nep-cba New Economics Papers
on Central Banking
Issue of 2015‒09‒05
thirty-one papers chosen by
Maria Semenova
Higher School of Economics

  1. Is optimal monetary policy always optimal? By Davig, Troy A.; Gurkaynak, Refet S.
  2. The Inflation Target at the Zero Lower Bound By Chattopadhyay, Siddhartha; Daniel, Betty C.
  3. When does the cost channel pose a challenge to inflation targeting central banks? By Smith, Andrew Lee
  4. Inflation-Forecast Targeting: Applying the Principle of Transparency By Kevin Clinton; Charles Freedman; Michel Juillard; Ondra Kamenik; Douglas Laxton; Hou Wang
  5. Multiple objectives in monetary policy: a de facto analysis for ‘advanced’ countries By David Cobham
  6. Que Nous Révèlent les Fonctions de Réaction à Propos des Préférences des Banques Centrales? By Fiodendji, Komlan
  7. Always and Everywhere Inflation? Treasuries Variance Decomposition and the Impact of Monetary Policy By Alexandros Kontonikas; Charles Nolan; Zivile Zekaite
  8. Does Easing Monetary Policy Increase Financial Instability? By Ambrogio Cesa-Bianchi; Alessandro Rebucci
  9. The Transmission of Monetary Policy through Redistributions and Durable Purchases By Sterk, Vincent; Tenreyro, Silvana
  10. Nominal GDP Targeting for Middle-Income Countries By Frankel, Jeffrey
  11. The walking dead Euler equation - Addressing a challenge to monetary policy models By A. POISSONNIER
  12. Efficacy of New Monetary Framework and Determining Inflation in India: An Empirical Analysis of Financially Deregulated Regime. By Chakraborty, Lekha; Varma, Kushagra Om
  13. Comparing inflation and price level targeting: the role of forward guidance and transparency By Honkapohja, Seppo; Mitra, Kaushik
  14. Pushing on a String: US Monetary Policy is Less Powerful in Recessions By Tenreyro, Silvana; Thwaites, Gregory
  15. (Not) Dancing Together: Monetary Policy Stance and the Government Spending Multiplier By Vincent Belinga; Constant Lonkeng Ngouana
  16. The Institutions of Federal Reserve Independence By Conti-Brown, Peter
  17. The Possible Trinity: Optimal interest rate,exchange rate, and taxes on capital flows in a DSGE model for a Small Open Economy By Guillermo Escudé
  18. Cross-Country Report on Inflation: Selected Issues By International Monetary Fund. European Dept.
  19. Bank Capital Requirements: A Quantitative Analysis By Nguyen, Thien Tung
  20. A Simple Analytical Model of the Adverse Real Effects of Inflation By Eduardo Bastian; Mark Setterfield
  21. Economic uncertainty: the implications for monetary policy By Rosengren, Eric S.
  22. A Probability-Based Stress Test of Federal Reserve Assets and Income By Christensen, Jens H. E.; Lopez, Jose A.; Rudebusch, Glenn D.
  23. Macro-Financial Stability under EMU By Philip R. Lane;
  24. From Systemic Banking Crises to Fiscal Costs: Risk Factors By David Amaglobeli; Nicolas End; Mariusz Jarmuzek; Geremia Palomba
  25. Indicators used in setting the countercyclical capital buffer By Kalatie, Simo; Laakkonen, Helinä; Tölö, Eero
  26. Lower for Longer: Neutral Rates in the United States By Andrea Pescatori; Jarkko Turunen
  27. The Euro Crisis: Where to From Here? By Frankel, Jeffrey
  28. Rethinking Financial Regulation: How Confusions Have Prevented Progress By Admati, Anat R.
  29. What has Capital Liberalization Meant for Economic and Financial Statistics By Robert M. Heath
  30. Stress Testing Convergence By Gallardo, German Gutierrez; Schuermann, Til; Duane, Michael
  31. Is Gold an Inflation-Hedge? Evidence from an Interrupted Markov-Switching Cointegration Model By Goodness C. Aye; Tsangyao Chang; Rangan Gupta

  1. By: Davig, Troy A. (Federal Reserve Bank of Kansas City); Gurkaynak, 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.
    Date: 2014–12–01
  2. By: Chattopadhyay, Siddhartha; Daniel, Betty C.
    Abstract: We propose that the monetary authority adopt the inflation target as a time varying policy instrument at the zero lower bound (ZLB) with the same zeal with which they have adopted a fixed inflation target away from the ZLB. Specifically, after an extreme adverse shock reduces demand, the monetary authority promises future inflation by raising the inflation target in the Taylor Rule and announcing its persistence over time. The loss under our proposed policy is very similar to that under optimal monetary policy with the advantage that it is cummuicable using the language of the inflation target and implementable using the Taylor Rule. We also show that the inflation target and its persistence could be raised high enough to keep the economy away from the ZLB, but welfare costs are large.
    Keywords: New-Keynesian Model, Inflation Target, Liquidity Trap
    JEL: E52 E58 E63
    Date: 2014–07–31
  3. By: Smith, Andrew Lee (Federal Reserve Bank of Kansas City)
    Abstract: In a sticky-price model where firms finance their production inputs, there is both a lower and an upper bound on the central bank's inflation response necessary to rule out the possibility of self-fulfilling inflation expectations. This paper shows that real wage rigidities decrease this upper bound, but coefficients in the range of those on the Taylor rule place the economy well within the determinacy region. However, when there is time-variation in the share of firms who finance their inputs (i.e. Markov-Switching) then inflation targeting interest rate rules are often found to result in indeterminacy, even if the central bank also targets output. In this case, adding money growth as an intermediate target in the Taylor rule can alleviate this indeterminacy and anchor inflation expectations. Whether the money growth target should be a constant feature of the central bank's policy rule or Markov-Switch depends on the weight the central bank places on output stability relative to inflation stability and the size of money demand shocks.
    Keywords: Cost channel; Money; Regime switching; Taylor principle
    JEL: E30 E40 E50
    Date: 2015–06–01
  4. By: Kevin Clinton; Charles Freedman; Michel Juillard; Ondra Kamenik; Douglas Laxton; Hou Wang
    Abstract: Many central banks in emerging and advanced economies have adopted an inflation-forecast targeting (IFT) approach to monetary policy, in order to successfully establish a stable, low-inflation environment. To support policy making, each has developed a structured system of forecasting and policy analysis appropriate to its needs. A common component is a model-based forecast with an endogenous policy interest rate path. The approach is characterized, among other things, by transparent communications—some IFT central banks go so far as to publish their policy interest rate projection. Some elements of this regime, although a work still in progress, are worthy of consideration by central banks that have not yet officially adopted full-fledged inflation targeting.
    Keywords: Central banks and their policies;Inflation targeting;Monetary policy;Optimal Control, inflation, interest, interest rate, central bank, General,
    Date: 2015–06–24
  5. By: David Cobham
    Abstract: A statistical methodology is developed by which realised outcomes can be used to identify, for calendar years between 1974 and 2012, when policymakers in ‘advanced’ economies have successfully pursued single objectives of different kinds, or multiple objectives. A simple criterion is then used to distinguish between multiple objectives pure and simple and multiple objectives subject to a price stability constraint. The overall and individual country results which this methodology produces seem broadly plausible. Unconditional and conditional analyses of the inflation and growth associated with different types of objectives reveal that multiple objectives subject to a price stability constraint are associated with roughly as good economic performance as the single objective of inflation. A proposal is then made as to how the remit of an inflation-targeting central bank could be adjusted to allow it to pursue other objectives in extremis without losing the credibility effects associated with inflation targeting.
    JEL: E52 E58 F33
    Date: 2015
  6. By: Fiodendji, Komlan
    Abstract: Since Taylor’s (1993) paper researchers have invested a lot effort to estimation of monetary policy rules. Taylor (1993) showed that a simple reaction function of the central bank, with the interest rate as a monetary policy instrument and inflation and the output gap as explanatory variables, pretty much describes the rate (of Basic interest) of the Federal Reserve (US) between 1987 and 1992. Frequently, the Taylor rule coefficients are interpreted as if they reflect the preferences of the central bank. However, such an interpretation can lead to poor decision making. In this study, we show that the Taylor rule coefficients are complicated terms including preferences parameters as well as parameters associated with the structure of the economy. We illustrate our conclusion that the coefficients of the Taylor rule cannot be interpreted as reflecting the preferences of the central bank by estimating standard forward-looking Taylor rules for the BCEAO and to compare these with our results obtained by the method of Favero and Rovelli (2002), in order to detect the preferences of the central bank. This analysis leads us to the conclusion that the coefficients of the Taylor rule cannot be interpreted as indicators of the preferences of the central bank. Our results reveal that BCEAO authorities have preferences for smoothing interest rates and the stabilization of the output gap, however, the 2% inflation target is a major challenge.
    Keywords: Taylor rule, Preferences, Reaction function, GMM approach, BCEAO
    JEL: E5 E58
    Date: 2015–05
  7. By: Alexandros Kontonikas; Charles Nolan; Zivile Zekaite
    Abstract: This paper investigates the sources of variation in Treasury bonds returns and the role of monetary policy over the last three decades. At the first stage of our analysis, we decompose unexpected excess returns on 2-, 5- and 10-year Treasury bonds in three components related to revisions in expectations (news) about future excess returns, inflation and real interest rates. Our results indicate that inflation news is the key driver of Treasury bond returns. At the second stage, we evaluate the impact of conventional and unconventional monetary policy on Treasury bond returns and their components. We find that the positive impact of monetary policy easing on Treasury bond returns is largely explained through downward revisions in inflation expectations.
    Keywords: Bond Market Variance Decomposition; Monetary Policy; Financial Crisis.
    JEL: G12 G01 E44 E52
    Date: 2015–09
  8. By: Ambrogio Cesa-Bianchi; Alessandro Rebucci
    Abstract: This paper develops a model featuring both a macroeconomic and a financial friction that speaks to the interaction between monetary and macro-prudential policies. There are two main results. First, real interest rate rigidities in a monopolistic banking system have an asymmetric impact on financial stability: they increase the probability of a financial crisis (relative to the case of flexible interest rate) in response to contractionary shocks to the economy, while they act as automatic macro-prudential stabilizers in response to expansionary shocks. Second, when the interest rate is the only available policy instrument, a monetary authority subject to the same constraints as private agents cannot always achieve a (constrained) efficient allocation and faces a trade-off between macroeconomic and financial stability in response to contractionary shocks. An implication of our analysis is that the weak link in the U.S. policy framework in the run up to the Global Recession was not excessively lax monetary policy after 2002, but rather the absence of an effective regulatory framework aimed at preserving financial stability.
    Keywords: Financial crises;Financial stability;Econometric models;Automatic stabilizers;Real interest rates;Macroprudential Policy;Monetary policy;United States;Macro-prudential policies, credit frictions, interest rate rigidities, interest, interest rate, interest rates, Financial Markets and the Macroeconomy, Monetary Policy (Targets, Instruments, and Effects),
    Date: 2015–06–26
  9. By: Sterk, Vincent; Tenreyro, Silvana
    Abstract: The central explanation for how monetary policy transmits to the real economy relies critically on nominal rigidities, which form the basis of the New Keynesian (NK) framework. This paper studies a different transmission mechanism that operates even in the absence of nominal rigidities. We show that in an OLG setting, standard open market operations (OMO) carried by central banks have important revaluation effects that alter the level and distribution of wealth and the incentives to work and save for retirement. Specifically, expansionary OMO lead households to front-load their purchases of durable goods and work and save more, thus generating a temporary boom in durables, followed by a bust. The mechanism can account for the empirical responses of key macroeconomic variables to monetary policy interventions. Moreover, the model implies that different monetary interventions (e.g., OMO versus helicopter drops) can have different qualitative effects on activity. The mechanism can thus complement the NK paradigm. We study an extension of the model incorporating labor market frictions.
    Keywords: durable goods; monetary policy; open market operations; redistributive effects of monetary policy; transmission mechanism
    JEL: E1 E31 E32 E52 E58
    Date: 2015–08
  10. By: Frankel, Jeffrey (Harvard University)
    Abstract: It has been proposed that central banks should target Nominal GDP (NGDP), as an alternative to targeting the money supply, exchange rate, or inflation. But the proposal appears in the context of the largest advanced economies. In fact NGDP Targeting may be more appropriate for middle-sized middle-income countries. The reason is that such countries are more often subject to large supply shocks and terms of trade shocks. Such unexpected shocks can force the credibility-damaging abandonment of CPI targets or exchange rate targets that had been previously declared. But they do not require the abandonment of a nominal GDP target, which automatically divides an adverse supply shock equally between impacts on inflation and real GDP. The argument can be illustrated in a model where the ultimate objective is minimizing a quadratic loss function in output and inflation but a credible rule is needed in order to prevent an inflationary bias that arises under discretion. A NGDP rule dominates IT unless the Aggregate Supply curve is especially steep or the weight placed on price stability is especially high. Parameters estimated for the cases of India and Kazakhstan suggest that the Aggregate Supply curve is flat enough to satisfy the necessary condition. The general argument applies regardless whether the monetary authorities at a particular time seek credible disinflation, credible reflation, or simply a credible continuation of the recent path.
    JEL: E52 F41
    Date: 2014–07
  11. By: A. POISSONNIER (Insee)
    Abstract: Despite some strong cases built against it, the Euler equation on consumption remains a cornerstone of monetary policy models. In this paper I test the representative household's consumption-savings trade-off in two original directions. I first use households' specific interest rates for both US and France. These rates have a better explanatory power of the representative consumer's behaviour than the monetary policy rate. I also use a less restrictive approach to measure households' expectations based on survey data. However, the challenge posed by the Euler equation to monetary policy models remains.
    Keywords: Euler equation, consumption
    JEL: E21 D91
    Date: 2015
  12. By: Chakraborty, Lekha (National Institute of Public Finance and Policy); Varma, Kushagra Om (National Institute of Public Finance and Policy)
    Abstract: Against the backdrop of the new monetary policy framework, this paper analyses the determinants of inflation in the deregulated financial regime. The paper upfront has been kept free from adherence to any particular school of thought on inflation, particularly fiscal theories of price determination (where inflation targeting is emphasised) and the monetarist axioms. Using the ARDL methodology, the determinants of inflation based on Wholesale Price Index (WPI) and the Consumer Price Index (CPI) have been empirically tested for the financially deregulated period. The results reveal that the supply-side variables are indeed significant and have a considerable effect on inflation. This result has policy implications especially in the context of a shift from discretion to rule-based monetary policy in the context of India.
    Keywords: Inflation ; Supply side ; ARDL
    JEL: C E E H
    Date: 2015–08
  13. By: Honkapohja, Seppo (Bank of Finland); Mitra, Kaushik (University of Birmingham)
    Abstract: We examine global dynamics under learning in New Keynesian models with price level targeting that is subject to the zero lower bound. The role of forward guidance is analyzed under transparency about the policy rule. Properties of transparent and non-transparent regimes are compared to each other and to the corresponding cases of inflation targeting. Robustness properties for different regimes are examined in terms of the domain of attraction of the targeted steady state and volatility of inflation, output and interest rate. We analyze the effect of higher inflation targets and large expectational shocks for the performance of these policy regimes.
    Keywords: adaptive learning; monetary policy; inflation targeting; zero interest rate lower bound
    JEL: E52 E58 E63
    Date: 2015–04–07
  14. By: Tenreyro, Silvana; Thwaites, Gregory
    Abstract: We estimate the impulse response of key US macro series to the monetary policy shocks identified by Romer and Romer (2004), allowing the response to depend flexibly on the state of the business cycle. We find strong evidence that the effects of monetary policy on real and nominal variables are more powerful in expansions than in recessions. The magnitude of the difference is particularly large in durables expenditure and business investment. The effect is not attributable to differences in the response of fiscal variables or the external finance premium. We find some evidence that contractionary policy shocks have more powerful effects than expansionary shocks. But contractionary shocks have not been more common in booms, so this asymmetry cannot explain our main finding.
    Keywords: assymetric effects of monetary policy; monetary policy
    JEL: E1 E31 E32 E52 E58
    Date: 2015–08
  15. By: Vincent Belinga; Constant Lonkeng Ngouana
    Abstract: This paper provides estimates of the government spending multiplier over the monetary policy cycle. We identify government spending shocks as forecast errors of the growth rate of government spending from the Survey of Professional Forecasters (SPF) and from the Greenbook record. The state of monetary policy is inferred from the deviation of the U.S. Fed funds rate from the target rate, using a smooth transition function. Applying the local projections method to quarterly U.S. data, we find that the federal government spending multiplier is substantially higher under accommodative than non-accommodative monetary policy. Our estimations also suggest that federal government spending may crowd-in or crowd-out private consumption, depending on the extent of monetary policy accommodation. The latter result reconciles—in a unified framework—apparently contradictory findings in the literature. We discuss the implications of our findings for the ongoing normalization of monetary conditions in advanced economies.
    Keywords: Central banks and their policies;Econometric models;Sensitivity analysis;Shock identification;Monetary policy;Fiscal stimulus and multipliers;Fiscal policy;Government expenditures;Spending multiplier, accommodative monetary policy, local projections, government spending, interest rates, interest, Quantitative Policy Modeling, Comparative or Joint Analysis of Fiscal and Monetary or Stabilization Policy,
    Date: 2015–05–27
  16. By: Conti-Brown, Peter (Stanford University)
    Abstract: The Federal Reserve System has come to occupy center stage in the formulation and implementation of national and global economic policy. And yet, the mechanisms through which the Fed creates that policy are assumed but rarely analyzed. These assumptions--of scholars, central bankers, and other policy-makers--are that the Fed's independent authority to make policy is created by law: specifically, the Federal Reserve Act with its creation of removability protection for actors within the Fed, long tenures for Fed Governors, and budgetary autonomy from Congress. This article analyzes these assumptions about law and argues that nothing about them is as it seems. Removability protection does not exist for the Fed Chair, but exists in unconstitutional form for the Reserve Bank presidents; the fourteen-year terms of the Governors are never served, giving every President since FDR twice the appointments the Federal Reserve Act anticipated; and the budgetary independence designed in 1913 bears little relationship to the budgetary independence of 2015. The article thus challenges the prevailing accounts of agency independence in administrative law and central bank independence in economics and political science, both of which focus on statutory mechanisms of creating Fed independence. It argues, instead, that the life of the Act--how its statutory terms are interpreted, how the legal and economic contexts change with the times, and how individual personalities influence policy-making--is more important to understanding Fed independence than the birth of the Act, the language passed by Congress. Fed independence is not simply a creature of statute, but an ecosystem of formal and informal institutional arrangements, within and beyond the control of the ac-tors and organizations most interested in controlling Fed policy.
    Date: 2015–04
  17. By: Guillermo Escudé (Central Bank of Argentina)
    Abstract: A traditional way of thinking about the exchange rate (XR) regime and capital account openness has been framed in terms of the "impossible trinity" or "trilemma", in which policymakers can only have 2 of 3 possible outcomes: open capital markets, monetary independence and pegged XRs. This paper is an extension of Escudé (2012), which focused on interest rate and XR policies, since it introduces the third vertex of the "trinity" in the form of taxes on private foreign debt. These affect the risk-adjusted uncovered interest parity equation and hence influence the SOE´s international financial flows. A useful way to illustrate the range of policy alternatives is to associate them with the faces of a triangle. Each of 3 possible government intervention policies taken individually (in the domestic currency bond market, in the FX market, and in the foreign currency bonds market) corresponds to one of the vertices of the triangle, each of the 3 possible pairs of intervention policies correspond to one of its 3 edges, and the 3 simultaneous intervention policies taken jointly correspond to its interior. This paper shows that this interior, or "possible trinity" is quite generally not only possible but optimal, since the CB obtains a lower loss when it implements a policy with all three interventions.
    Keywords: DSGE models, Small Open Economy, monetary and exchange rate policy, capital controls, optimal policy
    JEL: E58 O24
    Date: 2015–03
  18. By: International Monetary Fund. European Dept.
    Abstract: This Selected Issues paper examines the causes and drivers of low inflation in European inflation targeting countries outside the euro area, focusing on the Czech Republic, Poland, Sweden, and Switzerland. It estimates the effects on inflation from the output gap and external factors, including oil price changes, nominal effective exchange rate (NEER) fluctuations, and euro area inflation spillovers. It is observed that external factors have been significant drivers of low inflation recently, though their contributions to inflation and the channels through which they operate vary across countries. Policy responses and options are also discussed, taking into account country-specific circumstances.
    Keywords: Poland;Sweden;Switzerland;Czech Republic;inflation, external factors, core inflation, output gap, disinflation
    Date: 2015–07–14
  19. By: Nguyen, Thien Tung (OH State University)
    Abstract: This paper examines the welfare implications of bank capital requirements in a general equilibrium model in which a dynamic banking sector endogenously determines aggregate growth. Due to government bailouts, banks engage in risk-shifting, thereby depressing investment efficiency; furthermore, they over-lever, causing fragility in the financial sector. Capital regulation can address these distortions and has a first-order effect on both growth and welfare. In the model, the optimal level of minimum Tier 1 capital requirement is 8%, greater than that prescribed by both Basel II and III. Increasing bank capital requirements can produce welfare gains greater than 1% of lifetime consumption.
    JEL: G21 G28
    Date: 2014–01
  20. By: Eduardo Bastian (Federal University of Rio de Janeiro (UFRJ)); Mark Setterfield (Department of Economics, New School for Social Research)
    Abstract: The essential insight advanced in this paper is that the claim that inflation can impair growth makes most sense in the context of a monetary production economy, wherein a role for money in the determination of real activity is posited from the very start. We construct a model of inflation and growth that distinguishes between the properties of various qualitatively different inflation regimes. It is then shown how some of these regimes, by undermining confidence in various nominal contracts that are central to the process of accumulation in a monetary production economy, can adversely affect growth.
    Keywords: Inflation, strato-inflation, hyper-inflation, indexation, conflicting claims, uncertainty, growth.
    JEL: E31 O41 E12
    Date: 2015–08
  21. By: Rosengren, Eric S. (Federal Reserve Bank of Boston)
    Abstract: Remarks by Eric S. Rosengren, President and Chief Executive Officer, Federal Reserve Bank of Boston, at The Global Interdependence Center's Seventh Annual Rocky Mountain Economic Summit, Victor, Idaho, July 10, 2015.
    Date: 2015–07–10
  22. By: Christensen, Jens H. E. (Federal Reserve Bank of San Francisco); Lopez, Jose A. (Federal Reserve Bank of San Francisco); Rudebusch, Glenn D. (Federal Reserve Bank of San Francisco)
    Abstract: To support the economy, the Federal Reserve amassed a large portfolio of long-term bonds. We assess the Fed's associated interest rate risk--including potential losses to its Treasury securities holdings and declines in remittances to the Treasury. Unlike past examinations of this interest rate risk, we attach probabilities to alternative interest rate scenarios. These probabilities are obtained from a dynamic term structure model that respects the zero lower bound on yields. The resulting probability-based stress test finds that the Fed's losses are unlikely to be large and remittances are unlikely to exhibit more than a brief cessation.
    JEL: E43 E52 E58 G12
    Date: 2013–12
  23. By: Philip R. Lane (Department of Economics, Trinity College Dublin);
    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 Ofinancial 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: David Amaglobeli; Nicolas End; Mariusz Jarmuzek; Geremia Palomba
    Abstract: This paper examines the risk factors associated with fiscal costs of systemic banking crises using cross-country data. We differentiate between immediate direct fiscal costs of government intervention (e.g., recapitalization and asset purchases) and overall fiscal costs of banking crises as proxied by changes in the public debt-to-GDP ratio. We find that both direct and overall fiscal costs of banking crises are high when countries enter the crisis with large banking sectors that rely on external funding, have leveraged non-financial private sectors, and use guarantees on bank liabilities during the crisis. The better quality of banking supervision and the higher coverage of deposit insurance help, however, alleviate the direct fiscal costs. We also identify a possible policy trade-off: costly short-term interventions are not necessarily associated with larger increases in public debt, supporting the thesis that immediate intervention may be actually cost-effective over time.
    Keywords: Banking crisis;Financial crisis;Contingent liabilities;fiscal costs, banking, banking crises, debt, public debt, bank, General,
    Date: 2015–07–20
  25. By: Kalatie, Simo (Bank of Finland); Laakkonen, Helinä (Bank of Finland); Tölö, Eero (Bank of Finland, Financial Stability and Statistics Department)
    Abstract: According to EU legislation, the national authorities should use the principle of 'guided discretion' in setting the countercyclical capital buffer (CCB), which increases banks' resilience against systemic risk associated with periods of excessive credit growth. This means that the decision should be based on signals from a pre-determined set of early warning indicators, but that there should also be room for discretion, as there is always uncertainty associated with the use of early warning indicators. The European Systemic Risk Board (ESRB) recommends that the authorities use the deviation of the credit-to-GDP ratio from its long term trend value (credit-to-GDP gap) as the primary indicator in setting the CCB. In addition, designated authorities should use in their decision making indicators that measure private sector credit developments and debt burden, overvaluation of property prices, external imbalances, mispricing of risk, and strength of bank balance sheets. Based on an empirical analysis of data on EU countries and a large assortment of potential indicators, we propose a set of suitable early warning indicators for each of these categories.
    Keywords: countercyclical capital buffer; macroprudential policy; early warning indicators
    JEL: G01 G28
    Date: 2015–03–16
  26. By: Andrea Pescatori; Jarkko Turunen
    Abstract: We use a semi structural model to estimate neutral rates in the United States. Our Bayesian estimation incorporates prior information on the output gap and potential output (based on a production function approach) and accounts for unconventional monetary policies at the ZLB by using estimates of “shadow†policy rates. We find that our approach provides more plausible results than standard maximum likelihood estimates for the unobserved variables in the model. Results show a significant trend decline in the neutral real rate over time, driven only in part by a decline in potential growth whereas other factors (including excess global savings) matter. Neutral rates likely turned negative during the Global Financial Crisis and are expected to increase only gradually looking forward.
    Keywords: Monetary policy;United States;Neutral interest rate, output, interest, output gap, interest rates, General, Monetary Policy (Targets, Instruments, and Effects),
    Date: 2015–06–24
  27. By: Frankel, Jeffrey (Harvard University)
    Abstract: Germans cannot agree to unlimited bailouts of euro members. On the other hand, if they had insisted on the founding principles (fiscal constraints, "no bailout clause," and low inflation as the sole goal of the ECB), the euro would not have survived the post-2009 crisis. The impact of fiscal austerity has been to raise debt/GDP ratios among periphery countries, not lower them. The eurozone will endure, but through a lost decade of growth. It would help if the ECB further eased monetary policy, which it could do by buying US treasury bonds rather than eurozone bonds. Still needed is a long-run fiscal regime to address the moral hazard problem. Two worthwhile proposals are blue bonds and the delegation of forecasting to independent fiscal agencies.
    JEL: F33 F40
    Date: 2015–03
  28. By: Admati, Anat R. (Stanford University)
    Abstract: Flawed and ineffective financial regulation fails to counter, and may exacerbate, distorted incentives within the financial system. The forces that lead to excessive fragility through unnecessary and dangerous levels of leverage, opacity, complexity and interconnectedness also distort credit markets and create other inefficiencies. In this chapter I focus on the failure to correct key flaws, which were evident in 2007-2009, in the design and implementation of capital regulations. These flaws include low equity levels, the risk-weighting system, allowing debt-like hybrids (under various titles, such as Total Loss Absorbing Capacity or TLACs) as substitutes for equity, and measurement issues, including poor accounting of risk exposures in derivatives markets and in the so-called shadow banking system. Confusions about the sources of the problems and about the tradeoffs associated with specific tools have muddled the policy debate and have allowed narrow interests and political forces to derail progress towards a safer and healthier financial system.
    Date: 2015–06
  29. By: Robert M. Heath
    Abstract: The liberalization of capital flows both in the domestic economy and cross-border has been among the most important policies adopted by IMF member countries over recent decades. The impact has been wide-ranging. This paper looks at the impact on the field of economic and financial statistics in the past two decades, as statisticians have responded to the changing policy needs. The paper considers the historical context of changes that have occurred, draws out the key trends, and asks where these trends might lead statisticians in the foreseeable future. The paper considers that there has been nothing short of a revolution in the field of economic and financial statistics over the past two decades led by a need for greater transparency; greater standardization; new data sets to support understanding of financial interconnections and financial sector risks; and the strengthening of the governance of the statistical function through greater independence of statistical agencies.
    Keywords: Capital account liberalization;Financial sector;Group of Twenty;Transparency;data dissmination standards, financial interconnections, capital flow, capital flows, investment, financial stability, monetary fund, General, financial interconnections.,
    Date: 2015–04–30
  30. By: Gallardo, German Gutierrez (Oliver Wyman); Schuermann, Til (Oliver Wyman); Duane, Michael (Oliver Wyman)
    Abstract: Increasingly aggressive capital management: Banks initially responded to CCAR by maintaining wide capital cushions vs. regulatory minimums. However, as CCAR processes stabilize and capital minimums increase, some institutions appear to be managing capital more and more tightly, especially investment banks, universals and custodians. Drivers of enhanced financial resource management: What allows institutions to manage capital more closely? First, stress test results are beginning to stabilize and, in some cases, converge. Second, although we have just a handful of examples, the market seems to reward aggressive capital requests, even if they are, at first, rejected by the Fed. Unintended consequences: As stress test results converge and institutions begin to manage capital to Fed-projected results, the Fed?s stress testing models become an increasingly important driver of the fate of the financial system.
    JEL: G20 G21 G28
    Date: 2015–07
  31. By: Goodness C. Aye (Department of Economics, University of Pretoria, South Africa); Tsangyao Chang (Department of Finance, College of Finance, Feng Chia University, Taichung, Taiwan); Rangan Gupta (Department of Economics, University of Pretoria)
    Abstract: This paper investigates the inflation hedging role of gold price after controlling for the prices of other investment assets. We use annual data on the U.S. economy spanning from 1833 to 2013. We employ a recently developed flexible nonlinear approach that allows for potential ‘interruption’ in the long run equilibrium relationship in which the equilibrium term dynamics is modelled as an AR(1) depending upon an unobserved state process that is a stationary first-order Markov chain in two states, stationarity and non-stationarity. While, a battery of standard cointegration tests without and with breaks could not find evidence to support the inflation hedging role of gold, results from the flexible nonlinear approach indicate the existence of temporary cointegration between gold price and inflation during 1864, 1919, 1932, 1934, 1976, 1980 and 1982. The interruptions in the long-run relationship at different time periods seem to be associated with the different structural changes that affected the gold market.
    Keywords: Gold, Inflation, Hedging, Interrupted Markov-Switching Cointegration
    JEL: C22 C52 G15 Q02
    Date: 2015–08

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