nep-cba New Economics Papers
on Central Banking
Issue of 2015‒08‒30
37 papers chosen by
Maria Semenova
Higher School of Economics

  1. Is Optimal Monetary Policy Always Optimal? By Davig, Troy; Gürkaynak, Refet S.
  2. Combining Monetary Policy and Prudential Regulation: an agent-based modeling approach By Michel Alexandre da Silva; Gilberto Tadeu Lima
  3. Bank of Japan's Monetary Policy in the 1980s: a View Perceived from Archived and Other Materials By Masanao Itoh; Ryoji Koike; Masato Shizume
  4. Uncertainty and the signaling channel of monetary policy By Tang, Jenny
  5. Country Shocks, Monetary Policy Expectations and ECB Decisions. A Dynamic Non-Linear Approach By Máximo Camacho; Danilo Leiva-León; Gabriel Pérez-Quiros
  6. What effects exert Economic Globalization and Central Bank Transparency on inflation of OECD countries? An Application of LSDVC Estimator on a dynamic Panel Model By Emna Trabelsi
  7. Central Bank Interventions, Demand for Collateral, and Sovereign Borrowing Costs By Luís Fonseca; Matteo Crosignani; Miguel Faria-e-Castro
  8. Distributional Effects of Monetary Policy in Emerging Market Economies By Prasad, Eswar; Zhang, Boyang
  9. Disentangling qualitative and quantitative central bank influence By Paul Hubert
  10. Housing Bubbles and Monetary Policy: A Reassessment By Graeme O'Meara
  11. Mortgages and Monetary Policy By Carlos Garriga; Finn E. Kydland; Roman Šustek
  12. Merging mandatory saving and monetary policy By Alfred Duncan
  13. Market beliefs about the UK monetary policy life-off horizon: a no-arbitrage shadow rate term structure model approach By Andreasen, Martin M; Meldrum, Andrew
  14. Exchange Rate Regimes and Persistence of Inflation in Thailand By Jiranyakul, Komain
  15. Forecasting Core Inflation: The Case of South Africa By Franz Ruch; Mehmet Balcilar Author-Name-First Mehmet; Mampho P. Modise; Rangan Gupta
  16. On the Sensitivity of Banking Activity to Macroeconomic Shocks: Evidence from CEMAC Sub-region By Christian-Lambert Nguena; Roger Tsafack-Nanfosso
  17. Should stay the Mali in Zone franc area ? By Sidibe, Tidiani
  18. The trade credit channel and monetary policy transmission: empirical evidence from U.S. panel data By Altunok, Fatih; Mitchell, Karlyn; Pearce, Douglas
  19. The impact of unconventional monetary policy on firm financing constraints: evidence from the maturity extension program By Foley-Fisher, Nathan; Ramcharan, Rodney; Yu, Edison
  20. Shadow Banking and Bank Capital Regulation By Guillaume Plantin
  21. Euro area monetary and fiscal policy tracking design in the time-frequency domain By Crowley, Patrick; Hudgins, David
  22. Structural Reforms and Stabilization Policies in the Euro Area By Alho, Kari E.O.
  23. Monetary-Financial Stability under EMU By Lane, Philip R.
  24. Corporate Structures, Transparency and Resolvability of Global Systemically Important Banks By Carmassi, Jacopo; Herring, Richard J.
  25. FED Liquidity Policy during the Financial Crisis: Playing for Time By Eisenbeis, Robert; Herring, Richard
  26. The Role of Economic Policy Uncertainty in Forecasting US Inflation Using a VARFIMA Model By Mehmet Balcilar; Rangan Gupta; Charl Jooste
  27. Bank Risk Taking and Liquidity Creation Following Regulatory Interventions and Capital Support By Berger, Allen N.; Bouwman, Christa H. S.; Kick, Thomas; Schaeck, Klaus
  28. Policy tradeoffs in an open economy and the role of G-20 in global macroeconomic policy coordination By Rajeswari Sengupta; Abhijit Sen Gupta
  29. Why Do Banks Practice Regulatory Arbitrage? Evidence from Usage of Trust Preferred Securities By Boyson, Nicole M.; Fahlenbrach, Rudiger; Stulz, Rene M.
  30. Fairness and Reflexivity in the Cyprus Bail-In By Zenios, Stavros A.
  31. The Federal Reserve's Discount Window and TAF Programs: "Pushing on a String?" By Berger, Allen N.; Black, Lamont K.; Bouwman, Christa H. S.; Dlugosz, Jennifer
  32. Heterogeneous Adjustments in Bank Leverage after Deposit Insurance Adoption By Mathias Lé
  33. Price dispersion and inflation rates: evidence from scanner data By Castellari, Elena; Moro, Daniele; Platoni, Silvia; Sckokai, Paolo
  34. Regulation of uncovered sovereign credit default swaps – evidence from the European Union By Kiesel, F.; Lücke, F.; Schiereck, D.
  35. The Growth-Inflation Nexus for the US over 1801-2013: A Semiparametric Approach By Mehmet Balcilar; Rangan Gupta; Charl Jooste
  36. Are monetary unions more synchronous than non-monetary unions? By Crowley, Patrick; Trombley, Christopher
  37. Where the Risks Lie: A Survey on Systemic Risk By Sylvain Benoit; Jean-Edouard Colliard; Christophe Hurlin; Christophe Pérignon

  1. By: Davig, Troy; Gürkaynak, Refet S.
    Abstract: No. And not only for the reason you think. In a world with multiple inefficiencies the single policy tool the central bank has control over will not undo all inefficiencies; this is well understood. We argue that the world is better characterized by multiple inefficiencies and multiple policy makers with various objectives. Asking the policy question only in terms of optimal monetary policy effectively turns the central bank into the residual claimant of all policy and gives the other policymakers a free hand in pursuing their own goals. This further worsens the tradeoffs faced by the central bank. The optimal monetary policy literature and the optimal simple rules often labeled flexible inflation targeting assign all of the cyclical policymaking duties to central banks. This distorts the policy discussion and narrows the policy choices to a suboptimal set. We highlight this issue and call for a broader thinking of optimal policies.
    Keywords: central banking; fiscal policy; monetary policy; optimal policy; optimal policy mix
    JEL: E02 E52 E58 E61
    Date: 2015–08
  2. By: Michel Alexandre da Silva; Gilberto Tadeu Lima
    Abstract: The aim of this paper is to study the interaction between monetary policy and prudential regulation in an agent-based modeling framework. In the model proposed here, firms borrow funds from the banking system in an economy regulated by a central bank. The central bank is responsible for carrying out monetary policy, by setting the interest rate, and prudential regulation, by establishing the banking capital requirement. Different combinations of interest rate and capital requirement rules are evaluated regarding both macroeconomic and financial stability. Several relevant policy implications are drawn from this analysis. First, the implementation of a cyclical capital component as proposed in Basel III, while successful in reducing financial instability when applied alone, loses its efficacy when combined with some interest rate rules. Second, interest rate smoothing is more effective than the other interest rate rules assessed, as it outperforms them concerning financial stability and performs as well as them regarding macroeconomic stability. Finally, there is no long-run tradeoff between monetary and financial stability regarding the sensitiveness of the cyclical capital component to the credit-to-output ratio, as well as the smoothing interest rate parameter
    Date: 2015–08
  3. By: Masanao Itoh (Professor, Otsuma Women's University and IMES, Bank of Japan (E-mail:; Ryoji Koike (Director and Deputy Head of Monetary History Studies Group, IMES, Bank of Japan (E-mail:; Masato Shizume (Professor, Waseda University and IMES, Bank of Japan (E-mail:
    Abstract: This monographic paper summarizes views held by the Bank of Japan (hereafter BOJ or the Bank) in the 1980s regarding economic conditions and monetary policy formulation, perceived from the BOJ archives and other materials from the period. From a historical viewpoint, the authors see the 1980s as a watershed time for the Bank's policy formulation, because the Bank acquired lessons for monetary policy formulation under a large fluctuation in economic and financial conditions and innovated new approaches for monetary policy formulation and money market management as stated below. First, during the 1980s the BOJ had to largely consider the external imbalance in formulating policy, and attention began to shift towards price stability in the medium or long term by the end of the decade. Second, the large fluctuations in asset prices, money supply, and commercial bank lending were closely monitored during this period, but the Bank's assessment about their impacts on macroeconomic consequences in the medium to long term was insufficient. A reflection of these lessons appears to evolve into a perspective on the Bank's monetary policy formulation that financial imbalances should be examined as a risk for achieving price stability in the medium to long term. Third, in light of ongoing financial deregulation during this period, the Bank started to change monetary policy measures from those based on a regulated interest rate framework to those based on market operation with good use of money markets and flexible interest rates.
    Keywords: Monetary policy management, Price stability in the medium and long term, Financial imbalance, External imbalance, Financial deregulation
    JEL: E52 N15
    Date: 2015–08
  4. By: Tang, Jenny (Federal Reserve Bank of Boston)
    Abstract: A growing body of evidence supports the view that monetary policy actions communicate information about the state of the economy to an imperfectly informed public. Therefore, it is important for policymakers to understand the implications of this signaling channel for optimal policy as well as for the value of central bank communication. This paper studies, both theoretically and empirically, a setting where such a monetary policy signaling channel arises because the policymaker has more information about economic fundamentals than private agents have. In this environment, policy actions taken in response to fundamentals provide a signal to rational private agents about those fundamentals.
    JEL: E52
    Date: 2013–10–13
  5. By: Máximo Camacho; Danilo Leiva-León; Gabriel Pérez-Quiros
    Abstract: Previous studies have shown that the effectiveness of monetary policy depends, to a large extent, on the market expectations of its future actions. This paper proposes an econometric framework to address the effect of the current state of the economy on monetary policy expectations. Specifically, we study the effect of contractionary (or expansionary) demand (or supply) shocks hitting the euro area countries on the expectations of the ECB.s monetary policy in two stages. In the first stage, we construct indexes of real activity and inflation dynamics for each country, based on soft and hard indicators. In the second stage, we use those indexes to provide assessments on the type of aggregate shock hitting each country and assess its effect on monetary policy expectations at different horizons. Our results indicate that expectations are responsive to aggregate contractionary shocks, but not to expansionary shocks. Particularly, contractionary demand shocks have a negative effect on short term monetary policy expectations, while contractionary supply shocks have negative effect on medium and long term expectations. Moreover, shocks to different economies do not have significantly different effects on expectations, although some differences across countries arise.
    Date: 2015–08
  6. By: Emna Trabelsi (ISG - Institut Supérieur de Gestion de Tunis [Tunis] - Université de Tunis [Tunis])
    Abstract: This paper outlines the implications of central bank transparency coupled with economic globalization on the effectiveness of monetary policy at achieving low and stable inflation, through an empirical analysis on a sample of 34 OECD central banks. Our results are threefold: (i) There is a dampening and highly significant negative impact of economic globalization (measured by the composite index of Dreher et al., 2008) on inflation (ii) An appropriate and efficient U shape test proposed by Lind and Mehlum (2010), indicates a robust optimal intermediate degree of transparency, but suggests new evidence as to its level differently from van der Cruijsen et al. (2010). Indeed, the optimal level is higher and seems to vary according to the set of controls included in the regression. The estimations were run using a bias corrected Least Square Dummy variable (hereafter, LSDVC), developed by Bruno (2005) for short dynamic panels with fixed effects, and extended to accommodate unbalanced data. Alternative results using Generalized Method of Moments (hereafter GMM) estimators: (Arellano and Bond, 1991, hereafter AB; Blundell and Bond, 1998, hereafter BB) are also provided. (iii) We find, overall, that LSDVC and BB estimators exhibit satisfactory fit, while AB estimator doesn't confirm the hypothesis of a quadratic relationship between transparency and inflation.
    Date: 2015–05–28
  7. By: Luís Fonseca; Matteo Crosignani; Miguel Faria-e-Castro
    Abstract: We analyze the effect of unconventional monetary policy, in the form of collateralized lending to banks, on sovereign borrowing costs. Using our unique dataset on monthly security- and bank-level holdings of government bonds, we document that Portuguese banks increased their holdings of domestic public debt during the allotment of the three year Long-Term Refinancing Operations (LTRO) of the European Central Bank. We argue that domestic banks engaged in a "collateral trade", which involved the purchase of high-yield bonds with short maturities that could be pledged as collateral for low cost and long-term borrowing from the ECB. This significant increase in bond holdings was concentrated in shorter maturities, as these were especially suited to mitigate funding liquidity risk. The resulting steepening of the sovereign yield curve and the timing and characteristics of government bond auctions are consistent with a strategic response by the debt management agency.
    JEL: E44 E52 E63 G21
    Date: 2015
  8. By: Prasad, Eswar (Cornell University); Zhang, Boyang (Cornell University)
    Abstract: We develop a two-sector, heterogeneous-agent model with incomplete financial markets to study the distributional effects and aggregate welfare implications of alternative monetary policy rules in emerging market economies. Relative to inflation targeting, exchange rate management benefits households in the tradable goods sector but in the long run these households are worse off due to higher consumption volatility. A fixed exchange rate reduces the welfare of these households and aggregate welfare when the economy is hit by positive shocks to nontradable goods productivity or foreign interest rates. Fiscal policy can more efficiently achieve similar short-run distributional objectives as exchange rate management.
    Keywords: monetary policy rules, exchange rate management, interest rate smoothing, distributional effects, emerging markets, financial frictions, inflation targeting
    JEL: E25 E52 E58 F41
    Date: 2015–08
  9. By: Paul Hubert (OFCE - OFCE - Sciences Po)
    Abstract: We aim at investigating how two different types of central bank communication affect the private inflation expectations formation process. The effects of ECB inflation projections and Governing Council members’ speeches on private inflation forecasts are identified through an Instrumental-Variables estimation using a Principal Component Analysis to generate valid instruments. We find that ECB projections have an effect on private current-year forecasts, while ECB speeches and the ECB rate impact next-year forecasts. When both communication types are interacted and go in the same direction, the inflation outlook signal tends to outweigh the policy path signal conveyed to private agents (and vice-versa).
    Date: 2014–12
  10. By: Graeme O'Meara
    Abstract: This study contributes to the ongoing debate over the causes of housing bubbles. The argument that excessively low interest rates were responsible for the run up in house prices over the last decade has received considerable attention in the literature. However, few papers have attempted to quantify the extent of house price overvaluation in countries that have seen housing booms and busts, in addition to quantifying the looseness of monetary policy. For a sample of 10 OECD countries, we estimate fundamental house prices using demand and supply side characteristics of the housing market. This is supplemented with analysis of price to rent ratios and fundamental price to rent ratios. Loose monetary policy is defined as the deviation of the short term interest rate from the rate which the Taylor rule would prescribe. The empirical results suggest that for some countries deviations from the Taylor rule played a role in the surge in house prices and that a monetary policy stance less discretionary and more closely aligned with a Taylor rule could curtail some of the imbalance in the housing market.
    Keywords: Housing bubbles; Taylor rule; Monetary policy; Interest rates
    JEL: E52 E58 R31 F33
    Date: 2015
  11. By: Carlos Garriga (Federal Reserve Bank of St. Louis); Finn E. Kydland (University of California–Santa Barbara and NBER); Roman Šustek (Queen Mary University of London and Centre for Macroeconomics)
    Abstract: Mortgages are prime examples of long-term nominal loans. As a result, under incomplete asset markets, monetary policy can affect 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 real interest rates. A stylized general equilibrium model in corporating 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, persistent, inflation benefits homeowners under FRMs but hurts them under ARMs.
    Keywords: Mortgages, Debt servicing costs, Monetary policy, Residential investment
    JEL: E32 E52 G21 R21
    Date: 2015–08
  12. By: Alfred Duncan
    Abstract: Alfred Duncan investigates the Labour Party’s Variable Savings Rate policy, where KiwiSaver contributions would become compulsory, and contribution rates adjusted by the Reserve Bank in conjunction with changes in the Official Cash Rate to achieve Monetary Policy objectives.
    Date: 2014–09–01
  13. By: Andreasen, Martin M (Aarhus University and CREATES); Meldrum, Andrew (Bank of England)
    Abstract: We use a no-arbitrage shadow rate term structure model to estimate investors’ views about the timing of monetary policy ‘lift-off’ in the United Kingdom over time. Our estimates show that when the UK policy rate was first cut to 0.5%, in March 2009, investors believed that it would remain at the lower bound only for a short period, with an estimated probability of 70% that the policy rate would rise above 0.75% within twelve months. The estimated median horizon for policy rate lift-off rose sharply in 2012 but fell back to thirteen months by the end of our sample period, in May 2014.
    Keywords: Shadow rate models; sequential regression estimation; policy lift-off; zero lower bound.
    JEL: C10 C50 G12
    Date: 2015–08–14
  14. By: Jiranyakul, Komain
    Abstract: This study explored the degree of inflation persistence in Thailand using both monthly headline and sectoral CPI indices during the 1985-2012 period. The results showed that the degree of inflation persistence for the headline inflation did not exist under the fixed exchange rate regime, even though some sectoral inflation series exhibited persistence. Under the floating regime, the headline inflation persistence was low, but various sectoral inflation rates showed low to moderate persistence. Therefore, inflation persistence for the entire sample period was caused by the switch from fixed to floating regime. Furthermore, there seemed to be no monetary accommodation of inflation persistence under the floating regime. Based upon the results from this study, inflation targeting implemented in May 2000 to combat inflation might not fully reduce inflation to the target of price stability.
    Keywords: Inflation persistence, exchange rate regimes, monetary policy, inflation targeting
    JEL: C22 E31
    Date: 2015–08
  15. By: Franz Ruch (South African Reserve Bank); Mehmet Balcilar Author-Name-First Mehmet (Department of Economics, Eastern Mediterranean University, Famagusta, Northern Cyprus); Mampho P. Modise (National Treasury, 40 Church Square, Pretoria, 0002, South Africa); Rangan Gupta (Department of Economics, University of Pretoria)
    Abstract: Forecasting and estimating core inflation has recently gained attention, especially for inflation targeting countries, following research showing that targeting headline inflation may not be optimal; a Central Bank can miss the signal due to the noise. Despite its importance there is sparse literature on estimating and forecasting core inflation in South Africa, with the focus still on measuring core inflation. This paper emphasises predicting core inflation using large time-varying parameter vector autoregressive models (TVP-VARs), factor augmented VAR, and structural break models using quarterly data from 1981Q1 to 2013Q4. We use mean squared forecast errors (MSFE) and predictive likelihoods to evaluate the forecasts. In general, we find that (i) small TVP-VARs consistently outperform all other models; (ii) models where the errors are heteroscedastic do better than models with homoscedastic errors; (iii) models assuming that the forgetting factor remains 0.99 throughout the forecast period outperforms models that allow for the forgetting factors to change with time; and (iv) allowing for structural break does not improve the predictability of core inflation. Overall, our results imply that additional information on the growth rate of the economy and interest rate is sufficient to forecast core inflation accurately, but the relationship between these three variables needs to be modelled in a time-varying (nonlinear) fashion.
    Keywords: Core inflation; forecasting; small- and large-scale vector autoregressive models; constant and time-varying parameters
    JEL: C22 C32 E27 E31
    Date: 2015
  16. By: Christian-Lambert Nguena (REMA - REMA - REMA (Research in Applied Micro and Macro Economy) - REMA - Recherche); Roger Tsafack-Nanfosso (REMA - REMA - REMA (Research in Applied Micro and Macro Economy) - REMA - Recherche)
    Abstract: This paper qualitatively and quantitatively assesses the degree of resilience in the financial intermediary sector of the Economic and Monetary Community of Central African States (CEMAC) to macroeconomic shocks and discusses the relevant policy implications. Using GMM and a battery of estimations techniques, the panel-based investigations broadly show that the sub-region is vulnerable to macroeconomic shocks. Lower bank provisions result on the one hand from shortages or decreases in long-term financing, real exchange, GDP per capita growth rate and on the other hand from increases of interest rates. Whereas the change in interest rate increases net income commission, the effect is negative from lower levels of short-term financing. The incidence of changes in interest rates on the interest rate margin of banks is ambiguous. The findings broadly confirm the need to incorporate macroeconomic shocks in financial policy decision making. The paper contributes at the same to the knowledge on stock management in monetary zones and the need to: (1) timely intervene to mitigate potential shocks and; (2) increase control to sustain the credibility of the banking system.
    Date: 2014–02–28
  17. By: Sidibe, Tidiani
    Abstract: The debate on the relevance of monetary cooperation agreements with France was back in the saddle by former Malian Prime Minister Moussa MARA July 23, 2015 during a radio broadcast; and Chadian President Idriss Deby Itno during the 55th anniversary of his country's 2015 Tuesday, August 11 The latter threw a big spanner in the franc zone, arguing that currency allows us to develop. Also, some harsh criticism, consider that the CFA franc, pegged to a strong euro hampers the competitiveness of our exports of raw materials quoted in dollars or pounds on the main financial centers in New York, London. This article shows the opposite, highlighting the arguments of stability and credibility enjoyed by the CFA franc. Indeed, the real effective exchange rate (REER) of the CFA franc jouie good parity level relative to trading partners, which means that the CFA franc is neither undervalued nor overestimates. Member countries become more competitive. The foreign reserves of the central banks (BCEAO and BEAC) represented the end of December 2014, only 4.9 months of imports. Monetary cooperation with France is not a zero sum game, it's a win-win partnership. Priority should be given to macroeconomic convergence.
    Keywords: Zone franc, central bank , currency, monetary maturity, foreign exchange reserves, real effective exchange rate ( REER) , exchange parity, unlimited convertibility guarantee, transaction accounts , devaluation , monetary policy, opportunity cost , common currency ECOWAS.
    JEL: E52 E58
    Date: 2015–08–25
  18. By: Altunok, Fatih; Mitchell, Karlyn; Pearce, Douglas
    Abstract: We investigate whether a trade credit channel mitigates monetary policy tightenings intended to slow economic activity. Unlike prior research, we study this issue using quarterly firm-level data for nearly the universe of non-financial public corporations and using more precise measures of their credit market access. We estimate firm-level models of the supply and demand for trade credit from 1988 to 2008. Our evidence suggests that policy tightenings evoke a flow of trade credit from public firms commensurate with their credit market access which goes primarily to private firms, a previously undocumented finding.
    Keywords: trade credit, trade credit channel, monetary policy transmission
    JEL: E5 E52 G1
    Date: 2015–08–10
  19. By: Foley-Fisher, Nathan (Federal Reserve Board); Ramcharan, Rodney (University of Southern California); Yu, Edison (Federal Reserve Bank of Philadelphia)
    Abstract: This paper investigates the impact of unconventional monetary policy on firm financing constraints. It focuses on the Federal Reserve’s maturity extension program (MEP), which was intended to lower longer-term rates and flatten the yield curve by reducing the supply of long-term government debt. Consistent with those models that emphasize bond market segmentation and limits to arbitrage, around the MEP’s announcement, stock prices rose most sharply for those firms that are more dependent on longer-term debt. These firms also issued more long-term debt during the MEP and expanded employment and investment. These responses are most pronounced for those firms with stronger balance sheets. There is also evidence of “reach for yield” behavior among some institutional investors, as the demand for riskier debt also rose during the MEP. Our results suggest that unconventional monetary policy may have helped to relax financing constraints and stimulate economic activity in part by affecting the pricing of risk in the bond market.
    Keywords: Quantitative easing; Unconventional monetary policy; Preferred habitat; Financial constraints
    JEL: E5 G3
    Date: 2015–08–13
  20. By: Guillaume Plantin (ECON - Département d'économie - Sciences Po)
    Abstract: Banks are subject to capital requirements because their privately optimal leverage is higher than the socially optimal one. This is in turn because banks fail to internalize all costs that their insolvency creates for agents who use their money-like liabilities to settle transactions. If banks can bypass capital regulation in an opaque shadow banking sector, it may be optimal to relax capital requirements so that liquidity dries up in the shadow banking sector. Tightening capital requirements may spur a surge in shadow banking activity that leads to an overall larger risk on the money-like liabilities of the formal and shadow banking institutions.
    Date: 2015–01
  21. By: Crowley, Patrick (Texas A&M University - Corpus Christi); Hudgins, David (Texas A&M University - Corpus Christi)
    Abstract: This paper first applies the MODWT (Maximal Overlap Discrete Wavelet Transform) to Euro Area quarterly GDP data from 1995 – 2014 to obtain the underlying cyclical structure of the GDP components. We then design optimal fiscal and monetary policy within a large state-space LQ-tracking wavelet decomposition model. Our study builds a MATLAB program that simulates optimal policy thrusts at each frequency range where: (1) both fiscal and monetary policy are emphasized, (2) only fiscal policy is relatively active, and (3) when only monetary policy is relatively active. The results show that the monetary authorities should utilize a strategy that influences the short-term market interest rate to undulate based on the cyclical wavelet decomposition in order to compute the optimal timing and levels for the aggregate interest rate adjustments. We also find that modest emphasis on active interest rate movements can alleviate much of the volatility in optimal government spending, while rendering similarly favorable levels of aggregate consumption and investment. This research is the first to construct joint fiscal and monetary policies in an applied optimal control model based on the short and long cyclical lag structures obtained from wavelet analysis.
    Keywords: discrete wavelet analysis; euro area; fiscal policy; LQ tracking; monetary policy; optimal control
    JEL: C49 C61 C63 C88 E52 E61
    Date: 2015–08–12
  22. By: Alho, Kari E.O.
    Abstract: Specifying a structurally built NKM model for EMU, and identifying in it the determinants of the potential output and the short-run cyclical factors, we consider structural reforms and monetary and fiscal policies in the euro area. Especially, we analyse whether structural reforms are deflationary or boost the economy in the short run and create spillovers within the euro area under the zero lower bound (ZLB) of the interest rate. We find that a structural reform towards a more competitive economy by lowering the mark ups in the goods and labour market is beneficial both in the short and long run, and both under normal and the ZLB situation in the financial markets. Coordination of reforms within the euro area is also called for, because the spillovers from reforms are typically negative. The national governments searching for an optimal structural policy can delegate the stabilization efforts to the ECB in a long-run equilibrium, but in the short run this separation does not hold in general. We find that in a recession the reform policy is typically curtailed, while in a boom it initially exceeds the long-run equilibrium of reform activity. Proper fiscal policy can alleviate this problematic feature in structural reform policies.
    Keywords: structural reform, EMU, coordination
    JEL: E63 E61 F42
    Date: 2015–08–24
  23. By: Lane, Philip R.
    Abstract: This paper examines the cyclical behaviour of country-level macro-financial variables under EMU. Monetary union strengthened the covariation pattern between the output cycle and the financial cycle, while macro-financial policies at national and area-wide levels were insufficiently counter-cyclical during the 2003-2007 boom period. We critically examine the policy reform agenda required to improve macro-financial stability.
    Keywords: EMU; financial stability; macroprudential
    JEL: E50 F30 F32
    Date: 2015–08
  24. By: Carmassi, Jacopo (University LUISS Guido Carli); Herring, Richard J. (University of PA)
    Abstract: Before the global 2008 financial crisis, most officials appeared not to have anticipated the problems that would need to be addressed if a large cross-border bank should need to be resolved. During and after the financial crisis, this issue surged to the top of the policy agenda. Events made clear that several institutions had become too big and too complex to fail: new rules were needed to make resolution of global banks possible, without cost to taxpayers or damaging spillovers to the economy. After the crisis, the G-20 gave the Financial Stability Board (FSB) a mandate to identify Global Systemically Important Banks (G-SIBs) and to ensure that each had a credible recovery and resolution plan. This study investigates the complexity of the 29 institutions that have been designated as G-SIBs in 2013.
    Date: 2015–06
  25. By: Eisenbeis, Robert (?); Herring, Richard (?)
    Abstract: This paper focuses on how the Federal Reserve (Fed) responded to the early stage of the international financial crisis, from 2007 through 2008, which it characterized as a short-term liquidity problem, despite growing evidence of potential insolvencies among some of the largest banks and investment banks [1]. The Fed provided large amounts of liquidity to both domestic and international institutions when credit risk spreads suddenly widened in September of 2007 and still more liquidity when these spreads virtually exploded in September of 2008 in the wake of the collapse of Fannie Mae and Freddie Mac and the bankruptcy of Lehman Brothers [2]. We argue that signs of increasing financial fragility and potential insolvencies appeared much earlier than fall of 2007. If these had been recognized and acted upon by the regulatory authorities, then it is possible that the most serious financial crisis since the Great Depression might have been substantially mitigated. While it is inherently difficult to disentangle issues of illiquidity from insolvency, the failure to recognize and address the insolvency problems in several major institutions delayed necessary adjustments and undermined confidence in the financial system.
    Date: 2014–12
  26. By: Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Famagusta, Northern Cyprus , via Mersin 10, Turkey; Department of Economics, University of Pretoria, Pretoria, 0002, South Africa); Rangan Gupta (Department of Economics, University of Pretoria); Charl Jooste (Department of Economics, University of Pretoria)
    Abstract: We compare inflation forecasts of a vector fractionally integrated autoregressive moving average (VARFIMA) model against standard forecasting models. U.S. inflation forecasts improve when controlling for persistence and economic policy uncertainty (EPU). Importantly, the VARFIMA model, comprising of inflation and EPU, outperforms commonly used inflation forecast models.
    Keywords: Inflation; long-range dependency; economic policy uncertainty;
    JEL: C53 E37
    Date: 2014
  27. By: Berger, Allen N. (University of SC and University of PA); Bouwman, Christa H. S. (Case Western Reserve University and University of PA); Kick, Thomas (Deutsche Bundesbank); Schaeck, Klaus (Bangor University)
    Abstract: We present the first study that jointly examines how regulatory interventions and capital support affect troubled banks' risk taking and liquidity creation. Using instrumental variables, we document that regulatory interventions and capital support both succeed in reducing bank risk taking. Regulatory interventions also trigger decreases in liquidity creation, pointing towards potential social costs of making troubled banks safer. These effects materialize quickly, persist in the long run, and are not offset by competitors' actions. Our findings provide novel insights into how supervision affects bank conduct and informs the debate about the design of bank bailouts.
    JEL: G21 G28
    Date: 2014–04
  28. By: Rajeswari Sengupta (Indira Gandhi Institute of Development Research); Abhijit Sen Gupta (Asian Development Bank)
    Abstract: In this paper we investigate the different nuances of India's capital account management through empirical analyses as well as descriptive discussions. In particular we study the evolution of the capital control regime in India since 1991, and explore the rationale behind liberalizing certain flows restricting others and the means employed to do so. Increased integration with global financial markets has amplified the complexity of macroeconomic management in India. We analyze the trade-offs faced by Indian policy makers between exchange rate stability, monetary autnomy and capital account opnenness, within the framework of the well-known Impossible Trinity or Trilemma and find that over time India has adopted an intermediate regime balancing the different policy objectives while at the same time accumulating massive international reserves. We also calculate the exchange market pressure (EMP) index in India, and track its evolution over the last couple of decades. We evaluate the extent to which the EMP index has been influenced by major macroeconomic factors and find that a deteriorating trade balance and decline in portfolio equity inflows are associated with a higher EMP while positive changes in stock market returns lower the EMP.
    Keywords: Capital controls, Macroeconomic trilemma, Financial integration, Foreign exchange intervention, Sterilization, Exchange market pressure, Reserve adequacy
    JEL: E4 E5 F3 F4
    Date: 2015–08
  29. By: Boyson, Nicole M. (Northeastern University); Fahlenbrach, Rudiger (EPFL Lausanne and Swiss Finance Institute); Stulz, Rene M. (OH State University and ECGI, Brussels)
    Abstract: We propose a theory of regulatory arbitrage by banks and test it using trust preferred securities (TPS) issuance. From 1996 to 2007, U.S. banks in the aggregate increased their regulatory capital through issuance of TPS while their net issuance of common stock was negative due to repurchases. We assume that, in the absence of capital requirements, a bank has an optimal capital structure that depends on its business model. Capital requirements can impose constraints on bank decisions. If a bank's optimal capital structure also meets regulatory capital requirements with a sufficient buffer, the bank is unconstrained by these requirements. We expect that unconstrained banks will not issue TPS, that constrained banks will issue TPS and engage in other forms of regulatory arbitrage, and that banks with TPS will be riskier than other banks with the same amount of regulatory capital, and therefore, more adversely affected by the credit crisis. Our empirical evidence supports these predictions.
    Date: 2014–03
  30. By: Zenios, Stavros A. (University of Cyprus and University of PA)
    Abstract: The Cyprus debt crisis provides some unique lessons on crisis management. By the time an assistance program was agreed with the Troika, the problem had become so complex that a depositor bail-in was implemented. This was a policy first for Eurozone and is now becoming a blueprint for dealing with future banking crises. This paper examines the events for the one-year period before the two eurogroup meetings on Cyprus on 17 and 25 March 2013 and the resulting resolution of the two systemic banks of the country with depositor bail-in. We show how delays in dealing with the crisis exacerbated the problem but also how the tools brought in to solve the problem created significant adverse side effects. Available evidence questions the validity of confidential studies guiding the policy decisions on depositor haircut and argues that the implemented bail-in violated international principles of fairness.
    JEL: E32 E44 E63 F32 F34 G33
    Date: 2014–03
  31. By: Berger, Allen N. (University of SC and University of PA); Black, Lamont K. (DePaul University); Bouwman, Christa H. S. (Case Western Reserve University and University of PA); Dlugosz, Jennifer (Washington University in St Louis)
    Abstract: The Federal Reserve injected unprecedented liquidity into banks during the crisis using the discount window and Term Auction Facility. We examine these facilities' use and effectiveness. We find: small bank users were generally weak, large bank users were not; the funds substituted to a limited degree for other funds; these facilities increased aggregate lending which would have decreased in their absence. The funds enhanced lending of expanding banks and reduced the decline at contracting banks. Small banks increased small-firm lending, while large banks enhanced large-firm lending. Loan quality only improved at small banks, while both left loan contract terms unchanged.
    JEL: E58 G21 G28
    Date: 2014–04
  32. By: Mathias Lé (ACPR - Autorité de Contrôle Prudentiel et de Résolution - Autorité de Contrôle Prudentiel et de Résolution, 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), EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics)
    Abstract: This paper empirically investigates the bank leverage adjustments after deposit insurance adoption. Banks are found to increase significantly their leverage after the introduction of deposit insurance. However, the banks’ responses appear to be heterogenous. The magnitude of the change in bank leverage decreases with (i) the size, (ii) the systemicity and (iii) the initial capitalisation of banks so that the most systemic and the most highly leveraged banks are unresponsive to deposit insurance. As a result, implementing a deposit insurance scheme could have important competitive effects.
    Date: 2014–10–16
  33. By: Castellari, Elena; Moro, Daniele; Platoni, Silvia; Sckokai, Paolo
    Abstract: In this paper we investigate the relationship between price dispersion and inflation; we use weekly retail scanner data from 2009 to 2011 to measure price dispersion and inflation for several dairy products. We implement a linear model to investigate the linkage between price dispersion and consumer price indexes. As in the previous literature, we obtain mixed results with respect to the relationship between price dispersion and inflation, and further investigation and theoretical refinement are needed to identify a common pattern.
    Keywords: price dispersion, consumer price indexes, food inflation, scanner data, dairy products, Agribusiness, Agricultural and Food Policy, L11, L66,
    Date: 2015–06
  34. By: Kiesel, F.; Lücke, F.; Schiereck, D.
    Abstract: This study aims to analyze the impact and effectiveness of the regulation on the European sovereign Credit Default Swap (CDS) market. The European sovereign debt crisis has drawn considerable attention to the CDS market. CDS have the ability of a speculative instrument to bet against a sovereign default. Therefore, the Regulation (EU) No. 236/2012 was introduced as the worldwide first uncovered CDS regulation. It prohibits buying uncovered sovereign CDS contracts in the European Union (EU).
    Date: 2015–08–06
  35. By: Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Famagusta, Northern Cyprus , via Mersin 10, Turkey); Rangan Gupta (Department of Economics, University of Pretoria); Charl Jooste (Department of Economics, University of Pretoria)
    Abstract: We try and detect whether there exists a threshold level of inflation for the US economy over 1801-2013, beyond which it has a negative effect on economic growth. We use a combination of nonparametric (NP) and instrumental variable semiparametric (SNP-IV) methods to obtain inflation thresholds for the United States. The results suggest that the relationship between growth and inflation is hump shaped—that higher levels of inflation reduce growth more. Our results consistently show that inflation above two per cent negatively affects growth.
    Keywords: Inflation; growth; nonparametric; semiparametric
    JEL: E31 O49 C14
    Date: 2014
  36. By: Crowley, Patrick (Texas A&M University - Corpus Christi); Trombley, Christopher (Texas A&M University - Corpus Christi)
    Abstract: Within currency unions, the conventional wisdom is that there should be a high degree of macroeconomic synchronicity between the constituent parts of the union. But this conjecture has never been formally tested by comparing sample of monetary unions with a control sample of countries that do not belong to a monetary union. In this paper we take euro area data, US State macro data, Canadian provincial data and Australian state data — namely real Gross Domestic Product (GDP) growth, the GDP deflator growth and unemployment rate data — and use techniques relating to recurrence plots to measure the degree of synchronicity in dynamics over time using a dissimilarity measure. The results show that for the most part monetary unions are more synchronous than non-monetary unions, but that this is not always the case and particularly in the case of real GDP growth. Furthermore, Australia is by far the most synchronous monetary union in our sample.
    Keywords: business cycles; growth cycles; frequency domain; optimal currency area; macroeconomic synchronization; monetary policy; single currency
    JEL: C49 E32 F44
    Date: 2015–07–31
  37. By: Sylvain Benoit (LEO - Laboratoire d'économie d'Orleans - UO - Université d'Orléans - CNRS); Jean-Edouard Colliard (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - CNRS - GROUPE HEC); Christophe Hurlin (LEO - Laboratoire d'économie d'Orleans - UO - Université d'Orléans - CNRS); Christophe Pérignon (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - CNRS - GROUPE HEC)
    Abstract: We review the extensive literature on systemic risk and connect it to the current regulatory debate. While we take stock of the achievements of this rapidly growing field, we identify a gap between two main approaches. The first one studies different sources of systemic risk in isolation, uses confidential data, and inspires targeted but complex regulatory tools. The second approach uses market data to produce global measures which are not directly connected to any particular theory, but could support a more efficient regulation. Bridging this gap will require encompassing theoretical models and improved data disclosure.
    Date: 2015–04–14

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