nep-cba New Economics Papers
on Central Banking
Issue of 2015‒07‒25
24 papers chosen by
Maria Semenova
Higher School of Economics

  1. Towards a “New” Inflation Targeting Framework: The Case of Uruguay By Matias Escudero; Martin Gonzalez-Rozada; Martin Sola
  2. Optimal Monetary Interventions in Credit Markets By Tai-Wei Hu; Luis Araujo
  3. A Model of the Twin Ds: Optimal Default and Devaluation By Na, Seunghoon; Schmitt-Grohé, Stephanie; Uribe, Martín; Yue, Vivian
  4. Bringing Financial Stability into Monetary Policy* By Leeper, Eric M.; Nason, James M.
  5. Why is inflation so low in the euro area? By Antonio M. Conti; Stefano Neri; Andrea Nobili
  6. Towards a New Keynesian theory of the price level By Barrdear, John
  7. Small DSGE Model with Financial Frictions By Melesse Wondemhunegn Ezezew
  8. The South African Economic Response to Monetary Policy Uncertainty By Mehmet Balcilar; Rangan Gupta; Charl Jooste
  9. What are the International Channels Through Which a US Policy Shock is Transmitted to The World Economies? Evidence from a Time Varying FAVAR By Anastasios Evgenidis; Costas Siriopoulos
  10. Monetary Policy and Dutch Disease: The Case of Price and Wage Rigidity By Constantino Hevia; Juan Pablo Nicolini
  11. Jump-Starting the Euro Area Recovery: Would a Rise in Core Fiscal Spending Help the Periphery?* By Blanchard, Olivier; Erceg, Christopher J.; Lindé, Jesper
  12. Forecaster heterogeneity, surprises and financial markets By Marcello Pericoli; Giovanni Veronese
  13. EMU 2.0 Drawing Lessons From the Crisis - a New Framework For Stability and Growth By Theodoros S. Papaspyrou
  14. The role of monetary policy in macroeconomic volatility of ASEAN-4 countries against oil price shock over time By Razmi, Fatemeh; Mohamed, Azali; Chin, Lee; Habibullah, Muzafar Shah
  15. Optimal Monetary and Fiscal Policy in a New Keynesian Model with a Dutch Disease: The Case of Complete Markets By Constantino Hevia; Pablo Andrés Neumeyer; Juan Pablo Nicolini
  16. Empirical Approaches to the Post-Keynesian Theory of Demand for Money: An Error Correction Model of Bangladesh By Kundu, Nobinkhor; Mollah, Muhammad Musharuf Hossain
  17. Estadísticas de Tasas de Interés del Sistema Bancario By Erika Arraño; Pablo Filippi; César Vásquez
  18. Contagion, bailouts and welfare impacts of Systemic Risk By Christoph Siebenbrunner
  19. Illiquidity in Sovereign Debt Markets By Juan Passadore
  20. The Greek referendum: an alternative approach By Mavrozacharakis, Emmanouil; Tzagarakis, Stelios
  21. Taming the Basel Leverage Cycle By Christoph Aymanns; Fabio Caccioli; J. Doyne Farmer; Vincent W. C. Tan
  22. Analysis the Determinants of Inflation Dynamics in Turkey By MUSTAFA KIZILTAN; ANNA GOLOVKO
  23. Time-varying integration in European post-transition sovereign bond market By Petra Posedel Simovic; Marina Tkalec; Maruska Vizek
  24. A Critical Review of Posch, J. and F. Rumler (2015), 'Semi-Structural Forecasting of UK Inflation Based on the Hybrid New Keynesian Phillips Curve,' Journal of Forecasting 34(2): 145-62 By Medel, Carlos A.

  1. By: Matias Escudero; Martin Gonzalez-Rozada; Martin Sola
    Abstract: Using a dynamic stochastic general equilibrium model with financial frictions we study the effects of a rule that incorporates not only the interest rate but also the legal reserve requirements as instruments of the monetary policy. We evaluate the effectiveness of both instruments to accomplish the inflationary and/or financial stability objectives of the Central Bank of Uruguay. The main findings are that: (i) reserve requirements can be used to achieve the inflationary objectives of the Central Bank. However, reducing inflation using this instrument, it also produces a real appreciation of the Uruguayan peso; (ii) when the Central Bank uses the monetary policy rate as an instrument, the effect of the reserve requirements is to contribute to reduce the negative impact over consumption, investment and output of an eventual increase in this rate. Nevertheless, the quantitative results in terms of inflation reduction are rather poor; and (iii) the monetary policy rate becomes more effective to reduce inflation when the reserve requirement instrument is solely directed to achieve financial stability and the monetary policy rate used to achieve the inflationary target. Overall, the main policy conclusion of the paper is that having a non-conventional policy instrument, when well-targeted, can help effectively inflation control. Moving reserve requirements can also be instrumental in offsetting the impact of monetary policy on the real exchange rate.
    Keywords: dynamic stochastic general equilibrium models, financial frictions, monetary policy, reserve requirements, inflation targeting, non-conventional policy instruments
    JEL: E52 E58
    Date: 2014–01
  2. By: Tai-Wei Hu (MEDS); Luis Araujo (Michigan State University)
    Abstract: In an environment based on Lagos and Wright (2005) but with two rounds of pairwise meetings, we introduce imperfect monitoring that resembles operations of unsecured loans. We characterize the set of implementable allocations satisfying individual rationality and pairwise core in bilateral meetings. We introduce a class of expansionary monetary policies that use the seignorage revenue to purchase privately issued debts that resemble unconventional monetary policies. We show that under the optimal trading mechanism, both money and debt circulate in the economy and the optimal inflation rate is positive, except for very high discount factors under which money alone achieves the first-best. Our model captures the view that unconventional monetary policy encourages lending while it may create inflation.
    Date: 2015
  3. By: Na, Seunghoon; Schmitt-Grohé, Stephanie; Uribe, Martín; Yue, Vivian
    Abstract: This paper characterizes jointly optimal default and exchange-rate policy in a small open economy with limited enforcement of debt contracts and downward nominal wage rigidity. Under optimal policy, default occurs during contractions and is accompanied by large devaluations. The latter inflate away real wages thereby avoiding massive unemployment. Thus, the Twin Ds phenomenon emerges endogenously as the optimal outcome. By contrast, under fixed exchange rates, optimal default takes place in the context of large involuntary unemployment. Fixed-exchange-rate economies are shown to have stronger default incentives and therefore support less external debt than economies with optimally floating rates.
    Keywords: capital controls; currency pegs; downward nominal wage rigidity; exchange rates; optimal monetary policy; sovereign default
    JEL: E43 E52 F31 F34 F41
    Date: 2015–07
  4. By: Leeper, Eric M. (Indiana University and NBER); Nason, James M. (zNorth Carolina State University and CAMA)
    Abstract: This paper arms central bank policy makers with ways to think about interactions between financial stability and monetary policy. We frame the issue of whether to integrate financial stability into monetary policy operating rules by appealing to the observation that in actual economies financial markets are incomplete. Incomplete markets create financial market frictions that prevent economic agents from perfectly sharing risk; in the absence of frictions, financial (in)stability would be of no concern. Overcoming these frictions to improve risk sharing across economic agents is, in our view, the intent of policies geared toward ensuring financial stability. There are many definitions of financial stability. Although the definitions share the notion that financial stability becomes an issue for policy makers when a breakdown in risk-sharing arrangements in financial markets has a negative effect on real economic activity, we give several examples that show this notion is too general for thinking about the role monetary policy might have in smoothing shocks to financial stability. Examples include statistical models that seek to separate “good” from “bad” changes in private-sector debt ag- gregates, new Keynesian policy prescriptions grounded in neo-Wicksellian natural rate rules, and a historical episode involving the 1920s Federal Reserve. These examples raise a cautionary flag for policy attempts to control the growth and the composition of debt that financial markets produce. We conclude with some advice for revising central banks’Monetary Policy Reports.
    Keywords: Financial frictions; incomplete markets; crises; new Keynesian; natural rate; monetary transmission mechanism
    JEL: E30 E40 E50 E60 G20 N12
    Date: 2015–07–01
  5. By: Antonio M. Conti (Bank of Italy); Stefano Neri (Bank of Italy); Andrea Nobili (Bank of Italy)
    Abstract: Inflation in the euro area has been falling steadily since early 2013 and at the end of 2014 turned negative. Part of the decline has been due to oil prices, but the weakness of aggregate demand has also played a significant role. This paper uses a VAR model to quantify the contribution of oil supply, aggregate demand and monetary policy shocks (identified by means of sign restrictions) on inflation in the euro area. The analysis suggests that in the last two years inflation has been driven down by all three factors, as the effective lower bound to policy rates has prevented the European Central Bank from reducing the short-term rates to support economic activity and align inflation with the definition of price stability. Remarkably, the joint contribution of monetary and demand shocks is at least as important as that of oil price developments to the deviation of inflation from its baseline. Country-by-country analysis shows that both aggregate demand and oil supply shocks have driven inflation down everywhere, albeit with varying intensity. The findings stand confirmed after a series of robustness checks.
    Keywords: oil supply, monetary policy, inflation, VAR models, Bayesian methods
    JEL: C32 E31 E32 E52
    Date: 2015–07
  6. By: Barrdear, John (Bank of England)
    Abstract: Modifying the standard New-Keynesian model to replace firms' full information and sticky prices with flexible prices and dispersed information, and imposing mild and plausible restrictions on the monetary authority's decision rule, produces the striking results that (i) there exists a unique and globally stable steady-state rate of inflation, despite the possibility of a lower bound on nominal interest rates; and (ii) in the vicinity of steady-state, the price level is determinate (and not just the rate of inflation), despite the central bank targeting inflation. The specification of firms' signal extraction problem under dispersed information removes the need to make use of Blanchard-Kahn conditions to solve the model,thereby removing the need to adhere to the Taylor principle and consequently circumventing the critique of Cochrane (2011). The model admits a determinate, stable solution with no role for sunspot shocks when the monetary authority responds by less than one-for-one to changes in expected inflation,including under an interest rate peg. An extension to include incomplete information on the part of the central bank permits the consideration of (rational) errors of judgement on the part of policymakers and provides a theoretical basis for inertial policymaking without interest rate smoothing, in support of Rudebusch (2002, 2006.
    Keywords: New-Keynesian; indeterminacy; dispersed information; FTPL; Blanchard-Kahn; Taylor rules; Taylor principle.
    JEL: D82 D84 E31 E52
    Date: 2015–07–10
  7. By: Melesse Wondemhunegn Ezezew (Department of Economics, University Of Venice Cà Foscari)
    Abstract: In the last few years, macroeconomic modelling has emphasised the role of credit market frictions in magnifying and transmitting nominal and real disturbances and their implication for macro-prudential policy design. In this paper, we construct a modest New Keynesian general equilibrium model with active banking sector. In this set-up, the financial sector interacts with the real side of the economy via firm balance sheet and bank capital conditions and their impact on investment and production decisions. We rely on the financial accelerator mechanism due to Bernanke et al. (1999) and combine it with a bank capital channel as demonstrated by Aguiar and Drumond (2007). We calibrate the resulting model from the perspective of a low income economy reflecting the existence of relatively high investment adjustment cost, strong fiscal dominance, and underdeveloped financial and capital markets where the central bank uses money growth in stabilizing the national economy. Then we examine the impulse response of selected endogenous variables to shocks stemming from the fiscal authority, the monetary policy process, and technological progress. The findings are broadly consistent with previous studies that demonstrated stronger role for credit market imperfections in amplifying and propagating monetary policy shocks. Moreover, we also compare the trajectory of the model economy under alternative monetary policy instruments. The results suggest that the model with money growth rule generates higher volatility in output and inflation than the one with interest rate rule.
    Keywords: Firm net worth, bank equity, monetary policy transmission, macro-prudential regulation, business cycle
    JEL: E32 E44 E50 C68
    Date: 2015
  8. By: Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Famagusta, Northern Cyprus, Turkey and Department of Economics, University of Pretoria, Pretoria, 0002, South Africa); Rangan Gupta (Department of Economics, University of Pretoria); Charl Jooste (Department of Economics, University of Pretoria)
    Abstract: We study the evolution of monetary policy uncertainty and its impact on the South African economy. We show that volatility is high and constant using a stochastic volatility model in a sign-restricted VAR setup. Stochastic volatility is model driven and there is an endogenous economic response to uncertainty. Both inflation and interest rates decline in response to uncertainty. Output rebounds quickly after a contemporaneous decrease. We study the transmission mechanism of uncertainty for South Africa using a nonlinear DSGE model. The model is calibrated based on the existing literature while the persistence and size of uncertainty is taken from the empirical VAR. The DSGE model shows that the size of the uncertainty shock matters - high uncertainty can lead to a severe contraction in output, inflation and interest rates.
    Keywords: Uncertainty, nonlinear DSGE, stochastic volatility
    JEL: C10 E52
    Date: 2015–07
  9. By: Anastasios Evgenidis (University of Patras); Costas Siriopoulos (Zayed University)
    Abstract: In this paper, we examine the international transmission of US monetary policy shocks across euro area and Asian countries by using a FAVAR model. We first examine all possible channels through which a policy shock is transmitted to each country. In general the transmission of the shock hides considerable heterogeneity across the countries. We find that the trade balance is important in explaining GDP spillover effects in the case of Singapore. Wealth effects along with the world interest rate channel explain the negative propagation of the US shock to the GDP of Hong Kong, the Philippines and Singapore. The exchange rate channel can explain the positive spillover effects on GDP in Korea and Japan. For the euro area, an endogenous response of the euro area monetary authority is observed. The wealth effect through the role of effective exchange rates seems adequate to describe the transmission of the shock to European countries. For Germany and Italy the decline in lending and spending reveal the importance of the balance sheet channel in the shock transmission. Second, we investigate to what extent the transmission mechanism has changed over time. For the 2007 financial crisis, our results indicate that the majority of the countries in both regions witness an increase in the size of the shock to real activity, inflation and credit variables in the post crisis period.
    Keywords: Monetary Policy; International Transmission Mechanism; FAVAR; Bayesian Statistics; Time Varying Parameters
    JEL: C38 E52 F41
    Date: 2015–01
  10. By: Constantino Hevia; Juan Pablo Nicolini
    Abstract: We study a model of a small open economy that specializes in the production of com- modities 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 consump- tion, as long as there is a signi?cant 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 de?ned in the paper - that resembles a "dirty ?oating" regime can approximate the optimal policy remarkably well.
    Date: 2015–06
  11. By: Blanchard, Olivier (International Monetary Fund); Erceg, Christopher J. (Federal Reserve Board); Lindé, Jesper (Research Department, Central Bank of Sweden)
    Abstract: We show that a fiscal expansion by the core economies of the euro area would have a large and positive impact on periphery GDP assuming that policy rates remain low for a prolonged period. Under our preferred model specification, an expansion of core government spending equal to one percent of euro area GDP would boost periphery GDP around 1 percent in a liquidity trap lasting three years, about half as large as the effect on core GDP. Accordingly, under a standard ad hoc loss function involving output and inflation gaps, increasing core spending would generate substantial welfare improvements, especially in the periphery. The benefits are considerably smaller under a utility-based welfare measure, reflecting in part that higher net exports play a material role in raising periphery GDP.
    Keywords: Monetary Policy; Fiscal Policy; Liquidity Trap; Zero Bound Constraint; DSGE Model; Currency Union
    JEL: E52 E58
    Date: 2015–07–01
  12. By: Marcello Pericoli (Bank of Italy); Giovanni Veronese (Bank of Italy)
    Abstract: We analyze the impact of US macroeconomic surprises and forecaster heterogeneity on the USD/EUR exchange rate and US and German long-term interest rates from 1999 to 2014. We show how a direct proxy of macroeconomic disagreement, given by the heterogeneity of beliefs among forecasters regarding the upcoming macroeconomic release, matters to explain the daily and intra-day movements. Surprises impact more strongly long-term yields and the exchange rate when forecaster heterogeneity is smaller. This result, holds for the main US macroeconomic surprises and is robust to the frequency of the data used in the estimation. However the sensitivity changes with the sample. To this end, we show how estimating the same regressions in a pre-crisis period, a crisis period, and an unconventional monetary policy period there is evidence of time variation in the responses: unconventional monetary policies attenuated the response of the exchange rate to US\ macroeconomic news, while no major change occurred for long-term interest rates in the US and in the euro area. The disagreement regimes remain relevant in determining an asymmetric response of these asset prices. Our finding underscores the importance of considering beliefs heterogeneity to describe the behavior of asset prices even at high frequency.
    Keywords: surprises, forecaster heterogeneity, foreign exchange, long-term interest rates, unconventional monetary policy
    JEL: E44 E52 F31 G14
    Date: 2015–07
  13. By: Theodoros S. Papaspyrou (Bank of Greece)
    Abstract: This paper, drawing on the lessons from the sovereign debt crisis, tries to give answers to some key questions: Was the strategy and specific actions to cope with the crisis appropriate? Was the priority given to preserving financial stability justified? Are stability and growth objectives possible in EMU? What is the scope for national economic policy in the new policy framework? It emerges from the analysis that, after some initial weaknesses in policy action, decisive initiatives by EU authorities, supported by significant progress to strengthen further economic and financial governance and reduce macroeconomic imbalances succeeded in preserving the stability and integrity of the euro area. While the priority given by the EU policy action to financial stability was fully justified, it is also clear that robust economic growth is essential for durable financial stability and overall welfare. Policies enhancing both stability and growth are possible in EMU and some of them have started being implemented while others are at an advanced stage of development. There is ample scope for national economic policies which, if well-designed and properly implemented, will enhance the growth potential of member countries. However, legacy problems such as the excessive government debt burden in some countries must be resolved
    Keywords: Economic governance in EMU; the sovereign debt crisis; adjustment in a monetary union; European economic and financial integration; financial stability and growth; national economic policy in EMU
    JEL: E42 E44 E52 E61 F32 F33 F41
    Date: 2015–03
  14. By: Razmi, Fatemeh; Mohamed, Azali; Chin, Lee; Habibullah, Muzafar Shah
    Abstract: This paper examines the impact of oil price, as a cause of economic crisis, and monetary policy through the four known channels of monetary transmission mechanism (interest rate, exchange rate, domestic credit, and stock price). Using a structural vector autoregression model based on monthly data from 2002 to 2013 for Association of Southeast Asian Nations-4 countries, oil price and monetary transmission channels are compared pre- and post-crisis. The result indicates oil price remains an important factor in explaining price volatility, even though oil price has a weaker effect compared to a stronger effect of monetary transmission mechanism on prices. Stock price for Malaysia and domestic credit for the three others can affect the prices against oil price shock. Unlike prices, the output of all countries except Thailand is more affected by oil price post-crisis compared to pre-crisis. Different monetary transmission tools affecting industrial production are compared for the four countries.
    Keywords: monetary transmission, global financial crisis, oil price shock
    JEL: E52 Q43
    Date: 2015–07
  15. By: Constantino Hevia; Pablo Andrés Neumeyer; Juan Pablo Nicolini
    Abstract: We analyze optimal policy in New Keynesian model of a small open economy with access to complete asset markets and Dutch Disease periods, in which terms of trade shocks reallocate resources away from the manufacturing sector. Following the policy debate, we introduce an externality in the manufacturing sector that makes the Dutch disease periods inefficient. We show theoretically that if the government has access to standard taxes that can be made time and state dependent, the optimal monetary policy implies complete price stability. The optimal intervention to deal with the externality in manufacturing is a subsidy. We next assume that taxes do not respond to temporary shocks and study monetary policy as the sole stabilization instrument. Using a calibrated version of the model we show that the externality and the lack of other policy instruments do not justify sizeable departures from price stability.
    Date: 2013–08
  16. By: Kundu, Nobinkhor; Mollah, Muhammad Musharuf Hossain
    Abstract: The demand for money is crucial important tool of monetary policy to deal with the macroeconomic problems and to prescribe appropriate policy of the economy. This paper investigates to empirically explore the long-run equilibrium for demand for real money balance as well as short-run dynamics in the context of monetary policy in Bangladesh. Using time-series annual data for the period 1981 to 2012 and applying the methods of cointegration and error-correction, the study find a single cointegrating equation showing long-run stable relationship between demand for money and explanatory variables in the model. The study also finds convergence of short-run dynamics towards statistically significant long-run equilibrium and concludes that the results have important implications for the conduct of monetary policy in Bangladesh.
    Keywords: Demand for Money, Cointegration, Bangladesh
    JEL: C22 C52 E41
    Date: 2014–08–12
  17. By: Erika Arraño; Pablo Filippi; César Vásquez
    Abstract: This paper describes the methodology and main concepts of financial system interest rate statistics published by the Central Bank of Chile, in order to facilitate understanding and analysis by the general public. In Chile, the Central Bank compiles and publishes information on observed interest rates using data provided daily by the banks themselves, which includes all their effective deposit and lending operations with third parties. The information disclosed includes primarily breakdowns by type of product, currency and contractual term. It is worth noting the high frequency and timing with which statistics are made available to the public.
    Date: 2015–07
  18. By: Christoph Siebenbrunner (Vienna University of Technology)
    Abstract: The aim of the paper is to study whether a private-sector bailout can emerge endogenously, when agents act rationally in the absence of a government intervention. I study a contagion model in which may prevent default cascades by bailing out defaulted. Using this model, I derive the conditions for social efficiency and individual rationality of bailouts. Bailouts are almost always socially efficient but hardly ever individually rational because of an interesting feature of contagion effects. There exists a solution that is both individually rational and socially efficient. However, it does not constitute a non-cooperative equilibrium. I conclude that a policy intervention in which are forced to contribute an amount proportional to the contagion losses received towards a bailout can provide a solution to this dilemma.
    Keywords: Systemic Risk; Financial Stability; Financial regulation
    JEL: G00 G01 G18
  19. By: Juan Passadore (MIT)
    Abstract: We study debt policy of emerging economies accounting for credit and liquidity risk. To account for credit risk we study an incomplete markets model with limited commitment and exogenous costs of default following the quantitative literature of sovereign debt. To account for liquidity risk, we introduce search frictions in the market for sovereign bonds. In our model, default and liquidity will be jointly determined.This permits us to structurally decompose spreads into a credit and liquidity component. To evaluate the quantitative performance of the model we perform a calibration exercise using data for Argentina. We find that introducing liquidity risk does not harm the overall performance of the model in matching key moments of the data (mean debt to GDP, mean sovereign spread and volatility of sovereign spread). At the same time, the model endogenously generates bid ask spreads, that can match those for Argentinean bonds in the period of analysis. Regarding the structural decomposition,we find that the liquidity component can explain up to 50 percent of the sovereign spread during bad times; when the sovereign is not close to default, the liquidity component is negligible. Finally, regarding business cycle properties, the model matches key moments in the data.
    Date: 2015
  20. By: Mavrozacharakis, Emmanouil; Tzagarakis, Stelios
    Abstract: Admittedly, the balance of power within the European institutions, especially those related to financial stability and economic policy, is controlled by Germany. The German Federal Republic as the "main creditor" controls the Eurogroup, the Euro Working Group and has privileged relations with the International Monetary Fund (IMF) and the European Central Bank (ECB). Due to this fact, Wolfgang Schäuble as the exponent of the hard German economic strategy has a leading role within the European decision-making institutions. France, Italy and other countries are unsuccessfully trying to counteract and mitigate the German influence, as shown by the Greek issue. This framework is tightly connected with the negotiating ability of any country that inconsistently attempts to reverse the status quo, modify the rules or change the terms of an agreement. The Greek government of Alexis Tsipras sufficiently experienced this suffocating experience and announced a referendum as an attempt to open the field of negotiations.
    Keywords: Greece, Populism, SYRIZA, Tsipras, Referendum , EU Crisis, Euro, Eurogroup
    JEL: A10 A11 A12 A13 E0 E02 G0 G01 H1 H12 H7 H77 P11 P16
    Date: 2015–07–12
  21. By: Christoph Aymanns; Fabio Caccioli; J. Doyne Farmer; Vincent W. C. Tan
    Abstract: Effective risk control must make a tradeoff between the microprudential risk of exogenous shocks to individual institutions and the macroprudential risks caused by their systemic interactions. We investigate a simple dynamical model for understanding this tradeoff, consisting of a bank with a leverage target and an unleveraged fundamental investor subject to exogenous noise with clustered volatility. The parameter space has three regions: (i) a stable region, where the system always reaches a fixed point equilibrium; (ii) a locally unstable region, characterized by cycles and chaotic behavior; and (iii) a globally unstable region. A crude calibration of parameters to data puts the model in region (ii). In this region there is a slowly building price bubble, resembling a "Great Moderation", followed by a crash, with a period of approximately 10-15 years, which we dub the "Basel leverage cycle". We propose a criterion for rating macroprudential policies based on their ability to minimize risk for a given average leverage. We construct a one parameter family of leverage policies that allows us to vary from the procyclical policies of Basel II or III, in which leverage decreases when volatility increases, to countercyclical policies in which leverage increases when volatility increases. We find the best policy depends critically on three parameters: The average leverage used by the bank; the relative size of the bank and the fundamentalist, and the amplitude of the exogenous noise. Basel II is optimal when the exogenous noise is high, the bank is small and leverage is low; in the opposite limit where the bank is large or leverage is high the optimal policy is closer to constant leverage. We also find that systemic risk can be dramatically decreased by lowering the leverage target adjustment speed of the banks.
    Date: 2015–07
    Abstract: The high inflation is undesirable phenomenon for Turkey especially from 1970s to 2000s. Turkey was introduced the destructive effects of inflation in the 1970s. In particular, this process began with the rise of oil prices in the 1970s lasted until the 2000s. The reasons of these political instability, populist policies, failure to comply with fiscal discipline, budget deficits, and growing SOE deficits. But with the 2000s, after the stand-by agreement with IMF, the fight against inflation has been one of the main public policies and, therefore, steps have been taken towards fiscal discipline. As a result of this context, inflation could be reduced to single digits. However, inflation still continues to maintain its place on the agenda. Therefore, the study focuses to examine the determinants of inflation in Turkey on economic and econometric criterion and also to investigate causal relationships among some macroeconomic variables. For that purpose, in this study, estimates have been investigated using Johansen Co-integration and Vector Error Correction approached.
    Keywords: Inflation, Budget Deficit, Fiscal Discipline, Johansen Co-integration Test
    JEL: E31 E60 H62
  23. By: Petra Posedel Simovic (Zagreb School of Economics and Management); Marina Tkalec (The Institute of Economics, Zagreb); Maruska Vizek (The Institute of Economics, Zagreb)
    Abstract: The aim of this paper is to study time-varying integration between European post-transition government bond markets and eurozone bond market. We follow the empirical approach defined in Bekaert and Harvey’s (1995) seminal paper, which enables direct estimation of the time-varying degree of financial markets integration. We thus investigate bond markets of eight new member states of EU and one non-EU member (Ukraine). The result of our empirical examination is a time-varying parameter of integration that is driven by a set of macroeconomic instruments defined in order to represent the intensity of real economic integration of analyzed countries into the eurozone, and their fiscal stances. Our results suggest integration varies with respect to economic development, as economically more advanced countries demonstrate a higher level of integration in the observed period. Moreover, we observe that integration decreased with the financial crisis, but it levelled off relatively swiftly afterwards. Depending on the country, joining the EU either exerted a positive boost on sovereign bond integration, or was neutral with regards to integration. We also show that macroeconomic performance relative to the eurozone benchmark and fiscal stance matter greatly for bond market integration in all countries under examination.
    Keywords: European post-transition countries, sovereign securities markets, bond market integration
    JEL: E44 F36 G15
    Date: 2015–04
  24. By: Medel, Carlos A.
    Abstract: This article critically reviews and proposes further extensions to Posch, J. and F. Rumler (2015), 'Semi-Structural Forecasting of UK Inflation Based on the Hybrid New Keynesian Phillips Curve,' Journal of Forecasting 34(2): 145-62.
    Keywords: New Keynesian Phillips Curve; inflation forecasts
    JEL: C22 C53 E31 E37 E47
    Date: 2015–07–17

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