nep-cba New Economics Papers
on Central Banking
Issue of 2015‒08‒25
nineteen papers chosen by
Maria Semenova
Higher School of Economics

  1. Nominal Targeting in an Economy with Government Debt By Yuting Bai; Tatiana Kirsanova; Campbell Leith
  2. Monetary and Fiscal Policy in a Liquidity Trap with Inflation Persistence By Jean-Baptiste Michau
  3. Taylor-Rule Exit Policies for the Zero Lower Bound By Chattopadhyay, Siddhartha; Daniel, Betty C.
  4. Central Bank Transparency and the consensus forecast: What does The Economist poll of forecasters tell us? By Emna Trabelsi
  5. Disclosure of stress test results By Berlin, Mitchell
  6. Alternative Interpretations of a Stateless Currency crisis By Sergio Cesaratto
  8. An Assessment of ECB Action By Jean-Paul Fitoussi
  9. The role of Central Banks in the aftermath of the 2008 financial crisis By Robert Amzallag
  10. Banking union a solution to the euro zone crisis By Maylis Avaro; Henri Sterdyniak
  11. Realized Bank Risk during the Great Recession By Altunbas, Yener; Manganelli, Simone; Marques-Ibanez, David
  12. As Atuações Cambiais do Banco Central Afetam as Expectativas de Mercado? By Jaqueline Terra Moura Marins; Gustavo Silva Araujo; José Valentim Machado Vicente
  13. Mapping Heat in the U.S. Financial System By Aikman, David; Kiley, Michael T.; Lee, Seung Jung; Palumbo, Michael G.; Warusawitharana, Missaka
  14. The origin of inflation in a domestic bank-based payment system By Pesenti, Amos
  15. Ordoliberalism and the macroeconomic policy in the face of the euro crisis By Michal Moszynski
  16. Systemic risk measures and macroprudential stress tests. An assessment over the 2014 EBA exercise By Chiara Pederzoli; Costanza Torricelli
  17. A Model of the Twin Ds: Optimal Default and Devaluation By Vivian Yue; Stephanie Schmitt-Grohe; Martin Uribe; Seunghoon Na
  18. How Insurers Differ from Banks: A Primer on Systemic Regulation By Christian Thimann
  19. Basel III and SME access to credit : Evidence from France By Thomas Humblot

  1. By: Yuting Bai; Tatiana Kirsanova; Campbell Leith
    Abstract: Most analyses of monetary policy delegation schemes typically ignore the behavior of the fiscal policy maker. The paper investigates how monetary price level targeting or monetary nominal income targeting may yield social gain in an economy with government debt and where the fiscal policymaker, acting strategically, may take counter actions. We argue that the choice of fiscal policy instrument plays an important role for the performance of monetary policy. The optimal choice of monetary policy delegation scheme depends crucially on the level of government debt and its maturity, with a switch from price level targeting being desirable to nominal income targets being strongly preferred as debt levels rise and maturity shortens.
    Keywords: Monetary and Fiscal Policy Interactions, Price Level Targeing, Nominal Income Targeting, Discretionary Policy
    JEL: E31 E52 E58 E61 C61
    Date: 2015–06
  2. By: Jean-Baptiste Michau (Department of Economics, Ecole Polytechnique - CNRS - Polytechnique - X)
    Abstract: This paper relies on the new Keynesian model with inflation persistence to characterize the optimal monetary and fiscal policy in a liquidity trap. It shows that, with a Phillips curve that is both forward and backward looking, the monetary policy that is implemented during a liquidity trap episode can lift the economy out of depression. The central bank does not need to commit beyond the end of the crisis to get some traction on the level of economic activity. Regarding fiscal policy, inflation persistence justifies some front-loading of government expenditures to get ination started, which reduces the real interest rate. The magnitude of the optimal fiscal stimulus is decreasing in the degree of inflation persistence. Finally, if inflation persistence is due to adaptive expectations, rather than to price indexation, then monetary policy is ineffective while the optimal fiscal stimulus is large and heavily front-loaded.
    Date: 2014–12–01
  3. By: Chattopadhyay, Siddhartha; Daniel, Betty C.
    Abstract: The monetary authority loses the ability to implement the Taylor Rule at the zero lower bound. However, the promise to implement a Taylor Rule upon exit remains an effective policy instrument. We present two Taylor-Rule exit policies, each with different commitment requirements, as alternatives to a truncated Taylor Rule. A Taylor Rule with an optimally-chosen exit date and time varying inflation target delivers fully optimal policy, but requires a negative inflation target, possibly threatening the ability to commit. A Taylor Rule with only an optimally-chosen exit date delivers almost all the gains of fully optimal policy with no need to commit to the negative inflation target.
    Keywords: New-Keynesian Model, Inflation Target, Liquidity Trap
    JEL: E52 E58 E63
    Date: 2015–08–11
  4. By: Emna Trabelsi (ISG - Institut Supérieur de Gestion de Tunis [Tunis] - Université de Tunis [Tunis])
    Abstract: We are interested, in this paper, in studying the effects that central banks exert on private sector forecasts by means of their transparency and communication measures. We analyze the impact of central bank transparency on the accuracy of the consensus forecasts (usually calculated as the mean or the median of the forecasts from a panel of individual forecasters) for a series of macroeconomic variables: inflation, Real output growth and the current account as a share of GDP for 7 advanced economies. Interestingly, while it is found of significance of central bank transparency and communication measures on forecasts themselves, there appear some limits of the same measures when we study their impact on forecast errors. Our findings, indeed, suggest that deviations of the forecasted economic data from the realized ones (i.e. RGDP and the current account as a share of GDP) are a bit affected by the central bank transparency measures considered in the paper. Inflation forecast errors, especially, are not affected at all by those measures. A possible explanation (among others) could be attributed to the inefficiency of the mean forecasts. Inefficiency of the consensus forecasts is not a new issue from a theoretical point of view, but its empirical relevance is for the first time (to our knowledge) questioned on data extracted from The Economist poll of forecasters. More particularly, our paper has implications over questioning the efficacy of releasing more transparent public information as sparked by Morris and Shin (2002) whose argument states that when private agents have diverse sources of information, public information can lead them to overreact to the signals from the central bank.
    Date: 2015–04–30
  5. By: Berlin, Mitchell (Federal Reserve Bank of Philadelphia)
    Abstract: Should regulatory bank examinations be made public? Regulators have argued that the confidentiality of the examination process promotes frank exchanges between bankers and examiners and that public disclosure of examination results could have a chilling effect. I examine the tradeoffs in a world in which examination results can be kept confidential, but regulatory interventions are observable by market participants, as they typically are for stress tests. Inducing banks to communicate truthfully requires regulators to engage in forbearance, which is priced into banks’ uninsured debt and raises the costs of inducing truthful communication. Regulators that disclose exam results bear higher monitoring costs and impose excessive capital requirements because interventions are not as sensitive to underlying risks. My model predicts that disclosure is optimal when the regulator’s model is relatively inaccurate.
    Keywords: Stress tests; Disclosure; Bank regulation
    JEL: G2 G21 G28
    Date: 2015–08–13
  6. By: Sergio Cesaratto (University of Siena)
    Abstract: A number of economists holding Keynesian or pragmatic monetarist views warned that political union was a necessary premise for a viable monetary union. Inspired by Goodhart, we name this the Cartalist view. The European currency union was, however, strongly influenced by New Classical Macroeconomics, which gave new strength to older traditions, like ordoliberalism, that back separation of monetary and fiscal policy, legitimizing a Stateless currency. Again like Goodhart, we call this the Metallist view. This distinction is particularly relevant for assessing two alternative perspectives of the nature of the Euro area crisis. On one hand, there are those who argue that the crisis is akin to a traditional balance of payment crisis of the kind typically occurring in fixed exchange rate regimes. On the other, there are those who attribute the crisis to obstacles to more resolute intervention by the European Central Bank (ECB). Accordingly, belated intervention by the ECB led to worsening of the fiscal crisis of peripheral Euro area states, subsequently exacerbated by austerity policies. In this view, a classical balance of payment crisis can be excluded as a cause of the crisis, because Target 2, a payment mechanism analogous to Keynes’s International Clearing Union, protects the Euro area. In this paper, I argue that although a balance of payments crisis cannot exist in a viable sovereign monetary union, it is still conceivable in a flawed, stateless monetary union like the Euro zone, possibly obscured by Target 2. In this regard, I also show that, while timely and resolute ECB intervention would have been appropriate, in the absence of federal institutions (particularly a federal budget controlled by a European democratic parliament), once this intervention finally took place, austerity measures necessarily accompanied it to check moral hazard possibilities of peripheral member countries. I argue that the German neo-mercantilist orientation and the influence of the predominant mainstream credo that monetary policy should be detached from politics and fiscal policy are obstacles to a viable federal union. I also warn about the risk that the Parliament of such a union would be divided according to national rather than ideological/class interests. Virtue out of necessity, Hayek pointed out long-ago that a currency union among different nation-States could only survive with a minimalist federal State.
    Keywords: Europe, Crisis, Target2, ECB, State.
    JEL: E11 F33 N14
    Date: 2015–08
  7. By: Ghrissi Mhamdi (Université de Sousse)
    Abstract: The aim of this paper is to give an answer to the question that remains wide open; Is Central Bank of Tunisia, capable to transmit all the information on the evolution of prices to economic agents through targeting monetary aggregates. To answer this question, a way that focuses on the stability of the money demand function through the test of Cumulative Sum of residues (SUMCU) and Chow's Forecast test is followed. The results of this study indicate that there is no significant and important relationship between money and prices either in short term or long term. In addition, by estimating the money demand function and its long-term stability, the results show that this relationship is not stable in the case of the Tunisian economy. Introduction The instability of money demand can be explained by the instability of the flow velocity. More frequently, the instability of the application is shown on the factors included in the demand function. Anderson (1985) identified three sources of instability in the demand for money, (i) the change in velocity in response to changes in interest rates as well as movements in other variables the demand function of the currency other than real income, (ii) The demand function of the currency itself may change. For example, financial innovations and releasing the interest rate may change the demand for money, and (iii) short-term monetary stocks actually provided may not correspond to the desired equilibrium. In other words, if the speed of adjustment is small compared to unexpected shocks, this can lead to unexpected changes in the velocity of circulation of money. 1. The relationship between money and prices in the Tunisian economy 1.1. Variables and data As Central Bank of Tunisia (CBT) targets the rate of increase in the money supply within the meaning of M3, then M3 is the variable used to measure changes in the money supply in the Tunisian economy. Concerning the measurement of inflation, changes in the price index (CPI) is the variable most suitable for our study. The adoption of the CPI instead of other measures of inflation is explained by two considerations. The first is the data. Indeed, the monthly data on the CPI are available for longer periods. The second consideration is the wide use of the CPI in the economic literature worldwide. While the CPI may involve some bais, it represents the most widely used measure as an indicator of inflation in empirical studies and analyzes of monetary policy. Regarding the sources of monthly data M2, M3 and CPI, they are issued by the IFC, and the CD-R 2008 IMF.
    Date: 2013–10–18
  8. By: Jean-Paul Fitoussi (OFCE - OFCE - Sciences Po)
    Abstract: An assessment of the conduct of monetary policy in Europe must necessarily be made along two distinct and complementary lines. The first is a comparison with the policies followed in the past. The second line has to assess whether monetary policy is adapted to the new conditions that came into existence with the inception of the Euro. The picture with respect to these two criteria is mixed. Monetary policy has certainly improved with respect to the policies followed in the 1990s, during the run up to the euro. In fact, the ECB proved to be much more growth friendly than its predecessors. On the other hand, though, the challenges posed by the new environment, the management of a large open economy, have not been internalized by the ECB, that was less reactive than the Fed, and too focussed on current inflation. The tightening of monetary conditions in the euro zone, mainly due to the euro appreciation, was not sufficiently cautioned by monetary policy. Especially considering the poor economic performances of the euro zone in the past few years, we must conclude that monetary policy was not helpful in fostering growth recovery in the euro area. The ECB did not fully recognise its new responsibility of conducting the monetary policy of a "big country".
    Date: 2014–04–03
  9. By: Robert Amzallag
    Abstract: Central Banks are powerful institutionsthat can print money, control liquidityand interest rates and, in manycountries, regulate their bankingsystem. So much so that governmentshave wisely restricted their mandatesand made them independent fromelected politicians.Central banks have traditionally beenvery discreet and always tried to avoidthe limelight. In most situations, theyworked in the background, usinggovernments or the banking systemresources to guide economic forcesaway from excesses onto the path ofreasonable growth and, in worse casescenarios, to solve economic crises.Until 2008, their decisions, oftencommunicated in impenetrablelanguage, were hardly reported passthe business sections of dailynewspapers. Their discreetinterventions to regulate or solve acrisis did not make waves beyond theupper financial and banking circle.Fast forward to 2015.Central bank actions are now frontpage material for daily newspapers.Janet Yellen, Chairman of the USFederal Reserve and Mario DraghiChairman of the European CentralBank are considered among the mostpowerful persons in the world andtreated by the press as celebrities.When the Chairman of the Fed hintsthat she might be considering a slightrise in interest rates, markets collapsearound the world, there is talk ofasphyxiating a fragile recovery andtriggering a world recession withpolitical consequences.The recent Eurozone crisis is an evenmore remarkable example. As politicalleaders were meeting endlessly inBrussels to try and find a solution toGreece financial default, all eyesturned on the ECB and its ChairmanMario Draghi.
    Date: 2015–08–05
  10. By: Maylis Avaro (ENS Cachan - École normale supérieure - Cachan); Henri Sterdyniak (OFCE - OFCE - Sciences Po)
    Abstract: The banking union emerged from the June 2012 European Council as a new project expected to help and solve the euro area crisis. Is banking union a necessary supplement to monetary union or a new rush forward? The banking union would break the link between the sovereign debt crisis and the banking crisis, by asking the ECB to supervise banks, establishing common mechanisms to solve banking crises, and encouraging banks to diversify their activities. The banking union project is based on three pillars: a Single Supervisory Mechanism (SSM), a Single Resolution Mechanism (SRM), a European Deposit Guarantee Scheme. Each of these pillars raises specific problems. Some are related to the current crisis (can deposits in euro area countries facing difficulties be guaranteed?); some other are related to the EU complexity (should the banking union include all EU member states? Who will decide on banking regulations?), some other are related to the EU specificity (is the banking union a step towards more federalism?), the more stringent are related to structural choices regarding the European banking system. The banks' solvency and their ability to lend would primarily depend on their capital ratios, and thus on financial markets' sentiment. The links between the government, firms, households and domestic banks would be cut, which is questionnable. Will governments be able tomorrow to intervene to influence bank lending policies, or to settle specific public banks? An opposite strategy could be promoted: restructuring the banking sector, and isolating retail banking activity from risky activities. Retail banks would focus on lending to domestic agents, and their solvency would be guaranteed because they would not be allowed to run risky activity. Can European peoples leave such strategic choices in the hands of the ECB?
    Date: 2013–09
  11. By: Altunbas, Yener (Bangor Business School); Manganelli, Simone (European Central Bank); Marques-Ibanez, David (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: In the years preceding the 2007-2009 financial crisis, forward-looking indicators of bank risk concentrated and suggested unusually low expectations of bank default. We assess whether the ex-ante (i.e. prior to the crisis) cross-sectional variability in bank characteristics is related to the ex-post (i.e. during the crisis) materialization of bank risk. Our tailor-made dataset crucially accounts for the different dimensions of realized bank risk including access to central bank liquidity during the crisis. We consistently find that less reliance on deposit funding, more aggressive credit growth, larger size and leverage were associated with larger levels of realized risk. The impact of these characteristics is particularly relevant for capturing the systemic dimensions of bank risk and tends to become stronger for the tail of the riskier banks. The majority of these characteristics also predicted bank risk as materialized before the financial crisis.
    Keywords: Bank risk; business models; Great Recession
    JEL: E58 G15 G21 G32
    Date: 2015–08–04
  12. By: Jaqueline Terra Moura Marins; Gustavo Silva Araujo; José Valentim Machado Vicente
    Abstract: The aim of this work is to study the effect of foreign exchange intervention of the Central Bank of Brazil through swaps in the risk neutral distribution of the BRL-USD quotation one month ahead. Data refers to the Brazilian market and encompass a period between January 2006 and December 2013. The methodology is based on event study allowing us to investigate episodes of intervention and its cumulative impact. Regarding to long swaps, where the central bank is short in the exchange rate, we show that interventions increase the skewness and kurtosis, without significant impact on the mean and volatility. For short swaps (central bank in a long position in the exchange rate), our tests indicate that interventions have no effects on the expectations
    Date: 2015–08
  13. By: Aikman, David (Bank of England); Kiley, Michael T. (Board of Governors of the Federal Reserve System (U.S.)); Lee, Seung Jung (Board of Governors of the Federal Reserve System (U.S.)); Palumbo, Michael G. (Board of Governors of the Federal Reserve System (U.S.)); Warusawitharana, Missaka (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: We provide a framework for assessing the build-up of vulnerabilities in the U.S. financial system. We collect forty-four indicators of financial and balance-sheet conditions, cutting across measures of valuation pressures, nonfinancial borrowing, and financial-sector health. We place the data in economic categories, track their evolution, and develop an algorithmic approach to monitoring vulnerabilities that can complement the more judgmental approach of most official-sector organizations. Our approach picks up rising imbalances in the U.S. financial system through the mid-2000s, presaging the financial crisis. We also highlight several statistical properties of our approach: most importantly, our summary measures of system-wide vulnerabilities lead the credit-to-GDP gap (a key gauge in Basel III and related research) by a year or more. Thus, our framework may provide useful information for setting macroprudential policy tools such as the countercyclical capital buffer.
    Keywords: Early warning system; financial crisis; financial stability; financial vulnerabilities; heat maps; macroprudential policy; systemic risk; data visualization; countercyclical capital buffers
    JEL: G01 G12 G21 G23 G28
    Date: 2015–06–24
  14. By: Pesenti, Amos
    Abstract: This paper shows how a disorderly-working bank-based payment system negatively affects monetary stability. This occurs when firms invest their profits in production with the aim of forming and accumulating (fixed) capital, while at the same time banks carry out the payment of workers’ wages and enter the corresponding payment order in the architecture for domestic payments. In fact, if the payment of wages is financed with profits, this payment operation corresponds to an emission of (empty) money without it being endowed with value, to wit, purchasing power. It follows that the existing value of money is “diluted” in a greater amount of money units, so much so that the current purchasing power of each unit of money is reduced. This monetary phenomenon can be defined as inflation, which, in turn, exerts an upward pressure on the general price level. A structural reform of the bank-based payment system, as suggested in this paper, may consequently improve the defective architecture for domestic payments and thereby promote long-run monetary stability.
    Keywords: banks; deflation; inflation; money; payment systems; profits; wages
    JEL: E20 E31 E42 E51
    Date: 2015–08–12
  15. By: Michal Moszynski (Nicolaus Copernicus University, Poland)
    Abstract: The global economic crisis and the crisis in the euro zone exposed the deep differences of opinion between German economists and scientists from other European countries and the US. The German approach conceptually differs in the views on the strategies and tools of anti-crisis policy, especially fiscal stimulus in the Keynesian-style, quantitative easing monetary policy of the ECB, the question of financial assistance to Greece and restructuring its debt. The other areas of difference are the approach to the rules in macroeconomic policy, fiscal consolidation, and interpretation of current account surplus. Given the size and performance of German economy it is important to understand the reasons for these opposites, which constitute the research goal of this article. Considerations are based on the thesis that ordoliberal thought still has a strong impact on the practice of macroeconomic policy in Germany and also at European level. The analysis is built on the short overview of ideological foundations of the German social market economy and its most important postulates, which then will be applied for interpretation of intellectual distinctions between economists from Germany and other countries in the theoretical and practical dimensions of economic policy observed in Europe. The methodology includes the critical literature studies and the comparative analysis of macroeconomic policy through the prism of economic thought.
    Keywords: Germany, macroeconomic policy, ordoliberalism, rules, economic order
    JEL: B25 E61 H12
    Date: 2015–08
  16. By: Chiara Pederzoli; Costanza Torricelli
    Abstract: The European Banking Authority (EBA) stress tests, which aim to quantify banks’ capital shortfall in a potential future crisis (adverse economic scenario), further stimulated an academic debate over systemic risk measures and their predictive/informative content. Focusing on marked based measures, Acharya et al. (2010) provides a theoretical background to justify the use of Marginal Expected Shortfall (MES) for predicting the stress test results, and verify it on the first stress test conducted after the 2007-2008 crises on the US banking system (SCAP, Supervisory Capital Assessment Program). The aim of this paper is to further test the goodness of MES as a predictive measure, by analysing it in relation to the results of the 2014 European stress tests exercise conducted by EBA. Our results are strongly dependent on index used to capture the systemic distress event, whereby MES, based on a global market index, does not show association with EBA stress test, by contrast to F-MES, which is based on a financial market index, and has a significant information and predictive power. Our results may carry useful regulatory implication for the stress test exercises.
    Keywords: systemic risk, stress test, macroprudential regulation
    JEL: G01 G10 G28
    Date: 2015–07
  17. By: Vivian Yue (Emory University); Stephanie Schmitt-Grohe (Columbia University); Martin Uribe (Columbia University); Seunghoon Na (Columbia University)
    Abstract: This paper characterizes jointly optimal default and exchange-rate policy in a small open economy with limited enforcement of debt contracts and downward nominal wage rigidity. Under optimal policy, default occurs during contractions and is accompanied by large devaluations. The latter inflate away real wages thereby avoiding massive unemployment. Thus, the Twin Ds phenomenon emerges endogenously as the optimal outcome. By contrast, under fixed exchange rates, optimal default takes place in the context of large involuntary unemployment. Fixed-exchange-rate economies are shown to have stronger default incentives and therefore support less external debt than economies with optimally floating rates.
    Date: 2015
  18. By: Christian Thimann (PSE - Paris-Jourdan Sciences Economiques - CNRS - Institut national de la recherche agronomique (INRA) - EHESS - École des hautes études en sciences sociales - ENS Paris - École normale supérieure - Paris - École des Ponts ParisTech (ENPC), Axa - AXA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics)
    Abstract: This paper aims at providing a conceptual distinction between banking and insurance with regard to systemic regulation. It discusses key differences and similarities as to how both sectors interact with the financial system. Insurers interact as financial intermediaries and through financial market investments, but do not share the features of banking that give rise to particular systemic risk in that sector, such as the institutional interconnectedness through the interbank market, the maturity transformation combined with leverage, the prevalence of liquidity risk and the operation of the payment system. The paper also draws attention to three salient features in insurance that need to be taken account in systemic regulation: the quasiabsence of leverage, the fundamentally different role of capital and the ‘built-in bail-in’ of a significant part of insurance liabilities through policy-holder participation. Based on these considerations, the paper argues that if certain activities were to give rise to concerns about systemic risk in the case of insurers, regulatory responses other than capital surcharges may be more appropriate.
    Date: 2014–10–16
  19. By: Thomas Humblot (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - Université Montesquieu - Bordeaux 4)
    Abstract: This paper investigates Basel III potential effects on SME access to bank credit. In an innovative empirical framework, French small firms are studied using microdata over the 2008-2013 periods. We conclude that the new regulation will have an M-shaped impact. Eventually, Basel III eliminates low profitable exposures regardless of their regulatory charge alleviations, restricts risky positions despite of their profitability and digs SME funding gap. Only regulatory adjusted dominant risk/return profiles are funded. On average, no reduction in credit matu-rity nor in volume is observable. The overall effect ultimately depends on banks' initial position.
    Date: 2014

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.