nep-cba New Economics Papers
on Central Banking
Issue of 2015‒08‒19
thirty-two papers chosen by
Maria Semenova
Higher School of Economics

  1. The interest rate pass-through in the euro area during the sovereign debt crisis By Leo Krippner; Sandra Eickmeier; Julia von Borstel
  2. Risk Management for Monetary Policy Near the Zero Lower Bound By Evans, Charles L.; Fisher, Jonas D. M.; Gourio, Francois; Krane, Spencer D.
  3. Indicators of core inflation: Case of Tunisia By Ghrissi Mhamdi; Mounir Smida; Ramzi Farhani
  4. Dealing with the ECB's triple mandate? By Christophe Blot; Jérôme Creel; Paul Hubert; Fabien Labondance
  5. Assessing the Interest Rate and Bank Lending Channels of ECB Monetary Policies By Jérôme Creel; Mathilde Viennot; Paul Hubert
  6. US Monetary and Fiscal Policies - conflict or cooperation? By Xiaoshan Che; Eric M. Leepe; Campbell Leith
  7. Financial Crises and Systemic Bank Runs in a Dynamic Model of Banking By Roberto Robatto
  8. Monetary Policy Surprises, Credit Costs, and Economic Activity By Peter Karadi; Mark Gertler
  9. External Shocks, Financial Volatility and Reserve Requirements in an Open Economy By Pierre-Richard Agénor; K. Alper; L. Pereira da Silva
  10. Dynamic Debt Deleveraging and Optimal Monetary Policy By Gauti Eggertsson; Federica Romei; Pierpaolo Benigno
  11. Monetary Policy and the Redistribution Channel By Adrien Auclert
  12. Japanese Fiscal Policy under the Zero Lower Bound of Nominal Interest Rates: Time-Varying Parameters Vector Autoregression By Morita, Hiroshi
  13. Mortgages and Monetary Policy By Roman Sustek; Finn Kydland; Carlos Garriga
  14. Coordination of banking regulation in the EU By Nedelchev, Miroslav
  15. Unconventional monetary policies and the macroeconomy: the impact of the United Kingdom's QE2 and Funding for Lending Scheme By Churm, Rohan; Joyce, Mike; Kapetanios, George; Theodoridis, Konstantinos
  16. Phases of Global Liquidity, Fundamentals News, and the Design of Macroprudential Policy By Javier Bianchi; Enrique G. Mendoza
  17. Assessing the link between Price and Financial Stability By Christophe Blot; Jérôme Creel; Paul Hubert; Fabien Labondance; Francesco Saraceno
  18. Spillover Implications of Differences in Monetary Conditions in the United States and the Euro Area By Carolina Osorio; Esteban Vesperoni
  19. Systemic risk of European banks: Regulators and markets By Maarten van Oordt; Chen Zhou
  20. The distortionary effect of monetary policy: credit expansion vs. lump-sum transfers in the lab By Romain Baeriswyl; Camille Cornand
  21. Financial Sector Accounts: The Chilean Experience in Their Use for Financial Stability Monitoring By Pablo García; Josué Pérez
  22. Optimal Conventional Stabilization Policy in a Liquidity Trap When Wages and Prices are Sticky By Adiya Belgibayeva; Michal Horvath
  23. The Optimal Tradeoff Between Consumption Smoothing and Macroprudential Regulation By Jean-Paul L'Huillier; Facundo Piguillem; Jean Flemming
  24. Decommodification of financial regulation : some unpleasant lessons from the 2007 crisis By Faruk Ülgen
  25. Sovereign Debt Risk in Emerging Countries: Does Inflation Targeting Adoption Make Any Difference? By Weneyam Hippolyte BALIMA; Jean-Louis Combes; Alexandru Minea
  26. Effectiveness of Macroprudential Policies in Developing Asia: An Empirical Analysis By Lee, Minsoo; Asuncion, Ruben Carlo; Kim, Jungsuk
  27. Can Foreign Exchange Intervention Stem Exchange Rate Pressures from Global Capital Flow Shocks? By Olivier Blanchard; Gustavo Adler; Irineu de Carvalho Filho
  28. Are the Responses of the U.S. Economy Asymmetric to Positive and Negative Money Supply Shocks? By Apostolos Serletis; Khandokar Istiak
  29. Inflation and speculation in a dynamic macroeconomic model By Matheus Grasselli; Adrien Nguyen Huu
  30. Disinflation and Inequality in a DSGE monetary model: A Welfare Analysis By Maria Ferrara; Patrizio Tirelli
  31. Systemic and Idiosyncratic Sovereign Debt Crises By Kaminsky, Graciela; Vega-Garcia, Pablo
  32. A New International Database on Financial Fragility By Svetlana Andrianova; Badi Baltagi; Thorsten Beck; Panicos Demetriades; David Fielding; Stephen G. Hall; Steven F. Koch; Robert Lensink; Johan Rewilak; Peter Rousseau

  1. By: Leo Krippner; Sandra Eickmeier; Julia von Borstel (Reserve Bank of New Zealand)
    Abstract: We investigate the pass-through of monetary policy to bank lending rates in the euro area during the sovereign debt crisis, in comparison to the pre-crisis period. We make the following contributions. First, we use a factor-augmented vector autoregression, which allows us to assess the responses of a large number of country-specifi…c interest rates and spreads. Second, we analyze the effects of monetary policy on the components of the interest rate pass-through, which reflect banks' funding risk (including sovereign risk) and markups charged by banks over funding costs. Third, we not only consider conventional but also unconventional monetary policy. We find that while the transmission of conventional monetary policy to bank lending rates has not changed with the crisis, the composition of the IP has changed. Specifically, expansionary conventional monetary policy lowered sovereign risk in peripheral countries and longer-term bank funding risk in peripheral and core countries during the crisis, but has been unable to lower banks' markups. This was not, or not as much, the case prior to the crisis. Unconventional monetary policy helped decreasing lending rates, mainly due to large shocks rather than a strong propagation.
    Date: 2015–05
  2. By: Evans, Charles L. (Federal Reserve Bank of Chicago); Fisher, Jonas D. M. (Federal Reserve Bank of Chicago); Gourio, Francois (Federal Reserve Bank of Chicago); Krane, Spencer D. (Federal Reserve Bank of Chicago)
    Abstract: As projections have inflation heading back toward target and the labor market continuing to improve, the Federal Reserve has begun to contemplate an increase in the federal funds rate. There is however substantial uncertainty around these projections. How should this uncertainty affect monetary policy? In many standard models uncertainty has no effect. In this paper, we demonstrate that the zero lower bound on nominal interest rates implies that the central bank should adopt a looser policy when there is uncertainty. In the current context this result implies that a delayed liftoff is optimal. We demonstrate this result theoretically in two canonical macroeconomic models. Using numerical simulations of our models, calibrated to the current environment, we find optimal policy calls for 2 to 3 quarters delay in liftoff relative to a policy that does not take into account uncertainty about policy being constrained by the ZLB. We then use a narrative study of Federal Reserve communications and estimated policy reaction functions to show that risk management is a longstanding practice in the conduct of monetary policy.
    Keywords: risk; monetary policy; risk management; zero lower bound
    JEL: E53 E58
    Date: 2015–05–21
  3. By: Ghrissi Mhamdi (Université de Sousse); Mounir Smida (Université de Sousse); Ramzi Farhani (Université de Sousse)
    Abstract: The aim of this paper is to provide a credible measure of inflation. This credibility is of great importance for successful inflation targeting regime. This paper proposes a technique to solve a conceptual disparity between inflation phenomenon and its measurement. For this, we proposed an alternative measure called core inflation, defined as the inflation component that has no real impact on long-term production. Evaluation of core inflation was obtained using a VAR system under the assumption that variations in the extent of inflation are affected by two types of shock. The first type has no impact on real output in the long term, while the second can have this effect. This approach is a reconstruction of the approach of Quah and Vahey (1995) in the case of the Tunisian economy. The study concluded that the administered prices constitute a major obstacle to measure, interpret and forecast inflation. Central Bank of Tunisia has no control over a third of the CPI basket. This feature of the Tunisian economy is simply a sign of weakness of the economic system and the need for monetary authorities to continue its efforts to liberalize prices. Introduction The concept of core inflation has played an important role in the decisions of responsible monetary policy in recent years. However, despite the centrality of this concept, there is still no consensus on the best measure of core inflation. The most widely adopted approach is the exclusion of certain categories of price inflation rate as a whole. It reflects the origin of the concept of core inflation during the turbulent 1970s. However, more recently, many economists are trying to set a robust measure of core inflation. Core inflation has become in recent years the most important subject of study for central banks of various countries. In fact, many of them are given as central or even ultimate objective of reducing inflation and achieving price stability. However, government policies other than monetary policy can play an important role in maintaining this goal. But the central bank sees its role as crucial when it admits that inflation can persist for a long time if it is tolerated by the monetary policy. It is important, then, that it should follow closely the evolution of the inflation rate.
    Date: 2014–04–18
  4. By: Christophe Blot (OFCE - OFCE - Sciences Po); Jérôme Creel (OFCE - OFCE - Sciences Po); Paul Hubert (OFCE - OFCE - Sciences Po); Fabien Labondance (ARPEGE - Atelier de recherche sur la politique économique et la gestion des entreprises - Facultés Universitaires Catholiques de Mons)
    Abstract: The prevailing consensus on the role of central banks has eroded. The pursuit of the goal of price stability only is now insufficient to ensure macroeconomic and financial stability. A new paradigm emerges in which central banks should ensure price stability, growth and financial stability. Recent institutional developments of the ECB go in this direction since it will be in charge of the micro-prudential supervision. In addition, the conduct of monetary policy in the euro area shows that the ECB also remained attentive to the evolution of economic growth. But if the ECB implements its triple mandate, the question of the proper relationship between these missions still arises. Coordination between the different actors in charge of monetary policy, financial regulation and fiscal policy is paramount and is lacking in the current architecture. Besides, certain practices should be clarified. The ECB has played a role as lender of last resort (towards banks and, to a lesser extent, towards governements) although this mission was not allocated to the ECB. Finally, in this new framework, the ECB suffers from a democratic illegitimacy, reinforced by the increasing role it plays in determining the macroeconomic and financial balance of the euro area. It seems important that the ECB is more explicit with regard to its different objectives and that it fulfils the conditions for close cooperation with the budgetary authorities and financial regulators. Finally, we call for the ex nihilo creation of a supervisory body of the ECB, which responsibility would be to discuss and analyze the relevance of the ECB monetary policy.
    Date: 2014–05
  5. By: Jérôme Creel (OFCE - OFCE - Sciences Po); Mathilde Viennot (ENS Cachan - École normale supérieure - Cachan); Paul Hubert (OFCE - OFCE - Sciences Po)
    Abstract: This paper assesses the transmission of ECB monetary policies, conventional and unconventional, to both interest rates and lending volumes for the money market, sovereign bonds at 6-month, 5-year and 10-year horizons, loans inferior and superior to 1M€ to non-financial corporations, cash and housing loans to households, and deposits, during the financial crisis and in the four largest economies of the Euro Area. We first identify two series of ECB policy shocks at the euro area aggregated level and then include them in country-specific structural VAR. The main result is that only the pass-through from the ECB rate to interest rates has been really effective, consistently with the existing literature, while the transmission mechanism of the ECB rate to volumes and of quantitative easing (QE) operations to interest rates and volumes has been null or uneven over this sample. One argument to explain the differentiated pass-through of ECB monetary policies is that the successful pass-through from the ECB rate to interest rates, which materialized as a huge decrease in interest rates during the sample period, had a negative effect on the supply side of loans, and offset itself its potential positive effects on lending volumes.
    Date: 2013–12
  6. By: Xiaoshan Che; Eric M. Leepe; Campbell Leith
    Abstract: Most of the literature estimating DSGE models for monetary policy analysis ignores Öscal policy and assumes that monetary policy follows a simple rule. In this paper we allow both Öscal and monetary policy to be described by rules and/or optimal policy which are subject to switches over time. We Önd that US monetary and Öscal policy have often been in conáict, and that it is relatively rare that we observe the benign policy combination of an conservative monetary policy paired with a debt stabilizing Öscal policy. In a series of counterfactuals, a conservative central bank following a time-consistent Öscal policy leader would come close to mimicking the cooperative Ramsey policy. However, if policy makers cannot credibly commit to such a regime, monetary accommodation of the prevailing Öscal regime may actually be welfare improving.
    Keywords: Bayesian Estimation, interest rate rules, Öscal policy rules, optimal mone- tary policy, optimal Öscal policy, great moderation, commitment, discretion
    Date: 2015–06
  7. By: Roberto Robatto (University Wisconsin-Madison)
    Abstract: I present a new dynamic general equilibrium model of banking to analyze monetary policy during financial crises. A novel channel gives rise to multiple equilibria. In the good equilibrium, all banks are solvent. In the bad equilibrium, many banks are insolvent and subject to runs. The bad equilibrium is also characterized by deflation and a flight to liquidity. Some central bank interventions are more effective than others at eliminating the bad equilibrium. Interventions that do not eliminate the bad equilibrium still counteract deflation and reduce the losses of insolvent banks, but, for some parameter values, amplify the flight to liquidity.
    Date: 2015
  8. By: Peter Karadi (European Central Bank); Mark Gertler (New York University)
    Abstract: We provide evidence on the transmission of monetary policy shocks in a setting with both economic and nancial variables. We first show that shocks identied using high frequency surprises around policy announcements as external instruments produce responses in output and in inflation that are typical in monetary VAR analysis. We also find, however, that the resulting "modest" move- ments in short rates lead to "large" movements in credit costs, which are due mainly to the reaction of both term premia and credit spreads. Finally, we show that forward guidance is important to the overall strength of policy transmission.
    Date: 2015
  9. By: Pierre-Richard Agénor; K. Alper; L. Pereira da Silva
    Abstract: The performance of a countercyclical reserve requirement rule is studied in a dynamic stochastic model of a small open economy with financial frictions, imperfect capital mobility, a managed float regime, and sterilized foreign exchange market intervention. Bank funding sources, domestic and foreign, are imperfect substitutes. The model is calibrated and used to study the effects of a temporary drop in the world risk-free interest rate. Consistent with stylized facts, the shock triggers an expansion in domestic credit and activity, asset price pressures, and a real appreciation. A credit-based reserve requirement rule helps to mitigate both macroeconomic and financial volatility, with the latter defined both in terms of a narrow measure based on the credit-to-output ratio, the ratio of capital flows to output, and interest rate spreads, and a broader measure that includes real asset prices as well. An optimal rule, based on minimizing a composite loss function, is also derived. Sensitivity tests, related to the intensity of sterilization, the degree of exchange rate smoothing, and the rule used by the central bank to set the cost of bank borrowing, are also performed, both in terms of the transmission process and the optimal rule
    Date: 2015–08
  10. By: Gauti Eggertsson (Brown University); Federica Romei (European University Institute); Pierpaolo Benigno (LUISS)
    Abstract: This paper studies optimal monetary policy under dynamic debt deleveraging once the zero bound is binding. Unlike the existing literature, the natural rate of interest is endogenous and depends on macroeconomic policy. Optimal monetary policy successfully raises the natural rate of interest by creating an environment that speeds updeleveraging, thus endogenously shortening the duration of the crisis and a binding zero bound. Inflation should be front loaded. Fiscal-policy multipliers can be even higher than in existing models, but depend on the way in which public spending is financed.
    Date: 2015
  11. By: Adrien Auclert (MIT)
    Abstract: This paper evaluates the role of redistribution in the transmission mechanism of monetary policy to consumption. Using consumer theory, I show that redistribution has aggregate effects whenever marginal propensities to consume (MPCs) covary, across households, with balance-sheet exposures to aggregate shocks. Unexpected inflation gives rise to a Fisher channel and real interest rate shocks to an interest rate exposure channel; both channels are likely to contribute to the expansionary effects of accommodative monetary policy. Indeed, using a sufficient statistic approach, I find that redistribution could be the dominant reason why aggregate consumer spending reacts to transitory changes in the real interest rate, provided households' elasticities of intertemporal substitution are reasonably small (0.3 or less in the United States). I then build and calibrate a general equilibrium model with heterogeneity in MPCs, and I evaluate how the redistribution channel alters the economy's response to shocks. When household assets and liabilities have short effective maturities, the interest rate exposure channel raises the elasticity of aggregate demand to real interest rates, which dampens fluctuations in the natural rate of interest in response to exogenous shocks and amplifies the real effects of monetary policy shocks. The model predicts that if U.S. mortgages all had adjustable rates---as they do in the U.K.---the effect of interest-rate changes on consumer spending would more than double. In addition, this effect would be asymmetric, with rate increases reducing spending by more than cuts would increase it.
    Date: 2015
  12. By: Morita, Hiroshi
    Abstract: This study investigates whether the effects of fiscal policy are enhanced during ZLB periods. We present a new strategy for identifying unconventional monetary policy shocks in the framework of a time-varying parameters vector autoregressive model. The main findings are as follows. First, during ZLB periods, the volatility of short-term interest rates is quite small, while that of the monetary base is large. Second, fiscal policy shocks have significant positive time-varying effects on GDP after adoption of unconventional monetary policy. Third, the effects of fiscal policy shocks increase during a ZLB period.
    Keywords: TVP-VAR model, zero lower bound, sign restriction, fiscal policy
    JEL: E62 E52 C11 C32
    Date: 2015–07
  13. By: Roman Sustek (Queen and Mary University of London); Finn Kydland (University of California, Santa Barbara); Carlos Garriga (Federal Reserve Bank of St. Louis)
    Abstract: Mortgages are a prime example of long-term nominal loans. As a result, under incomplete asset markets, monetary policy affects household decisions through the cost of new mortgage borrowing and the value of payments on outstanding debt. These channels are distinct from the transmission through the real interest rate. A general equilibrium model incorporating these features is developed. Persistent monetary policy shocks, resembling the level factor in the nominal yield curve, have larger real effects than transitory shocks. The transmission is stronger under adjustable- than fixed-rate mortgages. Higher inflation benefits homeowners under FRMs but hurts them under ARMs.
    Date: 2015
  14. By: Nedelchev, Miroslav
    Abstract: The formation of international banking groups was stimulated by pan-European policies. The emergence of sophisticated to regulate organizational structures and provision of difficult to control financial services hampered the exercise of effective banking supervision. The situation in the banking market significantly ahead in time the adaptation of supervisory framework for the expansion of activities abroad and entering into other financial sectors. The regulation policies remained into the national borders and failed to reach the degree of financial integration. In addition to private goods, the society wants other commodities such as financial stability and information on the financial situation of credit intermediaries. The role of supervisory policy is to provide “public good”. It is achieved by the central bank through its two functions - the lender of last resort and maintaining of confidence in the interbank market. With the expansion of activities abroad, began to recognize the importance of the supervisory authority of the host country. Before the global financial crisis, the regulatory paradigm was based on principles, with a large dose of self-regulation. It is achieved through a "soft" law - the conclusion of memoranda of understanding. The leading role was played by the supervisory authority of the home country who is convinced in possession of sufficient capital and reserves to cover risks in its territory. In this way, the financial system was divided into the "center-periphery". The globalization of banking activities put new challenge - a new kind of systemic risk that financial instability in one country is transferred to the international financial system. Arises real need to improve the strength of the financial system. International organizations formed modern supervisory framework. Since 2009, the Financial Stability Board (G20) apply globally coordinated approach to rescue packages through networks of regulatory authorities. In practice, entered new persons (colleges of supervisors and ministries of finance) and new instruments ("bridge bank" and "bank hospital"). Thus overcoming protectionism of various laws and maintain confidence in the interbank market. By the end of 2008, every government has taken independent measures to reduce the effects of the global crisis. The results not restored confidence between banks and society. Ad hoc actions of individual governments used taxpayers' funds to rescue troubled banks. The national policy provides rescue of bank assets and operations in their territory, which led to contagion in other Member States and provide competitive advantages for rescued banks. The individual jurisdictions used different criteria for beginning and form of unilateral interference by the state. The EU financial integration was accompanied by an opposite trend in which countries maintained national laws on financial stability which tend to the emergence of "balkanization" of supervisory policy. In isolated cases were reported positive results: measures taken by the banking group itself (where the subsidiary is crucial for the survival of the whole group) and measures taken by several countries (where the parent bank and its overseas subsidiaries are systemically important for respective countries). The key cases in banking history are cases with low supervisory coordination at Nordea (divergence of interests between the supervisory authorities in individual countries in determining of the leading supervisor and selection of a national system of deposit insurance) and Fortis (unrealized agreement for unified rescue plan, including nationalization due to different estimates of individual supervisors). Only in the case of Dexia has reported a high degree of cross-border cooperation between bailouts of supervisors. The supervisors provided “semi-public good”, as the cost of financial stability are specific to each country. On the agenda was put the need for coordination of national policies. Since 2009 was constituted the new supervisory framework in the EU. The architecture of the EU banking system was restructured of in line with the new reality. It represents a fundamentally new stage of financial integration with the delegation of powers to the sovereign rights of national authorities to pan-European institutions. The net effect is to prevent new crises and putting in first place the public interest before corporate interests. Supervisors provide pan-European financial stability ("shared public good"). The guiding principles provide for the protection of the interests of taxpayers, taking all the financial consequences of shareholders, temporary nature of financial intervention and real opportunities for governments to change management. The introduced restrictive measures on banks that have received state aid during the crisis led to a destructuration of financial groups through the European Commission's requirements for separation of commercial banking from insurance activities, separation of investment and commercial banking activities, contraction of branch network and separation of foreign subsidiaries. The new reality is characterized by equality between supervisors in the home and host country. Modern supervisory framework provides ex ante arrangements for ex post sharing of losses from cross-border insolvency. Taking measures the governments should provide secondary effects on other Member States. The coordination of supervisory policy provides financial stability throughout the EU ("pure public goods"), as opposed to "exceptional public goods", which are primarily provided to nationals. It is recommended that in the near future to review the definition of cross-border group and to take into account not only the performance of activities abroad, but also a threat to systemic risk and involvement of supervisors from other countries in transformation.
    Keywords: banking group, banking regulation
    JEL: G28 H41
    Date: 2015
  15. By: Churm, Rohan (Bank of England); Joyce, Mike (Bank of England); Kapetanios, George (Queen Mary, University of London); Theodoridis, Konstantinos (Bank of England)
    Abstract: In this paper we assess the macroeconomic effects of two of the flagship unconventional monetary policies used by the Bank of England during the later stages of the global economic crisis: additional quantitative easing (QE) and the introduction of the Funding for Lending Scheme (FLS). We argue that these policies can be seen as complements, as QE effectively bypasses the banks by attempting to reduce risk-free yields directly in order to have a wider effect on asset prices, while FLS operates directly through banks by reducing their funding costs and increasing incentives to lend. We attempt to quantify the effects of these policies by estimating their impact on long-term interest rates and bank funding costs, respectively, and then tracing out their wider effects on the macroeconomy using simulations from a large Bayesian vector autoregression (VAR), which are cross-checked with a simpler auto-regressive distributed lag (ARDL) approach. We find that the second round of the Bank’s QE purchases during 2011–12 and the initial phase of the FLS each boosted GDP in the United Kingdom by around 0.5%–0.8%. Their effect on inflation was also broadly positive reaching around 0.6 percentage points, at its peak.
    Keywords: Bayesian methods; large-scale asset purchases; quantitative easing; Funding for Lending Scheme; vector autoregressions; auto-regressive distributed lag.
    JEL: C11 C32 E52 E58
    Date: 2015–08–14
  16. By: Javier Bianchi; Enrique G. Mendoza
    Abstract: The unconventional shocks and non-linear dynamics behind the high volatility of financial markets present a challenge for the implementation of macroprudential policy. This paper introduces two of these unconventional shocks, news shocks about future fundamentals and regime changes in global liquidity, into a quantitative non-linear model of financial crises. The model is then used to examine how these shocks affect the design and effectiveness of optimal macroprudential policy. The results show that both shocks contribute to strengthen the amplification mechanism driving financial crisis dynamics. Macroprudential policy is effective for reducing the likelihood and magnitude of financial crises, but the optimal policy requires significant variation across regimes of global liquidity and realizations of news shocks. Moreover, the effectiveness of the policy improves as the precision of news rises from low levels, but at high levels of precision it becomes less effective (financial crises are less likely, but the optimal policy does not weaken them significantly).
    Keywords: financial crises, macroprudential policy, systemic risk, global liquidity, news shocks
    Date: 2015–07
  17. By: Christophe Blot (OFCE - OFCE - Sciences Po); Jérôme Creel (OFCE - OFCE - Sciences Po); Paul Hubert (OFCE - OFCE - Sciences Po); Fabien Labondance (ARPEGE - Atelier de recherche sur la politique économique et la gestion des entreprises - Facultés Universitaires Catholiques de Mons); Francesco Saraceno (OFCE - OFCE - Sciences Po)
    Abstract: This paper aims at investigating first the (possibly time-varying) empirical relationship between the level and conditional variances of price and financial stability, and second, the effects of macro and policy variables on this relationship in the United States and the Eurozone. Three empirical methods are used to examine the relevance of A.J. Schwartz's "conventional wisdom" that price stability would yield financial stability. Using simple correlations, VAR and Dynamic Conditional Correlations, we reject the hypothesis that price stability is positively correlated to financial stability. We then discuss the empirical appropriateness of the "leaning against the wind" monetary policy approach.
    Date: 2014–02
  18. By: Carolina Osorio; Esteban Vesperoni
    Abstract: This report analyzes the possible spillover effects that could result if the U.S. normalizes its monetary policy while euro area countries are increasing monetary stimulus (a situation referred to as asynchronous monetary conditions). This analysis identifies country-specific shocks to economic activity and monetary conditions since the early 1990s, finding that real and monetary conditions in the United States and the euro area have oftentimes been asynchronous and have often resulted in significant spillover effects, particularly since early 2014.
    Keywords: Spillovers;Negative spillovers;Positive spillovers;United States;Euro Area;Monetary policy;spillovers;monetary policy
    Date: 2015–07–23
  19. By: Maarten van Oordt; Chen Zhou
    Abstract: Rules and regulations may have different impacts on risk-taking by individual banks and on banks' systemic risk levels. That is why implementing prudential rules and policies requires careful consideration of their impact on bank risk and systemic risk. This chapter assesses whether market-based measures of systemic risk and recent regulatory indicators provide similar rankings on the systemically importance of large European banks. We find evidence that regulatory indicators of systemic importance are positively related to systemic risk. In particular, banks with higher scores on regulatory indicators have a stronger link to the system in the event of financial stress, rather than having a higher level of bank risk.
    Keywords: G-SIBs; financial stability; macroprudential regulation; systemic importance
    JEL: G01 G21 G28
    Date: 2015–07
  20. By: Romain Baeriswyl (Swiss National Bank - Swiss National Bank); Camille Cornand (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université Jean Monnet - Saint-Etienne - PRES Université de Lyon - CNRS)
    Abstract: In an experimental monetary general equilibrium economy, we assess two processes of monetary injection: credit expansion vs. lump-sum monetary transfers. In theory, both processes are neutral and exert no real effect on allocation. In the experiment, however, credit expansion leads to substantial distortions of real allocation and relative prices, and exerts a redistributive effect across subjects. By contrast, an increase in money through lump-sum transfers does not distort real allocation.
    Date: 2015
  21. By: Pablo García; Josué Pérez
    Abstract: The Central Bank of Chile has been disseminating quarterly sectoral balance sheets and financial flows since 2008. These accounts are compiled for institutional units, based on their respective balance sheets and profit-and-loss statements. They integrate production, income and expenditure, accumulation, and financial accounts. The ending balances of the accounts, which are also the opening balances of the next accounts, are then reconciled. This document describes possible uses of the financial accounts for financial stability monitoring, particularly regarding the assessment of households leverage, public finances, loan to deposit ratios in financial corporation, and derivative exposure.
    Date: 2015–07
  22. By: Adiya Belgibayeva; Michal Horvath
    Abstract: We study an economy in a liquidity trap in which wage adjustment is staggered. In this economy, it is optimal not to use expected inflation as a stabilization tool in or out of the liquidity trap. In such a world, the well-known conventional stabilization mix should be applied more forcefully: the forward commitment regarding interest rates should apply for even longer, and government spending should `lean against the wind' more vigorously. This policy strategy generates a real economy boom in the future and helps stabilizing demand in the short run. Tax policy plays a key role in ensuring price stability. This is generally consistent with a short-run income tax hike counteracting deflationary pressures. The initial government spending expansion is thus close to a balanced-budget one.
    Keywords: Zero Lower Bound, Sticky Wages, Inflation Stabilization, Income Tax, Government Spending.
    JEL: E31 E32 E52 E61 E62
    Date: 2015–07
  23. By: Jean-Paul L'Huillier (Einaudi Institute for Economics and Finance); Facundo Piguillem (EIEF); Jean Flemming (University of Rome, Tor Vergata)
    Abstract: We study the optimal determination of macroprudential regulation (Mendoza 2002, Bianchi 2011, Korinek 2014) in a macroeconomic model featuring advance information about future income ("news", cf. Beaudry and Portier 2006, or Schmitt-Grohe and Uribe 2012). We point out that the presence of news about the future in a standard model with systemic externalities introduces a tradeoff between consumption smoothing and macroprudential regulation. Indeed, favorable news call for lax regulation in order to allow for consumption smoothing, but this also increases the severity of welfare losses in systemic crises. We study this tradeoff first theoretically in a simple 3-period model, and then quantitatively in a fully dynamic model. We conclude that the possibility of news is an important consideration in the evaluation and of macroprudential regulation.
    Date: 2015
  24. By: Faruk Ülgen (CREG - Centre de recherche en économie de Grenoble - Grenoble 2 UPMF - Université Pierre Mendès France)
    Abstract: The Great Transformation of modern capitalism from the 1980s is the commodification of monetary/financial rules and related regulation. Assuming that free markets result in social optimum, financial liberalization has transformed public regulatory mechanisms into private self-regulation systems relying on market price-directed contractual schemas. In light of the 2007-08 crisis, this article seeks to question this blind faith in the market's self-adjustment capacity. It argues that free markets and individual rationality-based economic efficiency cannot result in social harmony. It maintains that financial stability should not be entrusted to the vicissitudes of markets. It then suggests the decommodification of financial supervision through alternative public regulation that seeks social-stability and economic viability.
    Date: 2015–01–02
  25. By: Weneyam Hippolyte BALIMA (CERDI - Centre d'études et de recherches sur le developpement international - CNRS - Université d'Auvergne - Clermont-Ferrand I); Jean-Louis Combes (CERDI - Centre d'études et de recherches sur le developpement international - CNRS - Université d'Auvergne - Clermont-Ferrand I); Alexandru Minea (CERDI - Centre d'études et de recherches sur le developpement international - CNRS - Université d'Auvergne - Clermont-Ferrand I)
    Abstract: Based on a sample of 38 emerging countries, we find that inflation targeting (IT) adoption improves sovereign debt risk. However, we show that IT adoption effectiveness is sensitive to several structural characteristics, such as the phase of the business cycle, the fiscal stance, and the level of development. In addition, the measure of the risk, namely ratings (rating agencies) or bond yield spreads (markets), as well as the form of IT (full-fledged or partial) is equally crucial for the effects of IT adoption on sovereign debt risk. Thus, our paper provides valuable insights for IT implementation as a device for improving emerging market economies’ access to international financial markets for financing long-term investment projects and supporting potential economic growth.
    Date: 2015–03–25
  26. By: Lee, Minsoo (Asian Development Bank); Asuncion, Ruben Carlo (Asian Development Bank); Kim, Jungsuk (Sogang University)
    Abstract: The global financial crisis highlighted the need for national bank supervisory authorities to improve surveillance systems and to detect early on the buildup of macroeconomic risks that could threaten the entire financial system. This paper presents an empirical framework for analyzing how effective macroprudential policies control credit growth, leverage growth, and housing price appreciation. Two significant findings emerge. Broadly, macroprudential policies can indeed promote financial stability in Asia. More specifically, different types of macroprudential policies are more effective against different types of macroeconomic risks.
    Keywords: developing Asia; financial stability; macroprudential policy
    JEL: G01 G28 L51
    Date: 2015–07–01
  27. By: Olivier Blanchard; Gustavo Adler; Irineu de Carvalho Filho
    Abstract: Many emerging market economies have relied on foreign exchange intervention (FXI) in response to gross capital inflows. In this paper, we study whether FXI has been an effective tool to dampen the effects of these inflows on the exchange rate. To deal with endogeneity issues, we look at the response of different countries to plausibly exogenous gross inflows, and explore the cross country variation of FXI and exchange rate responses. Consistent with the portfolio balance channel, we find that larger FXI leads to less exchange rate appreciation in response to gross inflows.
    JEL: F31 F41
    Date: 2015–07
  28. By: Apostolos Serletis (University of Calgary); Khandokar Istiak
    Abstract: We investigate whether the United States economy responds asymmetrically to positive and negative money supply shocks of different magnitude, using a test recently introduced by Kilian and Vigfusson (2011) based on impulse response functions. We use quarterly data, over the period from 1967:1 to 2014:1, and the new CFS Divisia monetary aggregates, making a comparison among the narrower monetary aggregates, M1 M2M, MZM, M2, and ALL, and the broad monetary aggregates, M4+, M4-, and M3. We show that there is no statistically signifiÂ…cant evidence of asymmetry in the response of the U.S. economy to positive and negative money supply shocks of different magnitude.
    Date: 2015–08–10
  29. By: Matheus Grasselli (Department of Mathematics and Statistics, McMaster University, Hamilton, Canada, Fields Institute for Research In Mathematical Sciences - Fields Institute for Research In Mathematical Sciences); Adrien Nguyen Huu (CERMICS - Centre d'Enseignement et de Recherche en Mathématiques et Calcul Scientifique - École des Ponts ParisTech (ENPC) - Université Paris Est (UPE))
    Abstract: We study a monetary version of the Keen model by merging two alternative extensions, namely the addition of a dynamic price level and the introduction of speculation. We recall and study old and new equilibria, together with their local stability analysis. This includes a state of recession associated with a deflationary regime and characterized by falling employment but constant wage shares, with or without an accompanying debt crisis. We also emphasize some new qualitative behavior of the extended model, in particular its ability to produce and describe repeated financial crises as a natural pace of the economy, and its suitability to describe the relationship between economic growth and financial activities.
    Date: 2014–12–15
  30. By: Maria Ferrara; Patrizio Tirelli
    Abstract: We investigate the redistributive e¤ects of a disinflation experiment in an otherwise standard medium-scale DSGE model augmented for Limited Asset Market Participation, implying that a fraction of households do not hold any wealth. We highlight two key mechanisms driving consumption and income distribution: i) the cash in advance constraint on firms working capital needs; ii) the response of profit margins to disinflation, which is crucially dependent on the two most used pricing assumptions in the New-Keynesian literature, i.e. Calvo vs Rotemberg. Results show that disinflation softens the cash in advance constraint and raises the real wage in steady state. This, in turn, lowers inequality. While under the Calvo formalism this e¤ect is reinforced by the fall of price markups, under Rotemberg it is more than compensated by the increase of price markups and, therefore, the opposite result obtains.
    Keywords: Disinflation, Inequality, Welfare, LAMP, Monetary Policy, Calvo Price Adjustment, Rotemberg Price Adjustment
    JEL: E31 E5
    Date: 2015–07
  31. By: Kaminsky, Graciela; Vega-Garcia, Pablo
    Abstract: The theoretical literature on sovereign defaults has focused on adverse shocks to debtors’ economies, suggesting that defaults are of an idiosyncratic nature. Still, sovereign debt crises are also of a systemic nature, clustered around panics in the financial center such as the European Sovereign Debt Crisis in the aftermath of the U.S. Subprime Crisis in 2008. Crises in the financial centers are rare disasters and thus, their effects on the periphery can only be captured by examining long episodes. This paper examines sovereign defaults from 1820 to the Great Depression, with a focus on Latin America. We find that 63% of the crises are of a systemic nature. These crises are different. Both the international collapse of liquidity and the growth slowdown in the financial centers are at their core. These global shocks trigger longer default spells and larger investors’ losses.
    Keywords: Sovereign debt crises, debt restructuring, defaults, default spells, debt reduction rates, debt sustainability, liquidity crises, systemic and idiosyncratic crises.
    JEL: F30 F34
    Date: 2015–07
  32. By: Svetlana Andrianova (University of Leicester); Badi Baltagi (Syracuse University); Thorsten Beck (Cass Business School); Panicos Demetriades (University of Leicester); David Fielding (University of Otago); Stephen G. Hall; Steven F. Koch (Department of Economics, University of Pretoria); Robert Lensink (University of Groningen); Johan Rewilak (University of Huddersfield); Peter Rousseau (Vanderbilt University)
    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.
    Keywords: Health Production, Contraception Efficiency, Nonparametric Analysis
    Date: 2015–08

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