nep-cba New Economics Papers
on Central Banking
Issue of 2015‒07‒04
27 papers chosen by
Maria Semenova
Higher School of Economics

  1. What Determines Institutional Arrangements for Macroprudential Policy? By Eri Egawa; Akira Otani; Toshiyuki Sakiyama
  2. Transmission of Quantitative Easing: The Role of Central Bank Reserves By Jens H.E. Christensen; Signe Krogstrup
  3. Jagged Cliffs and Stumbling Blocks: Interest Rate Pass-through Fragmentation during the Euro Area Crisis By Holton, Sarah; Rodriguez d’Acri, Costanza
  4. Macroprudential policy in a microprudential world By Williams, John C.
  5. Has the publication of minutes helped markets to predict the monetary policy decisions of the Bank of England's MPC? By El-Shagi, Makram; Jung, Alexander
  6. Looking forward, forward looking: the path for monetary policy By Williams, John C.
  7. Shadow Banking and Bank Capital Regulation By Guillaume Plantin
  8. Data is the new black: monetary policy by the numbers By Williams, John C.
  9. Conservatism and liquidity traps By Schmidt, Sebastian; Nakata, Taisuke
  10. Russia’s Monetary and Fiscal Policy in 2014 By Alexandra Bozhechkova; Pavel Trunin; Michael Khromov; Alexander Knobel; Anna Kiyutsevskaya
  11. The Macroeconomic Pass-through Effects of Monetary Policy through Sign Restrictions Approach: In the Case of Albania By Gerti Shijaku
  12. What has driven inflation dynamics in the Euro area, the United Kingdom and the United States By Melolinna, Marko
  13. A SVAR approach to evaluation of monetary policy in India By William A. Barnett; Soumya Suvra Bhadury; Taniya Ghosh
  14. The Spectral Stress VaR (SSVaR) By Dominique Guégan; Bertrand Hassani; Kehan Li
  15. Changing Exchange Rate Pass-Through in Japan: Does It Indicate Changing Pricing Behavior? By Naoko Hara; Kazuhiro Hiraki; Yoshitaka Ichise
  16. Development central banking : a review of issues and experiences By Epstein, Gerald
  17. Reassessing exchange rate overshooting in a monetary framework By Soumya Suvra Bhadury; Taniya Ghosh
  18. Loan-to-Value Policy as a Macroprudential Tool: The Case of Residential Mortgage Loans in Asia By Morgan, Peter; Regis, Paulo Jose; Salike, Nimesh
  19. The Informational Content of the Term-Spread in Forecasting the U.S. Inflation Rate: A Nonlinear Approach By Periklis Gogas; Theophilos Papadimitriou; Vasilios Plakandaras; Rangan Gupta
  20. Monetary transmission in low-income countries : an overview By Montiel, Peter J
  21. Role of the Central Bank in supporting economic diversification and productive employment in Cambodia By Khou, Vouthy; Cheng, Oudom; Leng, Soklong; Meng, Channarith
  22. Destabilizing carry trades By Guillaume Plantin; Hyun Song Shin
  23. Risk or Regulatory Capital? Bringing distributions back in the foreground By Dominique Guégan; Bertrand Hassani
  24. Challenges for the ECB in times of deflation By Saraceno, Francesco
  25. Debt Dilution and Sovereign Default Risk By Juan Carlos Hatchondo; Leonardo Martinez; Cesar Sosa-Padilla
  26. Bank bailouts and competition - Did TARP distort competition among sound banks? By Koetter, Michael; Noth, Felix
  27. Designing Macro-prudential Policy in Mortgage Lending: Do First Time Buyers Default Less? By Kelly, Robert; O'Malley, Terence; O'Toole, Conor

  1. By: Eri Egawa (Financial Infrastructure Studies Division, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: eri.; Akira Otani (Head of Economic and Financial Studies Division, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: akira.; Toshiyuki Sakiyama (Associate Director, Economic and Financial Studies Division, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: We use information on institutional arrangements for macroprudential policy in 66 countries to examine the recent developments in and characteristics on institutional arrangements for macroprudential policy. Then we conduct empirical analyses on drivers behind the choice of institutional arrangements, especially the roles of a central bank and a government. We show that many countries have recently developed their institutional arrangements with respect to the set-up of a mandate for macroprudential policy and a multi-agency communication/coordination framework. In addition, the current arrangements can be largely divided into two types: centralization in the central bank, where the central bank or a committee of the central bank is the sole owner of the macroprudential mandate; and coordination by the government, where the government coordinates views or policies among multiple agencies with the macroprudential mandate as the sole chairperson of the financial stability committee. Our empirical analyses suggest that wide-ranging features including economic and financial characteristics, the exchange rate regime, and the degree of democracy influence the differences in the roles the central bank and the government play in macroprudential policy in each country.
    Keywords: Macroprudential policy, Ordered probit analyses, Institutional arrangements, Financial stability committee
    JEL: E58 E61 G28 O57
    Date: 2015–06
  2. By: Jens H.E. Christensen; Signe Krogstrup
    Abstract: We argue that the issuance of central bank reserves per se can matter for the effectof central bank large-scale asset purchases-commonly known as quantitative easing- on long-term interest rates. This effect is independent of the assets purchased, and runs through a reserve-induced portfolio balance channel. For evidence we analyze the reaction of Swiss long-term government bond yields to announcements by the Swiss National Bank to expand central bank reserves without acquiring any long-lived securities. We find that declines in long-term yields following the announcements mainly reflected reduced term premiums suggestive of reserve-induced portfolio balance effects.
    Keywords: unconventional monetary policy, reserve-induced portfolio balance channel, term structure modeling
    JEL: G12 E43 E52 E58
    Date: 2015
  3. By: Holton, Sarah (Central Bank of Ireland); Rodriguez d’Acri, Costanza (Central Bank of Ireland)
    Abstract: The financial crisis has been characterised by fragmentation in the transmission of monetary policy, reflected in high dispersion in the cost of bank finance for euro area firms. This paper shows the first results using a new micro dataset on euro area banks to identify individual bank balance sheet characteristics that have contributed to this fragmentation. Interest rate pass-through heterogeneity is estimated using an error correction framework, which captures banks’ funding constraints and balance sheet structures. Our results show incomplete pass-through of changes in money market rates targeted by the central bank to firms’ lending rates charged by banks over the crisis, with increases in sovereign bond yields affecting the cost of finance for firms, particularly in stressed countries. We find that individual bank characteristics have an effect on the pass-through of policy rate cuts over the crisis, even after we control for changes in macroeconomic conditions across countries. The effect is greatest when looking at characteristics that capture bank funding difficulties, with riskier banks transmitting less of the policy rate cuts through to firms. This suggests that a recovery in banks’ balance sheets,funding capacities and risk perception will help reduce fragmentation in the transmission of monetary policy.
    Keywords: Interest rate pass-through, Monetary policy transmission, Financial crises.
    JEL: E52 E58 G01 G20 E43 E44
    Date: 2015–06
  4. By: Williams, John C. (Federal Reserve Bank of San Francisco)
    Abstract: Symposium on Asian Banking and Finance, Singapore, May 28, 2015
    Date: 2015–05–28
  5. By: El-Shagi, Makram; Jung, Alexander
    Abstract: This paper examines whether the minutes of the Bank of England’s Monetary Policy Committee (MPC) have provided markets with additional information about the future course of monetary policy. The paper conducts an econometric approach based on an Ordered Probit model explaining future policy rate changes (sample 1998 to 2014), and the Vuong test for model selection, which helps to identify changes in the market assessment around the release of MPC minutes. Our results suggest that the Bank of England’s published minutes of the MPC’s deliberations have indeed helped markets in forming their expectations on future monetary policy decisions. JEL Classification: C34, D78, E52, E58
    Keywords: Communication, monetary policy committee, MPC minutes, Probit, Vuong test
    Date: 2015–06
  6. By: Williams, John C. (Federal Reserve Bank of San Francisco)
    Abstract: Presentation to the New York Association for Business Economics, New York, New York , May 12, 2015
    Date: 2015–05–12
  7. By: Guillaume Plantin (Département d'économie)
    Abstract: Banks are subject to capital requirements because their privately optimal leverage is higher than the socially optimal one. This is in turn because banks fail to internalize all costs that their insolvency creates for agents who use their money-like liabilities to settle transactions. If banks can bypass capital regulation in an opaque shadow banking sector, it may be optimal to relax capital requirements so that liquidity dries up in the shadow banking sector. Tightening capital requirements may spur a surge in shadow banking activity that leads to an overall larger risk on the money-like liabilities of the formal and shadow banking institutions.
    Keywords: Shadow banking activity; Banking system; Banking crisis; Unregulated Banking
    JEL: G1 G21 G28
    Date: 2015–01
  8. By: Williams, John C. (Federal Reserve Bank of San Francisco)
    Abstract: Presentation to NBER East Asia Seminar on Economics, San Francisco, California, June 19, 2015
    Date: 2015–06–19
  9. By: Schmidt, Sebastian; Nakata, Taisuke
    Abstract: In an economy with an occasionally binding zero lower bound (ZLB) constraint, the anticipation of future ZLB episodes creates a trade-off for discretionary central banks between inflation and output stabilization. As a consequence, inflation systematically falls below target even when the policy rate is above zero. Appointing Rogoff’s (1985) conservative central banker mitigates this deflationary bias away from the ZLB and enhances welfare by improving allocations both at and away from the ZLB. JEL Classification: E52, E61
    Keywords: Deflationary Bias, Inflation Conservatism, Inflation Targeting, Liquidity Traps, Zero Lower Bound
    Date: 2015–06
  10. By: Alexandra Bozhechkova (Gaidar Institute for Economic Policy); Pavel Trunin (Gaidar Institute for Economic Policy); Michael Khromov (Gaidar Institute for Economic Policy); Alexander Knobel (Gaidar Institute for Economic Policy); Anna Kiyutsevskaya (RANEPA)
    Abstract: This paper deals with Russia's monetary policy in 2014
    Keywords: Russian economy; monetary policymoney market; inflation; balance of payments; exchange rate;
    JEL: E31 E43 E44 E51 E58 E52
    Date: 2015
  11. By: Gerti Shijaku (Bank of Albania)
    Abstract: This paper examines the transmission mechanism of monetary policy in Albania during 2002 M01 - 2014 M12. The main question addresses the macroeconomic pass-through effects of a monetary policy shock, with regards to a conventional interest rate and possible different balance sheet policy changes. The analysis is based on a structural vector autoregressive model for Albanian economy that includes means of the Cholesky identification scheme and the sign restrictions approach. The former produces mixed results, that are either statistically insignificant or show a puzzle behavior. The latter is found to reduce bias, albeit with some supportive significant clear cut robustness evidences of the short run macroeconomic pass-through effects of a stimulus monetary policy that materialises within twelve periods. A stimulus monetary policy is found to support economic activity and increase price level. The effect is positive with regards to bank lending and monetary money stock variables. Exchange rate depreciates, accomplished by some higher stress on financial market condition. Both of these variables show a contemporaneously stronger response compared to the other variables. Analyses show that the greatest impact, through means of policy rate, is found to be on price level, bank lending and real money stock. In contrast, the greatest impact, through the liquidity effect, is on output, exchange rate and financial market conditions.
    Keywords: Monetary transmission mechanism, financial market condition, VAR, sign restriction identification.
    JEL: C11 C32 E12 E13 E52 E58
    Date: 2015–06–18
  12. By: Melolinna, Marko
    Abstract: This paper studies factors behind inflation dynamics in the euro area, the UK and the US. It introduces a factor-augmented vector autoregression (FAVAR) framework with sign restrictions to study the effects of fundamental macroeconomic shocks on inflation in the three economies. The FAVAR model framework is also applied to study the effects on inflation subcomponents in the more recent past. The FAVAR models suggest that headline inflation in the three economies has reacted in a relatively similar fashion to macroeconomic shocks over the last four decades, with demand shocks causing the most persistent effects on inflation. According to the subcomponent FAVAR models, the responses of inflation subcomponents to macroeconomic shocks have also been relatively similar in the three economies. However, there is evidence of a stronger foreign exchange channel of monetary policy transmission as well as supply shocks in the responses of non-energy tradable goods prices in the UK than the other two economies, while the reaction of services inflation has been more muted to all types of shocks in the euro area than the other two economies. JEL Classification: C22, C32, E31, E52
    Keywords: FAVAR, inflation, macroeconomic shocks, sign restrictions
    Date: 2015–06
  13. By: William A. Barnett (University of Kansas); Soumya Suvra Bhadury (University of Kansas); Taniya Ghosh (Indira Gandhi Institute of Development Research)
    Abstract: After almost 15 years, following the flagship exchange-rate paper written by Kim and Roubini (K&R henceforth); we revisit the widely relevant questions on monetary policy, exchange rate delayed overshooting, inflationary puzzle and weak monetary transmission mechanism in the Indian context. We further try to incorporate a superior form of the monetary measure called the Divisia monetary aggregate in the K&R setup. Our paper still rediscovers the efficacy of K&R contemporaneous restriction (customized for the Indian economy which is a developing G-20 nation unlike advanced G-6 nations that K&R worked with) especially when we compared with the recursive structure (which is plagued by price puzzle and exchange rate puzzle). The importance of bringing back 'Money' in the exchange rate model especially correctly measured monetary aggregate is convincingly illustrated when we contested across models with no-money, simple-sum monetary models and Divisia monetary models; in terms of impulse response (eliminating some of the persistent puzzles), variance decomposition analysis (policy variable explaining more of the exchange rate fluctuation) and out-of-sample forecasting (LER forecasting graph). Further, we do a flip-flop variance decomposition analysis, which leads us to conclude two important phenomena in the Indian economy, (i) weak link between the nominal-policy variable and the real-economic activity (ii) Indian monetary authority had inflation-targeting as one of their primary goals, in tune with the RBI Act. These two main results are robust, holding across different time period, dissimilar monetary aggregates and diverse exogenous model setups.
    Keywords: Monetary Policy; Monetary Aggregates; Divisia; Structural VAR; Exchange Rate Overshooting; Liquidity Puzzle; Price Puzzle; Exchange Rate Puzzle; Forward Discount Bias Puzzle
    JEL: C32 E41 E51 E52 F31 F41 F47
    Date: 2015–06
  14. By: Dominique Guégan (Department of Economics, University Of Venice Cà Foscari and University Paris1 Panthéon – Sorbonne.); Bertrand Hassani (University Paris1 Panthéon – Sorbonne and Grupo Santander.); Kehan Li (University Paris1 Panthéon – Sorbonne)
    Abstract: One of the key lessons of the crisis which began in 2007 has been the need to strengthen the risk coverage of the capital framework. In response, the Basel Committee in July 2009 completed a number of critical reforms to the Basel II framework which will raise capital requirements for the trading book and complex securitisation exposures, a major source of losses for many international active banks. One of the reforms is to introduce a stressed value-at-risk (VaR) capital requirement based on a continuous 12-month period of significant financial stress (Basel III (2011)). However the Basel framework does not specify a model to calculate the stressed VaR and leaves it up to the banks to develop an appropriate internal model to capture material risks they face. Consequently we propose a forward stress risk measure ``spectral stress VaR" (SSVaR) as an implementation model of stressed VaR, by exploiting the asymptotic normality property of the distribution of estimator of VaR_p. In particular to allow SSVaR incorporating the tail structure information we perform the spectral analysis to build it. Using a data set composed of operational risk factors we fit a panel of distributions to construct the SSVaR in order to stress it. Additionally we show how the SSVaR can be an indicator regarding the inner model robustness for the bank.
    Keywords: Value at Risk, Asymptotic theory, Distribution, Spectral analysis, Stress, Risk measure, Regulation.
    JEL: C1 C6
    Date: 2015
  15. By: Naoko Hara (Bank of Japan); Kazuhiro Hiraki (Bank of Japan); Yoshitaka Ichise (Bank of Japan)
    Abstract: This paper empirically explores recent changes in the exchange rate pass-through in Japan. We take a two-pronged approach. First, we estimate the exchange rate pass-through into domestic prices using time-varying parameter estimation. Second, we decompose the estimated exchange rate pass-through into the responsiveness of marginal costs to the exchange rate and the responsiveness of inflation to marginal costs. The estimation results show that the rates of exchange rate pass-through into the Producer Price Index and the Consumer Price Index have been increasing since the late 2000s. Evidence from international input-output tables suggests that the import-intensity of Japan's manufacturing sector has increased considerably over the last decade. We find that although the increasing dependence on imports in production (as well as in the retail sector) accounts for part of the rise in exchange rate pass-through, a larger part of the rise is due to greater responsiveness of inflation to marginal costs. This finding hints at a structural change in firms' pricing behavior since the late 2000s.
    Keywords: Exchange Rate Pass-Through; Phillips Curve; Time-Varying Parameter Estimation; Markov Chain Monte Carlo Estimation; International Input-Output Tables
    JEL: C11 E31 F41
    Date: 2015–06–25
  16. By: Epstein, Gerald
    Keywords: banking, monetary system, economic recession, financial market, inflation, stabilization, developing countries, activité bancaire, système monétaire, récession économique, marché financier, inflation, stabilisation, pays en développement, actividad bancaria, sistema monetario, recesión económica, mercado financiero, inflación, estabilización, países en desarrollo
    Date: 2015
  17. By: Soumya Suvra Bhadury (University of Kansas); Taniya Ghosh (Indira Gandhi Institute of Development Research)
    Abstract: Money overtime has been deemphasized from most of the macroeconometric models of exchange rate making interest rate 'alone' the monetary policy instrument. One such model is Bjornland's (1999) Journal of International Economics and Monetary Policy and Exchange Rate Overshooting: Dornbusch was right after all. The model sets out to establish the empirical validity of Dornbusch exchange rate overshooting hypothesis for four small open economies. It does so though not with exact precision. When the same model is done using the correct econometric techniques, the impulse response functions for exchange rate due to a monetary policy shock are infact 'insignificant'. In this paper we revisit the Dornbusch exchange rate overshooting in a different model setting. A real money demand equations is added to the original model. Identification is achieved by imposing short-run and long-run restrictions while keeping the short-run interactions between the two variables monetary policy and exchange rate free. Classical neutrality of money is imposed according to which the monetary shocks are long-run neutral to certain real variables. Our paper rediscovers the validity of Dornbusch Overshooting hypothesis for Australia, Canada, Newzealand and Sweden when we compare it with Bjornland's model. More specifically, a contractionary monetary policy shock leads to exchange rate overshooting as predicted by Dornbusch. The exchange rate appreciates 'significantly' on impact to a monetary policy shock as shown by the impulse response functions and thereafter depreciates. Also the variance decomposition results justify our analysis by showing that money demand and money supply shocks explain siginificant portion of exchange rate fluctuations vis-a-vis Bjornland's original model.
    Keywords: Monetary Policy; Money Demand; Structural VAR; Short Run; Long Run; Exchange Rate Overshooting; Liquidity Puzzle; Price Puzzle; Exchange Rate Puzzle; Forward Discount Bias Puzzle
    JEL: C32 E41 E51 E52 F31 F41 F47
    Date: 2015–06
  18. By: Morgan, Peter (Asian Development Bank Institute); Regis, Paulo Jose (Asian Development Bank Institute); Salike, Nimesh (Asian Development Bank Institute)
    Abstract: Credit creation in the housing market has been a key source of systemic financial risk, and therefore is at the center of the debate on macroprudential policies. The loan-to-value (LTV) ratio is a widely used macroprudential tool aimed at moderating mortgage loan creation, and its effectiveness needs to be estimated empirically. This paper is unique in that it analyzes the effect of LTV on mortgage lending, the direct channel of influence, using a large sample of banks in 10 Asian economies. It uses estimation techniques to deal with the large presence of outliers in the data. Robust-to-outlier estimations show that economies with LTV polices have expanded residential mortgage loans by 6.7% per year, while non-LTV economies have expanded by 14.6%, which suggests LTV policies have been effective.
    Keywords: loan-to-value policy; residential mortgage loans; macroprudential policy; financial risk
    JEL: C23 E58 G21 G28
    Date: 2015–06–24
  19. By: Periklis Gogas (Department of Economics, Democritus University of Thrace, Greece); Theophilos Papadimitriou (Department of Economics, Democritus University of Thrace, Greece); Vasilios Plakandaras (Department of Economics, Democritus University of Thrace, Greece); Rangan Gupta (Department of Economics, University of Pretoria)
    Abstract: The difficulty in modelling inflation and the significance in discovering the underlying data generating process of inflation is expressed in an ample literature regarding inflation forecasting. In this paper we evaluate nonlinear machine learning and econometric methodologies in forecasting the U.S. inflation based on autoregressive and structural models of the term structure. We employ two nonlinear methodologies: the econometric Least Absolute Shrinkage and Selection Operator (LASSO) and the machine learning Support Vector Regression (SVR) method. The SVR has never been used before in inflation forecasting considering the term--spread as a regressor. In doing so, we use a long monthly dataset spanning the period 1871:1 – 2015:3 that covers the entire history of inflation in the U.S. economy. For comparison reasons we also use OLS regression models as benchmark. In order to evaluate the contribution of the term-spread in inflation forecasting in different time periods, we measure the out-of-sample forecasting performance of all models using rolling window regressions. Considering various forecasting horizons, the empirical evidence suggests that the structural models do not outperform the autoregressive ones, regardless of the model’s method. Thus we conclude that the term-spread models are not more accurate than autoregressive ones in inflation forecasting.
    Keywords: U.S. Inflation, forecasting, Support Vector Regression, LASSO
    JEL: C22 C45 C53 E31 E37
    Date: 2015–06
  20. By: Montiel, Peter J
    Keywords: monetary system, banking, credit, low income, monetary policy, developing countries, système monétaire, activité bancaire, crédit, faible revenu, politique monétaire, pays en développement, sistema monetario, actividad bancaria, crédito, bajos ingresos, política monetaria, países en desarrollo
    Date: 2015
  21. By: Khou, Vouthy; Cheng, Oudom; Leng, Soklong; Meng, Channarith
    Abstract: This study was undertaken by a team from the National Bank of Cambodia (NBC). It is a prime example of collaboration between a major national institution responsible for the conduct of monetary and financial policy and the ILO.
    Keywords: economic growth, bank, employment creation, Cambodia, croissance économique, banque, création d'emploi, Cambodge, crecimiento económico, banco, creación de empleos, Camboya
    Date: 2015
  22. By: Guillaume Plantin (Département d'économie); Hyun Song Shin (Princeton University)
    Abstract: We offer a model of currency carry trades in which carry traders generate self-sustained excess returns if they coordinate on supplying excessive capital to a target economy. The interest-rate differential between their funding currency and the target currency is their coordination device. Such self-fulfilling pro table currency trades arise when the central bank of the target economy ignores the impact of carry-trade in flows on domestic asset prices, and responds only to their effect on inflation. We solve for a unique equilibrium that exhibits the classic pattern of the carry-trade recipient currency appreciating for extended periods, punctuated by sharp falls.
    Keywords: Currency Carry Trades; Inflation Targeting; Financial Instability
    JEL: G01 G15 E58
    Date: 2015–04
  23. By: Dominique Guégan (Department of Economics, University Of Venice Cà Foscari and University Paris1 Panthéon – Sorbonne.); Bertrand Hassani (University Paris1 Panthéon – Sorbonne and Grupo Santander.)
    Abstract: This paper discusses the regulatory requirement (Basel Committee, ECB-SSM and EBA) to measure financial institutions' major risks, for instance Market, Credit and Operational, regarding the choice of the risk measures, the choice of the distributions used to model them and the level of confidence. We highlight and illustrate the paradoxes and the issues observed implementing an approach over another and the inconsistencies between the methodologies suggested and the goal to achieve. This paper makes some recommendations to the supervisor and proposes alternative procedures to measure the risks.
    Keywords: Risk measures - Sub-additivity - Level of confidence - Extreme value distributions - Financial regulation, aggregation.
    JEL: C1 C6
    Date: 2015
  24. By: Saraceno, Francesco
    Keywords: monetary policy, economic recession, deflation, banking, impact evaluation, fiscal policy, EMU, politique monétaire, récession économique, déflation, activité bancaire, évaluation de l'impact, politique fiscale, UEM, política monetaria, recesión económica, deflación, actividad bancaria, evaluación de impacto, política fiscal, UEM
    Date: 2015
  25. By: Juan Carlos Hatchondo (Indiana University); Leonardo Martinez (IMF); Cesar Sosa-Padilla (McMaster University)
    Abstract: We measure the effects of debt dilution on sovereign default risk and study debt covenants that could mitigate these effects. We calibrate a baseline model with en- dogenous debt duration and default risk (in which debt can be diluted) using data from Spain. We find that debt dilution accounts for 78 percent of the default risk in the baseline economy and that eliminating dilution increases the optimal duration of sovereign debt by almost two years. Eliminating dilution also increases consumption volatility, but still produces welfare gains. The debt covenants we study could help enforcing fiscal rules
    Date: 2015–06
  26. By: Koetter, Michael; Noth, Felix
    Abstract: This study investigates if the Troubled Asset Relief Program (TARP) distorted price competition in U.S. banking. Political indicators reveal bailout expectations after 2009, manifested as beliefs about the predicted probability of receiving equity support relative to failing during the TARP disbursement period. In addition, the TARP affected the competitive conduct of unsupported banks after the program stopped in the fourth quarter of 2009. The risk premium required by depositors was lower, and loan rates were higher for banks with higher bailout expectations. The interest margins of unsupported banks increased in the immediate aftermath of the TARP disbursement but not after 2010. These effects are economically very small though. No effects emerged for loan or deposit growth, which suggests that protected banks did not increase their market shares at the expense of less protected banks. JEL Classification: C30, C78, G21, G28, L51
    Keywords: bailout expectations, Banking, competition, TARP
    Date: 2015–06
  27. By: Kelly, Robert (Central Bank of Ireland); O'Malley, Terence (Central Bank of Ireland); O'Toole, Conor (Central Bank of Ireland)
    Abstract: Macro-prudential policy is designed to address risk at a systemwide level, an example of which is mortgage default following a period of excessive residential property lending. Policy tools to address this risk, such as caps on loan-to-value (LTV) and loan-to-income (LTI) ratios should by design reflect the risk profile of lending. This research considers the heterogeneity of default risk between first time buyers and second and subsequent buyers and finds that first time buyers have lower default rates having controlled for borrower and loan characteristics. The potential implications for the macro prudential policy setting are empirically analysed: the default-differential between the two groups linearly increases with LTI and a non-linear difference is found to be maximised at 80-85 per cent for LTV. In addition, the role for a rule designed on house valuation is examined, with results showing a diminishing default-differential as valuations increase. This research is consistent with differential regulatory treatment of first time buyers with default risk remaining comparable to the remainder of mortgage lending.
    Keywords: Macro Prudential, Credit Risk, Mortgages, Ireland
    JEL: E32 E51 F30 G21 G28
    Date: 2015–06

This nep-cba issue is ©2015 by Maria Semenova. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.