nep-cba New Economics Papers
on Central Banking
Issue of 2015‒06‒13
seventeen papers chosen by
Maria Semenova
Higher School of Economics

  1. Communication about future policy rates in theory and practice: A Survey By Richhild Moessner; David-Jan Jansen; Jakob de Haan
  2. Self-Fulfilling Debt Crises: Can Monetary Policy Really Help? By Philippe Bacchetta; Elena Perazzi; Eric van Wincoop
  3. Monetary dialogue 2009-2014: Looking backward, looking forward By Belke, Ansgar
  4. Does the central bank respond to credit market factors? A Bayesian DSGE approach By Paul Kitney
  5. Macroprudential policies: a discussion of the main issues By Paolo Angelini
  6. Estimating Monetary Policy Rules When Nominal Interest Rates Are Stuck at Zero By Jinill Kim; Seth Pruitt
  7. Money Multiplier under Reserve Option Mechanism By Akturk, Halit; Gocen, Hasan; Duran, Suleyman
  8. Regulatory influence on market conditions in the banking union: The cases of macro-prudential instruments and the bail-in tool By Tröger, Tobias H.
  9. Financial inclusion policy in Ecuador : roles of the Central Bank towards economic and job creation By Arias, Daniela
  10. Deflation expectations and Japan's lost decade By Roberto Piazza
  11. Where the Risks Lie: A Survey on Systemic Risk By Colliard , Jean-Edouard; Perignon , Christophe
  12. The Information in Systemic Risk Rankings By Federico Nucera; Bernd Schwaab; Siem Jan Koopman; André Lucas
  13. Time-Varying Trend Inflation and the New Keynesian Phillips Curve in Australia By Lie, Denny; Yadav, Anirudh S.
  14. The Financial Background of the European Deposit Guarantee Schemes and the Resolution Mechanism By Tóth, József
  15. The role of central banks in supporting economic growth and creation of productive employment : the case of Pakistan By Sayeed, Asad; Abbasi, Zubair Faisal
  16. Measuring sovereign contagion in Europe By Caporin, Massimiliano; Pelizzon, Loriana; Ravazzolo, Francesco; Rigobon, Roberto
  17. Do financial markets react to regulatory sanctions? An event study of the French case By Rezaee, Amir; Kirat, Thierry

  1. By: Richhild Moessner; David-Jan Jansen; Jakob de Haan
    Abstract: We discuss the theoretical rationale for central bank communication about future policy rates as part of inflation targeting or of forward guidance. We also summarize actual central bank communication about future policy rates in major advanced countries as well as empirical evidence on the effectiveness of both types of communication. We argue that there is a disconnect between the theory and practice of forward guidance, with theory assuming commitment by the central bank, while in practice central banks generally do not commit. Future theoretical research on forward guidance should therefore take the absence of commitment by central banks into account.
    Keywords: Central bank communication; interest rate forecasts; forward guidance; inflation targeting
    JEL: E52 E58
    Date: 2015–06
  2. By: Philippe Bacchetta; Elena Perazzi; Eric van Wincoop
    Abstract: This paper examines quantitatively the potential for monetary policy to avoid self-fullling 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: Monetary Policy; Sovereign Debt; Self-fulfilling Crises
    JEL: E52 E60 E63
    Date: 2015–06
  3. By: Belke, Ansgar
    Abstract: This Paper comments on the role of the Monetary Dialogue in the context of an evolving monetary policy. The discussion is conducted in terms of the adoption of forward guidance on interest rates by the European Central Bank (ECB), the ECB's model choice and data revision policies in inflation forecasts, its membership in the Troika, its activities as a financial supervisor, as well as regards its bond purchasing activities and the implication for ECB monetary policy stemming from Fed's envisaged exit from unconventional monetary policies. This paper also assesses on a case-by-case basis the actual exchange of information between the European Parliament (EP) and the ECB. We argue that the new ECB supervisory role has made the Monetary Dialogue exercise even more important 'now' than in 'normal' times. Still, we suggest changes, both procedural as well as regarding its focus range, to make it even more effective. In our view, the transparency/accountability issue represented by a Supervisory Board 'hosted' by ECB needs to be addressed. A crucial challenge for the Monetary Dialogue is also to assess the optimal degree of ECB transparency and accountability towards the EP, the key democratic institution.
    Abstract: Dieses Paper kommentiert die Bedeutung des vom Europa-Parlament seit Jahren fest institutionalisierten und viel beachteten 'Monetary Dialogue' des EZB-Präsidenten mit dem Unterausschuss Wirtschaft und Währung im Kontext einer sich gegenwärtig stark verändernden Geldpolitik. Die Diskussion wird geführt im Hinblick auf die Verwendung eines Zinsausblicks ('Forward Guidance') durch die Europäische Zentralbank (EZB) im Rahmen ihrer Transparenzoffensive, die Modellwahl und Datenbereinigungsverfahren der Inflationsprognosen der EZB, die Mitgliedschaft der EZB in der Troika, die EZB-Aktivitäten als Finanzaufsicht, die angekündigten EZB-Staatsanleihekäufe und die Folgen der Abkehr der US-Fed von unkonventionellen Geldpolitiken ('Exit') für die Geldpolitik der EZB.
    Keywords: accountability,European Parliament,forward guidance,monetary dialogue,transparency
    JEL: E52 E58
    Date: 2014
  4. By: Paul Kitney
    Abstract: This paper estimates a version of a New Keynesian Dynamic Stochastic General Equilibrium model with financial frictions for the United States using Bayesian techniques. Various Henderson-McKibbin-Taylor style monetary policy rules are examined, which react to inflation, output and credit market factors including credit spreads, financial leverage and credit growth. The central question is whether the central bank responds to credit market factors in setting the policy interest rate, which is investigated using posterior odds tests. The paper explores whether there is evidence of stabilization, if indeed the central bank is responding to credit market factors. This is conducted using impulse response analysis and an examination of parameter posterior distributions. The most compelling result during the period under study is the US Fed responded to credit spreads in setting the policy rate. The empirical results also confirm that credit spreads offer stabilization benefits. This result is robust to variations in the policy rule. It is also found that while financial leverage improves model fit when included in the policy rule, the response is pro-cyclical, which would unlikely be a feature of stabilization policy. Finally, there is no evidence that the policy interest rate responded to credit growth.
    Date: 2015–06
  5. By: Paolo Angelini (Bank of Italy)
    Abstract: Systemic risk, which macroprudential policies aim to minimize, is conceptually easy to define, but it is very difficult to identify ex ante. The search for indicators that may allow to activate macroprudential policies in time to prevent or contain crises, has given disappointing results so far, with the important exception of the class of indicators based on credit growth. A set of macroprudential tools is emerging through practice and legislation, but its outlines are not yet well defined. Also, the effects, effectiveness, and mutual interactions of the tools are not quite clear yet. Moreover, little is known about the interactions between macroprudential policy and other policies � e.g. monetary and microprudential. A reliable theoretical-analytical system to understand its functioning, and to calibrate and measure the effectiveness of macroprudential policies, is not available yet. In Europe, additional challenges arise from the complex architecture of the system of financial supervision and the changes introduced recently - the establishment of National Macroprudential Authorities and the start of the Single Supervisory Mechanism. On the economic front, while the macroeconomic developments in the Euro Area would suggest that expansionary macroprudential policies should be implemented, the measures adopted so far in many countries were almost exclusively of a restrictive nature. Overall, the analysis highlights several areas of uncertainty but also the strong potential of the new macroprudential policies, which can contribute, together with monetary policy, to a more stable macrofinancial system.
    Keywords: macroprudential policies, macroprudential instruments, monetary policy, systemic risk
    JEL: G21 E44 E58
    Date: 2015–06
  6. By: Jinill Kim (Department of Economics, Korea University, Seoul, Republic of Korea); Seth Pruitt (Federal Reserve Board)
    Abstract: Did the Federal Reserve's response to economic fundamentals change with the onset of the Global Financial Crisis? Estimation of a monetary policy rule to answer this question faces a censoring problem since the interest rate target has been set at the zero lower bound since late 2008. Surveys by forecasters allow us to sidestep the problem and to use conventional regressions and break tests. We nd that the Fed's in ation response has decreased and that the unemployment response has remained as strong, which suggests that the Federal Reserve's commitment to stable in ation has become weaker in the eyes of the professional forecasters.
    Keywords: monetary policy, policy rule, zero lower bound, survey data, market perceptions, censoring, Tobit, Blue Chip survey
    JEL: E53 E58
    Date: 2015
  7. By: Akturk, Halit; Gocen, Hasan; Duran, Suleyman
    Abstract: This paper introduces a generalized money (M2) multiplier formula to the literature for a monetary system with Reserve Option Mechanism (ROM). Various features of the proposed multiplier are then explored using monthly Turkish data during the decade 2005 to 2015. We report a step increase in the magnitude and a slight upward adjustment in the long-run trend of the multiplier with the adoption of ROM. We provide evidence for substantial change in the seasonal pattern of the multiplier, cash ratio, required and excess reserves under ROM. We show that money (M2) multiplier is less volatile in a monetary system with ROM and discuss the subsequent stabilizing influence of more predictable multiplier on the foreign exchange market.
    Keywords: Money multiplier, macroprudential policy, reserve option mechanism, reserve requirements, financial stability
    JEL: E51 E52 E58 F31
    Date: 2015–06
  8. By: Tröger, Tobias H.
    Abstract: This paper looks into the specific influence that the European banking union will have on (future) bank client relationships. It shows that the intended regulatory influence on market conditions in principle serves as a powerful governance tool to achieve financial stability objectives. From this vantage, it analyzes macro-prudential instruments with a particular view to mortgage lending markets - the latter have been critical in the emergence of many modern financial crises. In gauging the impact of the new European supervisory framework, it finds that the ECB will lack influence on key macro-prudential tools to push through more rigid supervisory policies vis-à-vis forbearing national authorities. Furthermore, this paper points out that the current design of the European bail-in tool supplies resolution authorities with undue discretion. This feature which also afflicts the SRM imperils the key policy objective to re-instill market discipline on banks' debt financing operations. The latter is also called into question because the nested regulatory technique that aims at preventing bail-outs unintendedly opens additional maneuvering space for political decision makers.
    Keywords: banking union,macro-prudential supervision,real estate lending,bail-in,market discipline
    JEL: E44 G01 G18 G21 G28 K22 K23
    Date: 2015
  9. By: Arias, Daniela
    Abstract: The basic premise of this study is that promoting financial inclusion is one of the most effective ways in which a central bank can support economic growth and productive employment creation. The study shows that the scope of the government's financial inclusion programme in Ecuador is wide and varied. It then proceeds to encapsulate the main objectives of the financial inclusion policy and identify the main actors involved in its execution.
    Keywords: bank, financial policy, economic policy, employment creation, Ecuador, banque, politique financière, politique économique, création d'emploi, Equateur, banco, política financiera, política económica, creación de empleos, Ecuador
    Date: 2015
  10. By: Roberto Piazza (Bank of Italy)
    Abstract: Starting from the early 1990s, GDP in Japan stagnated for about a decade while inflation has been persistently low, at times even negative. This paper provides new stylized facts about the Japanese deflationary process and puts these facts into the context of the literature addressing the origins of the Japanese "lost decade". In order to properly understand the evolution of inflation in Japan and the role of monetary and fiscal policy, a crucial question is whether the deflationary process, a phenomenon specific only to Japan during the period under consideration, was anticipated by agents. The paper suggests a positive answer to the question. In particular, I show that once a "global" inflation forecasting error, common across advanced countries, is removed from Japanese inflation expectations, then the remaining "idiosyncratic" inflation forecasting error is close to zero at various forecasting horizons. This indicates that the Japan-specific deflationary process was fully anticipated by agents, with medium-term (and "idiosyncratic") inflation expectations disanchoring very soon along the deflationary path.
    Keywords: deflation, lost decade, inflation expectations
    JEL: E2 E5 G21
    Date: 2015–06
  11. By: Colliard , Jean-Edouard; Perignon , Christophe
    Abstract: The authors review the extensive literature on systemic risk and connect it to the current regulatory debate. While they take stock of the achievements of this rapidly growing field, they identify a gap between two main approaches. The first one studies different sources of systemic risk in isolation, uses confidential data, and inspires targeted but complex regulatory tools. The second approach uses market data to produce global measures which are not directly connected to any particular theory, but could support a more efficient regulation. Bridging this gap will require encompassing theoretical models and improved data disclosure.
    Keywords: Banking; Macroprudential Regulation; Systemically Important Financial In- stitutions; Financial Crises; Too-Big-To-Fail
    JEL: G01 G32
    Date: 2015–04–13
  12. By: Federico Nucera (Luiss Guido Carli University, Rome, Italy); Bernd Schwaab (European Central Bank, Frankfurt, Germany); Siem Jan Koopman (Faculty of Economics and Business Administration, VU University Amsterdam); André Lucas (Faculty of Economics and Business Administration, VU University Amsterdam)
    Abstract: We propose to pool alternative systemic risk rankings for financial institutions using the method of principal components. The resulting overall ranking is less affected by estimation uncertainty and model risk. We apply our methodology to disentangle the common signal and the idiosyncratic components from a selection of key systemic risk rankings that are recently proposed. We use a sample of 113 listed financial sector firms in the European Union over the period 2002-2013. The implied ranking from the principal components is less volatile than most individual risk rankings and leads to less turnover among the top ranked institutions. We also find that price-based rankings and fundamentals based rankings deviated substantially and for a prolonged time in the period leading up to the financial crisis. We test the adequacy of our newly pooled systemic risk ranking by relating it to credit default swap premia.
    Keywords: systemic risk contribution; risk rankings; forecast combination; financial regulation; banking supervision
    JEL: G01 G28
    Date: 2015–06–01
  13. By: Lie, Denny; Yadav, Anirudh S.
    Abstract: This paper investigates whether the persistence and the time-varying nature of trend inflation can explain the persistence of inflation in Australia - that is, whether it can explain the apparent need for the backward-looking inflation term in the New Keynesian Phillips curve (NKPC) estimated using Australian data. We derive and estimate an extended open-economy NKPC equation, accounting explicitly for time-varying trend inflation. The paper finds that although the estimated role for backward-looking indexation is near zero in some difference-equation specifications, when one considers the closed-form specifications of the NKPC, the parameter estimate increases dramatically, implying a high degree of indexation to past inflation. Thus, in contrast to Cogley and Sbordones (2008) result for the US economy, our estimates suggest that accounting for time variation in trend inflation in the NKPC cannot explain away the inertia in the Australian inflation data. Our preferred estimates suggest that lagged inflation and future expectations of inflation enter the NKPC with almost equal weights. Finally, notwithstanding the previous results, we find a marked decline in the role of the backward-looking inflation terms since the adoption of an inflation targeting regime by the Reserve Bank in 1993.
    Date: 2015–05
  14. By: Tóth, József
    Abstract: The new directives of the European Parliament and the European Council issued in 2014 define unified expectations regarding deposit guarantee schemes and regarding banking resolution mechanism to be applied in territory of each EU member states. Moreover, the so called Single Resolution Fund must be implemented by euro member states in order to finance the resolution processes. The article introduces the main rules of the unified systems as well as deals with their financial background. The European Commission declared in its statement the target level of the Single Resolution Fund which is EUR 55 billion. However, we provide evidence that this target level is underestimated.
    Keywords: banking resolution, deposit guarantee scheme
    JEL: E52 E58 G20 G21 G28 G38
    Date: 2015–06–04
  15. By: Sayeed, Asad; Abbasi, Zubair Faisal
    Abstract: This study explores different facets of the evolving structure, functions and conduct of Pakistan’s central bank or the State Bank as it is usually called. The study commences by offering an overview of the country’s macroeconomic, labour market and social indicators and evaluates how they have evolved over time. It attempts to gauge the conduct of the State Bank through its response to moments of economic significance faced by the country in the last two and a half decades. Specific attention is paid to the conduct of monetary policy, the role of the State Bank in channelling investment resources to priority sectors and its coordination with fiscal policy.
    Keywords: bank, economic growth, employment creation, Pakistan, banque, croissance économique, création d'emploi, Pakistan, banco, crecimiento económico, creación de empleos, Pakistán
    Date: 2015
  16. By: Caporin, Massimiliano; Pelizzon, Loriana; Ravazzolo, Francesco; Rigobon, Roberto
    Abstract: This paper analyzes sovereign risk shift-contagion, i.e. positive and significant changes in the propagation mechanisms, using bond yield spreads for the major eurozone countries. By emphasizing the use of two econometric approaches based on quantile regressions (standard quantile regression and Bayesian quantile regression with heteroskedasticity) we find that the propagation of shocks in euro's bond yield spreads shows almost no presence of shift-contagion. All the increases in correlation we have witnessed over the last years come from larger shocks propagated with higher intensity across Europe.
    Keywords: Sovereign Risk,Contagion,Disintegration
    JEL: E58 F34 F36 G12 G15
    Date: 2015
  17. By: Rezaee, Amir; Kirat, Thierry
    Abstract: The paper offers an empirical analysis of the effects of sanctions decided by the Financial Markets Authority (AMF) on the reputation of firms in France. Using an event study, we intend to show the impact of three events on the stock prices : opening of an investigation by the AMF ; issuance of a monetary sanction ; publication of the information about sanction a newspaper. The reputational impact issue raises the broader issue of understanding of financial regulation enforcement operates in concreto. We find a strong negative impact of the announcement of sanction in press on the firms’ stock prices. We observe a reputational loss of the deferred firm following the disclosure of sanction in press. We observe also a weak decrease in stock prices when the firm has been notified of the opening of investigation on its misconducts, however we find no evidence on the impact of announcement of sanction directly to the firm on the stock prices. We carry out an OLS cross-section regression to assess the impact of the amount of sanction on the reputational loss of firm. The amount of monetary sanctions are too low, compared the market size of deferred companies, to influence stock prices and contribute in reputational loss.
    Keywords: Sanctions; Finances internationales; Autorité des marchés financiers; Finance regulation;
    JEL: K00
    Date: 2015–07

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