nep-cba New Economics Papers
on Central Banking
Issue of 2015‒06‒05
thirty-one papers chosen by
Maria Semenova
Higher School of Economics

  1. Central bank balance sheet policies and inflation expectations By Jan Willem van den End; Christiaan Pattipeilohy
  2. Self-Fulfilling Debt Crises: Can Monetary Policy Really Help? By Bacchetta, Philippe; Perazzi, Elena; van Wincoop, Eric
  3. Central Bank Balance Sheet, Liquidity Trap, and Quantitative Easing By Arthur Galego Mendes; Tiago Couto Berriel
  4. Interest rates, money, and banks in an estimated euro area model By Christoffel, Kai; Schabert, Andreas
  5. Policy mandates for macro-prudential and monetary policies in a new Keynesian framework By Levine, Paul; Lima, Diana
  6. Towards Adopting Inflation Targeting in Emerging Markets: The (A)symmetric Transmission Mechanism in Jordan By Noura Abu Asab; Juan Carlos Cuestas
  7. Monetary policy expectations and economic fluctuations at the zero lower bound By Doehr, Rachel; Martinez-Garcia, Enrique
  8. Monetary and macroprudential policy with foreign currency loans By Brzoza-Brzezina, Michał; Kolasa, Marcin; Makarski, Krzysztof
  9. Central Bank Balance Sheets: Expansion and Reduction since 1900 By Ferguson, Niall; Schaab, Andreas; Schularick, Moritz
  10. Private news and monetary policy forward guidance or (the expected virtue of ignorance) By Fujiwara, Ippei; Waki, Yuichiro
  11. Global financial market impact of the announcement of the ECB's extended asset purchase programme By Georgiadis, Georgios; Grab, Johannes
  12. Optimal supervisory architecture and financial integration in a banking union By Colliard, Jean-Edouard
  13. Policy regime change against chronic deflation? Policy option under a long-term liquidity trap By Fujiwara, Ippei; Nakazono, Yoshiyuki; Ueda, Kozo
  14. The Bank Capital Regulation (BCR) Model By Hyejin Cho
  15. Optimal Monetary Policy at the Zero Lower Bound By Azariadis, Costas; Bullard, James B.; Singh, Aarti; Suda, Jacek
  16. Did the Financial Reforms of the Early 1990s Fail? A Comparison of Bank Failures and FDIC Losses in the 1986-92 and 2007-13 Periods By Balla, Eliana; Prescott, Edward Simpson; Walter, John R.
  17. The global component of local inflation: revisiting the empirical content of the global slack hypothesis with Bayesian methods By Martinez-Garcia, Enrique
  18. Indonesian Macro Policy through Two Crises By Prayudhi Azwar; Rod Tyers
  19. Incorporating Anchored Inflation Expectations in the Phillips Curve and in the Derivation of OECD Measures of Equilibrium Unemployment By Elena Rusticelli; David Turner; Maria Chiara Cavalleri
  20. Monetary Neutrality By Apostolos Serletis; Zisimos Koustas
  21. Sustainable international monetary policy cooperation By Fujiwara, Ippei; Kam, Timothy; Sunakawa, Takeki
  22. Forecasting local inflation with global inflation: when economic theory meets the facts By Duncan, Roberto; Martinez-Garcia, Enrique
  23. Regional heterogeneity and monetary policy By Beraja, Martin; Fuster, Andreas; Hurst, Erik; Vavra, Joseph
  24. Inflation, Endogenous Market Segmentation and the Term Structure of Interest Rates By Casper de Vries; Xuedong Wang
  25. Macroprudential Policy in a Recovering Market: Too Much too Soon? By Duffy, David; Mc Inerney, Niall; McQuinn, Kieran
  26. Different Types of Central Bank Insolvency and the Central Role of Seignorage By Ricardo Reis
  27. Macroprudential oversight, risk communication and visualization By Sarlin, Peter
  28. Leading indicators of systemic banking crises: Finland in a panel of EU countries By Laina, Patrizio; Nyholm, Juho; Sarlin, Peter
  29. Post-Crisis Financial System Regulation and Its Research Foundation, May 25, 2015 By Mester, Loretta J.
  30. Systemic risk and macro-prudential policies: A credit network-based approach By Catullo, Ermanno; Gallegati, Mauro; Palestrini, Antonio
  31. The euro as an international currency By Agnès Benassy-Quere

  1. By: Jan Willem van den End; Christiaan Pattipeilohy
    Abstract: We analyse the empirical effects of credit easing and quantitative easing on inflation expectations and exchange rates. Both monetary policy strategies are summarised in measures for composition and size of the central bank balance sheet and included in a VAR model. The empirical results show that changes in balance sheet size had positive effects on inflation expectations in Japan, while the effects where negligible in the euro area. By contrast, an increasing balance sheet size is associated with reduced short-term inflation expectations in the US and UK, pointing at negative signalling effects. Shocks to balance sheet size or composition have no substantial effects on long-term inflation expectations in the euro area, US and UK. An expanding balance sheet size is associated with an appreciation of the US dollar and a depreciation of the euro, pound sterling and Japanese yen.
    Keywords: central banks and their policies; monetary policy
    JEL: E58 E52
    Date: 2015–05
  2. By: Bacchetta, Philippe; Perazzi, Elena; van Wincoop, Eric
    Abstract: This paper examines quantitatively the potential for monetary policy to avoid self-fulfilling sovereign debt crises. We combine a version of the slow-moving debt crisis model proposed by Lorenzoni and Werning (2014) with a standard New Keynesian model. We consider both conventional and unconventional monetary policy. Under conventional policy the central bank can preclude a debt crisis through inflation, lowering the real interest rate and raising output. These reduce the real value of the outstanding debt and the cost of new borrowing, and increase tax revenues and seigniorage. Unconventional policies take the form of liquidity support or debt buyback policies that raise the monetary base beyond the satiation level. We find that generally the central bank cannot credibly avoid a self-fulfilling debt crisis. Conventional policies needed to avert a crisis require excessive inflation for a sustained period of time. Unconventional monetary policy can only be effective when the economy is at a structural ZLB for a sustained length of time.
    Keywords: long-term debt; Monetary policy; Sovereign debt crises
    JEL: E52 E60 F34
    Date: 2015–05
  3. By: Arthur Galego Mendes (Department of Economics PUC-Rio); Tiago Couto Berriel (Department of Economics PUC-Rio)
    Abstract: We show that, when a central bank is not fully financially backed by the treasury and faces a solvency constraint, an increase in the size or a change in the composition of it’s balance sheet (quantitative easing) can serve as a commitment device in a liquidity trap scenario. In particular, when the short-term interest rate is in zero lower bound, open market operations by the central bank that involve purchases of long-term bonds can help mitigate deflation and recession under a discretionary policy equilibrium. This change in central bank balance sheet, which increases its size and duration, provides an incentive to the central bank to keep interest rates low in future in order to avoid losses and satisfy its solvency constraints, approximating its full commitment policy.Creation-Date: 2015-05-08
  4. By: Christoffel, Kai; Schabert, Andreas
    Abstract: This paper examines monetary transmission and macroeconomic shocks in a medium scale macroeconomic model with costly banking estimated for euro area data. In addition to data on measures of real activity and prices, we include data on bank loans, loan rates, and reserves for the estimation of the model with Bayesian techniques. We find that loans and holdings of reserves affect banking costs to a small but significant extent. Furthermore, shocks to reserve holdings are found to contribute more to variations in the policy rate, inflation and output than shocks to the feedback rule for the policy rate. Hence, holdings of central bank money, which is typically neglected in the literature, plays a substantial role for macroeconomics dynamics. The analysis further shows that exogenous shifts in banking costs hardly play a role for fluctuations in real activity and prices, even during the recent financial crisis. JEL Classification: C54, E52, E32
    Keywords: Bayesian estimation, central bank money supply, costly banking, financial shocks
    Date: 2015–05
  5. By: Levine, Paul; Lima, Diana
    Abstract: In the aftermath of the financial crisis, the role of monetary policy and macro-prudential regulation in promoting financial stability is under discussion. The old debate concerning whether monetary policy should respond to credit and asset price bubbles was revived, whereas macro-prudential regulation is being assessed as an alternative macroeconomic tool to deal with financial imbalances. The paper explores both sides of the debate in a New Keynesian framework with financial frictions by comparing the welfare and stabilisation impacts of distinct policy regimes. First, we investigate whether there is a welfare benefit from monetary policy leaning against financial instability. We show that monetary policy rules of this type perform better than conventional monetary rules. Second, by introducing macro-prudential regulation in the model, results from optimal policy analysis suggest also that there are welfare gains, even in the case in which monetary and macro-prudential authorities are independent and react to their own policy goal. JEL Classification: E30, E50, G28
    Keywords: DSGE, financial frictions, macro-prudential policy, monetary policy
    Date: 2015–04
  6. By: Noura Abu Asab (Department of Economics, University of Sheffield); Juan Carlos Cuestas (Department of Economics, University of Sheffield)
    Abstract: This paper is carried out to investigate adopting inflation targeting in Jordan. The interest rate pass-through channel is assessed to underline the possibility and challenges to target inflation when a country imports the credibility of low inflation from abroad. The interest rate pass through is examined within its intermediate lag of action to shed light on the effectiveness of monetary policy. The Johansen approach is performed to estimate the long-run degree of pass-through along with the speed of adjustment to disequilibrium. The dynamic model of Hendry and Doornik (1994) is employed to connect the short-run and long-run, and to estimate the mean lag of adjustment under (a)symmetric market response. The empirical findings suggest that the interest rate pass-through in Jordan is weak and slow and the symmetric mean lags in the loan and deposit market are highly sticky. In addition, an asymmetric adjustment is found in the loan market, where banks are faster to decrease their interest rates following a change in official interest rates, the behaviour which can be explained by the collusive pricing hypothesis. Comparing the results to the two inflation targeters: New Zealand and the UK, the study suggests that Jordan has to move to a more resilient exchange rate arrangement before committing to the lite-form of inflation targeting.
    Keywords: Passthrough, monetary policy, nonlinearties, Jordan
    JEL: C32 E40
    Date: 2015–05
  7. By: Doehr, Rachel (Claremont McKenna College); Martinez-Garcia, Enrique (Federal Reserve Bank of Dallas)
    Abstract: Using a panel of survey‐based measures of future interest rates from the Survey of Professional Forecasters, we study the dynamic relationship between shocks to monetary policy expectations and fluctuations in economic activity and inflation. We propose a smallscale structured recursive vector autoregression (VAR) model to identify the macroeconomic effects of changes in expectations about monetary policy. Our results show that when interest rates are away from the zero‐lower bound, a perception of higher future interest rates leads to a significant rise in current measures of inflation and a rise in economic activity. However, when interest rates approach zero, the effect on economic activity is the opposite, with significant but lagged decreases in economic activity following an upward revision to expected future interest rates. The impact of changes in expectations about monetary policy is robust when we control for other features of the transmission mechanism (e.g., long‐term interest rates, quantitative easing, exchange rate movements and even oil price shocks). Our findings also show that monetary policy expectations contribute up to 34 percent to the variability of economic activity (and 24 percent on inflation) while policy rates are fixed at the zero‐lower bound. This evidence points to the importance of managing monetary policy expectations (forward guidance) as a crucial policy tool for stimulating economic activity at the zero‐lower bound.
    JEL: E30 E32 E43 E52
    Date: 2015–05–01
  8. By: Brzoza-Brzezina, Michał; Kolasa, Marcin; Makarski, Krzysztof
    Abstract: In a number of countries a substantial proportion of mortgage loans is denominated in foreign currency. In this paper we demonstrate how their presence affects economic policy and agents' welfare. To this end we construct a small open economy model with housing loans denominated in domestic or foreign currency. The model is calibrated for Poland - a typical small open economy with a large share of foreign currency loans (FCL). We show that FCLs negatively affect the transmission of monetary policy. In contrast, their impact on the effectiveness of macroprudential policy is much weaker but positive. We also demonstrate that FCLs increase welfare when domestic interest rate shocks prevail and decrease it when risk premium (exchange rate) shocks dominate. Under a realistic calibration of the stochastic environment FCLs are welfare reducing. Finally, we show that regulatory policies that correct the share of FCLs may cause a short term slowdown. JEL Classification: E32, E44, E58
    Keywords: DSGE models with banking sector, foreign currency loans, monetary and macroprudential policy
    Date: 2015–04
  9. By: Ferguson, Niall; Schaab, Andreas; Schularick, Moritz
    Abstract: In this paper we study the evolution of central banks’ balance sheets in 12 advanced economies since 1900. We present a new dataset assembled from a wide array of historical sources. We find that balance sheet size in most developed countries has fluctuated within rather clearly defined bands relative to output. Historically, clusters of big expansions and contractions of balance sheets have been associated with periods of geopolitical or financial crisis. This explains the co-movement between the size of central bank balance sheets and public debt levels in the past century. Relative to the size of the financial sector, moreover, central bank balance sheets had shrunk dramatically in the three decades preceding the global financial crisis. By that yardstick, their recent expansion partly marks a return to earlier levels. Some of the recent increase could therefore prove to be permanent if the financial sector maintains permanently higher liquidity ratios.
    Keywords: balance sheets; central banks; financial sector; monetary policy; public debt
    JEL: E31 E52 E58 N10
    Date: 2015–05
  10. By: Fujiwara, Ippei (Keio University and Australian National University); Waki, Yuichiro (University of Queensland)
    Abstract: How should monetary policy be designed when the central bank has private information about future economic conditions? When private news about shocks to future fundamentals is added to an otherwise standard new Keynesian model, social welfare deteriorates by the central bank’s reaction to or revelation of such news. There exists an expected virtue of ignorance, and secrecy constitutes optimal policy. This result holds when news are about cost-push shocks, or about shocks to the monetary policy objective, or about shocks to the natural rate of interest, and even when the zero lower bound of nominal interest rates is taken into account. A lesson of our analysis for a central bank’s communication strategy is that Delphic forward guidance that helps the private sector form more accurate forecasts of future shocks can be undesirable and the central bank should instead aim to communicate its state-contingent policy.
    JEL: E30 E40 E50
    Date: 2015–04–01
  11. By: Georgiadis, Georgios (European Central Bank); Grab, Johannes (European Central Bank)
    Abstract: We estimate the impact of the ECB’s announcement of the extended asset purchase programme (EAPP) on 22 January 2015 on global equity prices, bond yields and the euro exchange rate. We find that the EAPP announcement benefited global financial markets by boosting equity prices in the euro area and the rest of the world. At the same time, the EAPP announcement caused a depreciation of the euro vis-à-vis advanced and emerging market economy currencies. Comparing the EAPP to previous ECB announcements of unconventional monetary policies, the main channel of transmission of the EAPP announcement to global financial markets was through signalling—the ECB convincingly conveying to market participants that its future monetary policy stance will remain accommodative—rather than through improving confidence (as was the case for the OMT) or through portfolio re-balancing (as for the SMP). Similarly, in contrast to the OMT and the SMP announcements the signaling channel also played a major role for the domestic financial market impact of the EAPP. Cross-country heterogeneities in the global financial market spillovers from the EAPP announcement were linked to differences in economies’ financial openness, exchange rate regime, trade and financial integration with the euro area and their attractiveness for carry trades.
    JEL: E52 E58 G15
    Date: 2015–03–01
  12. By: Colliard, Jean-Edouard
    Abstract: Both in the United States and in the Euro area, bank supervision is the joint responsibility of local and central/federal supervisors. I study how such a system can optimally balance the lower inspection costs of local supervisors with the ability of the central level to internalize cross-border or interstate externalities. The model predicts that centralised supervision endogenously increases market integration and cross-border externalities, further strengthening the need for centralised supervision. This complementarity implies that, for some parameterizations of the model, the economy can be trapped in a local supervision equilibrium with low supervision and integration. In such a case, the forward-looking introduction of a centralized supervisory architecture achieves a superior equilibrium. JEL Classification: D53, G21, G28, G33, G38, L51
    Keywords: bank supervision, banking union, financial integration, regulatory federalism, single supervisory mechanism
    Date: 2015–04
  13. By: Fujiwara, Ippei (Keio University and Australian National University); Nakazono, Yoshiyuki (Yokohama City University); Ueda, Kozo (Waseda University)
    Abstract: This paper evaluates the role of the first arrow of Abenomics in guiding public perceptions on monetary policy stance through the management of expectations. In order to end chronic deflation, a policy regime change must be perceived by economic agents. Analysis using the QUICK survey system (QSS) monthly survey data shows that the reaction of monetary policy to inflation has been declining since the mid 2000s, implying intensified forward guidance well before Abenomics. However, Japan seems to have moved closer to a long-term liquidity trap, where even long-term bond yields are constrained by the zero lower bound. Estimated changes in perceptions are not abrupt enough to satisfy Sargent's (1982) criteria for a regime change. This poses a serious challenge to central banks: what is an effective policy option left under the long-term liquidity trap?
    JEL: E47 E50 E60
    Date: 2015–03–01
  14. By: Hyejin Cho (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS)
    Abstract: The motivation of this article is to induce the bank capital management solution for banks and regulation bodies on commercial banks. The goal of the paper is intended to mitigate the risk of a banking area and also provide the right incentive for banks to support the real economy.
    Date: 2014–09–22
  15. By: Azariadis, Costas (Federal Reserve Bank of St. Louis); Bullard, James B. (Federal Reserve Bank of St. Louis); Singh, Aarti (University of Sydney); Suda, Jacek (Narodowy Bank Polski)
    Abstract: We study optimal monetary policy at the zero lower bound. The macroeconomy we study has considerable income inequality which gives rise to a large private sector credit market. Households participating in this market use non-state contingent nominal contracts (NSCNC). A second, small group of households only uses cash and cannot participate in the credit market. The monetary authority supplies currency to cash-using households in a way that changes the price level to provide for optimal risk-sharing in the private credit market and thus to overcome the NSCNC friction. For sufficiently large and persistent negative shocks the zero lower bound on nominal interest rates may threaten to bind. The monetary authority may credibly promise to increase the price level in this situation to maintain a smoothly functioning (complete) credit market. The optimal monetary policy in this model can be broadly viewed as a version of nominal GDP targeting.
    Keywords: Zero lower bound; forward guidance; quantitative easing; optimal monetary policy; life cycle economies; heterogeneous households; credit market participation; nominal GDP targeting.
    JEL: E4 E5
    Date: 2015–05–27
  16. By: Balla, Eliana (Federal Reserve Bank of Richmond); Prescott, Edward Simpson (Federal Reserve Bank of Richmond); Walter, John R. (Federal Reserve Bank of Richmond)
    Abstract: Two of the most significant banking reforms to come out of the banking problems in the late 1980s and early 1990s were the increase in capital requirements from Basel 1 and the prompt corrective action (PCA) provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). The PCA provisions require regulators to shut down banks before book capital becomes negative. We compare failures and FDIC losses on commercial banks in the pre-FDICIA commercial bank crisis of the mid-1980s to early 1990s with that in the recent financial crisis. Using a sample of community and mid-sized banks, we find that almost all the same bank characteristics predict failure and high losses in the two crises. Our results imply that for these classes of banks, the two crises were very similar. We find that the failure rate in the recent period was driven more by severe economic conditions than by the increased concentrations in real estate lending. The analysis suggests that the combination of PCA with higher capital levels helped reduce failure rates in the recent period. In contrast, the analysis suggests that the reforms did not help with FDIC losses. FDIC losses on failed commercial banks were approximately 14% of failed bank assets over the 1986-92 period but increased to approximately 24% over the 2007-13 period. We find that the increased losses are not explained by variations in bank balance sheets or local economic conditions. Finally, we find that a discretionary accounting variable, interest accrued but not yet received, is predictive of both failure and higher FDIC losses.
    JEL: G21 G28
    Date: 2015–05–15
  17. By: Martinez-Garcia, Enrique (Federal Reserve Bank of Dallas)
    Abstract: The global slack hypothesis is central to the discussion of the trade-offs that monetary policy faces in an increasingly more integrated world. The workhorse New Open Economy Macro (NOEM) model of Martínez-García and Wynne (2010), which fleshes out this hypothesis, shows how expected future local inflation and global slack affect current local inflation. In this paper, I propose the use of the orthogonalization method of Aoki (1981) and Fukuda (1993) on the workhorse NOEM model to further decompose local inflation into a global component and an inflation differential component. I find that the log-linearized rational expectations model of Martínez-García and Wynne (2010) can be solved with two separate subsystems to describe each of these two components of inflation. I estimate the full NOEM model with Bayesian techniques using data for the U.S. and an aggregate of its 38 largest trading partners from 1980Q1 until 2011Q4. The Bayesian estimation recognizes the parameter uncertainty surrounding the model and calls on the data (inflation and output) to discipline the parameterization. My findings show that the strength of the international spillovers through trade—even in the absence of common shocks—is reflected in the response of global inflation and is incorporated into local inflation dynamics. Furthermore, I find that key features of the economy can have different impacts on global and local inflation—in particular, I show that the parameters that determine the import share and the price-elasticity of trade matter in explaining the inflation differential component but not the global component of inflation.
    JEL: C11 C13 F41
    Date: 2015–02–01
  18. By: Prayudhi Azwar; Rod Tyers
    Abstract: Indonesia’s open, developing economy fielded shocks due to the Asian financial crisis (AFC) and the global financial crisis (GFC) quite differently. Although the origins of both crises were external, during the AFC the coincidence of financial contagion with domestic political upheaval saw the Indonesian economy collapse. By contrast, during the decade-later GFC, when most nations slumped into recession the Indonesian economy slowed but did not recess, achieving real growth of 6.1% (2008) and 4.5% (2009) and recording one of the world’s best performances for the period. This paper reviews these events and employs numerical modelling of stylized AFC and GFC shocks to show that some of the contrast stems from differences in the states of the global economy during the crises and the compositions of the external shocks in each case. This said, both shocks have capital flight elements and it is shown that the key policy responses include floating the exchange rate and fiscal expansions that are, where necessary, money financed. There is, nonetheless, evidence of evolution in Indonesian macroeconomic policy making between the crises that allowed its strong performance to be sustained.
    Keywords: Indonesia, External shocks, Financial crises, Exchange rates Macroeconomic policy
    JEL: E32 E44 E43 E58 F43 F47 N25
    Date: 2015–05
  19. By: Elena Rusticelli; David Turner; Maria Chiara Cavalleri
    Abstract: Inflation has become much less sensitive to movements in unemployment in recent decades. A common explanation for this change is that inflation expectations have become better anchored as a consequence of credible inflation targeting by central banks. In order to evaluate this hypothesis, the paper compares two competing empirical specifications across all OECD economies, where competing specifications correspond to the ‘former’ and ‘new’ specification for deriving measures of the unemployment gap which underlie the OECD’s Economic Outlook projections. The former OECD specification can be characterised as a traditional ‘backward-looking’ Phillips curve, where current inflation is partly explained by an autoregressive distributed lag process of past inflation representing both inertia and inflation expectations formed on the basis of recent inflation outcomes. Conversely, the new approach adjusts this specification to incorporate the notion that inflation expectations are anchored around the central bank’s inflation objective. The main finding of the paper is that the latter approach systematically out-performs the former for an overwhelming majority of OECD countries over a recent sample period. Relative to the backward-looking specification, the anchored expectations approach also tends to imply larger unemployment gaps for those countries for which actual unemployment has increased the most. Moreover, the anchored expectations Phillips curve reduces real-time revisions to the unemployment gap, although these still remain uncomfortably large, in the case of countries where there have been large changes in unemployment.<P>Intégrer des anticipations ancrées d'inflation à la courbe de Phillips pour le calcul de mesures du chômage d'équilibre<BR>L'inflation est devenue beaucoup moins sensible aux fluctuations du chômage au cours des dernières décennies. Une explication couramment avancée à cet égard, est que l'ancrage des anticipations d'inflation s'est amélioré. Ni cette explication ni l'approche économétrique retenue ne sont nouvelles, mais un des apports de ce document tient au fait que nous y utilisons deux spécifications économétriques différentes pour l'ensemble des économies de l'OCDE, celles-ci correspondant à l'« ancienne » et à la « nouvelle » spécifications employées pour calculer les mesures de l'écart de chômage sur lesquelles reposent les prévisions des Perspectives économiques de l'OCDE. L'ancienne spécification employée par l'OCDE peut être caractérisée comme une courbe de Phillips « rétrospective » classique, suivant laquelle l'inflation est expliquée en partie à l'aide d'un modèle autorégressif à retards échelonnés appliqué à l'inflation antérieure, représentant à la fois l'inertie de l'inflation et les anticipations d'inflation formées sur la base des récents résultats d'inflation. Inversement, la nouvelle approche consiste à ajuster cette spécification de manière à intégrer la notion que les anticipations d'inflation sont ancrées aux alentours de l'objectif d'inflation de la banque centrale. La principale conclusion de ce document est que la nouvelle approche donne systématiquement de meilleurs résultats que l'ancienne pour une écrasante majorité de pays de l'OCDE sur une période d'observation récente. Par rapport à la spécification rétrospective, l'approche fondée sur les anticipations ancrées tend également à mettre en évidence des écarts de chômage plus importants pour les pays où le taux de chômage effectif a le plus augmenté. En outre, la courbe de Phillips fondée sur des anticipations ancrées réduit les révisions en temps réel de l'écart de chômage, même si celles-ci restent d'une ampleur préoccupante, dans le cas des pays où le chômage a fortement varié.
    Keywords: Phillips curve, equilibrium unemployment, Anchored expectations, real-time revisions, anticipations ancrées, révisions en temps réel, chômage d’équilibre, courbe de Phillips
    JEL: C22 E24 E31 J64
    Date: 2015–05–28
  20. By: Apostolos Serletis (University of Calgary); Zisimos Koustas
    Abstract: We test the long-run neutrality of money proposition for the United States using the King and Watson (1997) methodology paying attention to the integration and cointegration properties of the variables. We use quarterly data (over the period from 1967:1 to 2014:1) and the new Center for Financial Stability Divisia monetary aggregates, documented in detail in Barnett et al. (2013). We make a comparison among the narrower monetary aggregates, M1 M2M, M2M, M2, and ALL, and the broad monetary aggregates, M4+, M4-, and M3, and show that there is no statistically signifiÂ…cant evidence against long-run monetary neutrality, consistent with both monetarist and Keynesian macroeconomic theory.
    Date: 2015–05–29
  21. By: Fujiwara, Ippei (Keio University and Australian National University); Kam, Timothy (Australian National University); Sunakawa, Takeki (University of Tokyo)
    JEL: E52 F41 F42
    Date: 2015–04–01
  22. By: Duncan, Roberto (Ohio University); Martinez-Garcia, Enrique (Federal Reserve Bank of Dallas)
    Abstract: This paper provides both theoretical insight as well as empirical evidence in support of the view that inflation is largely a global phenomenon. First, we show that inflation across countries incorporates a significant common factor captured by global inflation. Second, we show that in theory a role for global inflation in local inflation dynamics emerges over the business cycle even without common shocks, and under flexible exchange rates and complete international asset markets. Third, we identify a strong "error correction mechanism" that brings local inflation rates back in line with global inflation which explains the relative success of inflation forecasting models based on global inflation (e.g., Ciccarelli and Mojon (2010). Fourth, we argue that the workhorse New Open Economy Macro (NOEM) model of Martínez-García and Wynne (2010) can be approximated by a finiteorder VAR and estimated using Bayesian techniques to forecast domestic inflation incorporating all relevant linkages with the rest of the world. This NOEM-BVAR provides a tractable model of inflation determination that can be tested empirically in forecasting. Finally, we use pseudo-out-of-sample forecasts to assess the NOEM-BVAR at different horizons (1 to 8 quarters ahead) across 17 OECD countries using quarterly data over the period 1980Q1-2014Q4. In general, we find that the NOEM-BVAR model produces a lower root mean squared prediction error (RMSPE) than its competitors—which include most conventional forecasting models based on domestic factors and also the recent models based on global inflation. In a number of cases, the gains in smaller RMSPEs are statistically significant. The NOEM-BVAR model is also accurate in predicting the direction of change for inflation, and often better than its competitors along this dimension too.
    JEL: E31 F41 F42 F47
    Date: 2015–04–01
  23. By: Beraja, Martin (University of Chicago); Fuster, Andreas (Federal Reserve Bank of New York); Hurst, Erik (University of Chicago); Vavra, Joseph (University of Chicago)
    Abstract: We study the implications of regional heterogeneity within a currency union for monetary policy. We ask, first, does monetary policy mitigate or exacerbate ex-post regional dispersion over the business cycle? And second, does ex-ante regional heterogeneity increase or dampen the aggregate effects of a given monetary policy? To help answer these questions, we use detailed U.S. micro data to explore the extent to which mortgage activity differed across local areas in response to the first round of Quantitative Easing (QE1), announced in November 2008. We document that QE1 increased both mortgage activity and real spending but that its effects were smaller in parts of the country with the largest employment declines. This heterogeneous regional effect is driven by the fact that collateral values were most depressed in the regions with the largest employment declines, reducing the extent to which borrowers were able to benefit from rate decreases. We explore the implications of our empirical results for theoretical monetary policymaking using an incomplete-markets, heterogeneous-agent model of a monetary union whereby monetary policy influences local spending through collateralized lending. Preliminary results suggest that both the distributional and aggregate consequences of monetary policy depend on the joint distribution of local shocks. We find that if regions with low relative income also have depressed collateral values (as in 2008), then expansionary mon
    Keywords: monetary policy; regional inequality; quantitative easing; mortgage refinancing
    JEL: E21 E52 G21
    Date: 2015–06–01
  24. By: Casper de Vries (Erasmus School of Economics, Erasmus University Rotterdam, the Netherlands); Xuedong Wang (Erasmus School of Economics, Erasmus University Rotterdam, the Netherlands)
    Abstract: The term structure of interest rates does not adhere to the expectations hypothesis, possibly due to a risk premium. We consider the implications of a risk premium that arises from endogenous market segmentation driven by variable inflation rates. In the absence of autocorrelation in inflation, the risk premium is constant. If inflation is correlated, however, the risk premium becomes time varying and we can rationalize the failure of the expectations hypothesis. Indirect empirical tests of the model’s implications are provided.
    Keywords: Expectations hypothesis; Term structure; Time-Varying Risk Premia; Segmented markets; Inflation
    JEL: E43 G12
    Date: 2015–05–29
  25. By: Duffy, David; Mc Inerney, Niall; McQuinn, Kieran
    Abstract: The aftermath of the 2007/08 financial crisis has resulted in many Central Banks and regulatory authorities examining the appropriateness of macroprudential policy as an effective and efficient policy option in preventing the emergence of future credit bubbles. Specific limits on loan-to-value (LTV) and loan-to-income (LTI) ratios have been assessed and applied in a large number of markets both in developing and developed economies as a means of ensuring greater financial stability. The Irish property and credit market were particularly affected in the crisis as the domestic housing market had, since 1995, experienced sustained price and housing supply increases. Much of the activity in the Irish market was fuelled by a sizeable credit bubble which was greatly facilitated by the growth of international wholesale funding post 2003. After a period of pronounced declines, Irish house prices in late 2013 started to increase significantly. In early 2015, the Irish Central Bank responded by imposing new LTV and LTI limits to curb house price inflation. However, the introduction of these measures comes at a time when housing supply and mortgage lending are at historically low levels. In this paper we use a newly developed structural model of the Irish property and credit market to examine the implications of these measures for house prices and key activity variables in the mortgage market.
    Date: 2015–05
  26. By: Ricardo Reis
    Abstract: A central bank is insolvent if its plans imply a Ponzi scheme on reserves so the price level becomes infinity. If the central bank enjoys fiscal support, in the form of a dividend rule that pays out net income every period, including when it is negative, it can never become insolvent independently of the fiscal authority. Otherwise, this note distinguishes between intertemporal insolvency, rule insolvency, and period insolvency. While period and rule solvency depend on analyzing dividend rules and sources of risk to net income, evaluating intertemporal solvency requires overcoming the difficult challenge of measuring the present value of seignorage.
    JEL: E42 E58 E59
    Date: 2015–05
  27. By: Sarlin, Peter
    Abstract: This paper discusses the role of risk communication in macroprudential oversight and of visualization in risk communication. Beyond the soar in data availability and precision, the transition from firm-centric to system-wide supervision imposes vast data needs. Moreover, in addition to internal communication as in any organization, broad and effective external communication of timely information related to systemic risks is a key mandate of macroprudential supervisors. This further stresses the importance of simple representations of complex data. The present paper focuses on the background and theory of information visualization and visual analytics, as well as techniques within these fields, as potential means for risk communication. We define the task of visualization in risk communication, discuss the structure of macroprudential data, and review visualization techniques applied to systemic risk. We conclude that two essential, yet rare, features for supporting the analysis of big data and communication of risks are analytical visualizations and interactive interfaces. For visualizing the so-called macroprudential data cube, we provide the VisRisk platform with three modules: plots, maps and networks. While VisRisk is herein illustrated with five web-based interactive visualizations of systemic risk indicators and models, the platform enables and is open to the visualization of any data from the macroprudential data cube. JEL Classification: G01, G15, F37, F38, F47
    Keywords: analytical visualization, interactive visualization, macroprudential oversight, risk communication, VisRisk, visualization
    Date: 2015–03
  28. By: Laina, Patrizio; Nyholm, Juho; Sarlin, Peter
    Abstract: This paper investigates leading indicators of systemic banking crises in a panel of 11 EU countries, with a particular focus on Finland. We use quarterly data from 1980Q1 to 2013Q2, in order to create a large number of macro-financial indicators, as well as their various transformations. We make use of univariate signal extraction and multivariate logit analysis to assess what factors lead the occurrence of a crisis and with what horizon the indicators lead a crisis. We find that loans-to-deposits and house price growth are the best leading indicators. Growth rates and trend deviations of loan stock variables also yield useful signals of impending crises. While the optimal lead horizon is three years, indicators generally perform well with lead times ranging from one to four years. We also tap into unique long time-series of the Finnish economy to perform historical explorations into macro-financial vulnerabilities. JEL Classification: E44, F30, G01, G15, C43
    Keywords: banking crisis, leading indicators, logit analysis, macro-financial indicators, signal extraction
    Date: 2015–02
  29. By: Mester, Loretta J. (Federal Reserve Bank of Cleveland)
    Abstract: Good afternoon. It is hard for me to convey how honored I am to present the lunch keynote address at this year’s Financial Intermediation Research Society (FIRS) conference. At the risk of dating myself, I am proud to say that I was a founding member of the society, and it’s been a great pleasure to see how FIRS has developed and spread its wings to all parts of the globe. I thank George Pennacchi, president of the society, Vish Viswanathan, president-elect and this year’s program chair, and Allen Berger, my friend and co-author, for the opportunity to speak today. It’s been wonderful catching up with old friends and meeting new scholars who are pushing the envelope of financial intermediation research.
    Date: 2015–05–25
  30. By: Catullo, Ermanno; Gallegati, Mauro; Palestrini, Antonio
    Abstract: Assessing systemic risk and defining macro-prudential policies aiming at reducing economic system vulnerability have been at the center of the economic debate of the last years. Credit networks play a crucial role in diffusing and amplifying local shocks, following the network-based financial accelerator approach (Delli Gatti et al., 2010; Battiston et al., 2012), we constructed an agent based model reproducing an artificial credit network populated by heterogeneous firms and banks. Calibrating the model on a sample of firms and banks quoted on Japanese stock-exchange mar- kets from 1980 to 2012, we try to define both early warning indicators of crises and policy precautionary measures based on the analysis of the endogenous dynamics of credit network connectivity.
    Date: 2015
  31. By: Agnès Benassy-Quere (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS)
    Abstract: The euro, in spite of having many of the required attributes put forward by the theoretical literature and past experience, has failed to fulfill all the criteria that would enable it to rival the dollar as an international currency. This does not mean that the euro cannot achieve a status similar to that of the dollar; however, the window of opportunity may not last much more than a decade before the renminbi overtakes the euro. European monetary unification has never explicitly sought for its currency to gain an international status. This makes sense insofar as the key elements required for the euro to expand internationally are also those to be pursued internally: GDP growth; a fiscal backing to the single currency; a deep, liquid and resilient capital market; and a unified external representation of the euro area.
    Date: 2015–04

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