nep-cba New Economics Papers
on Central Banking
Issue of 2015‒07‒11
sixteen papers chosen by
Maria Semenova
Higher School of Economics

  1. Supervisory Stress Testing of Large Systemic Financial Institutions : A speech at the Riksbank Macroprudential Conference, Stockholm, Sweden, June 24, 2015 By Fischer, Stanley
  2. Monetary Policy in the United States and in Developing Countries : A speech at the Crockett Governors' Roundtable 2015 for African Central Bankers, University of Oxford, Oxford, United Kingdom, June 30, 2015 By Fischer, Stanley
  3. Central Bank Credibility, Reputation and Inflation Targeting in Historical Perspective By Michael David Bordo; Pierre Siklos
  4. Central bank policy paths and market forward rates: A simple model By De Graeve, Ferre; Iversen, Jens
  5. Optimal monetary policy in the presence of human capital depreciation during unemployment By Lien Laureys
  6. Different types of central bank insolvency and the central role of seignorage By Reis, Ricardo
  7. Reflections on Inflation Targeting and Financial Stability By Jacob Frenkel
  8. Learning-by-Sharing: Monetary Policy and the Information Content of Public Signals By Alexandre Kohlhas
  9. The QE experience: Worth a try? By Christophe Blot; Jérôme Creel; Paul Hubert; Fabien Labondance
  10. Risk or Regulatory Capital? Bringing distributions back in the foreground By Dominique Guegan; Bertrand Hassani
  11. Measuring the Non-Linear Effects of Monetary Policy By Christian Matthes; Regis Barnichon
  12. The role of external shocks for monetary policy in Colombia and Brazil: A Bayesian SVAR analysis By Christian Rohe; Matthias Hartermann
  13. Simultaneous Monetary Policies in the Context of the Trilemma: Evidence from the Central Bank of Turkey By Yasin Kursat Onder; Mauricio Villamizar-Villegas
  14. Too Unexpected to Fail: Bail-Out Policy and Sudden Freezes By Arup Daripa
  15. Limits to government debt sustainability By Jean-Marc Fournier; Falilou Fall
  16. Financial Markets: Government Regulation vs Self-regulation in Russia in 2014 By Natalia Polezhaeva

  1. By: Fischer, Stanley (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2015–06–24
  2. By: Fischer, Stanley (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2015–06–30
  3. By: Michael David Bordo; Pierre Siklos
    Date: 2015–06–26
  4. By: De Graeve, Ferre (Research Department, Central Bank of Sweden); Iversen, Jens (Monetary Policy Department, Central Bank of Sweden)
    Abstract: Increasingly many central banks announce likely paths for future policy rates. Re- cent experience suggest that market forward rates can differ substantially from those announced. Models commonly adopted in policy analysis ignore such differences. This paper studies a simple model that can capture deviations between announced paths and market forward rates. We detail the macroeconomic transmission of such deviations both in the model and in the data and show how the model can inform policy deliberations.
    Keywords: Policy path; forward rate; forward guidance
    JEL: E43 E44 E58
    Date: 2015–06–01
  5. By: Lien Laureys (Bank of England)
    Abstract: When workers are exposed to human capital depreciation during periods of unemployment, hiring affects the unemployment pool's composition in terms of skills, and hence the economy’s production potential. Introducing human capital depreciation during unemployment into an otherwise standard New Keynesian model with search frictions in the labour market leads to the finding that the flexible price allocation is no longer constrained-efficient even when the standard Hosios condition holds. This is because it generates a composition externality in job creation: firms ignore how their hiring decisions affect the extent to which the unemployed workers’ skills erode, and hence the output that can be produced by new matches. Consequently, it might be desirable from a social point of view for monetary policy to deviate from strict inflation targeting. But quantitative analysis shows that although optimal price inflation is no longer zero, strict inflation targeting stays close to the optimal policy.
    Date: 2015
  6. By: Reis, Ricardo
    Abstract: A central bank is insolvent if its plans imply a Ponzi scheme on reserves so the price level becomes infinity. If the central bank enjoys fiscal support, in the form of a dividend rule that pays out net income every period, including when it is negative, it can never become insolvent independently of the fiscal authority. Otherwise, this note distinguishes between intertemporal insolvency, rule insolvency, and period insolvency. While period and rule solvency depend on analyzing dividend rules and sources of risk to net income, evaluating intertemporal solvency requires overcoming the difficult challenge of measuring the present value of seignorage.
    Keywords: central bank capital; fiscal support; monetary policy
    JEL: E42 E58 E59
    Date: 2015–07
  7. By: Jacob Frenkel
    Abstract: Transcript of Jacob Frenkel’s1 presentation on reflectionson Inflation Targeting and Financial Stability
    Date: 2015–06–26
  8. By: Alexandre Kohlhas (Stockholm University)
    Abstract: This paper studies the effect of a central bank releasing public information about the state of the economy in a dispersed information business cycle model in which market participants learn from the distribution of prices, economy-wide output and the level of the interest rate. It demonstrates how central bank information disclosure can increase the information content of public signals by making expectations of future central bank actions closer to common knowledge. This effect is shown in a calibrated business cycle model to completely offset the standard learning externality of additional public information. Central bank information disclosure can thus decrease the level of uncertainty about the state of the economy for everyone -- even the central bank itself. This qualifies the "anti-disclosure" result in Morris and Shin (2005) and Amador and Weill (2010).
    Date: 2015
  9. By: Christophe Blot (OFCE); Jérôme Creel (OFCE); Paul Hubert (OFCE); Fabien Labondance (Centre de REcherches sur les Stratégies Economiques (CRESE))
    Abstract: The ECB has decided to implement large-scale quantitative easing (QE) measures since March 2015 until September 2016. This unconventional monetary policy has had a variety of precedents, in the Japanese, UK and US economies. These experiments have been effective at modifying government and corporate bond yields, mostly in the UK and US and to a lesser extent in Japan. This conclusion is not context-free. The European QE has started in a deflation era which requires more activism and cooperation from the ECB and Euro area governments than in the UK and the US when their central banks embarked in QE. The success of the European QE will also depend substantially on the depreciation of the Euro and will require clear communication by the ECB that it is prepared to accept a large depreciation at least until the inflation rate goes back to its target.
    Keywords: Monetary policy; Quantitative easing
    JEL: E52
    Date: 2015–04
  10. By: Dominique Guegan (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS); Bertrand Hassani (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS)
    Abstract: This paper discusses the regulatory requirement (Basel Committee, ECB-SSM and EBA) to measure financial institutions' major risks, for instance Market, Credit and Operational, regarding the choice of the risk measures, the choice of the distributions used to model them and the level of confidence. We highlight and illustrate the paradoxes and the issues observed implementing an approach over another and the inconsistencies between the methodologies suggested and the goal to achieve. This paper make some recommendations to the supervisor and proposes alternative procedures to measure the risks.
    Date: 2015–05
  11. By: Christian Matthes (Federal Reserve Bank of Richmond); Regis Barnichon (CREI)
    Abstract: This paper proposes a method to identify the non-linear effects of structural shocks by using Gaussian basis functions to parametrize impulse response functions. We apply our approach to monetary policy and find that the effect of a monetary intervention depends strongly on (i) the sign of the intervention, (ii) the size of the intervention, and (iii) the state of the business cycle at the time of the intervention. A contractionary policy has a strong adverse effect on output, much stronger than linear estimates suggest, but an expansionary policy has, on average, no significant effect on output. An expansionary policy can have some expansionary effect on output, but only if the intervention is large and during a recession. Even so, a contractionary policy is always more potent than its expansionary counterpart.
    Date: 2015
  12. By: Christian Rohe; Matthias Hartermann
    Abstract: This paper identifies the effects of US interest rate and commodity price shocks on the monetary policy of two in flation targeting emerging economies from Latin America, Colombia and Brazil. We estimate country-specic Bayesian SVARs with block exogeneity restrictions and account for the fact that central banks in both countries use two different instruments of monetary policy, a policy interest rate and foreign exchange market interventions. Our findings show that the Colombian and, to a lesser degree, the Brazilian central bank use sterilized interventions as a systematic component of their infl ation targeting regimes, which are more accurately described as "in flation-targeting-cum-intervention". Foreign exchange interventions are used in both countries to set domestic interest rates more independently from US monetary policy and, in Colombia, to increase interest rates in response to rising import prices without further deteriorating the terms of trade. Our results also indicate a lower susceptibility to shocks emanating from outside Colombia or Brazil under this policy regime than what studies for the pre-infl ation targeting period have found.
    Keywords: External Shocks, Inflation Targeting, Foreign Exchange Intervention, Bayesian SVAR, Block Exogeneity
    JEL: C32 E52 E58 F31 O54
    Date: 2015–06
  13. By: Yasin Kursat Onder; Mauricio Villamizar-Villegas
    Abstract: Many central banks that have opted for monetary autonomy have also been reluctant to relinquish control over the value of their currencies. As a result, they have operated through both interest rate and foreign exchange interventions. However, in the context of the monetary trilemma, both effects can potentially offset each other. Using daily data from the Central Bank of Turkey during the period of 2002 - 2010, we study the effects of simultaneous policies by first purging the intended monetary decisions from responses to real-time macroeconomic variables, and then determining their impact on economic activity. We find that the Central Bank of Turkey adjusted its policy rate mostly in response to inflation levels relative to both the yearly target and agents’ expectations, and conducted purchases and sales of foreign currency in response to exchange rate behavior. These responses varied depending on whether interventions were pre-announced. We also find that unannounced purchases of foreign currency had a significant effect in reducing exchange rate volatility but appeared to have no effect on exchange rate changes. On the other hand, changes in the policy rate significantly affected inflation but had no discernible effect on output growth.
    Keywords: Central bank intervention, simultaneous policies, monetary shocks, price puzzle, monetary policy trilemma, foreign exchange intervention
    JEL: E43 E52 E58 F31
    Date: 2015–07–03
  14. By: Arup Daripa (Department of Economics, Mathematics & Statistics, Birkbeck)
    Abstract: I present a mechanism that relies on the interaction of coordination and ambiguity (Knightian uncertainty) and makes precise how a loss of confidence can arise in loan markets, leading to a systemic liquidity crisis. The paper studies a simple global-game coordination model among lenders to a financial intermediary and shows how a market haircut arises in equilibrium. I show how the haircut responds to a variety of parameters. In particular, I show that coordination is non-robust to ambiguity in investor signals and becomes fragile in an environment with ambiguity. This leads to the haircut jumping up suddenly, possibly to 100% when enough lenders are ambiguity-sensitive. Further, I show that the fragility of coordination implies that in such an environment, policy itself becomes a systemic trigger. If the regulator fails to rescue an institution that the market expects to be saved, which in turn changes market expectation about policy for other institutions even slightly, an immediate systemic collapse of liquidity ensues. The results explain both the contagious run on liquidity markets at the advent of the recent crisis as well as the liquidity market freeze after the Lehman collapse. While what matters for the possibility run is whether an institution is too-unexpected-to-fail (TUTF), it is likely that institutions typically considered too-big-to-fail (TBTF) are also likely to be TUTF. The results then show that TBTF institutions limit the spread of crises, and breaking up a TBTF increases systemic vulnerability. Further, the results cast some doubt on the efficacy of the ring-fencing policy proposed by the UK banking commission.
    Keywords: Short-term debt, systemic liquidity crises, coordination, ambiguity, bail-out policy, liquidity policy.
    JEL: G2 C7 E5
    Date: 2015–04
  15. By: Jean-Marc Fournier; Falilou Fall
    Abstract: The recent euro area sovereign debt crisis has shown the importance of market reactions for the sustainability of debt. The objective of this paper is to calculate endogenous government debt limits given the markets assessment of the probability to default. The estimated primary balance reaction function to growing debt has the “fiscal fatigue” property (a loosening fiscal effort makes the primary balance insufficient to support rising debt) at high debt levels. It is the combination of this feature of the primary balance reaction function with the market interest rate reaction to growing debt that determines the government debt limit beyond which debt cannot be rolled over. An application of this framework to OECD countries over the period 1985 – 2013 shows that current debt limits are high for most of the OECD thanks to particularly low current interest rates. It shows also for some countries that current debt levels are not sustainable without a change in government behaviour as compared to the past. Most importantly, the framework illustrates the state contingent nature of debt limits and therefore the vulnerability of governments to a change in macroeconomic conditions and to market reactions.<P>Les limites à la viabilité de la dette publique<BR>La récente crise de la dette souveraine dans la zone euro a montré l’importance des réactions des marchés pour la viabilité de la dette. L’objectif de ce document est de calculer les limites endogènes de la dette publique compte tenu de l’évaluation que font les marchés de la probabilité de défaut. À de hauts niveaux d’endettement, la fonction de réaction estimée du solde primaire à une dette croissante présente la propriété de « fatigue budgétaire » (c’est-à-dire qu’un relâchement des efforts budgétaires aboutit à un solde primaire insuffisant pour soutenir l’accroissement de la dette). Cette propriété de la fonction de réaction du solde primaire, combinée à la réaction des marchés à l’accroissement de la dette via les taux d’intérêt, détermine la limite de la dette publique au-delà de laquelle celle-ci ne peut plus être refinancée. L’application de ce cadre aux pays de l’OCDE pour la période 1985-2013 montre que les limites actuelles de la dette sont hautes pour la majorité d’entre eux, grâce à des taux d’intérêt particulièrement bas actuellement. Elle montre également que les niveaux d’endettement actuels ne sont pas viables pour un certain nombre de pays. Surtout, ce cadre montre que les limites de la dette sont conditionnées par l’état de l’économie et que par conséquent, les États sont vulnérables à toute évolution de la situation macroéconomique et aux réactions des marchés.
    Keywords: sustainability, fiscal policy, debt, dette, viabilité de la dette publique, politique budgétaire
    JEL: E27 E44 E61 E62 H62 H63 H68
    Date: 2015–07–03
  16. By: Natalia Polezhaeva (RANEPA)
    Abstract: This paper deals with the issues of government regulation in financial markets.
    Keywords: Russian economy; financial markets, regulation
    JEL: G18
    Date: 2015

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