nep-cba New Economics Papers
on Central Banking
Issue of 2015‒08‒13
forty papers chosen by
Maria Semenova
Higher School of Economics

  1. Applying an Inflation Targeting Lens to Macroprudential Policy 'Institutions' By Güneş Kamber; Özer Karagedikli; Christie Smith
  2. Impact of trilemma indicators on macroeconomic policy: Does central bank independence matter? By Geeta Garg
  3. What Measure of Inflation Should a Developing Country Central Bank Target? By Anand, Rahul; Prasad, Eswar; Zhang, Boyang
  4. Financial Stability and Monetary Policy By Martin Hellwig
  5. Monetary Policy and Foreign Exchange Management: Reforming Central Bank Functions in Myanmar By Nijathaworn, Bandid; Chaikhor, Suwatchai; Chotika-arpa, Suppakorn; Sakkankosone, Suchart
  6. Credit and Macroprudential Policy in an Emerging Economy: a Structural Model Assessment By Horacio A. Aguirre; Emilio F. Blanco
  7. The Evolution of US Monetary Policy: 2000-2007 By Michael T. Belongia; Peter N. Ireland
  8. Monetary Policy under the Microscope: Intra-bank Transmission of Asset Purchase Programs of the ECB By L. Cycon; Michael Koetter
  9. Bank's Price Setting and Lending Maturity: Evidence from an Inflation- Targeting Economy By Emiliano Luttini; Michael Pedersen
  10. Monetary Policy and the Risk-Taking Channel By Michele Piffer
  11. Exit Strategies and Trade Dynamics in Repo Markets By Aleksander Berentsen; Sébastien Philippe Kraenzlin; Benjamin Müller
  12. What drives the global official/policy interest rate? By Ronald A. Ratti; Joaquin L. Vespignani
  13. Banks Exposures and Sovereign Stress Transmission By Carlo Altavilla; Marco Pagano; Saverio Simonelli
  14. Prudential Regulation, Currency Mismatches and Exchange Rate Regimes in Latin America and the Caribbean By Martín Tobal
  15. Monetary Policy under Behavioral Expectations: Theory and Experiment By Cars Hommes; Domenico Massaro; Matthias Weber
  16. Is the European banking system more robust? An evaluation through the lens of the ECB's Comprehensive Assessment By Guillaume Arnould; Salim Dehmej
  17. A Global Lending Channel Unplugged? Does U.S. Monetary Policy Affect Cross-border and Affiliate Lending by Global U.S. Banks? By Temesvary, Judit; Ongena, Steven; Owen, Ann L.
  18. The Systematic Component of Monetary Policy in SVARs: An Agnostic Identification Procedure By Juan Rubio-Ramirez; Dario Caldara; Jonas Arias
  19. Federal Reserve Tools for Managing Rates and Reserves By Antoine Martin; James McAndrews; Ali Palida; David Skeie
  20. Inflation forecasting models for Uganda: is mobile money relevant? By Janine Aron; John Muellbauer; Rachel Sebudde
  21. On the International Spillovers of US Quantitative Easing By Marcel Fratzscher; Marco Lo Duca; Roland Straub
  22. On the sustainability of exchange rate target zones with central parity realignments By Martinez-Garcia, Enrique
  23. Bank leverage, credit traps and credit policies By Foulis, Angus; Nelson, Benjamin; Tanaka, Misa
  24. On the Desirability of Nominal GDP Targeting By Julio Garín; Robert Lester; Eric Sims
  25. The impact of liquidity regulation on banks By Banerjee, Ryan; Mio, Hitoshi
  26. Maturity Structure and Supply Factors in Japanese Government Bond Markets By Ichiro Fukunaga; Naoya Kato; Junko Koeda
  27. "Is a Very High Public Debt a Problem?" By Pedro Leao
  28. Indonesian Macro Policy through Two Crises By Prayudhi Azwar; Rod Tyers
  29. Cold Turkey vs. gradualism: Evidence on disinflation strategies from a laboratory experiment By Giamattei, Marcus
  30. The Real-Time Predictive Content of Asset Price Bubbles for Macro Forecasts By Benjamin Beckers
  31. A Dissection of the Current Account Persistence Puzzle By Michael Bleaney; Mo Tian
  32. Do inflation expectations propagate the inflationary impact of real oil price shocks?: Evidence from the Michigan survey By Benjamin Wong
  33. The Development Impact of Financial Regulation: Evidence from Ethiopia and Antebellum USA By Nicola Limodio
  34. The oil cycle, the Federal Reserve, and the monetary and exchange rate policies of Qatar By Khalid Rashid, Alkhater; Syed Abul, Basher
  35. The relative effectiveness of Monetary and Fiscal Policies on growth: what does long-run SVAR model tell us? By Şen, Hüseyin; Kaya, Ayşe
  36. Macroprudential policy in a Knightian uncertainty model with credit-, risk-, and leverage cycles By Eddie Gerba; Dawid Zochowski
  37. Yards implementation of Basel prudential framework and IFRS: some ideas for African banks. By SIDIBE, Tidiani
  38. Macroprudential Policies in a Commodity Exporting Economy By Andrés González; Franz Hamann; Diego Rodríguez
  39. A New International Database on Financial Fragility By Svetlana Andrianova; Badi Baltagi; Thorsten Beck; Panicos Demetriades; David Fielding; Stephen Hall; Steven Koch; Robert Lensink; Johan Rewilak; Peter Rousseau
  40. Conditional Systemic Risk with Penalized Copula By Ostap Okhrin; Alexander Ristig; Jeffrey Sheen; Stefan Trück

  1. By: Güneş Kamber; Özer Karagedikli; Christie Smith (Reserve Bank of New Zealand)
    Abstract: We describe the origins of inflation targeting in New Zealand, and then use the four key attributes of inflation targeting - independence, the inflation target, transparency, and accountability - as an organizing device to analyze macroprudential policy 'institutions' - the rules, regulations and governance frameworks that implement macroprudential policies.
    Date: 2015–06
  2. By: Geeta Garg (Indira Gandhi Institute of Development Research)
    Abstract: As countries have become increasingly integrated in their capital accounts and moved away from fixed exchange rates, pressures mount on central banks to maintain an independent monetary policy. Amidst the constraints imposed by this monetary policy trilemma, the ability of central banks to take decisions independent of domestic political pressures becomes crucial. The literature suggests that the trilemma choices when opted carefully render the independence of central banks unnecessary in stabilizing macroeconomic outcome. For a sample of 42 high and middle income countries analyzed over a period of 30 years ranging from 1982 till 2011, this paper shows that while an efficient trilemma policy choice can help lower inflation and improve growth, the independence of central banks from the domestic political pressure, as measured in terms of the actual number of turnover of central bank governors, still matters. This is especially true of middle income countries. A less independent central bank can worsen the outcome derived from an effective trilemma policy choice. In addition, this paper shows that the institutional changes such as Inflation Targeting (IT) helps lower inflation without depending upon the level of Central Bank Independence (CBI) in a country as is suggested in the literature while the occurrence of general elections (ELEC) in any country exacerbates the macroeconomic outcome if a country grants lower autonomy to its central bankers.
    Keywords: Central Bank Independence, Trilemma, Monetary Independence, Exchange Rate Stability, Capital Account Openness, Inflation targeting, Elections
    JEL: E0 E5 E6
    Date: 2015–07
  3. By: Anand, Rahul (International Monetary Fund); Prasad, Eswar (Cornell University); Zhang, Boyang (Cornell University)
    Abstract: In closed or open economy models with complete markets, targeting core inflation enables monetary policy to maximize welfare by replicating the flexible price equilibrium. We analyze this result in the context of developing economies, where a large proportion of households are credit constrained and the share of food expenditures in total consumption expenditures is high. We develop an open economy model with incomplete financial markets to show that headline inflation targeting improves welfare outcomes. We also compute the optimal price index, which includes a positive weight on food prices but, unlike headline inflation, assigns zero weight to import prices.
    Keywords: inflation targeting, monetary policy framework, core inflation, headline inflation, financial frictions
    JEL: E31 E52 E61
    Date: 2015–07
  4. By: Martin Hellwig (Max Planck Institute for Research on Collective Goods)
    Abstract: The paper gives an overview over issues concerning the role of financial stability in monetary policy. Historically, financial stability has figured highly among central banks’ objectives, with policy measures ranging from interest rate stabilization to serving as a lender of the last resort. With the ascent of macroeconomics, these traditional tasks of central banks have been displaced by macroeconomic objectives, price stability, full employment, growth. The financial crisis has shifted the focus back to financial stability concerns. Along with these developments, the shift from a specie standard to a pure fiat money system has widened the scope for central bank policies, which are no longer constrained by legal obligations attached to central bank money. The paper first surveys the evolution of financial-stability and macroeconomic-stability concerns in central banking and monetary policy. Then it discusses two major challenges: (i) What should be done to assess the relevance of financial stability concerns in any given situation? How should one deal with the fact that systemic interdependence takes multiple forms and is changing all the time and that many contagion risks cannot be measured? (ii) What is the relation between financial-stability and macroeconomic-stability objectives? To what extent do they coincide, to what extent are they in conflict? How should tradeoffs be handled and what can be done to reduce the risk of the central bank’s succumbing to financial dominance?
    Keywords: financial stability, Systemic Risk, monetary policy, central banking
    JEL: E58 E44 E42 E52
    Date: 2015–10
  5. By: Nijathaworn, Bandid (Thai Institute of Directors); Chaikhor, Suwatchai (Bank of Thailand); Chotika-arpa, Suppakorn (Bank of Thailand); Sakkankosone, Suchart (Bank of Thailand)
    Abstract: Myanmar’s macroeconomic policy framework does not adequately support the new functions of the Central Bank of Myanmar. The monetary policy regime is deficient and institutions that complement the working of a market-based economy lacking. This paper identifies 10 priority areas for reform to allow the central bank to effectively perform its emerging new functions in support of economic growth and stability. This is a three-front effort: dismantle nonmarket arrangements, especially in the finance sector; implement a monetary policy framework and operational procedures, including financial markets development; and enhance central bank policy capacity. The latter includes elevating the policy process, central banking functions, and institutional roles to match the tasks of a modern monetary authority in a market-based economy.
    Keywords: central bank; financial markets; monetary policy; Myanmar
    JEL: E51 E52 E58
    Date: 2015–05–01
  6. By: Horacio A. Aguirre; Emilio F. Blanco
    Abstract: We build a small structural open economy model, augmented to depict the credit market and interest rate spreads (distinguishing by credit to firms and families); monetary policy with sterilized intervention in the foreign exchange market; and macroprudential policy as capital requirements. We estimate the model using Bayesian techniques with quarterly data for Argentina in 2003-2011; it can be extended to other emerging economies, allowing for comparative empirical analysis. Results indicate that shocks to lending rates and spread weigh on macroeconomic variables; likewise, the credit market is affected by macroeconomic shocks. Capital requirements, beyond their strictly prudential role, appear to have contributed to lower volatility of key variables such as output, prices, credit and interest rates. The interaction of monetary policy, foreign exchange intervention and prudential tools appears to be synergic: counting on a larger set of tools helps dampen volatility of both macroeconomic and financial system variables, taking into account the type of shocks faced during the estimation period.
    Keywords: macroprudential policy, semi-structural model, Bayesian estimation
    Date: 2015–07
  7. By: Michael T. Belongia (University of Mississippi); Peter N. Ireland (Boston College)
    Abstract: This paper estimates a VAR with time-varying parameters to characterize the changes in Federal Reserve policy that occurred from 2000 through 2007 and assess how those changes affected the performance of the U.S. economy. The results point to a gradual shift in the Fed's emphasis over this period, away from stabilizing inflation and towards stabilizing output. A persistent deviation of the federal funds rate from the settings prescribed by the estimated monetary policy rule appears more important, however, in causing inflation to overshoot its target in the years leading up to the Great Recession.
    Keywords: Federal Reserve, Monetary Policy, Bayesian VAR, Time-Varying Parameters
    JEL: C32 E31 E32 E37 E52 E58
    Date: 2015–08–07
  8. By: L. Cycon; Michael Koetter
    Abstract: With a unique loan portfolio maintained by a top-20 universal bank in Germany, this study tests whether unconventional monetary policy by the European Central Bank (ECB) reduced corporate borrowing costs. We decompose corporate lending rates into refinancing costs, as determined by money markets, and markups that the bank is able to charge its customers in regional markets. This decomposition reveals how banks transmit monetary policy within their organizations. To identify policy effects on loan rate components, we exploit the co-existence of eurozone-wide security purchase programs and regional fiscal policies at the district level. ECB purchase programs reduced refinancing costs significantly, even in an economy not specifically targeted for sovereign debt stress relief, but not loan rates themselves. However, asset purchases mitigated those loan price hikes due to additional credit demand stimulated by regional tax policy and enabled the bank to realize larger economic margins.
    Keywords: unconventional monetary policy, asset purchase programs, ECB, interest rate channel, internal capital markets
    JEL: G01 G21 E42 E43 E52
    Date: 2015–07
  9. By: Emiliano Luttini; Michael Pedersen
    Abstract: Acknowledging that pass-through of the policy interest rate may be different amongst the private banks, this paper presents evidence of monetary pass-through conditional on different banks characteristics. A simple theoretical model is used to argue that the inflation rate also has to be taken into account when analyzing monetary pass-through. The focus is on nominal and real interest rates for commercial and consumer loans with different payback horizons. Taking a closer look at the construction of the interest rate data available, it becomes clear that short-term consumption rates are quite rigid and, thus, by construction react less to changes in the policy rate. Evidence from panel estimations with Chilean data for the period 2008 to 2014 suggests that short-term commercial rates react quite fast to changes in the monetary policy rate, while those at long-term seem to react more to inflation. Particularly size and deposit strength affect banks when fixing nominal commercial rates, while the determination of rates of consumer loans is particularly influenced by bank size and capital strength. With respect to real interest rates, commercial loans are affected by deposit strength, noninterest income and external obligations, while mortgages are affected by liquidity strength and provisions. The evidence provided in the present study reveals that the degree to which different bank characteristics affect pass-through of changes in the monetary policy rate and inflation depends to a great extent on the horizons of the loans.
    Date: 2015–07
  10. By: Michele Piffer
    Abstract: Before the 2007 crisis, the trade-off between output and inflation played a leading role in the discussion of monetary policy. Instead, issues relating to financial stability played a less pronounced role in shaping the stance of monetary policy andwere limited to asset price dynamics. This Round-Up argues that the great interest that emerged after the 2007 crisis in the effects of monetary policy on financial stability reflects the shift in attention from asset price dynamics to risk-taking incentives of financial intermediaries. The Round-Up reviews the economic literature that contributed to this shift in the interpretation of the main trade-offs faced by central banks in setting interest rates.
    Date: 2015
  11. By: Aleksander Berentsen; Sébastien Philippe Kraenzlin; Benjamin Müller
    Abstract: How can a central bank control interest rates in an environment with large excess reserves? In this paper, we develop a dynamic general equilibrium model of a secured money market and calibrate it to the Swiss franc repo market to study this question. The theoretical model allows us to identify the factors that determine demand and supply of central bank reserves, the money market rate and trading activity in the money market. In addition, we simulate various instruments that a central bank can use to exit from unconventional monetary policy. These instruments are assessed with respect to the central bank's ability to control the money market rate, their impact on the trading activity and the operational costs of an exit. All exit instruments allow central banks to attain an interest rate target. However, the trading activity differs significantly among the instruments and central bank bills and reverse repos are the most cost-effective.
    Keywords: exit strategies, money market, repo, monetary policy, interest rates
    JEL: E40 E50 D83
    Date: 2015
  12. By: Ronald A. Ratti; Joaquin L. Vespignani
    Abstract: We construct a GFAVAR model with newly released global data from the Federal Reserve Bank of Dallas to investigate the drivers of official/policy interest rate. We find that 62% of movement in global official/policy interest rates is attributed to changes in global monetary aggregates (21%), oil prices (18%), global output (15%) and global prices (8%). Global official/policy interest rates respond significantly to increases in global output and prices and oil prices. Increases in global policy interest rates are associated with reductions in global prices and global output. The response in official/policy interest rate for the emerging countries is more to global inflation, for the advanced countries (excluding the U.S.) is more to global output, and for the U.S. is to both global output and inflation.
    Keywords: Global interest rate, global monetary aggregates, oil prices, GFAVAR
    JEL: E44 E50 Q43
    Date: 2015–07
  13. By: Carlo Altavilla (European Central Bank and CSEF); Marco Pagano (University of Naples "Federico II", CSEF and EIEF); Saverio Simonelli (University of Naples "Federico II" and CSEF)
    Abstract: The domestic sovereign exposures have amplified the transmission of sovereign stress to the solvency risk of banks and to their lending activity, both during and after the Euro debt crisis. We estimate the magnitude of this amplification mechanism relying on novel ECB monthly data on sovereign exposures and lending policies of 245 euro-area banks from 2007 to 2015. For the median bank in stressed countries, the amplification due to sovereign exposures almost doubled the response of the bank’s CDS premium to the sovereign CDS premium, and the response of its loan rate to the sovereign yield. Moreover, the losses on domestic sovereign holdings associated with a 1-standard-deviation rise of the 10-year sovereign yield account for 9% of the actual drop in total loans in stressed countries. No such amplification effects are detected in non-stressed countries. Finally, both yield-seeking and moral suasion motives appear to have affected banks’ portfolio choices in stressed countries: in response to higher domestic sovereign yields, banks increased their domestic sovereign holdings more if public- than private-owned, domestic- than foreign-owned, and poorly than well-capitalized.
    Keywords: sovereign exposures, sovereign risk, credit risk, bank lending, euro debt crisis
    JEL: E44 F3 G01 G21 H63
    Date: 2015–07–30
  14. By: Martín Tobal (Banco de México)
    Abstract: In this paper, the author reports some of the results from a survey on limits and reserve requirements involving FX positions and the flexibility of their exchange rate regimes. The survey reveals new facts. Countries that have more intensively implemented these measures have taken the bulk of their policies in the transition towards exchange rate flexibility. The author shows that, in flexible regimes, policymakers have higher motivations for implementing FX regulation to achieve exchange rate stability. Yet, policy makers’ concerns differ substantially across countries and implementation characteristics are heterogeneous across policies constraining the same relationship in the balance sheet.
    Keywords: Prudential regulation, currency mis-matches, exchange rate regimes, Latin America,Caribbean.
    JEL: E58 F31
    Date: 2014–11
  15. By: Cars Hommes (University of Amsterdam); Domenico Massaro (University of Amsterdam); Matthias Weber (University of Amsterdam)
    Abstract: Expectations play a crucial role in modern macroeconomic models. We replace the common assumption of rational expectations in a New Keynesian framework by the assumption that expectations are formed according to a heuristics switching model that has performed well in earlier work. We show how the economy behaves under these assumptions with a special focus on inflation volatility. Contrary to comparable models based on full rationality, the behavioral model predicts that inflation volatility can be lowered if the central bank reacts to the output gap in addition to inflation. We test the opposing theoretical predictions with a learning to forecast experiment. The experimental results support the behavioral model and the claim that reacting to the output gap in addition to inflation can indeed lower inflation volatility.
    Keywords: Experimental Macroeconomics; Heterogeneous Expectations; Learning to forecast Experiment; Trade-off Inflation and Output Gap
    JEL: C90 E52 D84
    Date: 2015–07–27
  16. By: Guillaume Arnould (Centre d'Economie de la Sorbonne - Labex Régulation Financière (Réfi)); Salim Dehmej (Centre d'Economie de la Sorbonne - Labex Régulation Financière (Réfi))
    Abstract: The results of the Comprehensive Assessment (CA) conducted by the ECB seem to attest the soundness of the European banking system since only 8 of 130 assessed banks still need to raise €6 billion. However it would be a mistake to conclude that non failing banks are completely healthy. Using data provided by the ECB and the ECB and the EBA after the CA, we assess the capital shortfalls for each banks by considering the transitional arrangements, an implementation of Basel III sovereign debt requirements and an enhancement of the leverage ratio. In addition we show, that if the CA has been a very complex exercise, it is not the best lens through which the soundness of the eurozone banking system should be evaluated. The assumptions used for the Asset Quality Review (AQR) and the stress-tests lead to week scenarios and requirements that undermine the reliability of the results. Finally we show that the low profitability, the massive dividend distribution and the incurred fines, give rise to concern on the ability of eurozone banks to meet the incoming capital requirements
    Keywords: financial stability; stress tests; banking; financial regulation; Basel III
    JEL: G21 G28
    Date: 2015–07
  17. By: Temesvary, Judit; Ongena, Steven; Owen, Ann L.
    Abstract: We examine how U.S. monetary policy affects the international activities of U.S. Banks. We access a rarely studied US bank-level dataset to assess at a quarterly frequency how changes in the U.S. Federal funds rate (before the crisis) and quantitative easing (after the onset of the crisis) affects changes in cross-border claims by U.S. banks across countries, maturities and sectors, and also affects changes in claims by their foreign affiliates. We find robust evidence consistent with the existence of a potent global bank lending channel. In response to changes in U.S. monetary conditions, U.S. banks strongly adjust their cross-border claims in both the pre and post-crisis period. However, we also find that U.S. bank affiliate claims respond mainly to host country monetary conditions.
    Keywords: bank lending channel; monetary transmission; global banking; cross-country analysis
    JEL: E44 E52 F42 G15 G21
    Date: 2015–08–01
  18. By: Juan Rubio-Ramirez (Duke University); Dario Caldara (Federal Reserve Board); Jonas Arias (Federal Reserve Board)
    Abstract: Following Leeper, Sims, and Zha (1996), we identify monetary policy shocks in SVARs by restricting the systematic component of monetary policy. In particular, we impose sign and zero restrictions only on the monetary policy equation. Since we do not restrict the response of output to a monetary policy shock, we are agnostic in Uhlig's (2005) sense. But, in contrast to Uhlig (2005), our results support the conventional view that a monetary policy shock leads to a decline in output. Hence, our results show that the contractionary effects of monetary policy shocks do not hinge on questionable exclusion restrictions.
    Date: 2015
  19. By: Antoine Martin (Federal Reserve Bank of New York (E-mail:; James McAndrews (Federal Reserve Bank of New York (E-mail:; Ali Palida (Federal Reserve Bank of New York (E-mail:; David Skeie (Federal Reserve Bank of New York (E-mail:
    Abstract: Monetary policy measures taken by the Federal Reserve as a response to the 2007-09 financial crisis and subsequent economic downturn led to a large increase in the level of outstanding reserves. The Federal Open Market Committee (FOMC) has a range of tools to control short-term market interest rates in this situation. We study several of these tools, namely interest on excess reserves (IOER), reverse repurchase agreements (RRPs), and the term deposit facility (TDF). We find that overnight RRPs (ON RRPs) provide a better floor on rates than term RRPs because they are available to absorb daily liquidity shocks. Whether the TDF or RRPs best support equilibrium rates depends on the relative intensity of the frictions that banks face, which are bank balance sheet costs and interbank monitoring costs in our model. We show that when both costs are large, using the RRP and TDF concurrently most effectively raises short- term rates. While public money supplied by the Federal Reserve in the form of reserves can alleviate bank liquidity shocks by reducing interbank lending costs, large levels of reserve increase banks' balance sheet size and can induce greater bank moral hazard. RRPs can reduce levels of costly bank equity that banks are endogenously required to hold as a commitment device against risk-shifting returns on assets.
    Keywords: monetary policy, fixed-rate full allocation overnight reverse repurchases, term deposit facility, interest on excess reserves, FOMC, banking
    JEL: E42 E43 G12 G20
    Date: 2015–07
  20. By: Janine Aron; John Muellbauer; Rachel Sebudde
    Abstract: Forecasting inflation is challenging in emerging markets, where trade and monetary regimes have shifted, and the exchange rate, energy and food prices are highly volatile. Mobile money is a recent financial innovation giving financial transaction services via a mobile phone, including to the unbanked. Stable models for the 1-month and 3-month-ahead rates of inflation in Uganda, measured by the consumer price index for food and non-food, and for the domestic fuel price, are estimated over 1994-2013. Key features are the use of multivariate models with equilibrium-correction terms in relative prices; introducing non-linearities to proxy state dependence in the inflation process; and applying a ‘parsimonious longer lags’ (PLL) parameterisation to feature lags up to 12 months. International influences through foreign prices and the exchange rate (including food prices in Kenya after regional integration) have an important influence on the dependent variables, as does the growth of domestic credit. Rainfall deviation from the long-run mean is an important driver for all, most dramatically for food. The domestic money stock is irrelevant for food and fuel inflation, but has a small effect on non-food inflation. Other drivers include the trade and current account balances, fiscal balance, terms of trade and trade openness, and the international interest rate differential. Parameter stability tests suggest the models could be useful for short-term forecasting of inflation. There is no serious evidence of a link between mobile money and inflation.
    Keywords: Error Correction Models; Model Selection; Multivariate Time Series
    JEL: E31 E37 E52 C22 C51 C52 C53
    Date: 2015
  21. By: Marcel Fratzscher (DIW Berlin, Humboldt-University Berlin and CEPR (E-mail:; Marco Lo Duca (European Central Bank (E-mail:; Roland Straub (European Central Bank (E-mail:
    Abstract: The paper analyses the global spillovers of the Federal Reserve's unconventional monetary policy measures. First, we find that Fed measures in the early phase of the crisis (QE1) were highly effective in lowering sovereign yields and raising equity markets, especially in the US relative to other countries. Fed measures since 2010 (QE2) boosted equities worldwide, while they had muted impact on yields across countries. Yet Fed policies functioned in a pro-cyclical manner for capital flows to emerging markets (EMEs) and a counter-cyclical way for the US, triggering a portfolio rebalancing across countries out of EMEs into US equity and bond funds under QE1, and in the opposite direction under QE2. Second, the impact of Fed operations, such as Treasury and MBS purchases, on portfolio allocations and asset prices dwarfed those of Fed announcements, underlining the importance of the market repair and liquidity functions of Fed policies. Third, we find no evidence that FX or capital account policies helped countries shield themselves from these US policy spillovers, but rather that responses to Fed policies are related to country risk. The results thus illustrate how US unconventional measures have contributed to portfolio reallocation as well as a re-pricing of risk in global financial markets.
    Keywords: monetary policy, quantitative easing, portfolio choice, capital flows, Federal Reserve, United States, policy responses, emerging markets, panel data
    JEL: E52 E58 F32 F34 G11
    Date: 2015–07
  22. By: Martinez-Garcia, Enrique (Federal Reserve Bank of Dallas)
    Abstract: I show that parity realignments alone do not suffice to ensure the long-run sustainability of an exchange rate target zone with imperfect credibility due to the gambler’s ruin problem. However, low credibility and frequent realignments can destabilize the exchange rate.
    JEL: E58 F31 F33 F41 G15
    Date: 2015–06–01
  23. By: Foulis, Angus (Bank of England); Nelson, Benjamin (Bank of England); Tanaka, Misa (Bank of England)
    Abstract: We construct an overlapping generations macroeconomic model with which to study the causes, consequences and remedies to ‘credit traps’ — prolonged periods of stagnant real activity accompanied by low productivity, financial sector undercapitalisation, and the misallocation of credit. In our model, credit traps arise when shocks to bank equity capital tighten banks’ borrowing constraints, causing them to allocate credit to easily collateralisable but low productivity projects. Low productivity weakens bank capital generation, reinforcing tight borrowing constraints, sustaining the credit trap steady state. We use the model to study policy options, both ex ante(avoiding credit traps) and ex post (escaping them). Ex ante, restrictions on bank leverage can help to enhance the economy’s resilience to the shocks that can cause credit traps. Further, a policymaker focused on maximising the economy’s resilience to credit traps would set leverage countercyclically, allowing an expansion of leverage in minor downturns and reducing leverage in upswings. However, ex post, relaxing a leverage cap will not help escape the trap. Instead, a range of unconventional policies are needed. We study publicly intermediated lending, discount window lending, and recapitalisation, and compare the efficacy of these policies under different conditions.
    Keywords: Unconventional credit policy; leverage regulation; financial intermediation; financial crisis.
    JEL: E58 G01 G21
    Date: 2015–07–31
  24. By: Julio Garín; Robert Lester; Eric Sims
    Abstract: This paper evaluates the welfare properties of nominal GDP targeting in the context of a New Keynesian model with both price and wage rigidity. In particular, we compare nominal GDP targeting to inflation and output gap targeting as well as to a conventional Taylor rule. These comparisons are made on the basis of welfare losses relative to a hypothetical equilibrium with flexible prices and wages. Output gap targeting is the most desirable of the rules under consideration, but nominal GDP targeting performs almost as well. Nominal GDP targeting is associated with smaller welfare losses than a Taylor rule and significantly outperforms inflation targeting. Relative to inflation targeting and a Taylor rule, nominal GDP targeting performs best conditional on supply shocks and when wages are sticky relative to prices. Nominal GDP targeting may outperform output gap targeting if the gap is observed with noise, and has more desirable properties related to equilibrium determinacy than does gap targeting.
    JEL: E31 E47 E52 E58
    Date: 2015–07
  25. By: Banerjee, Ryan (Bank for International Settlements); Mio, Hitoshi (Bank of Japan)
    Abstract: We present the first study to estimate the causal effect of liquidity regulation on bank balance sheets. It takes advantage of the heterogeneous implementation of tighter liquidity regulation by the UK Financial Services Authority in 2010. We find that banks adjusted the composition of both assets and liabilities, increasing the share of high-quality liquid assets and non-financial deposits while reducing intra-financial loans and short-term wholesale funding. We do not find evidence that the tightening of liquidity regulation caused banks to shrink their balance sheets, nor reduce the amount of lending to the non-financial sector.
    Keywords: -
    JEL: E32 E51 F30 G21 G28
    Date: 2015–07–24
  26. By: Ichiro Fukunaga (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (currently International Monetary Fund, E-mail:; Naoya Kato (Associate Director, Institute for Monetary and Economic Studies (currently Research and Statistics Department), Bank of Japan (E-Mail:; Junko Koeda (Associate Professor, School of Political Science and Economics, Waseda University (E-mail:
    Abstract: Using our constructed database on the amount outstanding of Japanese Government Bonds (JGBs) categorized by holder and remaining maturity, we examine the effects of changes in the holders and maturity structures on the term structure of interest rates and the risk premium on long-term bonds. Both approaches using single-equation regressions and a term structure model confirm that the net supply of JGBs, the issuance (supply) by the government minus the demand by the preferred-habitat investors including the Bank of Japan (BOJ), had significant effects on long-term interest rates. The regression approach implies that the net supply effects were stronger in the zero interest rate periods, while this relationship was not found using the model approach. We also calculate the net supply effects of the BOJ's JGB purchases as part of its Quantitative and Qualitative Monetary Easing and compare the results with those obtained from a simple event-study analysis.
    Keywords: Japanese Government Bonds, Term structure of interest rates, Preferred habitat, Unconventional monetary policy
    JEL: E43 E44 E52 E58 G11 G12 H63
    Date: 2015–07
  27. By: Pedro Leao
    Abstract: This paper has two main objectives. The first is to propose a policy architecture that can prevent a very high public debt from resulting in a high tax burden, a government default, or inflation. The second objective is to show that government deficits do not face a financing problem. After these deficits are initially financed through the net creation of base money, the private sector necessarily realizes savings, in the form of either government bond purchases or, if a default is feared, "acquisitions" of new money.
    Keywords: Fiscal Policy; Functional Finance; Modern Monetary Theory; Monetary Policy; Public Debt Sustainability; Zero Interest Rates
    JEL: E12 E42 E52 E62 E63
    Date: 2015–07
  28. By: Prayudhi Azwar (Business School, University of Western Australia and Bank Indonesia); Rod Tyers (Business School, University of Western Australia and Research School of Economics Australian National University, and Centre for Applied Macroeconomic Analysis (CAMA) Crawford School of Government ANU)
    Abstract: Indonesia’s open, developing economy fielded shocks due to the Asian financial crisis (AFC) and the global financial crisis (GFC) quite differently. Although the origins of both crises were external, during the AFC the coincidence of financial contagion with domestic political upheaval saw the Indonesian economy collapse. By contrast, during the decade-later GFC, when most nations slumped into recession the Indonesian economy slowed but did not recess, achieving real growth of 6.1% (2008) and 4.5% (2009) and recording one of the world’s best performances for the period. This paper reviews these events and employs numerical modelling of stylized AFC and GFC shocks to show that some of the contrast stems from differences in the states of the global economy during the crises and the compositions of the external shocks in each case. This said, both shocks have capital flight elements and it is shown that the key policy responses include floating the exchange rate and fiscal expansions that are, where necessary, money financed. There is, nonetheless, evidence of evolution in Indonesian macroeconomic policy making between the crises that allowed its strong performance to be sustained.
    Date: 2015
  29. By: Giamattei, Marcus
    Abstract: Disinflation can be implemented gradually or via Cold Turkey - an immediate change of policy - with the latter being mainly recommended by theory and empirical literature. But Cold Turkey may only be superior because it is endogenously selected for favorable environments. To eliminate this endogeneity and to disentangle the credible push through of a disinflation policy from ex-ante credibility, I run an experiment where a central banker has to decide for a disinflationary strategy and four forecasters try to coordinate on it. The design abstracts from any rigidities and provides full information so that Cold Turkey is the Nash equilibrium. But Cold Turkey fails to be the most successful strategy because forecasters react sluggishly due to limited reasoning. Cold Turkey does not speed up learning or increase reasoning, is less successful and is reversed more often.
    Keywords: Disinflation,Credibility,Cold Turkey,Gradualism,Limited Reasoning,Endogenous Treatments
    JEL: E52 E58 C72 C92
    Date: 2015
  30. By: Benjamin Beckers
    Abstract: This paper contributes to the debate of whether central banks can \lean against the wind" of emerging stock or house price bubbles. Against this background, the paper evaluates if new advances in real-time bubble detection, as brought forward by Phillips et al. (2011), can timely detect bubble emergences and collapses. Building on simulations, the paper shows that the detection capabilities of all indicators are sensitive to their exact specifications and to the characteristics of the bubbles in the sample. Therefore, the paper suggests a combination approach of different bubble indicators which helps to account for the uncertainty around start and end dates of asset price bubbles. Additionally, the paper then investigates if the individual and combination indicators carry predictive content for inflation and output growth when the real-time availability of all variables is taken into account. It finds that a combination indicator is best suited to uncover the most common stock and house price bubbles in the U.S. and shows that this indicator improves output forecasts.
    Keywords: Asset price bubbles, financial stability, leaning-against-the-wind, monetary policy, real-time forecasting, unit root monitoring test
    JEL: C22 C53 E44 E47 G12
    Date: 2015
  31. By: Michael Bleaney; Mo Tian
    Abstract: Chinn and Wei (2013) show that the ratio of the current account balance to GDP is as persistent under floating rates as under pegged rates. This result contradicts economists’ widely held belief that current account imbalances should be corrected more quickly under floating. This belief consists of three elements: (a) imbalances will induce corrective real exchange rate movements; (b) real exchange rates move further under floating; and (c) larger real exchange rate movements will induce bigger shifts in the current account balance. It is shown that the data support (b) and (c) but not (a): the real effective exchange rate does not respond significantly to the current account balance. The results are robust to the choice of regime classification scheme, time variation of equilibrium values using a Hodrick-Prescott filter, and to recent regime switches. The implication is that the failure of real exchange rates to react as expected to current account imbalances is the main source of the puzzle.
    Keywords: current account, exchange rates, trade balance JEL codes: F31
    Date: 2015–07
  32. By: Benjamin Wong (Reserve Bank of New Zealand)
    Abstract: This paper presents evidence that inflation expectations, as measured by the Michigan Survey of consumers, only play a minimal role in the propagation of real oil price shocks into inflation. This is despite evidence which confirms in flation expectations are sensitive to real oil price shocks. Further analysis exploring structural breaks suggest at some point after the mid-1990s, inflation expectations may have played no part in propagating real oil price shocks into inflation.
    JEL: C32 D84 E31
    Date: 2015–04
  33. By: Nicola Limodio (London School of Economics)
    Abstract: Abstract Does financial regulation promote financial development by restraining banks profitability? We test this hypothesis in a model with a monopolistic bank investing in branches over a geography and facing classical maturity mismatch. Financial regulation lowers profits by pushing the bank to hold more precautionary holdings and lend less. Because the default probability declines, the bank partly compensates the profit loss and take on more risk by opening new branches. The regulation cause an unambiguous decline in profits, increase in deposits, while two forces affect lending: loans become smaller in old branches (intensive margin); the number of loans increases because of new branches (extensive margin). We show conditions under which the second effect dominates and the regulation makes the bank bigger, safer and less profitable. Two empirical tests are presented: 1) a regulation change by the National Bank of Ethiopia in 2011; 2) the state roll-over of bank taxes in Antebellum USA (1800-1861). Analyzing bank balance sheets, we find that these policies lower profits and increase branches, deposits, loans and overall precautionary holdings.
    Date: 2015
  34. By: Khalid Rashid, Alkhater; Syed Abul, Basher
    Abstract: Supporters of the Arab oil-exporting countries’ decades-long fixed exchange rate regime argue that since, oil is traded in United States (US) dollars, pegging to the dollar is optimal. However, the weakening relationship between oil prices and the US economy in terms of the Federal Reserve’s expansionary monetary stance amid soaring oil prices for much of the previous decade has raised questions about the viability of the peg. Using Qatar as a case study, this paper empirically analyzes whether the synchronization pattern of business cycles has recently changed between Qatar and the US. The results of the analysis show a pronounced desynchronization or decoupling of business cycles between Qatar and the US during 2001–2010. Moreover, the dissimilarly of demand shocks between the two countries suggests that the imported monetary policy stance of the Federal Reserve has not been viable for Qatar in recent years. A natural implication of our findings is the need for a truly independent monetary policy oriented towards domestic goals.
    Keywords: Oil price, Business cycle synchronization, Counter-cyclical monetary policy, Exchange rate regimes.
    JEL: E32 E61 F44
    Date: 2015–06–03
  35. By: Şen, Hüseyin; Kaya, Ayşe
    Abstract: This paper studies empirically the relative effectiveness of monetary and fiscal policies on growth. Unlike many previous papers which have focused, to a large extent, on the effect of monetary or fiscal policies separately, this paper considers the comparative efficacy of the two policies on growth by applying the Structural Vector Autoregression (SVAR) model to the quarterly data for Turkey over the period 2001:Q1-2014:Q2. The empirical findings of this paper show that both monetary and fiscal policies do have significant effects on growth. However, monetary policy is more effective than fiscal policy in stimulating growth. More specifically, interest rate ―a monetary policy variable― is the most potent instrument in affecting growth. Then budget deficit ―a fiscal policy variable― becomes the second important variable after interest rate. These findings suggest that although the relative effectiveness in boosting growth is different, both policies significantly affect growth, suggesting that they should be used jointly but in an efficient manner.
    Keywords: Monetary Policy, Fiscal Policy, Growth, Macroeconomic Policy Management, SVAR, Turkey.
    JEL: E52 E58 E62 E63
    Date: 2015–07–31
  36. By: Eddie Gerba; Dawid Zochowski
    Abstract: We study the impact of uncertainty on financial stability and the business cycle. We extend the work of Boz and Mendoza (2014) by endogenizing credit production, modifying learning mechanism into an adaptive set-up, as well as including financial and monetary policies. In our model households are (intrinsically) rational but take economic decisions under incomplete information. The incompleteness is not caused by their cognitive limitations, as in rational inattention theory (Sims, 2003). Households `learn by doing' and once a sufficient number of realizations of the state variable have materialized, and the incomplete information set is completed. This learning set-up is incorporated into a New Keynesian model with credit market frictions, extended to include uncertainty, where a share of households needs external financing to consume. Because of limited enforceability of financial contracts, households are required to provide collateral for their loans, and so the relationship between the bank and household is tightened for many periods ahead. We find in our framework the build up of risk, leverage, increase in consumption and price of collateral takes longer than in other DSGEs with standard financial friction models. We also find that both the frequency and the amplitude of expansions and contractions are asymmetric - recessions are less frequent and deeper than expansions. Moreover, we find that boom-bust cycles occur as rare events. Using the Cogley and Sargant's (2008) definition of a severe(or systemic) crisis, we find on average two such events per century. We also find that, different from standard boom-bust cycles, a systemic crisis can be followed by a sequence of subsequent contractions, as it makes the economy more unstable. The result is asymmetric distributions of key macroeconomic and financial variables, with high skewness and fat tails. Lastly, we also find that, by reducing the amount of borrowing and leverage in upturns, the LTV-ratio regulation is effective in smoothing the cycles and reducing the effects of a deep contraction on the real-financial variables. We also discuss the role of macroprudential policy in reducing information incompleteness by generating information that helps the agent learn faster the new environment, or provide a smoother transition to the new economic environment.
    Keywords: uncertainty; financial engeneering; deregulation; leverage forecasting; macroprudential policy
    JEL: E44 E58 G14 G21 G32
    Date: 2015
  37. By: SIDIBE, Tidiani
    Abstract: This article is striving to present the Basel prudential framework (Basel II and Basel III) following the international financial crisis from 2007 to 2008 and interfer ences with IAS / IFRS-IASB. Clearly these two sites for African banks are structuring projects under the path taken by their European counterparts. The purpose of this document is to present the two standards in a brief and succinct manner to facilitate understanding and issues related thereto to readers; and show some interference between them and justify the usefulness of conducting two projects simultaneously in order to save budgetary burdens.
    Keywords: Credit risk; market risk; operational risk; securitization; equity; weighted net assets; Basel, IAS / IFRS; prudential ratios; standard method; internal ratings.
    JEL: E58 G18 G21 G28
    Date: 2015–07–29
  38. By: Andrés González; Franz Hamann; Diego Rodríguez
    Abstract: Colombia is a small open and commodity exporter economy, sensitive to international commodity price fluctuations. During the surge in commodity prices, as income from the resource sector increases total credit expands, boosting demand for tradable and nontradable goods, appreciating the currency and shifting resources from the tradable sector to the nontradable. Although this adjustment is efficient, the presence of financial frictions in the economy exacerbates the resource allocation process through credit. In this phase, as total credit expands, the appreciation erodes the net worth of the tradable sector and boosts the nontradable one, and thus credit gets concentrated in that sector. A sudden reversal of commodity prices causes a rapid adjustment of resources in the opposite direction. However, the ability of the tradable sector to absorb the freed resources is limited by its financial capacity. In this scenario, macroprudential policies may help to restrain aggregate credit dynamics and thus prevent or act prudently in anticipation to the effects of large oil price shock reversals. In this work we write a model that accounts for these facts and quantify the role of three policy instruments: short term interest rate, FX intervention and financial regulation. We explore this issues in a DSGE model estimated for the Colombian economy and find that both FX intervention and regulation policies complement the short-term interest rates in smoothing the business cycle by restraining credit, raising market interest rates and smoothing economic activity. However, these additional instruments have undesirable sectoral implications. In particular, the use of these policies implies that credit to the tradable sector dries and becomes more expensive, weakening its financial position, which in turn implies a sharper fall of this sector during the price reversal and a longer recovery. These effects, nonetheless, appear to be quantitatively small according to the estimated model.
    Keywords: credit, leverage, financial accelerator, business cycle, monetary policy, macro-prudential policies, Colombia
    Date: 2015–07
  39. By: Svetlana Andrianova; Badi Baltagi; Thorsten Beck; Panicos Demetriades; David Fielding; Stephen Hall; Steven Koch; Robert Lensink; Johan Rewilak; Peter Rousseau
    Abstract: We present a new database on financial fragility for 124 countries over 1998 to 2012. In addition to commercial banks, our database incorporates investment banks and real estate and mortgage banks, which are thought to have played a central role in the recent financial crisis. Furthermore, it also includes cooperative banks, savings banks and Islamic banks, that are often thought to have different risk appetites than do commercial banks. As a result, the total value of financial assets in our database is around 50% higher than that accounted for by commercial banks alone. We provide eight different measures of financial fragility, each focussing on a different aspect of vulnerability in the financial system. Alternative selection rules for our variables distinguish between institutions with different levels of reporting frequency.
    Date: 2015–07
  40. By: Ostap Okhrin; Alexander Ristig; Jeffrey Sheen; Stefan Trück
    Abstract: Financial contagion and systemic risk measures are commonly derived from conditional quantiles by using imposed model assumptions such as a linear parametrization. In this paper, we provide model free measures for contagion and systemic risk which are independent of the speci- cation of conditional quantiles and simple to interpret. The proposed systemic risk measure relies on the contagion measure, whose tail behavior is theoretically studied. To emphasize contagion from extreme events, conditional quantiles are specied via hierarchical Archimedean copula. The parameters and structure of this copula are simultaneously estimated by imposing a non-concave penalty on the structure. Asymptotic properties of this sparse estimator are derived and small sample properties illustrated using simulations. We apply the proposed framework to investigate the interconnectedness between American, European and Australasian stock market indices, providing new and interesting insights into the relationship between systemic risk and contagion. In particular, our ndings suggest that the systemic risk contribution from contagion in tail areas is typically lower during times of nancial turmoil, while it can be signicantly higher during periods of low volatility.
    Keywords: Conditional quantile, Copula, Financial contagion, Spill-over eect, Stepwise penalized ML estimation, Systemic risk, Tail dependence
    JEL: C40 C46 C51 G1 G2
    Date: 2015–08

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.