nep-cba New Economics Papers
on Central Banking
Issue of 2015‒06‒20
thirty-one papers chosen by
Maria Semenova
Higher School of Economics

  1. Inflation, financial conditions and non-standard monetary policy in a monetary union. A model-based evaluation By Lorenzo Burlon; Andrea Gerali; Alessandro Notarpietro; Massimiliano Pisani
  2. Nominal Income and Inflation Targeting By Arayssi, Mahmoud
  3. Firm Inflation Expectations and Monetary Policy in Uruguay By Gerardo Licandro; Miguel Mello
  4. Mexico’s monetary policy communication and money markets By Alicia Garcia-Herrero; Eric Girardin; Arnoldo Lopez Marmolejo
  5. Measuring persistence in inflation: evidence for Angola By José Manuel Belbute; Leonardo Dia Massala; Júlio António Delgado
  6. Monetary Policy Transmission in China: A DSGE Model with Parallel Shadow Banking and Interest Rate Control By Michael Funke; Petar Mihaylovski; Haibin Zhu
  7. Regional Inflation Convergence In Turkey By Hasan Engin Duran
  8. Financial stability: Underlining context By Ashima Goyal
  9. Zero lower bound, unconventional monetary policy and indicator properties of interest rate spreads By Jari Hännäkäinen
  10. Foreign Exchange Interventions at the Zero Lower Bound in the Czech Economy: A DSGE Approach By Simona Malovana
  11. Regulatory influence on market conditions in the banking union: The cases of macro-prudential instruments and the bail-in tool By Tröger, Tobias H.
  12. How Effective are Macroprudential Policies? An Empirical Investigation By Akinci, Ozge; Olmstead-Rumsey, Jane
  13. Macro-prudential Policies, Moral Hazard and Financial Fragility By Carlos Arango; Oscar Valencia
  14. The Influence of Media Use on Laymen’s Monetary Policy Knowledge in Germany By Bernd Hayo; Edith Neuenkirch
  15. Follow what I do and also what I say: monetary policy impact on Brazil’s financial markets By Alicia Garcia-Herrero; Eric Girardin; Enestor Dos Santos
  16. Comparative assessment of macroprudential policies By Valentina Bruno; Ilhyock Shim; Hyun Song Shin
  17. The Bank Capital Regulation (BCR) Model By Hyejin Cho
  18. Monetary Policy and Dutch Disease: The Case of Price and Wage Rigidity By Hevia, Constantino; Nicolini, Juan Pablo
  19. The U.S. economic and monetary policy outlook By Dudley, William
  20. Zero Lower Bound and Indicator Properties of Interest Rate Spreads By Jari Hännäkäinen
  21. A note on the implementation of the countercyclical capital buffer in Italy By Piergiorgio Alessandri; Pierluigi Bologna; Roberta Fiori; Enrico Sette
  22. Banking Integration and Fragmentation in the Interest Rate Channel By filippo gori
  23. Sovereign Debt, Domestic Banks and the Provision of Public Liquidity By Diego J. Perez
  24. Money and velocity during financial crises: from the Great Depression to the Great Recession By Anderson, Richard G.; Bordo, Michael D.; Duca, John V.
  25. The impossible trinity: Where does India stand? By Rajeswari Sengupta
  26. Assessing core inflation indicators: evidence for Angola By José Manuel Belbute; Leonardo Dia Massala; Júlio António Delgado
  27. Insurance Regulation in the Dodd-Frank Era By Hester Peirce
  28. Changing economic relationships: implications for monetary policy and simple monetary policy rules By Rosengren, Eric S.
  29. Stabilizing Wage Policy By Mordecai Kurz
  30. Global Trends in the Choice of Exchange Rate Regime By Michael Bleaney; Mo Tian; Lin Yin
  31. Bailout Stigma By Yeon-Koo Che; Chongwoo Choe; Keeyoung Rhee

  1. By: Lorenzo Burlon (Bank of Italy); Andrea Gerali (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: This paper evaluates the macroeconomic effects of purchases of long-term sovereign bonds by a central bank in a monetary union when (1) the private sector faces tight financial conditions and (2) the zero lower bound (ZLB) on the policy rate holds. To this end, we calibrate a dynamic general equilibrium model to the euro area (EA). We assume that households in one member country have a large initial debt position and are subject to a borrowing constraint. We simulate the effects of a negative EA-wide demand shock that induces a decline in inflation. The main results are as follows. First, the reduction in inflation amplifies the domestic and cross-country spillovers of the negative demand shock because of the country-specific borrowing constraint and the ZLB. Second, sovereign bond purchases boost economic activity and, hence, indirectly allow households to reduce their debt and relax the borrowing constraint. Third, the new, lower value of debt allows households to smooth consumption, fostering macroeconomic resilience not only in the member country concerned but also in the rest of the monetary union.
    Keywords: DSGE models, financial frictions, open-economy macroeconomics, non-standard monetary policy, zero lower bound
    JEL: E43 E44 E52 E58
    Date: 2015–06
  2. By: Arayssi, Mahmoud
    Abstract: In this paper a macro- economic model in the area of monetary policy game theory is extended to one-sided dismissal rules concerning observed nominal output and inflation targets for the central banker. These rules specify firing the central banker if some observed policy targets have been exceeded. Such rules are shown to reduce inflationary bias if the central banker perceives her reappointment chances as being strong and is preferred to discretionary monetary policy. Various policy targets are considered and it is shown that nominal output targeting may be preferred to inflation targeting under certain conditions.
    Keywords: Monetary Policy; Game Theory; Nominal Output Targeting; Inflation Targeting; Full Discretion; Dismissal Rule.
    JEL: E58 G18
    Date: 2014–06
  3. By: Gerardo Licandro (Banco Central del Uruguay); Miguel Mello (Banco Central del Uruguay)
    Abstract: Using a novel monthly survey of firm inflation expectations for Uruguay from October 2009 to June 2013, this paper studies the impact of monetary policy on inflation expectations at the micro level. Using several panel data techniques we consistently find a negative and statistically significant relationship between monetary policy and inflation expectations. We also find a high level of inertia in expectations. Past inflation changes have a positive impact on inflation expectations, while exchange rate changes have a significant but low importance on expectations. We observe a negative link between inflation expectations and expected economic activity, potentially due to past experiences of a monetary financing of crisis. Contrary to intuition, there is no clear link between firm inflation expectations and the median assessment of experts published by the Central Bank.
    Keywords: Monetary transmission, inflation expectations, expectations channel
    JEL: C18 C82 E23 E24 J21 L16 L70
    Date: 2014
  4. By: Alicia Garcia-Herrero; Eric Girardin; Arnoldo Lopez Marmolejo
    Abstract: Central bank communication is becoming a key aspect of monetary policy. How much financial markets listen and, possibly, understand Banco de Mexico’s communication on its monetary policy stance should be a key consideration for the central bank to further modernize its monetary policy toolkit
    Keywords: Central Banks, Economic Analysis, Mexico, Research, Working Paper
    JEL: E52 E58 E43
    Date: 2015–05
  5. By: José Manuel Belbute (Department of Economics, University of Évora, Portugal Center for Advanced Studies in Management and Economics - CEFAGE, Portugal); Leonardo Dia Massala (Departament of Economic Studies, Banco Nacional da Angola); Júlio António Delgado (INOVE Research)
    Abstract: Understanding inflation persistence in Angola is crucial because National Bank of Angola has approved in 2012 a new monetary policy operational framework which upgrades and expands the set of instruments to achieve its monetary goals. The purpose of this paper is to measure the degree of persistence of the headline, food, energy, underlying and 10% trimmed core inflations for Angola and to identify its implications for decision-making. Using both a traditional univariate method and non-parametric approach, our results suggest the presence of a statistically significant level of persistence in five inflation indicators for Angola. Moreover, the degree of persistence is similar both across the five inflation indicators and also across the sample period. Finally, our results also confirm that extracting the most volatile components of the headline inflation indicator does not generate a new inflation indicator that is less volatile and more persistent than the original. These results have important implications for the design, the implementations and the effectiveness of the monetary policy, specialty when under an inflation targeting regime. First, since shocks tend to temporarily deviate inflation from its trend value a permanent policy stance is required. Secondly, a low degree of persistence means that monetary policy aiming price stability can only be implemented in a favorable setting with a permanent policy stance. Moreover, a low degree of persistence means that inflation can be stabilized in a short period time following a shock. Finally results are also relevant for prediction and modeling purposes.
    Keywords: Inflation; Persistence; Angola.
    JEL: C14 C22 E31 E52
    Date: 2015
  6. By: Michael Funke (Hamburg University, CESifo, Munich, and Hong Kong Institute for Monetary Research); Petar Mihaylovski (Hamburg University); Haibin Zhu (JP Morgan Chase Bank)
    Abstract: The paper sheds light on the interplay between monetary policy, the commercial banking sector and the shadow banking sector in mainland China by means of a nonlinear stochastic general equilibrium (DSGE) model with occasionally binding constraints. In particular, we analyze the impacts of interest rate liberalization on monetary policy transmission as well as the dynamics of the parallel shadow banking sector. Comparison of various interest rate liberalization scenarios reveals that monetary policy results in increased feed-through to the lending and investment under complete liberalization. Furthermore, tighter regulation of interest rates in the commercial banking sector in China leads to an increase in loans provided by the shadow banking sector.
    Keywords: DSGE Model, Monetary Policy, Financial Market Reform, Shadow Banking, China
    JEL: E32 E42 E52 E58
    Date: 2015–05
  7. By: Hasan Engin Duran (Izmir Institute of Technology, City and Regional Planning Department, 35430 Urla-Izmir, Turkey)
    Abstract: The aim of the present article is to analyze the convergence of regional inflation rates in Turkey from 2004 to 2015 by adopting a distribution dynamics approach, namely discrete time Markovian chains. Convergence across regional inflation rates is politically a crucial matter for two reasons. First, if inflation rates differ largely between regions, monetary policy can hardly satisfy the needs of all regions equally. Such that, places which experience high inflation rates naturally require a contractionary monetary policy while the ones which experience low inflation need rather an expansionary monetary stance. Second, inflation differentials are likely to create a regional dispersion in real interest rates which induce differential effects on local economic growth. The outcomes of our research can be summarized in two groups. First, inflation disparities have declined over time, especially during the post-crisis period; after 2010. Hence, aggregate price stabilization and disinflation process in Turkey is coupled with convergence in inflation rates across regions. These results are confirmed using several methodologies (panel unit root tests and Kernel Density Estimates). Second, in addition to the findings in the literature, we found that regions change their relative inflation rate positions quite often. This indicates that regional inflation behaivor is random and non-structural as the relatively high and low inflationary places tend to change their quintiles frequently in time. Similarly, a geographical randomness of inflation is also verified using Moran I’s test.
    Date: 2015
  8. By: Ashima Goyal (Indira Gandhi Institute of Development Research)
    Abstract: The paper argues that context is important in discussions of financial stability. It explores weaknesses in domestic and international reforms and ways of overcoming them, based on mitigating the fundamental failures finance is subject to. Relevant market failures need to be taken into account even in the design of monetary policy regimes such as inflation targeting. Rather than blind following of international prescriptions better alignment to domestic structure and needs whether in monetary policy, restructuring financial regulators, capital adequacy criteria and bank balance sheets is required. It argues marginal changes in India's financial regulatory structure will suffice, brings out a possible trade-off between capital adequacy and leverage caps following from special features of Indian regulations some of which need to be preserved, gives the history behind the rise in non-performing assets, and points to technological changes that may make financial inclusion more compatible with financial stability. The possibility of coordinating on simple leverage reducing measures with good incentive possibilities should be taken up in global dialogue, and regional alternatives supported as a corrective for asymmetries in bargaining power.
    Keywords: Financial stability and reforms; market failures; leverage caps; non-performing assets; inflation targeting
    JEL: G18 G28 F36 E50
    Date: 2015–05
  9. By: Jari Hännäkäinen (School of Management, University of Tampere)
    Abstract: This paper re-examines the out-of-sample predictive power of interest rate spreads when the short-term nominal rates have been stuck at the zero lower bound and the Fed has used unconventional monetary policy. Our results suggest that the predictive power of some interest rate spreads have changed since the beginning of this period. In particular, the term spread has been a useful leading indicator since December 2008, but not before that. Credit spreads generally perform poorly in the zero lower bound and unconventional monetary policy period. However, the mortgage spread has been a robust predictor of economic activity over the 2003–2014 period.
    Keywords: business fluctuations, forecasting, interest rate spreads, monetary policy, zero lower bound, real-time data
    JEL: C53 E32 E44 E52 E58
    Date: 2014–06
  10. By: Simona Malovana (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic; Czech National Bank)
    Abstract: The paper contributes to understanding the economic dynamics at the zero lower bound and the exchange rate movements under different central bank intervention regimes. It provides a theoretical framework for modeling foreign exchange interventions at the ZLB within a dynamic general equilibrium model. We find a pronounced volatility of real and nominal macroeconomic variables in response to the domestic demand shock, the foreign demand and financial shocks and the terms-of-trade shock at the ZLB. This effects become severe in response to highly persistent shocks which leads to stronger reaction of variables and prolong period of binding constraint. The FX interventions have proven to be effective in mitigating deflationary pressures and recovering the economic activity in response to all examined shocks at the ZLB. In this sense, the central bank achieves the best performance by fixing the nominal exchange rate temporarily at the ZLB.
    Keywords: zero lower bound, foreign exchange interventions, dynamic stochastic general equilibrium, Bayesian estimation, exchange rate and price dynamics
    JEL: C11 E31 E43 E52 E58 F31
    Date: 2015–05
  11. 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
  12. By: Akinci, Ozge (Board of Governors of the Federal Reserve System (U.S.)); Olmstead-Rumsey, Jane (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: In recent years, policymakers have generally relied on macroprudential policies to address financial stability concerns. However, our understanding of these policies and their efficacy is limited. In this paper, we construct a novel index of domestic macroprudential policies in 57 advanced and emerging economies covering the period from 2000:Q1 to 2013:Q4, with tightenings and easings recorded separately. The effectiveness of these policies in curbing bank credit growth and house price inflation is then assessed using a dynamic panel data model. The main findings of the paper are: (1) Macroprudential policies have been used far more actively after the global financial crisis in both advanced and emerging market economies. (2) These policies have primarily targeted the housing sector, especially in the advanced economies. (3) Macroprudential policies are usually changed in tandem with bank reserve requirements, capital flow management measures, and monetary policy. (4) Empirical analysis suggests that macroprudential tightening is associated with lower bank credit growth, housing credit growth, and house price inflation. (5) Targeted policies--for example, those specifically intended to limit the growth of housing credit--seem to be more effective. (6) In emerging economies, capital inflow restrictions targeting the banking sector are also associated with lower credit growth, although portfolio flow restrictions are not.
    Keywords: Bank credit; house prices; macroprudential policy; dynamic panel data model
    JEL: E32 F41 F44 G15
    Date: 2015–06–01
  13. By: Carlos Arango (Central Bank of Colombia); Oscar Valencia (Central Bank of Colombia)
    Abstract: This paper presents a DSGE model with banks that face moral hazard in management. Banks receive demand deposits and fund investment projects. Banks are subject to potential withdrawals by depositors which may force them into early liquidation of their investments. The likelihood of this happening depends on the bank management efforts to keep the bank financially sound and the degree of bank leverage. We study the properties of this model under different monetary and macro-prudential policy arrangements. Our model is able to replicate the pro-cyclicality of leverage, and provides insights on the interplay between bank leverage and bank management incentives as a result of monetary, productivity and financial shocks. We find that a combination of pro-cyclical capital requirements and a standard monetary policy are well suited to contain the effects on output and prices of a downturn, keeping the financial system in check. Yet, in an expansionary phase (i.e. a productivity shock) this policy combinat on may produce desirable results for some macro-variables but at the expense of a deterioration in other macro-financial indicators.
    Keywords: DSGE modeling, financial frictions, moral hazard, macro-prudential policies
    JEL: G11 D86
    Date: 2015–03–13
  14. By: Bernd Hayo (University of Marburg); Edith Neuenkirch (University of Marburg)
    Abstract: We analyse German citizens’ knowledge about monetary policy and the European Central Bank (ECB), as well as the public’s use of mass communication media to obtain information about the ECB. We employ a unique representative public opinion survey of German households conducted in 2011. We find that a person’s desire to be informed about the ECB, together with the use of various media channels to keep informed, are decisive for both (i) the person’s perception of how much he or she knows about the ECB and (ii) the person’s actual knowledge. The media-related influence varies by level of education and is stronger for subjective knowledge. Women are significantly less interested in and knowledgeable about the ECB. We conclude that the ECB is not only well advised to continue with education programmes designed to convince the public of the importance of knowing about monetary policy, but to take the gender-specific differences into account in doing so.
    Keywords: ECB, Economic knowledge, Subjective knowledge, Information
    JEL: A20 E52 E58
    Date: 2015
  15. By: Alicia Garcia-Herrero; Eric Girardin; Enestor Dos Santos
    Abstract: We find that futures rates increase (decrease) after both an increase in the reference interest rate and a hawkish (dovish) communication by the BCB. Moreover, BCB words create more “noiseâ€, since they increase volatility of futures rates. Our analysis reveals that BCB communication has increased its effectiveness after the 2008 crisis, while deeds became less relevant.
    Keywords: Brazil, Central Banks, Latin America, Research, Working Paper
    JEL: E52 E58 E43
    Date: 2015–05
  16. By: Valentina Bruno; Ilhyock Shim; Hyun Song Shin
    Abstract: This paper provides a comparative assessment of the effectiveness of macroprudential policies in 12 Asia-Pacific economies, using comprehensive databases of domestic macroprudential policies and capital flow management (CFM) policies. We find that banking sector CFM polices and bond market CFM policies are effective in slowing down banking inflows and bond inflows, respectively. We also find some evidence of spillover effects of these policies. Finally, regarding the interaction of monetary policy and macroprudential policies, our empirical findings suggest that macroprudential policies are more successful when they complement monetary policy by reinforcing monetary tightening, than when they act in opposite directions.
    Keywords: macroprudential policy, capital flow management policy, interest rate policy, complementarity, Asia-Pacific
    Date: 2015–06
  17. 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: 2015–02
  18. By: Hevia, Constantino (Universidad Di Tella); Nicolini, Juan Pablo (Federal Reserve Bank of Minneapolis)
    Abstract: We study a model of a small open economy that specializes in the production of commodities and that exhibits frictions in the setting of both prices and wages. We study the optimal response of monetary and exchange rate policy following a positive (negative) shock to the price of the exportable that generates an appreciation (depreciation) of the local currency. According to the calibrated version of the model, deviations from full price stability can generate welfare gains that are equivalent to almost 0.5% of lifetime consumption, as long as there is a significant degree of rigidity in nominal wages. On the other hand, if the rigidity is concentrated in prices, the welfare gains can be at most 0.1% of lifetime consumption. We also show that a rule - formally defined in the paper - that resembles a "dirty floating" regime can approximate the optimal policy remarkably well.
    Keywords: Dutch disease; Inflation targeting; Foreign exchange intervention
    JEL: F31 F41
    Date: 2015–06–08
  19. By: Dudley, William (Federal Reserve Bank of New York)
    Abstract: Remarks at the Economic Club of Minnesota’s June luncheon, Minneapolis
    Keywords: normalization; lift-off; interest rate paid on banks’ reserve balances (IOER); daily overnight reverse repo (ON RRP); short-term rates
    JEL: E52 E66
    Date: 2015–06–05
  20. By: Jari Hännäkäinen (School of Management, University of Tampere)
    Abstract: This paper examines the predictive power of interest rate spreads when the zero lower bound restriction for monetary policy is binding. We show that this restriction has a major eect on the predictive content of some interest rate spreads. Most importantly, we nd that the term spread outperforms the AR benchmark in real-time forecasting exercise when the short-term rate is at the zero lower bound, but not otherwise. On the other hand, our results indicate that the dierence between the 30-year mortgage rate and ten-year Treasury bond rate is a robust predictor of future economic activity.
    Keywords: business fl uctuations, forecasting, interest rate spreads, monetary policy, zero lower bound
    JEL: C53 E32 E44 E52 E58
    Date: 2013–10
  21. By: Piergiorgio Alessandri (Bank of Italy); Pierluigi Bologna (Bank of Italy); Roberta Fiori (Bank of Italy); Enrico Sette (Bank of Italy)
    Abstract: This paper analyzes the challenges posed by the implementation of the countercyclical capital buffer framework in Italy and proposes ways of meeting them. In the first part of the analysis we review the limitations of the standardized Basel III credit-to-GDP gap; we then propose possible solutions, which while remaining in the spirit of Basel, can better capture the state of the credit cycle in real time. In the second part of the paper we propose a step by step approach for reducing the uncertainty that may arise when looking at the indicators which, in addition to the credit-to-GDP gap, are designed to help authorities take decisions about the buffer rate; we also analyze the relationship between the selected indicators and a continuous variable of banking system riskiness. While the analysis is conducted with reference to Italian data, the proposed analytical framework is applicable to any country.
    Keywords: countercyclical capital buffer, financial cycle, credit cycle, macroprudential policy, capital requirements, banks, banking crises
    JEL: E32 G01 G21 G28
    Date: 2015–06
  22. By: filippo gori (IHEID, The Graduate Institute of International and Development Studies, Geneva)
    Abstract: At the forefront of the economic consolidation of the euro area, banking integration came to a stall following the beginning of the 2008 crisis. Since then European banks started retrenching their asset holdings within national borders, effectively reducing the scale of their European operations. This paper explores the link between banking integration and fragmentation in the interest rate channel in the eurozone. Using a rolling VAR, I estimate the overtime evolution of the interest rate pass-through across European countries, and then I relate this evidence to banking integration dynamics. The results support the existence of a statistically significant and negative link between banking integration and cross-country differentials in the interest rate channel.
    Keywords: Monetary policy, banking integration, financial fragmentation.
    JEL: E31 E44 E52 F36
    Date: 2014–03–05
  23. By: Diego J. Perez (Stanford University)
    Abstract: This paper explores two mechanisms through which a sovereign default can disrupt the domestic economy via its banking system. First, a sovereign default creates a negative balance-sheet effect on banks, which reduces their ability to raise funds and prevents the flow of resources to productive investments. Second, default undermines internal liquidity as banks replace government securities with less productive investments. I quantify the model using Argentinean data and find that these two mechanisms can generate a deep and persistent fall in output post-default, which accounts for the government’s commitment necessary to explain observed levels of external public debt. The balance-sheet effect is more important because it generates a larger output cost of default and a stronger ex-ante commitment for the government. Post-default bailouts of the banking system, although desirable ex-post, are welfare reducing ex-ante since they weaken government’s commitment. Imposing a minimum public debt requirement on banks is welfare improving as it enhances commitment by increasing the output cost of default.
    Keywords: Sovereign default, public debt, banks, liquidity.
    Date: 2015–06
  24. By: Anderson, Richard G. (Lindenwood University); Bordo, Michael D.; Duca, John V. (Federal Reserve Bank of Dallas)
    Abstract: This study models the velocity (V2) of broad money (M2) since 1929, covering swings in money [liquidity] demand from changes in uncertainty and risk premia spanning the two major financial crises of the last century: the Great Depression and Great Recession. V2 is notably affected by risk premia, financial innovation, and major banking regulations. Findings suggest that M2 provides guidance during crises and their unwinding, and that the Fed faces the challenge of not only preventing excess reserves from fueling a surge in M2, but also countering a fall in the demand for money as risk premia return to normal amid velocity shifts stemming from financial reform.
    Keywords: Money demand; Financial crises; Monetary policy; Liquidity; Financial innovation
    Date: 2015–05–01
  25. By: Rajeswari Sengupta (Indira Gandhi Institute of Development Research)
    Abstract: The Global Financial Crisis of 2008 and the heightened macroeconomic and financial volatility that followed the crisis raised important questions about the current international financial architecture as well as about individual countries' external macroeconomic policies. Policy makers dealing with the global crisis have been confronted with the 'impossible trinity' or the 'Trilemma', a potent paradigm of open economy macroeconomics asserting that a country may not target the exchange rate, conduct an independent monetary policy and have full financial integration, all at the same time. This issue is highly pertinent for India. A number of challenges have emanated from India's greater integration with the global financial markets during the last two decades, one of which includes managing the policy tradeoffs under the Trilemma. In this chapter, I present a comprehensive overview of a few empirical studies that have explored the issue of Trilemma in the Indian context. Based on these studies I attempt to analyze how have Indian policy makers dealt with the various trade-offs while managing the Trilemma over the last two decades.
    Keywords: Impossible Trinity, Financial Integration, Currency Stabilization, International Reserves, Sterilized Intervention
    JEL: F3 F4
    Date: 2015–03
  26. By: José Manuel Belbute (Department of Economics, University of Évora, Portugal Center for Advanced Studies in Management and Economics - CEFAGE, Portugal); Leonardo Dia Massala (Departament of Economic Studies, Banco Nacional da Angola); Júlio António Delgado (INOVE Research)
    Abstract: The objective of this paper is to evaluate whether or not four core inflation indicators for Angola meet the conditions that must be met by any candidate to core inflation indicator. Our results suggest that the cross-section price change of the Consumer Price Index for Angola is right skewed and leptokurtic. Moreover, asymmetry and kurtosis are positively and highly correlated which make impossible to isolate and correct separately these two statistical characteristics of the sample. Our findings also suggest that the underlying inflation and the 10% trimmed inflation indicators satisfy the proposed conditions for a core inflation indicator. Therefore these two indicators can be used as useful measures for core inflation in Angola by the Banco Nacional de Angola.
    Keywords: Core inflation indicators; Underlying inflation; Trimmed mean; Assessment criteria.
    JEL: C43 E31 E52
    Date: 2015
  27. By: Hester Peirce
    Abstract: The wrenching financial crisis of 2007 to 2009 triggered an intense period of regulatory reflection. The congressional response - the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) - substantially reshaped the country's financial regulatory framework. The new framework reflects a deep confidence in federal regulators to identify systemic problems and prevent them from causing system crises. Dodd-Frank, however, seemingly left the industry securely in state regulators’ hands, where it had been for well over a century. Although one of Dodd-Frank’s sixteen titles is devoted to insurance, that title creates a Federal Insurance Office (FIO) with a comparatively narrow mandate.
    Keywords: Dodd-Frank, Federal Insurance Office, Financial Stability Oversight Council, systemic designation, insurance regulation
    Date: 2015–03
  28. By: Rosengren, Eric S. (Federal Reserve Bank of Boston)
    Abstract: Remarks by Eric S. Rosengren, President and Chief Executive Officer, Federal Reserve Bank of Boston, at Chatham House, London, England, April 16, 2015
    Date: 2015–04–16
  29. By: Mordecai Kurz (Stanford University)
    Abstract: A rapid recovery from deflationary shocks that result in transition to the Zero Lower Bound (ZLB) requires that policy generate an inflationary counter-force. Monetary policy cannot achieve it and the lesson of the 2007-2015 Great Recession is that growing debt give rise to a political gridlock which prevents restoration to full employment with deficit financed public spending. Even optimal investments in needed public projects cannot be undertaken at a zero interest rate. Hence, failure of policy to arrest the massive damage of eight year’s Great Recession shows the need for new policy tools. I propose such policy under the ZLB called "Stabilizing Wage Policy" which requires public intervention in markets instead of deficit financed expenditures. Section 1 develops a New Keynesian model with diverse beliefs and inflexible wages. Section 2 presents the policy and studies its efficacy. The integrated New Keynesian (NK) model economy consists of a lower s ub-economy under a ZLB and upper sub-economy with positive rate, linked by random transition between them. Household-firm-managers hold heterogenous beliefs and inflexible wage is based on a four quarter staggered wage structure so that mean wage is a relatively inflexible function of inflation, of unemployment and of a distributed lag of productivity. Equilibrium maps of the two sub-economies exhibit significant differences which emerge from the relative rates at which the nominal rate, prices and wage rate adjust to shocks. Two key results: first, decline to the ZLB lower sub- economy causes a powerful debt-deflation spiral. Second, output level, inflation and real wages rise in the lower sub-economy if all base wages are unexpectedly raised. Unemployment falls. This result is explored and explained since it is the key analytic result that motivates the policy. A Stabilizing Wage Policy aims to repair households' balance sheets, expedite recovery and exit from the ZLB. It raises base wages for policy duration with quarterly cost of living adjustment and a prohibition to alter base wages in order to nullify the policy. I use demand shocks to cause recession under a ZLB and a deleveraging rule to measure recovery. The rule is calibrated to repair damaged balance sheets of US households in 2007-2015. Sufficient deleveraging and a positive rate in the upper sub-economy without a wage policy are required for exit hence at exit time inflation and output in the lower sub-economy are irrelevant for exit decision. Simulations show effective policy selects high policy intensity at the outset and given the 2007-2015 experience, a constant 10% increased base wages raises equilibrium mean wage by about 5.5%, generates a controlled inflation of 5%-6% at exit time and attains recovery in a fraction of the time it takes for recovery without policy. Under a successful policy inflation exceeds the target at exit time and when policy terminates, inflation abates rapidly if the inflation target is intact. I suggest that a stabilizing wage policy with a constant 10% increased base wages could have been initiated in September 2008. If controlled inflation of 5% for 2.25 years would have been politically tolerated, the US would have recovered and exited the ZLB in 9 quarters and full employment restored by 2012. Lower policy intensity would have resulted in smaller increased mean wage, lower inflation but increased recession’s duration. The policy would not have required any federal budget expenditures, it would have reduced public deficits after 2010 and the US would have reached 2015 with a lower national debt. The policy negates the effect of demand shocks which cause the recession and the binding ZLB. It attains it’s goal with strong temporary intervention in the market instead of generating demand with public expenditures. It does not solve other long term structural problems that persist after exit from the ZLB and which require other solutions.
    Keywords: New Keynesian Model; wage scale; reference wage; inflexible wages; sticky prices; heterogenous beliefs; market belief; Rational Belie fs; Great Recession; Depression; monetary policy; Stabilizing Wage Policy
    JEL: D21 E12 E24 E3 E4 E52 E6 H3 J3 J6
    Date: 2015–05
  30. By: Michael Bleaney; Mo Tian; Lin Yin
    Abstract: The raw data suggest that the global trend towards greater exchange rate flexibility that was evident before 1990 has since stopped. An optimum currency area (OCA) model of exchange rate regime choice is estimated. Four different schemes for classifying exchange rate regime are investigated. Trends in the explanatory variables made little difference to the trend towards greater flexibility before 1990 but have worked against it since, largely because of the reduction in inflation. Underlying preferences are still shifting gradually in the direction of greater flexibility.
    Keywords: exchange rate regimes, inflation, openness JEL codes: F31
    Date: 2015–03
  31. By: Yeon-Koo Che; Chongwoo Choe; Keeyoung Rhee
    Abstract: Financially distressed firms may be reluctant to accept government bailouts for fear that it may signal the weakness of their balance sheets and inhibit future financing. We study such bailout stigma via a model in which a firm must finance projects by selling legacy assets. The value of the asset is the firm’s private information, which results in inefficient trading of the asset due to standard adverse selection. Although the adverse selection problem creates a scope for government intervention, accepting a bailout can signal the toxicity of the asset, which worsens the adverse selection for the firm in the subsequent trading of its asset. We find multiple equilibrium responses to a government bailout. Bailout terms that would otherwise be acceptable may be refused due to the stigma. Even terms that are so generous as to be acceptable for firms with non-toxic assets may result in low take-up; nevertheless, such a policy could be beneficial indirectly by allowing a firm to improve its market perception by refusing the bailout. Bailout that leads to immediate market rejuvenation is welfare-dominated by an equilibrium without such market rejuvenation. A secret bailout that conceals the identity of its recipient can mitigate the stigma and can implement the (constrained) efficient outcome.
    Keywords: Adverse selection, bailout stigma, secret bailout
    Date: 2015–04

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