nep-cba New Economics Papers
on Central Banking
Issue of 2015‒05‒30
thirty-six papers chosen by
Maria Semenova
Higher School of Economics

  1. Financial Crises, Development, and Growth: A Long-term Perspective By Reinhart, Carmen; Reinhart, Vincent
  2. The Time-Varying Degree of Inflation Expectations Anchoring By Till Strohsal; Rafi Melnick; Dieter Nautz;
  3. Macroprudential Policy: A Silver Bullet or Refighting the Last War? By Lopez, Claude; Markwardt, Donald; Savard, Keith
  4. The interest rate pass-through in the euro area during the sovereign debt crisis By Julia von Borstel; Sandra Eickmeier; Leo Krippner
  5. Asymmetric shocks in a currency union: The role of central bank collateral policy. By F. Koulischer
  6. On Default and Uniqueness of Monetary Equilibria By Lin, Li; Tsomocos, Dimitrios P.; Vardoulakis, Alexandros
  7. The bankers’ paradox: the political economy of macroprudential regulation By Andrew Baker
  8. Sovereign Default: The Role of Expectations By Nicolini, Juan Pablo; Teles, Pedro; Ayres, Joao Luiz; Navarro, Gaston
  9. Supervising large, complex financial companies: what do supervisors do? By Eisenbach, Thomas M.; Haughwout, Andrew F.; Hirtle, Beverly; Kovner, Anna; Lucca, David O.; Plosser, Matthew
  10. Regulating the Financial Cycle: An Integrated Approach with a Leverage Ratio By Dirk Schoenmaker; Peter Wierts
  11. Are Survey Expectations Theory-Consistent? The Role of Central Bank Communication and News By Drager, Lena; Lamla, Michael; Pfajfar, Damjan
  12. Do central bank forecasts matter for professional forecasters? By Jacek Kotłowski
  13. Uncertainty and Monetary Policy in the CAEMC zone By NGNIADO NOGNOU Edwige
  14. Past, Present, and Future Challenges for the Euro Area : a speech at the ECB Forum on Central Banking conference "Inflation and Unemployment in Europe", Sintra, Portugal, May 21, 2015. By Fischer, Stanley
  15. The Application of Visual Analytics to Financial Stability Monitoring By Mark D. Flood; Victoria L. Lemieux; Margaret Varga; B.L. William Wong
  16. Stress Tests to Promote Financial Stability: Assessing Progress and Looking to the Future By Rick Bookstaber; Jill Cetina; Greg Feldberg; Mark Flood; Paul Glasserman
  17. Towards a tacit low-degree independence central banking model ? By BLANCHETON Bertrand
  18. Hard Pegs versus Intermediate Currency Arrangements in the Pacific By Helble, Matthias; Prasetyo, Ahmad; Yoshino, Naoyuki
  19. A Stochastic Dominance Approach to the Basel III Dilemma: Expected Shortfall or VaR? By Chia-Lin Chang; Juan-Ángel Jiménez-Martín; Esfandiar Maasoumi; Michael McAleer; Teodosio Pérez-Amaral
  20. Anchoring Heuristic Messes with Inflation Targeting By Da Silva, Evelin; Da Silva, Sergio
  21. Foreign Capital Flows, Credit Growth and Macroprudential Policy in a DSGE Model with Traditional and Matter-of-Fact Financial Frictions By Fabia A. de Carvalho; Marcos R. Castro
  22. Cryptography and the Economics of Supervisory Information: Balancing Transparency and Confidentiality By Mark Flood; Jonathan Katz; Stephen Ong; Adam Smith
  23. A Microfounded Model of Money Demand Under Uncertainty, and its Empirical Validation Using Cointegration and Rolling-Window Dynamic Multiplier Analysis. By Ingrid Größl; Artur Tarassow
  24. Ex-post Inflation Forecast Uncertainty and Skew Normal Distribution: ‘Back from the Future’ Approach By Wojciech Charemza; Carlos Díaz; Svetlana Makarova
  25. Labor Market Policies and the "Missing Deflation" Puzzle: Lessons from Hoover Policies during the U.S Great Depression By Jordan Roulleau-Pasdeloup; Anastasia Zhutova
  26. The relationship between Foreign Currency trading and Economic Development: A case Study of Pakistan By Mashkoor, Asim; Ahmed, Ovais; Herani, Dr. Gobin
  27. Time varying pass-through: Will the yen depreciation help Japan hit the inflation target? By Etsuro Shioji
  28. Are the Federal Reserve's Stress Test Results Predictable? By Paul Glasserman; Gowtham Tangirala
  29. Choosing the Right Skew Normal Distribution: the Macroeconomist’ Dilemma By Wojciech Charemza; Carlos Díaz; Svetlana Makarova
  30. “Twin deficits” in Greece: in search of causality By Michalis Nikiforos; Laura Carvalho, Christian Schoder
  31. Risk or Regulatory Capital? Bringing distributions back in the foreground By Dominique Guegan; Bertrand K Hassani
  32. Design of Risk Weights By Paul Glasserman; Wanmo Kang
  33. Banking Stress Scenarios for Public Debt Projections By Peter Benczur; Katia Berti; Jessica Cariboni; Francesca Erica Di Girolamo; Sven Langedijk; Andrea Pagano; Marco Petracco Giudici
  34. Intermediation, Money Creation, and Keynesian Macrodynamics in Multi-agent Systems By Bill Gibson; Mark Setterfield
  35. Conditional Term Structure of Inflation Forecast Uncertainty: The Copula Approach By Wojciech Charemza; Carlos Díaz; Svetlana Makarova
  36. Runs versus Lemons: Information Disclosure and Fiscal Capacity By Miguel Faria-e-Castro; Joseba Martinez; Thomas Philippon

  1. By: Reinhart, Carmen; Reinhart, Vincent
    Abstract: Observed over long periods, the upward path of the output of most economies occasionally takes jagged steps down. More often than not, these events are associated with a variety of crises, including systemic banking stresses, exchange rate crashes, a burst of inflation, and a restructuring or default on sovereign debt. Using a large panel of countries over a long period, we document that crises are typically associated with lower medium-term growth. That may be a direct causal channel, a reverse channel, or the influence of some other factors on both growth and finance. But they tend to go together. Given that the forces for convergence of income across countries are estimated to be slow, going off track around a crisis will likely have long-lived consequences for relative economic development.
    Keywords: Growth, financial crises, development, inflation
    JEL: G1 N1 N2 O4 O5 O50
    Date: 2015–02
  2. By: Till Strohsal; Rafi Melnick; Dieter Nautz;
    Abstract: Well-anchored inflation expectations have become a key indicator for the credibility of a central bank’s inflation target. Since the outbreak of the recent financial crisis, the existence and the degree of de-anchoring of U.S. inflation expectations have been under debate. This paper introduces an encompassing time-varying parameter model to analyze the changing degree of U.S. inflation expectations anchoring. We confirm that inflation expectations have been partially de-anchored during the financial crisis. Yet, our results suggest that inflation expectations have been successfully re-anchored ever since.
    Keywords: Anchoring of Inflation Expectations, Financial Crisis, Break-Even Inflation Rates, Time-Varying Parameter
    JEL: E31 E52 E58 C22
    Date: 2015–05
  3. By: Lopez, Claude; Markwardt, Donald; Savard, Keith
    Abstract: As many central banks contemplate the normalization of monetary policy, their focus is turning to the promise of macroprudential policy as a tool to manage possible future systemic risk in financial markets. Janet Yellen and Mario Draghi, among others, are pinning much of their hopes for managing financial stability in the context of Basel III on macroprudentialism. Despite central banks’ clear intention that this policy will play a significant role in developed economies, few policymakers or financial players know what macroprudential policy is, much less how to assess its efficacy or necessity. Our report aims to clarify the concept of macroprudential policy for a broader audience, cultivating a better understanding of these tools and their implications for broader monetary policy going forward. The report also advocates the use of more refined indicators for financial cycles as benchmarks for policy discussions on macroprudential policy.
    Keywords: macroprudential policy, non-core liabilities, Basel III
    JEL: E6 F3
    Date: 2015–05
  4. By: Julia von Borstel; Sandra Eickmeier; Leo Krippner
    Abstract: We investigate the pass-through of monetary policy to bank lending rates in the euro area during the sovereign debt crisis, in comparison to the pre-crisis period. We make the following contributions. First, we use a factor-augmented vector autoregression, which allows us to assess the responses of a large number of country-specific interest rates and spreads. Second, we analyze the effects of monetary policy on the components of the interest rate pass-through, which reflect banks’ funding risk (including sovereign risk) and markups charged by banks over funding costs. Third, we not only consider conventional but also unconventional monetary policy. We find that while the transmission of conventional monetary policy to bank lending rates has not changed with the crisis, the composition of the IP has changed. Specifically, expansionary conventional monetary policy lowered sovereign risk in peripheral countries and longer term bank funding risk in peripheral and core countries during the crisis, but has been unable to lower banks’ markups. This was not, or not as much, the case prior to the crisis. Unconventional monetary policy helped decreasing lending rates, mainly due to large shocks rather than a strong propagation.
    Keywords: Interest rate pass-through, factor model, sovereign debt crisis, unconventional monetary policy
    JEL: E5 E43 E44 C3
    Date: 2015–05
  5. By: F. Koulischer
    Abstract: Currency unions limit the ability of the central bank to use interest rate policy to accommodate asymmetric shocks. I show that collateral policy can serve to dampen asymmetric shocks in a currency area when these shocks also affect the collateral held by banks and when collateral portfolios of banks differ systematically across countries. In my model banks from 2 countries use collateral to borrow from the money market or a central bank that targets a level of interest rate (or investment) in each economy. The distressed bank may enter a “collateral crunch” regime where it is constrained in its access to funding due to a moral hazard problem. The central bank faces an heterogeneous transmission of its interest rate: a unit change in rate has a smaller effect on the economy rate of the distressed country. The central bank therefore sets a high interest rate which is well transmitted in the booming economy and relaxes the haircut on the collateral owned by the distressed bank.
    Keywords: Central banking, currency union, collateral policy, repo, monetary policy.
    JEL: E58 G01 G20
    Date: 2015
  6. By: Lin, Li (International Monetary Fund); Tsomocos, Dimitrios P. (University of Oxford); Vardoulakis, Alexandros (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: We examine the role that credit risk in the central bank's monetary operations plays in the determination of the equilibrium price level and allocations. Our model features trade in fiat money, real assets and a monetary authority which injects money into the economy through short-term and long-term loans to agents. Short-term loans are riskless, but long-term loans are collateralized by a portfolio of real assets and are subject to credit risk. The private monetary wealth of individuals is zero, i.e., there is no outside money. When there is no default in equilibrium, there is indeterminacy. Positive default in every state of the world on some long-term loan endogenously creates positive liquid wealth that supports positive interest rates and resolves the aforementioned indeterminacy. Hence, a non-Ricardian policy across loan markets can determine the equilibrium allocations while it allows the central bank to earn profits from seigniorage in order to compensate for any losses.
    Keywords: Collateral; Default; Determinacy; Liquid wealth; Monetary policy
    JEL: D50 E40 E50
    Date: 2015–05–08
  7. By: Andrew Baker
    Abstract: Macroprudential regulation, which has emerged as a new departure in financial regulation (albeit with a longer heritage), since the financial crash, is in a fluid, evolving and highly experimental phase. Understanding its future political economy requires engaging with macroprudential's constituent concepts and how they interrelate to one another. This paper argues that the emerging political economy of macroprudential regulation revolves around five paradoxes. The first three of these are paradoxes that characterise the financial system and are identified by the macroprudential perspective. In seeking to respond to these paradoxes, macroprudential policy, generates a further two distinctly institutional and political paradoxes. The last of these is a central bankers' paradox which relates to the source of independent central bank authority and the difficulty of building legitimacy and public support for macroprudential regulation. Functioning macroprudential regulation is about executing a technocratic control project that rests on a depoliticisation strategy, that in turn risks politicising central banks, exposing their claims to technical authority to critical scrutiny and potential political backlash. This is the ultimate central bankers’ paradox in the era of post-crash political economy. Central banks conducting macroprudential regulation need to be aware of this paradox and handle it with great care.
    JEL: E5 E6
    Date: 2015–04–29
  8. By: Nicolini, Juan Pablo (Federal Reserve Bank of Minneapolis); Teles, Pedro (Universidade Catolica Portuguesa); Ayres, Joao Luiz (Federal Reserve Bank of Minneapolis); Navarro, Gaston (New York University)
    Abstract: We study a variation of the standard model of sovereign default, as in Aguiar and Gopinath (2006) or Arellano (2008), and show that this variation is consistent with multiple interest rate equilibria. Some of those equilibria correspond to the ones identified by Calvo (1988), where default is likely because rates are high, and rates are high because default is likely. The model is used to simulate equilibrium movements in sovereign bond spreads that resemble sovereign debt crises. It is also used to discuss lending policies similar to the ones announced by the European Central Bank in 2012.
    Keywords: Sovereign default; Interest rate spreads; Multiple equilibria
    JEL: E44 F34
    Date: 2015–05–14
  9. By: Eisenbach, Thomas M. (Federal Reserve Bank of New York); Haughwout, Andrew F. (Federal Reserve Bank of New York); Hirtle, Beverly (Federal Reserve Bank of New York); Kovner, Anna (Federal Reserve Bank of New York); Lucca, David O. (Federal Reserve Bank of New York); Plosser, Matthew (Federal Reserve Bank of New York)
    Abstract: The Federal Reserve is responsible for the prudential supervision of bank holding companies (BHCs) on a consolidated basis. Prudential supervision involves monitoring and oversight to assess whether these firms are engaged in unsafe or unsound practices, as well as ensuring that firms are taking corrective actions to address such practices. Prudential supervision is interlinked with, but distinct from, regulation, which involves the development and promulgation of the rules under which BHCs and other regulated financial intermediaries operate. This paper describes the Federal Reserve’s supervisory approach for large, complex financial companies and how prudential supervisory activities are structured, staffed, and implemented on a day‐to‐day basis at the Federal Reserve Bank of New York as part of the broader supervisory program of the Federal Reserve System. The goal of the paper is to generate insight for those not involved in supervision into what supervisors do and how they do it. Understanding how prudential supervision works is a critical precursor to determining how to measure its impact and effectiveness.
    Keywords: bank supervision; large and complex financial companies
    JEL: G21 G28
    Date: 2015–05–01
  10. By: Dirk Schoenmaker (Faculty of Economics and Business Administration, VU University Amsterdam, Duisenberg school of finance, the Netherlands); Peter Wierts (Duisenberg school of finance, the Netherlands)
    Abstract: We propose a regulatory approach for restricting debt financing as an amplification mechanism across the financial system. A small stylised model illustrates the trade-off between static and time varying limits on leverage in dampening the financial cycle. The policy section proposes its application to highly leveraged entities and activities across the financial system. Whereas the traditional view on regulation focuses on capital as a buffer against exogenous risks, our approach focuses instead on debt financing, endogenous feedback mechanisms and resource allocation. It explicitly addresses the boundary problem in entity-based financial regulation and provides a motivation for substantially lower levels of leverage – and thereby higher capital buffers – than in the traditional approach.
    Keywords: Financial cycle; macroprudential regulation; financial supervision; (shadow) banking
    JEL: E58 G10 G18 G20
    Date: 2015–05–18
  11. By: Drager, Lena (University of Hamburg); Lamla, Michael (University of Essex); Pfajfar, Damjan (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: In this paper we analyze whether central bank communication can facilitate the understanding of key economic concepts. Using survey data for consumers and professionals, we calculate how many of them have expectations consistent with the Fisher Equation, the Taylor rule and the Phillips curve and test, by accounting for three different communication channels, whether central banks can influence those. A substantial share of participants has expectations consistent with the Fisher equation, followed by the Taylor rule and the Phillips curve. We show that having theory-consistent expectations is beneficial, as it improves the forecast accuracy. Furthermore, consistency is time varying. Exploring this time variation, we provide evidence that central bank communication as well as news on monetary policy can facilitate the understanding of those concepts and thereby improve the efficacy of monetary policy.
    Keywords: Macroeconomic expectations; central bank communication; consumer forecast accuracy; macroeconomic literacy; monetary news; survey microdata
    JEL: C25 D84 E31 E52 E58
    Date: 2015–05–04
  12. By: Jacek Kotłowski
    Abstract: This paper examines to what extent public information provided by the central bank affects the forecasts formulated by professional forecasters. We investigate empirically whether disclosing GDP and inflation forecasts by Narodowy Bank Polski (the central bank of Poland) reduces the disagreement in professional forecasters’ expectations. The results only partially support the hypothesis on the coordinating role of the central bank existing in the literature. The main finding is that by publishing its projection of future GDP growth, the central bank reduces the dispersion of one-year-ahead GDP forecasts. Moreover our study indicates that the role of the central bank in reducing the forecasts dispersion is strengthening over time. We also find using non-linear STR models that the extent to which the projection release affects the dispersion of GDP forecasts varies over the business cycle. By disclosing its own projection the central bank reduces the disagreement among the forecasters the most in the periods when the economy moves from one phase of the business cycle to another. On the contrary, the release of CPI projection by NBP affects neither the cross-sectional dispersion nor the level of forecasts formulated by professional forecasters.
    Keywords: Monetary policy, inflation targeting, forecasting, central bank communication, survey expectations, forecasts disagreement, STR models.
    JEL: C24 E37 E52 E58
    Date: 2015
  13. By: NGNIADO NOGNOU Edwige
    Abstract: This paper proposes to identify from the specificities of the CEMAC zone different sources of uncertainties that may affect monetary policies actions. We first realize a review of literature on the implementation of monetary policy under uncertainty as it is presented in the general theory. Two rules of conduct are mentioned. The certainty equivalence principle for which uncertainty has no effect on the optimal policy and the Brainard (1967) Conservatism principle that recommends more cautious and whose empirical validity is not always verified and depends on the type of uncertainty.
    Keywords: Monetary Policy – Uncertainty – CEMAC
    JEL: C32 E31 E52
    Date: 2015
  14. By: Fischer, Stanley (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2015–05–21
  15. By: Mark D. Flood (Office of Financial Research); Victoria L. Lemieux (University of British Columbia); Margaret Varga (University of Oxford); B.L. William Wong (Middlesex University)
    Abstract: This paper provides an overview of visual analytics -- the science of analytical reasoning enhanced by interactive visualizations tightly coupled with data analytics software -- and discusses its potential benefits in monitoring systemic financial stability. Macroprudential supervisors face a daunting challenge with at least three facets of the financial system. First, the financial system is complex, enormous, highly diverse, and constantly changing. Second, the set of financial and econometric models proposed to help comprehend threats to financial stability is large, diverse, and growing. Third, certain regulatory activities, such as rulemaking and decision-making, generate special requirements for transparency and accountability that can complicate or restrict the choices of tools and approaches. This paper explores these challenges in the context of visual analytics. Visual analytics can increase supervisors' comprehension of the data stream, helping to transform it into actionable knowledge to support decision- and policy-making. The paper concludes with suggestions for a research agenda.
    Keywords: Financial stability, macroprudential supervision, monitoring, systemic risk, visual analytics
    Date: 2014–05–09
  16. By: Rick Bookstaber (Office of Financial Research); Jill Cetina (Office of Financial Research); Greg Feldberg (Office of Financial Research); Mark Flood (Office of Financial Research); Paul Glasserman (Columbia Business School, Columbia University)
    Abstract: Stress testing, which has its roots in risk management, should be adapted to support financial stability monitoring and to incorporate the interconnections and dynamics of the financial system. Since the 2008 financial crisis, bank supervisors have honed their financial stability monitoring tools and significantly expanded the use of stress testing in the supervision of the largest financial institutions. This article describes areas in which further research could contribute to the development of best practices in stress testing and how bank supervisory stress tests can be made more useful for macroprudential supervision. We discuss both near-term and longer-term objectives.
    Keywords: Stress Tests, Financial Stability
    Date: 2013–07–18
  17. By: BLANCHETON Bertrand
    Abstract: This article puts the independence of central banks into historical perspective. In doing so, it underlines the highly versatile nature of the balance of forces between central banks and governments. From this viewpoint, the situation of public finances emerges as a key explanatory factor, and an analysis of the sequence of central banking models is proposed from the late 19th century to the present day. The article upholds the thesis of the emergence, since the subprime crisis, of a new model qualified as “tacit low-degree independence”: central banks have, of their own volition, given up some of their de facto independence, helping governments to contain the rise in national debt. But while keeping a step ahead of pressure from governments, they have lost the control of money supply.
    Keywords: central banking, public debt, central bank independence
    JEL: N10 N20 G20 N40
    Date: 2015
  18. By: Helble, Matthias (Asian Development Bank Institute); Prasetyo, Ahmad (Asian Development Bank Institute); Yoshino, Naoyuki (Asian Development Bank Institute)
    Abstract: The 14 Pacific developing member countries (DMCs) of the Asian Development Bank (ADB) have opted for very different exchange rate regimes with varying degrees of flexibility. Whereas several microstates have adopted an external currency as their legal tender, others have decided to use a basket currency and yet others have chosen a managed float. The choice of exchange rate regime can have far reaching economic consequences. In this paper, we first build a simple exchange rate model that illustrates how monetary authorities should best determine the weights of the basket currencies in order to keep fluctuations in gross domestic product (GDP) and in exchange rates to a minimum. We add to the literature by explicitly modeling tourism flows. In the second part of the paper we study the recent developments of the Pacific DMCs in terms of the volatility of their exchange rates, their GDP and their balance of trade. We find that Pacific DMCs with external currencies systematically exhibit lower GDP volatility compared to Pacific DMCs with basket currencies or floats. We conclude that Pacific DMCs with basket currencies or floats seem to have managed their exchange rate with the objective to minimize fluctuations of exchange rates, rather than those of their GDP. Our model therefore provides valuable guidance for those monetary authorities in the Pacific that would like to lower GDP fluctuations.
    Keywords: exchange rate policy; economic integration; economic development; microstates
    JEL: F31 F33
    Date: 2015–05–12
  19. By: Chia-Lin Chang (National Chung Hsing University, Taichung, Taiwan); Juan-Ángel Jiménez-Martín (Complutense University of Madrid, Spain); Esfandiar Maasoumi (Emory University, United States); Michael McAleer (National Tsing Hua University, Taiwan, Erasmus School of Economics, Erasmus University Rotterdam,Tinbergen Institute, The Netherlands, Complutense University of Madrid, Spain); Teodosio Pérez-Amaral (Complutense University of Madrid, Spain)
    Abstract: The Basel Committee on Banking Supervision (BCBS) (2013) recently proposed shifting the quantitative risk metrics system from Value-at-Risk (VaR) to Expected Shortfall (ES). The BCBS (2013) noted that “a number of weaknesses have been identified with using VaR for determining regulatory capital requirements, including its inability to capture tail risk” (p. 3). For this reason, the Basel Committee is considering the use of ES, which is a coherent risk measure and has already become common in the insurance industry, though not yet in the banking industry. While ES is mathematically superior to VaR in that it does not show “tail risk” and is a coherent risk measure in being subadditive, its practical implementation and large calculation requirements may pose operational challenges to financial firms. Moreover, previous empirical findings based only on means and standard deviations suggested that VaR and ES were very similar in most practical cases, while ES could be less precise because of its larger variance. In this paper we find that ES is computationally feasible using personal computers and, contrary to previous research, it is shown that there is a stochastic difference between the 97.5% ES and 99% VaR. In the Gaussian case, they are similar but not equal, while in other cases they can differ substantially: in fat-tailed conditional distributions, on the one hand, 97.5%-ES would imply higher risk forecasts, while on the other, it provides a smaller down-side risk than using the 99%-VaR. It is found that the empirical results in the paper generally support the proposals of the Basel Committee.
    Keywords: Stochastic dominance; Value-at-Risk; Expected Shortfall; Optimizing strategy; Basel III Accord
    JEL: C53 C22 G32 G11 G17
    Date: 2015–05–18
  20. By: Da Silva, Evelin; Da Silva, Sergio
    Abstract: We evaluate recent inflation-targeting using Brazilian data and also consider the framework of the macroeconomic model of adaptive learning blended with a cognitive psychology approach. We suggest that forecasters interpret the inflation target as an anchor, and adjust to it accordingly. As current inflation increases above the target level, a central bank loses credibility, and forecasters start the adjustment from the top because they expect an even higher future inflation. Then, they move back to the core target within a range of uncertainty, but the adjustment is likely to end before the core is reached, as predicted by the psychological theory of anchors. After calibrating the model, we find an asymptotic equilibrium of a 6.1 percent inflation rate, which overshoots the announced target inflation core of 4.5 percent. This example casts doubt on the very justification for inflation targeting, which is unlikely to succeed when private forecasters rely on anchoring heuristics.
    Keywords: Anchoring Heuristic, Inflation Targeting, Adaptive Learning
    JEL: D03
    Date: 2015
  21. By: Fabia A. de Carvalho; Marcos R. Castro
    Abstract: We investigate the transmission channel of reserve requirements, capital requirements, and risk weights of different types of credit in the computation of capital adequacy ratios and compare the power of each macroprudential instrument to counteract the impact of domestic and international shocks that potentially challenge financial stability. To this end, we model a small open economy that receives inflows of foreign direct investment, foreign portfolio investment, and issues foreign debt. The central bank manages international reserves, with an impact on the foreign exchange market and on the country risk premium. Shocks in international markets affect domestic credit even though foreign capital flows are directly destined to non-financial institutions. Banks operate in four distinct credit markets: consumer, housing and commercial– each of them facing default risk and having specific borrowing constraints– and safe export-related credit lines in the form of working capital loans to exporters. Consumer loans are granted based on banks’ expectations with respect to borrowers’ future labor income net of senior debt services. Banks optimize their balance sheet allocation facing frictions intended to reproduce banks’ incentives given regulatory constraints. The model is estimated with Bayesian techniques using data from Brazil
    Date: 2015–05
  22. By: Mark Flood (Office of Financial Research); Jonathan Katz (Computer Science Department, University of Maryland); Stephen Ong (Federal Reserve Bank of Cleveland); Adam Smith (Computer Science and Engineering Department, Pennsylvania State University)
    Abstract: We elucidate the tradeoffs between transparency and confidentiality in the context of financial regulation. The structure of information in financial contexts creates incentives with a pervasive effect on financial institutions and their relationships. This includes supervisory institutions, which must balance the opposing forces of confidentiality and transparency that arise from their examination and disclosure duties. Prudential supervision can expose confidential information to examiners who have a duty to protect it. Disclosure policies work to reduce information asymmetries, empowering investors and fostering market discipline. The resulting confidentiality/transparency dichotomy tends to push supervisory information policies to one extreme or the other. We argue that there are important intermediate cases in which limited information sharing would be welfare-improving, and that this can be achieved with careful use of new techniques from the fields of secure computation and statistical data privacy. We provide a broad overview of these new technologies. We also describe three specific usage scenarios where such beneficial solutions might be implemented.
    Keywords: Transparency, Confidentiality, Cryptography, Supervisory Data
    Date: 2013–09–04
  23. By: Ingrid Größl (Universität Hamburg (University of Hamburg)); Artur Tarassow (Universität Hamburg (University of Hamburg))
    Abstract: In this article we derive a microfounded model of money demand under uncertainty built on intertemporally optimizing risk-averse households. Deriving a complete solution of the optimization problem taking the intertemporal budget constraint into account leads to ambiguous effects w.r.t. to the impact of capital as well as inflation risk, thus contradicting standard results. We estimate both the long- and short-run model dynamics as well as potential time-variation by means of a rolling-window dynamic multiplier analysis using the error-correction framework for the U.S. economy between 1978q1 to 2013q4. The results reveal that U.S. households increase their demand for money in response to positive changes in inflation and stock market risks.
    Keywords: Money Demand, Uncertainty, Inflation Risk, Stock Market Risk, Monetary Policy, ARDL Model, Cointegration, Dynamic Multiplier, Rolling-Window
    JEL: C22 E41 E51 E58 G11
    Date: 2015–05
  24. By: Wojciech Charemza; Carlos Díaz; Svetlana Makarova
    Abstract: Empirical evaluation of macroeconomic uncertainty and its use for probabilistic forecasting are investigated. New indicators of forecast uncertainty, which either include or exclude effects of macroeconomic policy, are developed. These indicators are derived from the weighted skew normal distribution proposed in this paper, which parameters are interpretable in relation to monetary policy outcomes and actions. This distribution is fitted to forecast errors, obtained recursively, of annual inflation recorded monthly for 38 countries. Forecast uncertainty term structure is evaluated for U.K. and U.S. using new indicators and compared with earlier results. This paper has supplementary material.
    Keywords: forecast term structure, macroeconomic forecasting, monetary policy, non-normality
    JEL: C54 E37 E52
    Date: 2015–05
  25. By: Jordan Roulleau-Pasdeloup; Anastasia Zhutova
    Abstract: We document the existence of a "missing deflation" puzzle during the U.S. Great Depression (1929-1941) and show that the solution of this puzzle lies in Hoover policies. Herbert Hoover made multiple public announcements asking firms not to cut wages, most of which complied. The consequences of such a policy are ambiguous since it affects aggregate fluctuations via two channels: as a negative aggregate supply shock this policy decreases output while increasing inflation, but more inflation can postpone the occurrence of a liquidity trap when the economy is hit by a large negative aggregate demand shock. We develop and estimate a medium scale New Keynesian model to measure the effect of Hoover policies during the Great Depression and we find evidence that without such polices the U.S. economy would have ended up in a liquidity trap two years before it actually did, suffering an even deeper recession with a larger deflation. In addition, the welfare effects of Hoover policy are found to be clearly positive.
    Keywords: Zero lower bound; Deflation; Great Depression
    JEL: C11 E24 E31 E32 E44 E52 N12
    Date: 2015–05
  26. By: Mashkoor, Asim; Ahmed, Ovais; Herani, Dr. Gobin
    Abstract: In order to determine the relationship between few factors whom not calculated or evaluated by central bank is a tough job. The researcher tried to accumulate such secondary factors which are directly combined together and form very important primary factors. The researchers have reviewed many international researches in order to enhance the accuracy and focus of the research data and their variables. These researches has provided many new variables which are not very commonly used in our monetary research paradigm. This is a descriptive research where the researchers identified some new dimensions of usage of secondary variables into the formation of primary variables. There are many limitations researchers have during the course of the research. The most important and notable is the unavailability of the statistical data regarding many important statistical aspects of the economy. In the conclusion the researchers have found that the inflation, interest rate and exchange rates are highly correlated with currency trading. By manipulating such factors, inflation and exchange rates are exert influenced by central banks and varies impact currency and inflation. The valuation of foreign currency trading needs high attention from capital formation, determinants of inflation rate and proper utilization of supply of money in economy. The growth rate of GDP is essential factor for both economic development and foreign currency trading.
    Keywords: Economic development, Foreign Currency Trade.
    JEL: G20 O1 O23 O24
    Date: 2015–05–20
  27. By: Etsuro Shioji (Department of Economics, Hitotsubashi University)
    Abstract: There is a growing recognition that pushing up the public’s inflation expectation is a key to a successful escape from a chronic deflation. The question is how this can be achieved when the economy is stuck in a liquidity trap. This paper argues that, for Japan, the currency depreciation since the late 2012 could turn out to be useful for ending the country’s long battle with falling prices. Prior studies have suggested that household expectations are greatly influenced by prices of items that they purchase frequently. This paper demonstrates that the extent of exchange rate pass-through to those prices, once near-extinct, has come back strong in recent years. Evidence based on VARs as well as TVP-VARs indicates that a 25% depreciation of the yen would produce a 2% increase in the prices of goods that households purchase regularly.
    Keywords: exchange rate, pass-through, expected inflation, CPI by purchase frequency class, time series analysis.
    Date: 2015–03
  28. By: Paul Glasserman (Office of Financial Research); Gowtham Tangirala (Columbia University)
    Abstract: Regulatory stress tests have become a key tool for setting bank capital levels. Publicly disclosed results for four rounds of stress tests suggest that as the stress testing process has evolved, its outcomes have become more predictable and therefore arguably less informative. In particular, projected stress losses in the 2013 and 2014 stress tests are nearly perfectly correlated for bank holding companies that participated in both rounds. We also compare projected losses across different scenarios used in the 2014 stress test and find surprisingly high correlations for outcomes grouped by bank or by loan category, which suggests an opportunity to get more information out of the stress tests through greater diversity in the scenarios used. We discuss potential implications of these patterns for the further development and application of stress testing.
    Keywords: Stress Testing
    Date: 2015–03–03
  29. By: Wojciech Charemza; Carlos Díaz; Svetlana Makarova
    Abstract: The paper discusses the consequences of possible misspecification in fitting skew normal distributions to empirical data. It is shown, through numerical experiments, that it is easy to choose a distribution which is different from that which generated the sample, if the minimum distance criterion is used. The distributions compared are the two-piece normal, weighted skew normal and the generalized Balakrishnan skew normal distribution which covers a variety of other skew normal distributions, including the Azzalini distribution. The estimation method applied is the simulated minimum distance estimation with the Hellinger distance. It is suggested that, in case of similarity in values of distance measures obtained for different distributions, the choice should be made on the grounds of parameters’ interpretation rather than the goodness of fit. For monetary policy analysis, this suggests application of the weighted skew normal distribution, which parameters are directly interpretable as signals and outcomes of monetary decisions. This is supported by empirical evidence of fitting different skew normal distributions to the ex-post monthly inflation forecast errors for Poland, Russia, Ukraine and U.S.A., where estimations do not allow for clear distinction between the fitted distributions for Poland and U.S.A.
    Keywords: Skew Normal Distributions, Ex-post Uncertainty, Inflation Forecasting, Economic Policy
    JEL: E17 C46 E52 E37
    Date: 2015–05
  30. By: Michalis Nikiforos; Laura Carvalho, Christian Schoder
    Abstract: The paper discusses the trajectories of the Greek public deficit and sovereign debt between 1980 and 2010 and its connection to the political and economic environment of the same period. We pay special attention to the causality between the public and the external deficit in the period after 1995, the post-Maastricht treaty period. We argue that, due to the European monetary unification process and the adoption of the common currency, causality ran from the external deficit to the public deficit. This hypothesis is tested econometrically using both Granger Causality and Cointegration analyses. We find empirical support for this hypothesis
    Keywords: Greece; crisis; public debt; twin deficits; imbalances
    JEL: E62 F21 F34 F41
    Date: 2015–05–20
  31. By: Dominique Guegan (Centre d'Economie de la Sorbonne); Bertrand K Hassani (Grupo Santander et Centre d'Economie de la Sorbonne)
    Abstract: This paper discusses the regulatory requirement (Basel Committee, ECB-SSM and EBA) to measure financial institutions' major risks, for instance Market, Credit and Operational, regarding the choice of the risk measures, the choice of the distributions used to model them and the level of confidence. We highlight and illustrate the paradoxes and the issues observed implementing an approach over another and the inconsistencies between the methodologies suggested and the goal to achieve. This paper make some recommendations to the supervisor and proposes alternative procedures to measure the risks
    Keywords: Risk measures; Sub-additivity; Level of confidence; Extreme value distributions; Financial regulation
    JEL: C1 C6
    Date: 2015–05
  32. By: Paul Glasserman (Office of Financial Research); Wanmo Kang (Korea Advanced Institute of Science and Technology)
    Abstract: Banking regulations set minimum levels of capital for banks. These requirements are generally formulated through a ratio of capital to risk-weighted assets. A risk-weighting scheme assigns a weight to each asset or category of assets and effectively functions as a linear constraint on a bank's portfolio choice; it also changes the incentives for banks to hold various kinds of assets. In this paper, we investigate the design of risk weights to align regulatory and private objectives in a simple mean-variance framework for portfolio selection. By setting risk weights proportional to profitability rather than risk, the regulator can induce a bank to reduce its overall level of risk without distorting its asset mix. Because the regulator is unlikely to know the true profitability of assets, we introduce an adaptive formulation in which the regulator sets weights by observing a bank's portfolio. The adaptive scheme converges to the same combination of weights and portfolio choice that would hold if the regulator knew the asset profitability. We also investigate other objectives, including steering banks to a target mix of assets, adding robustness, mitigating procyclicality, and reducing system-wide risk in a setting with multiple heterogeneous banks.
    Keywords: Risk Weights, Banking
    Date: 2014–08–19
  33. By: Peter Benczur; Katia Berti; Jessica Cariboni; Francesca Erica Di Girolamo; Sven Langedijk; Andrea Pagano; Marco Petracco Giudici
    Abstract: The euro area sovereign debt crisis brought to light the potential risks to public finances posed by the banking sector. This paper simulates the potential impact of bank defaults on public finances based on stress test scenarios using an advance analytical methodology.
    JEL: C15 E62 G01 G21 H63 H68
    Date: 2015–04
  34. By: Bill Gibson (University of Vermont); Mark Setterfield (Department of Economics, New School for Social Research)
    Abstract: Keynesian economists refer to capitalism as a monetary production economy, in which the theory of money and the theory of production are inseparable (Skidelsky, 1992). One important aspect of this, brought to light by Robertson following the publication of The General Theory, is that in a Keynesian economy, endogenous money creation is logically necessary if the economy is to expand. A Keynesian economy cannot operate with an exogenously given supply of money as in verticalism. One way to ensure that money is endogenous is to simply assume that the supply of money is infinitely elastic, known in the literature as horizontalism. In this view, prior savings cannot be a constraint on current investment and it follows that the level of economic activity is determined by effective demand. Using a multi-agent systems model, this paper shows that real economies, especially those subject to recurrent financial crises, can be neither horizontalist nor verticalist. Horizontalism overlooks microeconomic factors that might block flows from savers to investors, while verticalism ignores an irreducible ability of the system to generate endogenous money, even when the monetary authority does everything in its power to limit credit creation.
    Keywords: Multi-agent system, intermediation, endogenous money, Keynesian macroeconomics
    JEL: D58 E12 C00
    Date: 2015–05
  35. By: Wojciech Charemza; Carlos Díaz; Svetlana Makarova
    Abstract: The paper introduces the concept of conditional inflation forecast uncertainty. It is proposed that the joint and conditional distributions of the bivariate forecast uncertainty can be derived from estimation unconditional distributions of these uncertainties and applying appropriate copula function. Empirical results have been obtained for Canada and US. Term structure has been evaluated in the form of unconditional and conditional probabilities of hitting the inflation range of ±1% around the Canadian inflation target. The paper suggests a new measure of inflation forecast uncertainty that accounts for possible inter-country dependence. It is shown that evaluation of targeting precision can be effectively improved with the use of ex-ante formulated conditional and unconditional probabilities of inflation being within the pre-defined band around the target.
    Keywords: Macroeconomic Forecasting, Inflation, Uncertainty, Non-normality, Density Forecasting, Forecast Term Structure, Copula Modelling
    JEL: C53 E37 E52
    Date: 2015–05
  36. By: Miguel Faria-e-Castro; Joseba Martinez; Thomas Philippon
    Abstract: We characterize the optimal use of information disclosure and fiscal backstops during financial crises. In our model, financial crises force governments to choose between runs and lemons. Revealing information about banks' assets reduces adverse selection in credit markets, but it can also create inefficient runs on weak banks. A fiscal backstop mitigates this risk and allows the government to pursue a high disclosure strategy. A government with a strong fiscal position is more likely to run informative stress tests than a government with a weak fiscal position. As a result, such a government is also less likely to rely on outright bailouts.
    JEL: E44 E5 E6 G01 G21 G28 H12 H2
    Date: 2015–05

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