nep-cba New Economics Papers
on Central Banking
Issue of 2015‒09‒26
thirty-two papers chosen by
Maria Semenova
Higher School of Economics

  1. Gradualism in Monetary Policy: A Time-Consistency Problem? By Jeremy C. Stein; Adi Sunderam
  2. What Measure of Inflation Should a Developing Country Central Bank Target? By Rahul Anand; Eswar Prasad
  3. Is the Monetary Policy Rate Effective? Recent Evidence from Ghana By Nana Kwame Akosah
  4. Bond markets and monetary policy dilemmas for the emerging markets By Jhuvesh Sobrun; Philip Turner
  5. Country shocks, monetary policy expectations and ECB decisions. A dynamic non-linear approach By Maximo Camacho; Danilo Leiva-Leon; Gabriel Perez-Quiros
  6. Country shocks, monetary policy expectations and ECB decisions. A dynamic non-linear approach By Camacho, Maximo; Leiva-Leon, Danilo; Pérez-Quirós, Gabriel
  7. Implementation of Monetary Policy and its Influence on the Output By Ricardo Álvarez Torres; María Irma Manrique Campos; Alejandra Fernández Hernández
  8. Fear of Liftoff: Uncertainty, Rules and Discretion in Monetary Policy Normalization By Orphanides, Athanasios
  9. How to De-Dollarize Financial Systems in the Caucasus and Central Asia? By Sami Ben Naceur; Amr Hosny; Gregory Hadjian
  10. An SVAR Approach to Evaluation of Monetary Policy in India: Solution to the Exchange Rate Puzzles in an Open Economy By Barnett, William A.; Bhadury, Soumya; Ghosh, Taniya
  11. On the Theoretical Efficacy of Quantitative Easing at the Zero Lower Bound By Boel, Paola; Waller, Christopher J.
  12. The choice of flexibility in targeting inflation during normal times and during disinflation By Cukierman, Alex
  13. Managing the Fed’s Liftoff and Transmission of Monetary Policy By Manmohan Singh
  14. Monetary Policy and Employment By McGrattan, Ellen R.
  15. Euro area macro-financial stability: A flow-of-funds perspective By Beck, Günter W.; Kotz, Hans-Helmut; Zabelina, Natalia
  17. Taylor rule in practice : Evidence from tunisia By Chaouech, Olfa
  18. Normalization of Global Financial Conditions: The Implications for Brazil By Troy Matheson
  19. Global Factors in the Term Structure of Interest Rates By Mirko Abbritti; Salvatore Dell'Erba; ​Antonio Moreno; Sergio Sola
  20. Money Creation: Tax or Public Liquidity? By Reichlin, Pietro
  21. Did emergency liquidity assistance (ELA) of the ECB delay the bankruptcy of Greek banks? By Götz, Martin R.; Haselmann, Rainer; Krahnen, Jan Pieter; Steffen, Sascha
  22. Disinflations in a model of imperfectly anchored expectations By Christopher G. Gibbs; Mariano Kulish
  23. Estimating the Real Effects of Uncertainty Shocks at the Zero Lower Bound By Efrem Castelnuovo; Giovanni Caggiano; Giovanni Pellegrino
  24. Exit expectations and debt crises in currency unions By Kriwoluzky, Alexander; Müller, Gernot; Wolf, Martin
  25. Banks and Sovereign Risk: A Granular View By C. M. Buch; Michael Koetter; Jana Ohls
  26. Prospects for the Russian Ruble to Become Regional Reserve Currency By Pavel Trunin; Sergey Narkevich
  27. Long-Run and Short-Run Effects of Money Injections By Tsz-Nga Wong; Pierre-Olivier Weill; Guillaume Rocheteau
  28. Does intelligence help fighting inflation: an empirical test? By Salahodjaev, Raufhon
  29. “But we are different!â€: 12 Common Weaknesses in Banking Laws, and What to Do About Them By Wouter Bossu; Dawn Chew
  30. Evaluating Performance of Inflation Forecasting Models of Pakistan By Hanif, Muhammad Nadim; Malik, Muhammad Jahanzeb
  31. Towards an Economic Theory of Islamic Finance Regulation By Al-Jarhi, Mabid
  32. ‘It’s a trap!’ The degree of poverty persistence in Italy and Europe By Elena Giarda; Gloria Moroni

  1. By: Jeremy C. Stein; Adi Sunderam
    Abstract: We develop a model of monetary policy with two key features: (i) the central bank has private information about its long-run target for the policy rate; and (ii) the central bank is averse to bond-market volatility. In this setting, discretionary monetary policy is gradualist, or inertial, in the sense that the central bank only adjusts the policy rate slowly in response to changes in its privately-observed target. Such gradualism reflects an attempt to not spook the bond market. However, this effort ends up being thwarted in equilibrium, as long-term rates rationally react more to a given move in short rates when the central bank moves more gradually. The same desire to mitigate bond-market volatility can lead the central bank to lower short rates sharply when publicly-observed term premiums rise. In both cases, there is a time-consistency problem, and society would be better off appointing a central banker who cares less about the bond market. We also discuss the implications of our model for forward guidance once the economy is away from the zero lower bound.
    JEL: E44 E52 E58
    Date: 2015–09
  2. By: Rahul Anand; Eswar Prasad
    Abstract: In closed or open economy models with complete markets, targeting core inflation enables monetary policy to maximize welfare by replicating the flexible price equilibrium. We analyze this result in the context of developing economies, where a large proportion of households are credit constrained and the share of food expenditures in total consumption expenditures is high. We develop an open economy model with incomplete financial markets to show that headline inflation targeting improves welfare outcomes. We also compute the optimal price index, which includes a positive weight on food prices but, unlike headline inflation, assigns zero weight to import prices.
    Date: 2015–09–23
  3. By: Nana Kwame Akosah (Bank of Ghana)
    Abstract: We examine the effectiveness of monetary policy transmission mechanism in Ghana using several of statistical and econometric techniques for the period 2002M1 – 2014M12. We find monetary policy rate (MPR) to be quite effective in signaling the money market interest rates in both the short run and long run, as the effect is incomplete (that is, not one-to-one). In addition, a hierarchy of short-term money market rates in Ghana is identified as follows: Monetary Policy Rate, Treasury bill rate, Interbank rate and retail rates (preferably, lending rate), accentuating the large role played by Treasury bill interest rate in the interest rate transmission channel in Ghana. Essentially, monetary authority responds positively and contemporaneously to output and inflationary pressures. Inflation is mostly driven by interest rate shock over the medium to long term, pointing to an impact of monetary policy. In the short term, however, exchange rate shock has relatively larger influence on inflation than that emanating from interest rate. In contrast, output is largely driven by credit and assets prices shocks. This suggests that agents’ knowledge about future output prospects are immediately reflected in assets prices before impacting on output. The paper therefore supports policies that would promote strong financial and macroeconomic stability to help inure effective monetary policy transmission in Ghana.
    Keywords: Monetary Policy, Inflation Targeting, Transmission Mechanism, Structural Shocks.
    JEL: E52 E58
    Date: 2015–06–01
  4. By: Jhuvesh Sobrun; Philip Turner
    Abstract: Financial conditions in the emerging markets (EMs) have become more dependent on the 'world' long-term interest rate, which has been driven down by monetary policies in the advanced economies - notably Quantitative Easing (QE) - and by several non-monetary factors. This paper analyses some new mechanisms that link global long-term rates to monetary policy and to domestic bank lending in the EMs. Understanding these mechanisms could help EM central banks prepare for the exit from QE and higher (and perhaps divergent) policy rates in advanced economies. Although monetary policy in the EMs has continued to be guided by domestic objectives, it has nevertheless lost some traction. Difficult trade-offs now confront central banks.
    Keywords: Exit from QE, long-term interest rate, emerging market economies, bond markets
    Date: 2015–08
  5. By: Maximo Camacho (University of Murcia); Danilo Leiva-Leon (Central Bank of Chile); Gabriel Perez-Quiros (Banco de España, Airef and CEPR)
    Abstract: Previous studies have shown that the effectiveness of monetary policy largely depends on market expectations about future policy 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 about the ECB’s monetary policy in two stages. In the first stage, we construct indices of real activity and inflation dynamics for each country, based on soft and hard indicators. In the second stage, we use those indices to provide assessments of 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. In particular, contractionary demand shocks have a negative effect on short-term monetary policy expectations, while contractionary supply shocks have a negative effect on medium and long-term expectations. Moreover, shocks to different economies do not have significantly different effects on expectations, although some cross-country differences arise.
    Keywords: business cycles, inflation cycles, monetary policy
    JEL: E32 C22 E27
    Date: 2015–09
  6. By: Camacho, Maximo; Leiva-Leon, Danilo; Pérez-Quirós, Gabriel
    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.
    Keywords: business cycles; inflation cycles; monetary policy
    JEL: C22 E32 E37
    Date: 2015–09
  7. By: Ricardo Álvarez Torres (Economic Research Institute of the National Autonomous University of Mexico (UNAM)); María Irma Manrique Campos (Economic Research Institute of the National Autonomous University of Mexico (UNAM)); Alejandra Fernández Hernández (Universidad Politécnica del Estado de Morelos (UPEMOR))
    Abstract: The output plays one of the main roles in both theoretical: orthodox and heterodox framework. In Mexico, where was embrace, and it is still ruling, an Inflation Targeting policy, it says that the output gap determines the inflation level, hence it symbolize worthy role of the application policy. Besides the fact that, in the heterodox framework, where the aggregate demand determines the output, it in turn, affect the level of employment, etc. This paper portrays, though statistics analysis, how monetary policy affects the output in Mexican case, also to provide a contrast of the role of product into the orthodox and heterodox framework.
    Keywords: Monetary Policy, Output, Mexico
    JEL: E52 E58 O42
  8. By: Orphanides, Athanasios
    Abstract: The Federal Reserve’s muddled mandate to attain simultaneously the incompatible goals of maximum employment and price stability invites short-term-oriented discretionary policymaking inconsistent with the systematic approach needed for monetary policy to contribute best to the economy over time. Fear of liftoff—the reluctance to start the process of policy normalization after the end of a recession—serves as an example. Causes of the problem are discussed, drawing on public choice and cognitive psychology perspectives. The Federal Reserve could adopt a framework that relies on a simple policy rule subject to periodic reviews and adaptation. Replacing meeting-by-meeting discretion with a simple policy rule would eschew discretion in favor of systematic policy. Periodic review of the rule would allow the Federal Reserve the flexibility to account for and occasionally adapt to the evolving understanding of the economy. Congressional legislation could guide the Federal Reserve in this direction. However the Federal Reserve may be best placed to select the simple rule and could embrace this improvement on its own, within its current mandate, with the publication of a simple rule along the lines of its statement of longer-run goals.
    Keywords: discretion; Federal Reserve; liftoff; policy normalization; policy rules
    JEL: E32 E52 E58 E61
    Date: 2015–09
  9. By: Sami Ben Naceur; Amr Hosny; Gregory Hadjian
    Abstract: Dollarization rates in the Caucasus and Central Asia (CCA) region are among the highest in the world, with adverse consequences for macroeconomic stability, monetary policy transmission, and financial sector development. Using dynamic panel data models, we find that foreign exchange deposits and loans in the CCA are mainly driven by volatile inflation and exchange rates, low financial depth, and asymmetric exchange rate policies biased toward depreciation. Although there is no unique formula for success, empirical studies and cross-country experiences suggest that credible monetary and exchange rate frameworks, low and stable inflation, and deep domestic financial markets are essential ingredients of any de-dollarization strategy. In implementation, policymakers need to consider proper sequencing of policies, effective communication as well as risks from potential financial disintermediation and instability, and/or capital flight.
    Date: 2015–09–23
  10. By: Barnett, William A.; Bhadury, Soumya; Ghosh, Taniya
    Abstract: Following the exchange-rate paper by Kim and Roubini (2000), we revisit the questions on monetary policy, exchange rate delayed overshooting, the inflationary puzzle, and the weak monetary transmission mechanism; but we do so for the open Indian economy. We further incorporate a superior monetary measure, the aggregation-theoretic Divisia monetary aggregate. Our paper confirms the efficacy of the Kim and Roubini (2000) contemporaneous restriction, customized for the Indian economy, especially when compared with recursive structure, which is damaged by the price puzzle and the exchange rate puzzle. The importance of incorporating correctly measured money into the exchange rate model is illustrated, when we compare models with no-money, simple-sum monetary measures, and Divisia monetary measures. Our results are confirmed in terms of impulse response, variance decomposition analysis, and out-of-sample forecasting. In addition, we do a flip-flop variance decomposition analysis, finding two important phenomena in the Indian economy: (i) the existence of a weak link between the nominal-policy variable and real-economic activity, and (ii) the use of inflation-targeting as a primary goal of the Indian monetary authority. These two main results are robust, holding across different time period, dissimilar monetary aggregates, and diverse exogenous model designs.
    Keywords: Monetary Policy; Monetary Aggregates; Divisia monetary aggregates; Structural VAR; Exchange Rate Overshooting; Liquidity Puzzle; Price Puzzle; Exchange Rate Puzzle; Forward Discount Bias Puzzle.
    JEL: C32 E51 E52 F3 F41
    Date: 2015–09–19
  11. By: Boel, Paola (Sveriges Riksbank, Sweden); Waller, Christopher J. (Federal Reserve Bank of St. Louis)
    Abstract: We construct a monetary economy in which agents face aggregate demand shocks and hetero- generous idiosyncratic preference shocks. We show that, even when the Friedman rule is the best interest rate policy, not all agents are satiated at the zero lower bound. Thus, quantitative easing can be welfare improving since it temporarily relaxes the liquidity constraint of some agents, without harming others. Moreover, due to a pricing externality, quantitative easing may also have beneficial general equilibrium effects for the unconstrained agents. Lastly, our model suggests that it can be optimal for the central bank to buy private debt claims instead of government debt.
    Keywords: Money; Heterogeneity; Stabilization Policy; Zero Lower Bound; Quantitative Easing
    JEL: E40 E50
    Date: 2015–09–01
  12. By: Cukierman, Alex
    Abstract: This paper investigates the relationship between the return path to price stability and the extent of flexibility in targeting inflation under perfect reputation as well as under imperfectly anchored inflation targeting systems characterized by imperfect reputation. The first part of the paper shows that the mapping from the flexibility parameter, to the return path to price stability is generally non-unique. It discusses reasons and consequences of this non-uniqueness, and proposes several ways to address the communication and related problems that this fact creates for the conduct of monetary policy. The second part investigates the impact of reputation (defined as the weight given by the public to preannounced interim targets in forming inflationary expectations) on the speed of inflation stabilization. The main result is that higher reputation is associated with faster stabilizations at all levels of the flexibility parameter.
    Keywords: anchoring expectations; reputation; return to price stability
    JEL: E02 E31 E50 E52
    Date: 2015–09
  13. By: Manmohan Singh
    Abstract: In recent years, many money and repo rates in the United States have been between zero and 25 basis points. As Fed’s liftoff approaches, the question of the level of these rates (and the markets that determine them) becomes increasingly important. The paper discusses (i) whether the Fed can control short–term rates as it starts to tighten; and (ii) what are the advantages and disadvantages of using asset sales versus a large reverse repo program (RRP). A large RRP by the Fed will deprive the financial system of the money pool (i.e., GSEs and money market funds) as the Fed will directly absorb the money on to its balance sheet. This will rust the financial plumbing that connects the money pool to collateral suppliers. Some asset sales may be preferred to a large RRP as this will result in a market-determined repo rate and will allow the Fed to reach its monetary policy liftoff objectives with minimal footprint on market plumbing. We also discuss cost of issuing short tenor T-bills relative to a large RRP in a rising rate environment.
    Date: 2015–09–23
  14. By: McGrattan, Ellen R. (Federal Reserve Bank of Minneapolis)
    Abstract: In its “Statement on Longer-Run Goals and Monetary Policy Strategy,” the Federal Open Market Committee (Federal Reserve Board of Governors, 2014) summarizes its two main objectives: to mitigate (i) deviations of inflation from its longer-run goal and (ii) deviations of employment from the Federal Open Market Committee’s assessment of its maximum level. In the case of employment, the statement acknowledges that “the maximum level ... is largely determined by nonmonetary factors,” which is why the FOMC sets no fixed goal for the employment level. It instead depends on the Committee’s “assessment.” In this paper, I investigate the link between monetary policy and employment using predictions of current monetary theory. The results show that even with the extraordinary monetary accommodation provided by the Fed since 2008, theory predicts only a small impact of monetary policy on employment. Other research suggests that to understand what does impact employment levels and hours worked, economic theory should be modified to account for factors that impact labor-leisure decisions.
    Date: 2015–09–23
  15. By: Beck, Günter W.; Kotz, Hans-Helmut; Zabelina, Natalia
    Abstract: The global financial crisis (as well as the European sovereign debt crisis) has led to a substantial redesign of rules and institutions - aiming in particular at underwriting financial stability. At the same time, the crisis generated a renewed interest in properly appraising systemic financial vulnerabilities. Employing most recent data and applying a variety of largely only recently developed methods we provide an assessment of indicators of financial stability within the Euro Area. Taking a "functional" approach, we analyze comprehensively all financial intermediary activities, regardless of the institutional roof - banks or non-bank (shadow) banks - under which they are conducted. Our results reveal a declining role of banks (and a commensurate increase in non-bank banking). These structural shifts (between institutions) are coincident with regulatory and supervisory reforms (implemented or firmly anticipated) as well as a non-standard monetary policy environment. They might, unintendedly, actually imply a rise in systemic risk. Overall, however, our analyses suggest that financial imbalances have been reduced over the course of recent years. Hence, the financial intermediation sector has become more resilient. Nonetheless, existing (equity) buffers would probably not suffice to face substantial volatility shocks.
    Keywords: bank and non-bank financial intermediation,shadow banking,financial stability,systemic risk,financial regulation
    Date: 2015
  16. By: Pippenger, John
    Abstract: Teh Forward-Bias Puzzle, failure of uncovered interest parity and related puzzles suggest that there is a fundamental failure in internatonal financial markets.  Many theories attempt to explain this bias and failure.  But none of them has been widely accepted; at least partly because they are not consistent with the related puzzles.  The model of monetary policy in Table 6 explains the Forward-Bias Puzzle and the UIP failure without appealing to risk premia or information failures.  It also explains, or is at least consistent with, the related puzzles.  Finally it suggests that we need to change the way we think about UIP.
    Keywords: Social and Behavioral Sciences, exchange rates, interest rates, risk premia, uncovered interest parity, forward bias, arbitrage, expectations
    Date: 2015–08–26
  17. By: Chaouech, Olfa
    Abstract: This paper estimates the Taylor rule under the static version, then the dynamic version of the Central bank of Tunisia (CBT), using monthly data from 2002:Q1 to 2014:Q12. The empirical results indicate that the CBT followed the Taylor rule in its dynamic version.
    Keywords: Tylor rule, GMM, Monetary policy, Reaction function
    JEL: C13 E52
    Date: 2015–06–01
  18. By: Troy Matheson
    Abstract: Global financial conditions are poised to tighten further as the global recovery proceeds. While monetary policy normalization should be a healthy global development as growth continues to recover in advanced economies, financial spillovers seen during the taper episode—which started with the announcement in May 2013 of possible tapering of U.S. asset purchases—hint at potential challenges for Brazil. The Fed’s communications related to normalization have improved significantly since the taper episode and, at present, a rise in Fed Funds rate in 2015 is widely anticipated by markets—arguably the most widely anticipated tightening of monetary policy in history. While Brazil could benefit from tighter global financial conditions associated with improved global prospects, bouts of heightened uncertainty about the future course of monetary policy cannot be ruled out. Thus, the correct diagnosis of the underlying reasons behind tighter global financial conditions remains crucially important for Brazil. Adverse spillovers can be mitigated by strengthening policy frameworks and fundamentals.
    Date: 2015–09–03
  19. By: Mirko Abbritti (​University of Navarra); Salvatore Dell'Erba (International Monetary Fund); ​Antonio Moreno (University of Navarra); Sergio Sola (International Monetary Fund)
    Abstract: This paper introduces global factors within a FAVAR framework in an empirical affine term structure model. We apply our method to a panel of international yield curves and show that global factors account for more than 80 percent of term premia in advanced economies. In particular they tend to explain long-term dynamics in yield curves, as opposed to domestic factors which are instead more relevant to short-run movements. We uncover the key role for global curvature in shaping term premia dynamics. We show that this novel factor precedes global economic and financial instability. In particular, it coincides with immediate expectations of permanent expansionary monetary policy during the recent crisis
    Date: 2014–01–01
  20. By: Reichlin, Pietro
    Abstract: When the nominal return on all public liabilities is allowed to adjust to changing market conditions, or the central bank has access to unlimited open market operations, money growth is likely to stimulate output. This is shown in the model used by Lucas in his Nobel Prize Lecture as an example of the non neutral effects of anticipated monetary expansions. A rise in net outside assets increases households' incentives to work through a reallocation of consumption across periods. This result survives with non interest-bearing cash when the latter does not generate relevant distortions.
    Keywords: inflation; monetary policy
    JEL: E40 E41 E44 E52 E58 G10
    Date: 2015–09
  21. By: Götz, Martin R.; Haselmann, Rainer; Krahnen, Jan Pieter; Steffen, Sascha
    Abstract: The European Central Bank (ECB) increased the emergency liquidity assistance (ELA) for Greek banks from €50 billion in February 2015 to approximately €90 billion in June 2015. Its actions were accompanied by a discussion among academics, politicians and practitioners regarding the legitimacy of the ELA. Some have even accused the ECB of deliberately delaying the bankruptcy filing of already insolvent Greek banks. We take the claim regarding insolvency delay as an opportunity to highlight the underlying economics of the ELA program and discuss its legitimacy in the current situation. We start by characterizing the complex interrelationship of the European Union, the ECB and the Greek banks through the lens of financial economics, with a particular focus on the political economy of a monetary union with incomplete fiscal union (or fiscal consolidation). Combining these two issues, we examine the decision of the ECB to continue the provision of ELA to Greek banks. Our conclusions, drawn from the analysis, do not support the claim that the ECB's actions are consistent with a delayed filing for insolvency.
    Keywords: emergency liquidity assistance (ELA),economic and monetary union,banking supervision,Greece
    Date: 2015
  22. By: Christopher G. Gibbs; Mariano Kulish
    Abstract: We study disinflations under imperfect credibility of the central bank. Imperfect credibility is modeled as the extent to which agents rely on adaptive learning to form expectations. Lower credibility increases the mean, variance, and skewness of the distribution of sacrifice ratios. When credibility is low, disinflationary policies become very costly for adverse realizations of the shocks. Even if the impact of an announcement decreases with lower credibility, pre-announcing a disinflation reduces the sacrifice ratio. Additionally, disinflationary policies implemented after a period of below trend inflation lead to lower sacrifice ratios. Opportunistic disinflations are desirable when credibility is low.
    Date: 2015–09
  23. By: Efrem Castelnuovo (University of Padova); Giovanni Caggiano (University of Padova); Giovanni Pellegrino (University of Verona)
    Abstract: We employ a parsimonious nonlinear Interacted-VAR to examine whether the real effects of uncertainty shocks are greater when the economy is at the Zero Lower Bound. Our results show that the contractionary effects of uncertainty shocks are statistically larger when the ZLB is binding, with differences that are economically important. Such differences are shown not to be driven by the contemporaneous occurrence of the Great Recession. These fi?ndings lend support to recent theoretical contributions on the interaction between uncertainty shocks and the stance of monetary policy.
    Keywords: Uncertainty shocks, Nonlinear Structural Vector AutoRegressions, Interacted VAR, Generalized Impulse Response Functions, Zero Lower Bound.
    JEL: C32 E32
    Date: 2015–08
  24. By: Kriwoluzky, Alexander; Müller, Gernot; Wolf, Martin
    Abstract: Membership in a currency union is not irreversible. Expectations of exit may emerge during a sovereign debt crisis, because by exiting countries can redenominate and reduce their liabilities. This possibility alters the dynamics of sovereign debt crises. We establish this formally within a small open economy model of changing policy regimes. The model permits explosive dynamics of debt and sovereign yields inside the currency union and allows us to distinguish between exit expectations and those of an outright default. By estimating the model on Greek data, we quantify the contribution of exit expectations to the crisis dynamics during 2009-2012.
    Keywords: currency union; euro crisis; exit; fiscal policy; redenomination premium; regime-switching model; sovereign debt crisis
    JEL: E41 E52 E62
    Date: 2015–09
  25. By: C. M. Buch; Michael Koetter; Jana Ohls
    Abstract: We identify the determinants of all German banks’ sovereign debt exposures between 2005 and 2013 and test for the implications of these exposures for bank risk. Larger, more capital market affine, and less capitalised banks hold more sovereign bonds. Around 15% of all German banks never hold sovereign bonds during the sample period. The sensitivity of sovereign bond holdings by banks to eurozone membership and inflation increased significantly since the collapse of Lehman Brothers. Since the outbreak of the sovereign debt crisis, banks prefer sovereigns with lower debt ratios and lower bond yields. Finally, we find that riskiness of government bond holdings affects bank risk only since 2010. This confirms the existence of a nexus between government debt and bank risk.
    Keywords: sovereign debt, bank-level heterogeneity, bank risk
    JEL: G01 G11 G21
    Date: 2015–09
  26. By: Pavel Trunin (Gaidar Institute for Economic Policy); Sergey Narkevich (Gaidar Institute for Economic Policy)
    Abstract: 2007-2009 global financial crisis demonstrated that financial markets of major countries can be subject to the large scale system shocks. One of the manifestations of the crisis was the slump of the global trade and significant capital outflow from the emerging markets. This papers deals with the issue of the Russian ruble becoming a regional reserve currency.
    Keywords: Russian economy, financial crisis, reserve currency, regional reserve currency, Russian ruble
    JEL: E42 E44 E58 F31 F33 F36 F42 F55 G15
    Date: 2013
  27. By: Tsz-Nga Wong (Bank of Canada); Pierre-Olivier Weill (UCLA); Guillaume Rocheteau (University of California, Irvine)
    Abstract: We construct a tractable model of monetary exchange with search and bargaining that features a non-degenerate distribution of money holdings in which one can study the short-run and long-run effects of changes in the money supply. While money is neutral in the long run, an unanticipated, one-time, money injections in a centralized market with flexible prices and unrestricted participation generates an increase in aggregate real balances and aggregate output, a decrease in the rate of return of money, and a redistribution of output and consumption levels across agents in the short run. Moreover, the initial impact on the price level is non-monotonic with the size of the money injection, e.g., small injections can lead to a deflation followed by inflation. We also study repeated money injections and show they can lead to higher output and higher welfare.
    Date: 2015
  28. By: Salahodjaev, Raufhon
    Abstract: This article empirically investigates the effect of intelligence on inflation, using data from 122 countries, over the period 1990 – 2013. The findings suggest strong evidence for the hypothesis that intelligence is negatively linked to inflation. This paper documents that on average, when national IQ increases from the level of El Salvador (78 points) to that of Malaysia (91.7 points), the long run inflation decreases by 27 percent. In particular, the negative effect of intelligence on inflation is stronger in countries with low levels of democracy. The negative impact of national IQ remains robust when controlled for potential determinants of inflation.
    Keywords: inflation; IQ; intelligence; democracy; cross-country
    JEL: E31
    Date: 2015
  29. By: Wouter Bossu; Dawn Chew
    Abstract: Well-designed banking laws are critical for regulating the market access and operations of banks, as well as their removal from the market in case of failure. While at a financial policy level there is a broad consensus as to the content of banking laws, from a legal perspective their drafting often leaves something to be desired. In spite of what is often argued, the types of weaknesses of banking laws are hardly country-specific; many weaknesses are shared by many banking laws. This working paper discusses those weaknesses and ways to remedy them, by focusing on a selected set of legal policy principles.
    Keywords: Banking law;Banking supervision legal framework;Bank regulations;Corporate governance;Banking Regulation, Policy Analysis
    Date: 2015–09–10
  30. By: Hanif, Muhammad Nadim; Malik, Muhammad Jahanzeb
    Abstract: This study compares the forecasting performance of various models of inflation for a developing country estimated over the period of last two decades. Performance is measured at different forecast horizons (up to 24 months ahead) and for different time periods when inflation is low, high and moderate (in the context of Pakistan economy). Performance is considered relative to the best amongst the three usually used forecast evaluation benchmarks – random walk, ARIMA and AR(1) models. We find forecasts from ARDL modeling and certain combinations of point forecasts better than the best benchmark model, the random walk model, as well as structural VAR and Bayesian VAR models for forecasting inflation for Pakistan. For low inflation regime, upper trimmed average of the point forecasts out performs any model based forecasting for short period of time. For longer period, use of an ARDL model is the best choice. For moderate inflation regime different ways to average various models’ point forecasts turn out to be the best for all inflation forecasting horizons. The most important case of high inflation regime was best forecasted by ARDL approach for all the periods up to 24 months ahead. In overall, we can say that forecasting performance of different approaches is state dependent for the case of developing countries, like Pakistan, where inflation is occasionally high and volatile.
    Keywords: Inflation, Forecast Evaluation, Random Walk model, AR(1) model, ARIMA model, ARDL model, Structural VAR model, Bayesian VAR model, Trimmed Average
    JEL: C52 E31 E37
    Date: 2015–09–22
  31. By: Al-Jarhi, Mabid
    Abstract: Islamic finance has several comparative advantages over conventional finance. Since they are related to efficiency, stability and other macroeconomic benefits, they cannot be easily internalized by Islamic bankers. Islamic bankers have no incentive to stick to the Islamic finance paradigm and instead tend to mimic conventional finance. Regulation is therefore required to modify their behavior in order to allow the Islamic finance industry to enjoy its advantages. This paper attempts to modify the economic theory of bank regulations towards that aim.
    Keywords: Islamic banking, Islamic finance, Islamic monetary and financial economics, regulations banking, finance
    JEL: E4 E5 E6
    Date: 2014
  32. By: Elena Giarda; Gloria Moroni
    Abstract: This paper analyses poverty persistence in Italy and compares it with France, Greece, Portugal, Spain and the United Kingdom, focusing on its dynamics through the analysis of transitions into and out of poverty and the econometric quantification of true state dependence. The analysis is performed on the longitudinal component of the EU-SILC for the period 2009-2012. Descriptive statistics and transition matrices reveal that households in Italy are characterised by a higher degree of poverty persistence than in other countries. This evidence is confirmed by the estimation of Heckman’s dynamic random effects probit model. Italy is the country with the highest level of true state dependence estimated at 0.26, after Greece (0.30), while the UK has the lowest value (0.07). Italy also shows an impact of individual characteristics on current poverty lower, in absolute terms, than the lagged dependent variable. This may explain the gap in the persistent to current poverty ratio between Italy and other countries.
    Keywords: poverty, dynamic probit models, state dependence, EU-SILC
    JEL: I32 C23 C25
    Date: 2015–09

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