nep-cba New Economics Papers
on Central Banking
Issue of 2015‒05‒22
29 papers chosen by
Maria Semenova
Higher School of Economics

  1. Negative nominal central bank policy rates: where is the lower bound? By McAndrews, James J.
  2. Non-Neutrality of Open-Market Operations By Benigno, Pierpaolo; Nisticò, Salvatore
  3. Maintaining Central-Bank Financial Stability under New-Style Central Banking By Robert E. Hall; Ricardo Reis
  4. A Narrative Indicator of Monetary Conditions in China By Sun, Rongrong
  5. How Independent are the South African Reserve Bank’s Monetary Policy Decisions? Evidence from a Global New-Keynesian DSGE Model By Annari De Waal; Rangan Gupta; Charl Jooste
  6. The global implications of diverging monetary policy settings in advanced economies By Dudley, William
  7. Let's talk about it: what policy tools should the Fed "normally" use? By Barnes, Michelle L.
  8. Monetary transmission models for bank interest rates By Laura Parisi; Igor Gianfrancesco; Camillo Gilberto; Paolo Giudici
  9. Indexation, Monetary Accomodation and Inflation in Brazil By Eliana A. Cardoso
  10. Dilemma not Trilemma: The global Financial Cycle and Monetary Policy Independence By Hélène Rey
  11. Exchange Rate Pass-Through in an Emerging Market: The Case of the Czech Republic By Jan Hájek; Roman Horváth
  12. Dispersion of inflation expectations in the European Union during the global financial crisis By Jan Acedanski; Julia Wlodarczyk
  13. Euro Area Government Bonds—Integration and Fragmentation During the Sovereign Debt Crisis By Ehrmann, Michael; Fratzscher, Marcel
  14. Coordination and Crisis in Monetary Unions By Aguiar, Mark; Amador, Manuel; Farhi, Emmanuel; Gopinath, Gita
  15. SNAP: should we be worried about a sudden, sharp rise from low, long-term rates? By Ozdagli, Ali K.
  16. The Failure of supervisory stress testing: Fannie Mae, Freddie Mac, and OFHEO By Frame, W. Scott; Gerardi, Kristopher S.; Willen, Paul S.
  17. Quantity Theory of Money Redux? Will Inflation Be the Legacy of Quantitative Easing? By William R. Cline
  18. Regulation and Supervision of Community Banks : a speech at the Annual Community Bankers Conference sponsored by the Federal Reserve Bank of New York, New York, New York, May 14, 2015. By Powell, Jerome H.
  19. Financial Flows and the International Monetary System By Passari, Evgenia; Rey, Hélène
  20. The relationship between Financial liberalization, Financial Stability and Capital Control: Evidence from a multivariate framework for developing countries By BOUKEF JLASSI, NABILA; Hamdi, Helmi
  21. What Drives US Inflation and Unemployment in the Long Run? By Antonio Ribba
  22. Sovereign debt crisis of euro zone countries By Slawomir Miklaszewicz
  23. Financial Flows and the International Monetary System By Evgenia Passari; Hélène Rey
  24. The Demand for Money in High Inflation Processes By Octavio A. F. Tourinho
  25. Greek Debt Crisis: The “@-euro” a New Possible Solution to Greek Debt Crisis By Mantalos, Panagiotis
  26. Quantile forecasts of inflation under model uncertainty By Korobilis, Dimitris
  27. A Tractable Model of Monetary Exchange with Ex-post Heterogeneity By Guillaume Rocheteau; Pierre-Olivier Weill; Tsz-Nga Wong
  28. Remarks on Monetary Policy : a speech at the C. Peter McColough Series on International Economics Council on Foreign Relations, New York, New York, April 8, 2015. By Powell, Jerome H.
  29. How Not to Regulate Insurance Markets: The Risks and Dangers of Solvency II By Avinash D. Persaud

  1. By: McAndrews, James J. (Federal Reserve Bank of New York)
    Abstract: Remarks at the University of Wisconsin.
    Keywords: Danmarks Nationalbank (DNB); negative policy rates; quantitative easing; nominal interest rate; real interest rate; Fisher equation; currency; money illusion; negative yields; negative rates; negative interest rates; debt securities
    JEL: E58
    Date: 2015–05–08
  2. By: Benigno, Pierpaolo; Nisticò, Salvatore
    Abstract: Unconventional monetary policy can have consequences for inflation and output because of income losses on central-bank balance sheet. A proposition of neutrality holds under some special monetary and fiscal policy regimes in which the treasury is ready to back central bank's losses through appropriate transfers levied as taxes on the private sector. In absence of fiscal backing, large and recurrent central bank's losses can undermine its long-run solvency and should be resolved through a prolonged increase in inflation. Small and infrequent losses are backed by future profits without any further consequences. A central bank averse to declining net worth commits to a more inflationary stance and delayed exit strategy from a liquidity trap. If fiscal policy is active, it is also desirable to reduce the duration of central bank's losses through higher inflation.
    Keywords: central bank's balance sheet; QE; unconventional monetary policy
    JEL: E40
    Date: 2015–05
  3. By: Robert E. Hall; Ricardo Reis
    Abstract: Since 2008, the central banks of advanced countries have borrowed trillions of dollars from their commercial banks in the form of interest-paying reserves and invested the proceeds in portfolios of risky assets. We investigate how this new style of central banking affects central banks' solvency. A central bank is insolvent if its requirement to pay dividends to its government exceeds its income by enough to cause an unending upward drift in its debts to commercial banks. We consider three sources of risk to central banks: interest-rate risk (the Federal Reserve), default risk (the European Central Bank), and exchange-rate risk (central banks of small open economies). We find that a central bank that pays dividends equal to a standard concept of net income will always be solvent---its reserve obligations will not explode. In some circumstances, the dividend will be negative, meaning that the government is making a payment to the bank. If the charter does not provide for payments in that direction, then reserves will tend to grow more in crises than they shrink in normal times. To prevent this buildup, the charter needs to provide for makeup reductions in payments from the bank to the government. We compute measures of the financial strength of central banks at the end of 2013, and discuss how different institutions interact with quantitative easing policies to put these banks in less or more danger of instability. We conclude that the risks to financial stability are real in theory, but remote in practice today.
    JEL: E42 E58
    Date: 2015–05
  4. By: Sun, Rongrong
    Abstract: In this paper, we apply the narrative approach, studying the PBC's historical records, to infer policy-makers' intentions and thereby build a time series of monetary policy indicator. We show that our narrative policy indicator is informative about economic activity. Changes in it reflect the PBC's responses to its perceptions of economic conditions. It is a good indicator of monetary policy actions. Finally, we show that compared to monetary aggregates, changes in interest rates and the required reserve ratio are more associated with changes in monetary policy, as measured by our narrative indicator, but only to a limited degree. None of them alone can be a good proxy of policy indicator.
    Keywords: the narrative-based policy indicator, quantitative policy measures, VAR, predictive power
    JEL: E52 E58
    Date: 2015
  5. By: Annari De Waal (Department of Economics, University of Pretoria); Rangan Gupta (Department of Economics, University of Pretoria); Charl Jooste (Department of Economics, University of Pretoria)
    Abstract: We study the response of South African monetary policy decisions to foreign monetary policy shocks. We estimate the extent of foreign monetary policy pass-through by augmenting standard Taylor rules and comparing the results within the context of a Global New-Keynesian Dynamic Stochastic General Equilibirum (DSGE) model. The general equilibrium model captures important spill-over effects that would otherwise have been ignored in a single equation setup. The results show that the relationship between foreign monetary policy shocks and South African interest rates is complicated - South Africa does not import foreign monetary policy directly, but is still affected. Except for the U.S. an increase in foreign interest rates lead to a decrease in South African interest rates - highlighting the complex channels that monetary policy authorities have to monitor outside of its economy.
    Keywords: Monetary policy, Contagion, Global New-Keynesian DSGE model
    JEL: C20 C30 E43
    Date: 2015–05
  6. By: Dudley, William (Federal Reserve Bank of New York)
    Abstract: Panel Remarks at the Sixth High Level Conference on the International Monetary System: Monetary Policy Challenges in a Changing World, Zurich, Switzerland.
    Keywords: emerging market economies (EMEs); normalization; lift-off; unconventional monetary policy; transparency; global capital flows; foreign exchange; financial asset prices
    JEL: E58
    Date: 2015–05–12
  7. By: Barnes, Michelle L. (Federal Reserve Bank of Boston)
    Abstract: During the onset of a very severe financial and economic crisis in 2008, the federal funds rate reached the zero lower bound (ZLB). With this primary monetary policy tool therefore rendered ineffective, in November 2008 the Federal Reserve started to use its balance sheet as an alternative policy tool when it began the large-scale asset purchases. Now attention is turning to how the Fed should transition back to a more conventional monetary policy stance. Largely missing from these discussions about the Fed's "exit strategy" is a consideration that perhaps it should retain, not discard, the balance sheet tools. Since the Dodd-Frank Act (DFA) has added maintaining financial stability to the Fed's existing dual mandate to achieve maximum sustainable employment in the context of price stability, it might be beneficial to have several tools to achieve multiple policy objectives. An additional consideration is that some of these tools may be needed to stem future crises as a result of the DFA's new limitations on how the Fed can provide liquidity under such adverse circumstances. In an effort to spur a broader debate, this brief discusses what is known and knowable regarding the effectiveness of balance sheet tools and examines four primary arguments for keeping these as part of the Fed's toolkit.
    JEL: E52 E58 G01 G12
    Date: 2014–12–29
  8. By: Laura Parisi (Department of Economics and Management, University of Pavia); Igor Gianfrancesco (Banco di Desio e della Brianza, Risk Management Division); Camillo Gilberto (Banca Monte dei Paschi di Siena); Paolo Giudici (Department of Economics and Management, University of Pavia)
    Abstract: Monetary policies, either actual or perceived, cause changes in monetary interest rates. These changes impact the economy through financial institutions, which react to changes in the monetary rates with changes in their administered rates, on both deposits and lendings. The dynamics of administered bank interest rates in response to changes in money market rates is essential to examine the impact of monetary policies on the economy. Chong et al. (2006) proposed an error correction model to study such impact, using data previous to the recent financial crisis. In this paper we examine the validity of the model in the recent time period, characterised by very low monetary rates. The current state of close-to-zero interest rates is of particular relevance, as it has never been studied before. Our main contribution is a novel, more parsimonious, model and a predictive performance assessment methodology, which allows to compare it with the error correction model. We also contribute to the literature on interest rate risk modelling proposing a forward looking method to allocate on-demand deposits to non-zero time maturity bands, according to the predicted bank rates.
    Keywords: Error Correction Model, Forecasting Bank Rates, Monte Carlo predictions, Interest Rate Risk models
    JEL: C15 C20 E47 G32
  9. By: Eliana A. Cardoso
    Date: 2015–01
  10. By: Hélène Rey
    Abstract: There is a global financial cycle in capital flows, asset prices and in credit growth. This cycle co‐moves with the VIX, a measure of uncertainty and risk aversion of the markets. Asset markets in countries with more credit inflows are more sensitive to the global cycle. The global financial cycle is not aligned with countries’ specific macroeconomic conditions. Symptoms can go from benign to large asset price bubbles and excess credit creation, which are among the best predictors of financial crises. A VAR analysis suggests that one of the determinants of the global financial cycle is monetary policy in the centre country, which affects leverage of global banks, capital flows and credit growth in the international financial system. Whenever capital is freely mobile, the global financial cycle constrains national monetary policies regardless of the exchange rate regime. For the past few decades, international macroeconomics has postulated the “trilemma”: with free capital mobility, independent monetary policies are feasible if and only if exchange rates are floating. The global financial cycle transforms the trilemma into a “dilemma” or an “irreconcilable duo”: independent monetary policies are possible if and only if the capital account is managed. So should policy restrict capital mobility? Gains to international capital flows have proved elusive whether in calibrated models or in the data. Large gross flows disrupt asset markets and financial intermediation, so the costs may be very large. To deal with the global financial cycle and the “dilemma”, we have the following policy options: ( a) targeted capital controls; (b) acting on one of the sources of the financial cycle itself, the monetary policy of the Fed and other main central banks; (c) acting on the transmission channel cyclically by limiting credit growth and leverage during the upturn of the cycle, using national macroprudential policies; (d) acting on the transmission channel structurally by imposing stricter limits on leverage for all financial intermediaries.
    JEL: E5 F02 F33 G15
    Date: 2015–05
  11. By: Jan Hájek (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic); Roman Horváth (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic; Institute for East and Southeast European Studies, Regensburg, Germany)
    Abstract: We examine exchange rate pass-through, or how domestic prices respond to exchange rate shocks, in the Czech Republic from 1998 to 2013 by employing vector autoregression models. Using the aggregate consumer price index and its sub-components, we find that the degree of passthrough is incomplete except for food prices. The peak response occurs between 9 and 13 months after the exchange rate shock. The long-term pass-through is approximately 50% at the aggregate level. The degree of pass-through is greater for tradables than for non-tradables. The results also suggest that the exchange rate pass-through becomes slower but more complete during the financial crisis experienced in period considered.
    Keywords: exchange rate pass-through, Czech Republic, inflation, vector autoregression
    JEL: E31 E52 E58 F31
    Date: 2015–04
  12. By: Jan Acedanski (University of Economics in Katowice); Julia Wlodarczyk (University of Economics in Katowice)
    Abstract: Inflation expectations, both their median and dispersion, are of a great importance to the effectiveness of monetary policy. The goal of this paper is to examine the impact of the global financial crisis on dispersion of inflation expectations in the European Union. Using European Commission’s survey data, we find that in the early phase of the crisis the dispersion dropped rapidly but then, after Lehman Brothers’ collapse, the trend reversed and these fluctuations cannot be explained by movements of inflation rates and other commonly used factors. We also observe that, in the new European Union member states, the initial drop of the dispersion was weaker whereas the subsequent rise was stronger as compared to the old member states.
    Keywords: inflation expectations, survey data, global financial crisis, European Union
    JEL: C33 C42 D84 E31
    Date: 2015–05
  13. By: Ehrmann, Michael; Fratzscher, Marcel
    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 substantial fragmentation 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: contagion; ECB; European crisis; fragmentation; high-frequency data; identification; integration; policy; sovereign debt
    JEL: E5 F3 G15
    Date: 2015–05
  14. By: Aguiar, Mark (Princeton University); Amador, Manuel (Federal Reserve Bank of Minneapolis); Farhi, Emmanuel (Harvard University); Gopinath, Gita (Harvard University)
    Abstract: We study fiscal and monetary policy in a monetary union with the potential for rollover crises in sovereign debt markets. Member-country fiscal authorities lack commitment to repay their debt and choose fiscal policy independently. A common monetary authority chooses inflation for the union, also without commitment. We first describe the existence of a fiscal externality that arises in the presence of limited commitment and leads countries to over-borrow; this externality rationalizes the imposition of debt ceilings in a monetary union. We then investigate the impact of the composition of debt in a monetary union, that is the fraction of high-debt versus low-debt members, on the occurrence of self-fulfilling debt crises. We demonstrate that a high-debt country may be less vulnerable to crises and have higher welfare when it belongs to a union with an intermediate mix of high- and low-debt members, than one where all other members are low-debt. This contrasts with the conventional wisdom that all countries should prefer a union with low-debt members, as such a union can credibly deliver low inflation. These findings shed new light on the criteria for an optimal currency area in the presence of rollover crises.
    Keywords: Debt crisis; Coordination failures; Monetary union; Fiscal policy
    JEL: E40 E50 F30 F40
    Date: 2015–05–11
  15. By: Ozdagli, Ali K. (Federal Reserve Bank of Boston)
    Abstract: Despite the expectations of FOMC and market participants at the beginning of 2014 to the contrary, the yield on 10-year U.S. Treasury debt declined by about 50 basis points from 2.72 percent at the beginning of 2014 to 2.17 percent as of December 22, 2014. This raises the worrisome possibility that we might observe a sudden change in longer-term yields once the Federal Reserve announces an increase in short-term rates. In other words, longer-term rates could snap, very much as they did in the summer of 2013 after the tapering announcement, once the Fed announces its first short-term rate hike indicating the end of the era of loose monetary policy. In order to study this possibility, this paper examines reactions to Fed announcements during the period when conventional monetary policy tools were used, to investigate whether FOMC announcements that imply reversals in the monetary policy stance have a greater effect on longer-term Treasury yields than similar monetary policy actions that do not imply a policy reversal.
    JEL: R11 R23
    Date: 2014–12–01
  16. By: Frame, W. Scott (Federal Reserve Bank of Atlanta); Gerardi, Kristopher S. (Federal Reserve Bank of Atlanta); Willen, Paul S. (Federal Reserve Bank of Boston)
    Abstract: In the aftermath of the global financial crisis, policymakers in the United States and elsewhere have adopted stress testing as a central tool for supervising large, complex, financial institutions and promoting financial stability. Although supervisory stress testing may confer substantial benefits, such tests are vulnerable to model risk. This paper studies the risk-based capital stress test conducted by the Office of Federal Housing Enterprise Oversight (OFHEO) for Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs) that are central to the U.S. housing finance system. This research aims to identify the sources of the stress test's spectacular failure to detect the growing risk and ultimate financial distress at these GSEs as mortgage market conditions deteriorated in 2007 and 2008. The analysis focuses on a key element of OFHEO's stress test, the models used to predict default and prepayment of 30-year fixed-rate mortgages.
    Keywords: bank supervision; stress test; model risk; residential mortgages; government-sponsored enterprises
    JEL: G21 G23 G28
    Date: 2015–03–01
  17. By: William R. Cline (Peterson Institute for International Economics)
    Abstract: Since the onset of the Federal Reserve's unconventional program of large scale asset purchases, known as quantitative easing (QE), some economists and financial practitioners have feared that the consequent buildup of the Fed’s balance sheet could lead to a large expansion of the money supply, and that such an increase could cause a sharp rise in inflation. So far fears about induced inflation have not been validated. This Policy Brief examines the basis for the original concerns about inflation in terms of the classic quantity theory of money, which holds that inflation occurs when the money supply expands more rapidly than warranted by increases in real production. The Brief first reviews the US experience and shows that whereas rapid money growth might have been a plausible explanation of inflation in the 1960s through the early 1980s, subsequent data have not supported such an explanation. It then shows that the quantity theory of money has not really been put to the test after the Great Recession, because a sharp increase in banks’ excess reserves and corresponding sharp decline in the “money multiplier” has meant that the rise in the Federal Reserve’s balance sheet has not translated into increased money available to the public in the usual fashion. The most likely aftermath of quantitative easing remains one of benign price behavior. However, if nascent inflationary conditions materialize, the Federal Reserve will need to manage adroitly the large amounts of banks’ excess reserves that have accumulated as a consequence of QE in order to limit inflationary pressures.
    Date: 2015–05
  18. By: Powell, Jerome H. (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2015–05–14
  19. By: Passari, Evgenia; Rey, Hélène
    Abstract: We review the findings of the literature on the benefits of international financial flows and find that they are quantitatively elusive. We then present evidence on the existence of a global cycle in gross cross border flows, asset prices and leverage and discuss its impact on monetary policy autonomy across different exchange rate regimes. We focus in particular on the effect of US monetary policy shocks on the UK's financial conditions.
    Keywords: financial integration; monetary policy
    JEL: E5 F3
    Date: 2015–05
  20. By: BOUKEF JLASSI, NABILA; Hamdi, Helmi
    Abstract: We analyze the dynamic relationship between financial liberalization and financial stability for a panel of 25 developing countries during the period 1986-2010. The empirical study employs the Toda and Yamamoto's (1995) procedure to test for the Granger no-causality between the six variables of our study including: credit-to-GDP ratio, deposit to credit ratio, net interest margin , bank supervision, Liberalization measured by kaopen and capital control proxied by the Quinn index (2007). The results show a first bidirectional causal relationship between financial stability and deposit to credit ratio, a second one between financial stability and capital control and a third one between financial stability and liberalization.
    Keywords: Liberalization, capital control, Developing countries, Toda and Yamamoto
    JEL: E58 G0 G01 G28
    Date: 2015
  21. By: Antonio Ribba
    Abstract: There is a growing consensus on the existence of a positive, long-run relation between inflation and unemployment in the US economy. However, the conclusion that the two variables move in the same direction at low frequencies leaves open the question of the identification of the factors - real or, alternatively, monetary - underlying this co-movement. In this paper we try to shed light on this question by adopting a structural VAR agnostic approach. The main conclusion is that in the postwar US economy an important role has been played by supply shocks in shaping the long-run evolution of unemployment. Thus, it seems that this evidence is at odds with purely monetary explanation of the co-movement between inflation and unemployment.
    Keywords: Long-run Unemployment; Inflation; Structural VARs
    JEL: E32 E62 C32
    Date: 2015–05
  22. By: Slawomir Miklaszewicz (Warsaw School of Economics)
    Abstract: The global financial crisis has led to a significant deterioration of the fiscal position of the euro area countries. Measures taken by member states after euro zone crisis led to a considerable worsening in the budget balance and growth of the public debt. Fiscal consolidations resulted in a deepening recession and farther fall of budget revenues, causing additional need for austerity programs, which contributed and contributes to delay in the exit of these countries from the crisis. However, the action taken by the European Central Bank has become the key point for rescuing situation of the most indebted countries. Increase of the European financial system’s liquidity by the ECB, when the euro zone sovereign debt crisis transformed additionally into a liquidity crisis, resulted in a reduction in debt servicing costs and de facto saved some member states from insolvency and the whole eurozone from collapse. The aim of the publication is to examine the fiscal position of the euro area countries and fiscal policy architecture in Europe after the outbreak of the financial and economic crisis stared in 2008. The first part of the publication consists of the analyses of the budgetary situation of euro area countries and complications with the increasing costs of servicing the public debt in the European market affected by the financial liquidity crisis. In the second section the most important changes in the framework of budgetary policies coordination process in the euro zone are presented. The final section describes the role and activities of the European Central Bank in minimising the negative consequences of the debt crisis in the euro zone.
    Keywords: sovereign debt crisis of the euro area, EMU monetary policy, the European Semester, Fiscal Pact, the European Stability Mechanism
    JEL: F43 F36 H63
    Date: 2015–05
  23. By: Evgenia Passari; Hélène Rey
    Abstract: We review the findings of the literature on the benefits of international financial flows and find that they are quantitatively elusive. We then present evidence on the existence of a global cycle in gross cross border flows, asset prices and leverage and discuss its impact on monetary policy autonomy across different exchange rate regimes. We focus in particular on the effect of US monetary policy shocks on the UK's financial conditions.
    JEL: E5 F3
    Date: 2015–05
  24. By: Octavio A. F. Tourinho
    Date: 2015–01
  25. By: Mantalos, Panagiotis (Örebro University School of Business)
    Abstract: We introducing the new idea, of “@-euro” is a self-part-financiering monetary policy. This new idea, introduced more money (liquidity) to Greek state, and a system to collect taxes from the black economy. This idea, which is a possible solution to the Greek Crisis applied in a 7-years alternative Budget. The “@-euro” has two characteristics, first self-financiering and self-discipline. The produced New MTFS with exceptional positive results, with 43,00 billion surplus after that we have pay 113,00 billion Euro back to the creditors in a 7 year period. Moreover, no negative effects of austerity. There is fiscal stimulus without inflation!
    Keywords: Austerity; Government Budget; “@-euro”
    JEL: C22 E62 F33 H63 O40
    Date: 2015–04–02
  26. By: Korobilis, Dimitris
    Abstract: Bayesian model averaging (BMA) methods are regularly used to deal with model uncertainty in regression models. This paper shows how to introduce Bayesian model averaging methods in quantile regressions, and allow for different predictors to affect different quantiles of the dependent variable. I show that quantile regression BMA methods can help reduce uncertainty regarding outcomes of future inflation by providing superior predictive densities compared to mean regression models with and without BMA.
    Keywords: Bayesian model averaging; quantile regression; inflation forecasts; fan charts
    JEL: C11 C22 C52
    Date: 2015–04
  27. By: Guillaume Rocheteau; Pierre-Olivier Weill; Tsz-Nga Wong
    Abstract: We construct a continuous-time, pure currency economy with the following three key features. First, our modelled economy incorporates idiosyncratic uncertainty—households receive infrequent and random opportunities of lumpy consumption—and displays an endogenous, non-degenerate distribution of money holdings. Second, the model is tractable: properties of equilibria can be obtained analytically, and equilibria can be solved in closed form in a variety of cases. Third, it admits as a special, limiting case the quasi-linear economy of Lagos and Wright (2005) and Rocheteau and Wright (2005). We use our modeled economy to obtain new insights into the effects of anticipated inflation on individual spending behavior, the social benefits and output effects of inflationary transfer schemes, and transitional dynamics following unanticipated monetary shocks.
    JEL: E0 E41 E52
    Date: 2015–05
  28. By: Powell, Jerome H. (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2015–04–08
  29. By: Avinash D. Persaud (Peterson Institute for International Economics)
    Abstract: Solvency II, which the European Parliament adopted in March 2014, codifies and harmonizes insurance regulations in Europe to reduce the risk of an insurer defaulting on its obligations and producing dangerous systemic side effects. The new directive tries to achieve these aims primarily by setting capital requirements for the assets of insurers and pension funds based on the annual volatility of the price of these assets. Persaud argues that these capital requirements will impose an asset allocation on life insurers and pension funds that does not serve the interests of consumers, the financial system, or the economy. The main problem with Solvency II is that the riskiness of the assets of a life insurer or pension fund with liabilities that will not materialize before 10 or sometimes 20 years is not well measured by the amount by which prices may fall during the next year. Solvency II fails to take account of the fact that institutions with different liabilities have different capacities for absorbing different risks and that it is the exploitation of these differences that creates systemic resilience. To correct this problem, Persaud offers an alternative approach that is more attuned to the risk that a pension fund or life insurer would fail to meet its obligations when they come due and less focused on the short-term volatility of asset prices.
    Date: 2015–04

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