concludes with some practical lessons for policy makers and financial supervisors that can help improve the effectiveness of systemic risk assessment and mitigation in these countries.
    Keywords: financial stability, stress testing, systemic risk, low-income countries, macroprudential policy, IMF
    JEL: G01 G28 G32 O16
    Date: 2015
  29. By: Christina Strobach; Carin van der Cruijsen
    Abstract: We empirically investigate how well different learning rules manage to explain the formation of household inflation expectations in six key member countries of the euro area. Our findings reveal a pronounced heterogeneity in the learning rules employed on the country level. While the expectation formation process in some countries can be best explained by rules that incorporate forward-looking elements (Germany, Italy, the Netherlands), households in other countries employ information on energy prices (France) or form their expectations by means of more traditional learning rules (Belgium, Spain). Moreover, our findings suggest that least squares based algorithms significantly outperform their stochastic gradient counterparts, not only in replicating inflation expectation data but also in forecasting actual inflation rates.
    Keywords: Inflation expectations; adaptive learning algorithms; household survey
    JEL: E31 E37 D84 C53
    Date: 2015–04
  30. By: Guonan Ma
    Abstract: â?¢ Chinese monetary policy was excessively tight in 2014 but started loosening in late 2014, in an attempt to cushion growth, facilitate rebalancing, support reform and mitigate financial risk. â?¢ There are three main reasons for this policy shift. First, there is evidence that the Chinese economy has been operating below its potential capacity. Second, among the big five economies, Chinaâ??s monetary policy stance and broader financial condition both tightened the most in the wake of the global financial crisis, likely weighing on domestic growth. Third, a mix of easy monetary policy and neutral fiscal policy would serve China best at the current juncture, because it would support domestic demand and help with the restructuring of China's local government debts, while facilitating a move away from the soft dollar peg. â?¢ Such a warranted shift in monetary policy stance faces the challenges of uncertain potential growth, a more liberalised financial system, an evolving monetary policy framework, the legacy of excess leverage and a politicised policy debate.
    Date: 2015–04
  31. By: Jung, Kuk Mo; Lee, Seungduck
    Abstract: A new monetary theory is set out to resolve the “Uncovered Interest Parity Puzzle (UIP Puzzle)”. It explores the possibility that liquidity properties of money and nominal bonds can account for the puzzle. A key concept in our model is that nominal bonds carry liquidity premium due to their medium of exchange role as either collateral or means of payment. In this framework no-arbitrage condition ensures a positive comovement of real return on money and nominal bonds. Thus, when inflation in one country becomes relatively lower, i.e., real return on this currency is relatively higher, its nominal bonds should also yield higher real return. We show that their nominal returns can also become higher under the economic environment where collateral pledgeability and/or liquidity of nominal bonds and/or collateralized credit based transactions are relatively bigger. Since a currency with lower inflation is expected to appreciate, the high interest currency does indeed appreciate in this case, i.e., the UIP puzzle is no longer an anomaly in our model. Our liquidity based theory in fact has interesting implications on many empirical observations that risk based explanations find difficult to reconcile with.
    Keywords: uncovered interest parity puzzle, monetary search models, FOREX market
    JEL: E31 E4 E52 F31
    Date: 2015–05
  32. By: Egert Juuse
    Abstract: Depolitization of public finances, majority foreign ownership of the banking industry and transition economy elements, accompanied by re-occurring banking crises in the 1990s have posed significant challenges for the regulatory framework in Estonia. Furthermore, the EU accession anchored the legislative development to external institutions and actors. Although banking regulation has been exemplary on paper, there have been significant weaknesses in implementation due to both internal incapacities and inadequacy of the formal EU law based regulatory principles for addressing the cross-border banking issues (accountability and responsibility for stability). Consequently, the established institutional setting in Estonia has not been able to address the division of two main functions of the banking sector between domestic and external actors: the functioning and safe payment systems by domestic actors and the financing of productive investments by external actors through foreign investments.
    Date: 2014–06
  33. By: Guo, Yanling
    Abstract: In this paper, the author considers the sovereign debt in the form of one-period government bonds with default risk, which can be purchased by and traded among domestic and foreign investors. She shows that the weight assigned to the lenders' interest by the borrowing government at the time of debt repayment, which captures the lenders' trust in the government's propensity to repay the debt and is denoted as », also determines the default risk: a higher » means a lower default risk ceteris paribus which leads to a lower risk premium, and vice versa. Since this relationship only holds in the "good equilibrium", the author further shows that the "good equilibrium" is the only stable equilibrium under some quite general assumptions while the "bad equilibrium" is an unstable one - a possible reason why in practice rather a negative correlation between » and the default risk as well as the corresponding risk premium is observed.
    Keywords: Public debt,sovereign debt,sovereign default,domestic debt,external debt,fiscal policy,government bond,government borrowing
    JEL: F34 H63 H74 H62 H6 H87
    Date: 2015
  34. By: Fischer, Stanley (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2015–03–23
  35. By: Swamy, Vighneswara
    Abstract: In the context of rising government debt levels in advanced economies and the ongoing euro zone debt crisis, there has been a revival of academic and policy debate on the impact of growing government debt on economic growth. This data-rich study offers an econometric investigation of the macroeconomic determinants of government debt and answers the much-debated question – What factors influence the government debt in a sovereign country? The study provides analyses for economy groupings, political governance groupings and income groupings of countries in addition to the full sample. Panel Granger causality testing is employed to establish causality running from the determinants of debt. The results of the full sample analysis reveal that real GDP growth, foreign direct investment, government expenditure, inflation and population growth have negative effect on debt. Gross fixed capital formation, final consumption expenditure, and trade openness have positive effect on debt. The results for different country groupings bring out some interesting implications.
    Keywords: Government Debt, economic growth, panel data, nonlinearity, country groupings
    JEL: C33 C36 E62 H63 O4 O40 O5 O50
    Date: 2015–04

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.