nep-cba New Economics Papers
on Central Banking
Issue of 2015‒10‒17
27 papers chosen by
Maria Semenova
Higher School of Economics

  1. Capital Controls or Macroprudential Regulation? By Anton Korinek; Damiano Sandri
  2. Comments on "Microprudential Versus Macroprudential Supervision" by Paul Tucker 59th Economic Conference–Macroprudential Monetary Policy Federal Reserve Bank of Boston Boston, MA October 2, 2015 By Mester, Loretta J.
  3. The impact of the ECB's conventional and unconventional monetary policies on stock markets By Reinder Haitsma; Deren Unalmis; Jakob de Haan
  4. The impact of bank capital regulation on financing the economy: Comments on the public consultation of the European Commission on the possible impact of the CRR and CRD IV By Demary, Markus; Haas, Heide
  5. Fiscal Seigniorage "Laffer-curve effect" on Central Bank Autonomy in India. By Chakraborty, Lekha
  6. Domestic and international macroeconomic effects of the Eurosystem expanded asset purchase programme By Pietro Cova; Patrizio Pagano; Massimiliano Pisani
  7. The Use of Monetary Aggregates as Indicators of the Future Evolution of Consumer Prices: Monetary Growth and Inflation Target By Ramos Francia Manuel; Noriega Antonio E.; Rodríguez-Pérez Cid Alonso
  8. Asynchronous Monetary Policies and International Dollar Credit By Dong He; Eric Wong; Andrew Tsang; Kelvin Ho
  9. Ordoliberalism and the macroeconomic policy in the face of the euro crisis By Michal Moszynski
  10. Any lessons for today? Exchange-rate stabilisation in Greece and South-East Europe between economic and political objectives and fiscal reality, 1841-1939 By Matthias Morys
  11. Sovereign Risk, Private Credit, and Stabilization Policies By Pancrazi, Roberto; Seoane, Hernan D; Vukotic, Marija
  12. Theinformational content of market-based measures of inflation expectations derived from govenment bonds and inflation swaps in the United Kingdom By Liu, Zhuoshi; Vangelista, Elisabetta; Kaminska, Iryna; Relleen, Jon
  13. Money demand estimations in Mexico and of its stability 1986-2010, as well as some examples of its uses By Noriega Antonio E.; Ramos Francia Manuel; Rodríguez-Pérez Cid Alonso
  14. Inflation Dynamics in LATAM: A Comparison with Global Trends and Implications for Monetary Policy By Elías Albagli; Alberto Naudon; Rodrigo Vergara
  15. Determinants of global spillovers from US monetary policy By Georgiadis, Georgios
  16. Financial-Monetary Instability Factors within the Framework of the Recent Crisis in Romania By Filip, Bogdan Florin
  17. QE and the Bank Lending Channel in the United Kingdom By Butt, Nicholas; Churm, Rohan; McMahon, Michael; Morotz, Arpad; Schanz, Jochen
  18. An interest rate rule to uniquely implement the optimal equilibrium in a liquidity trap By Duarte, Fernando M.; Zabai, Anna
  19. The coming US interest rate tightening cycle: smooth sailing or stormy waters? By Carlos Arteta; M. Ayhan Kose; Franziska Ohnsorge; Marc Stocker
  20. Three Challenges to Central Bank Orthodoxy By Bullard, James B.
  21. Monetary policy and financial spillovers: losing traction? By Piti Disyatat; Phurichai Rungcharoenkitkul
  22. Optimal time-consistent macroprudential policy By Javier Bianchi; Enrique G Mendoza
  23. Exchange Rate Pass-Through to Prices: VAR Evidence for Chile By Santiago Justel; Andrés Sansone
  24. "The Euro's Savior? Assessing the ECB's Crisis Management Performance and Potential for Crisis Resolution" By Jorg Bibow
  25. Proyección de la inflación agregada con modelos de vectores autorregresivos bayesianos By Carrera, Cesar; Ledesma, Alan
  26. Monetary Policy Transmission in Emerging Asia: The Role of Banks and the Effects of Financial Globalization By Nasha Ananchotikul; Dulani Seneviratne
  27. Does trend inflation make a difference? By Michele Loberto; Chiara Perricone

  1. By: Anton Korinek; Damiano Sandri
    Abstract: International capital flows can create significant financial instability in emerging economies because of pecuniary externalities associated with exchange rate movements. Does this make it optimal to impose capital controls or should policymakers rely on domestic macroprudential regulation? This paper presents a tractable model to show that it is desirable to employ both types of instruments: Macroprudential regulation reduces overborrowing, while capital controls increase the aggregate net worth of the economy as a whole by also stimulating savings. The two policy measures should be set higher the greater an economy's debt burden and the higher domestic inequality. In our baseline calibration based on the East Asian crisis countries, we find optimal capital controls and macroprudential regulation in the magnitude of 2 percent. In advanced countries where the risk of sharp exchange rate depreciations is more limited, the role for capital controls subsides. However, macroprudential regulation remains essential to mitigate booms and busts in asset prices.
    Keywords: Capital controls;Macroprudential policies and financial stability;Emerging markets;East Asia;Exchange rate depreciation;Borrowing;Domestic savings;Financial crises;Econometric models;Financial stability, pecuniary externalities, capital controls, macroprudential regulation, inequality.
    Date: 2015–10–01
  2. By: Mester, Loretta J. (Federal Reserve Bank of Cleveland)
    Abstract: I thank President Rosengren and the Boston Fed for the opportunity to participate in this year’s economic conference. This conference series has been a source of valuable discussions and insights over many years, and I’m happy to note that this year’s conference marks number 59 in the series, a remarkable track record. I’m even happier to say that I, myself, haven’t yet reached that milestone – although it does remain a goal of mine!
    Date: 2015–10–07
  3. By: Reinder Haitsma; Deren Unalmis; Jakob de Haan
    Abstract: Using an event study method, we examine how stock markets respond to the policies of the European Central Bank during 1999-2015. We use market prices of futures (government bonds) to identify surprises in (un)conventional monetary policy. Our results suggest that especially unconventional monetary policy surprises affect the EURO STOXX 50 index. We also find evidence for the credit channel, notably for unconventional monetary policy surprises. Our results also suggest that value and past loser stocks show a larger reaction to monetary policy surprises. These results are confirmed if identification of monetary policy surprises is based on the Rigobon-Sack heteroscedasticity approach.
    Keywords: monetary policy surprises; stock prices; event studies approach; identification through heteroscedasticity
    JEL: E43 E44 E52
    Date: 2015–09
  4. By: Demary, Markus; Haas, Heide
    Abstract: The Global Financial Crisis as well as the Eurozone Banking and Sovereign Debt Crisis revealed deficiencies in bank capital regulation which made banks vulnerable to stress in interbank markets as well as to stress in sovereign debt markets. Deterio-rating banks' balance sheet quality weakened the loan supply. Especially loans to small and medium-sized enterprises within the EU became restrictive. Among reform-ing bank supervision, the European Commission strengthened bank regulation by applying the Basel III recommendations to European law in form of the Capital Re-quirements Regulation (CRR) and the Capital Requirements Directive IV (CRD IV). A public consultation on the effects of CRD IV and CRR is taking place until October 7th of this year. [...]
    Abstract: Die Globale Finanzmarktkrise nach der Insolvenz der US-Investmentbank Lehman Brothers und die darauffolgende Banken- und Staatsschuldenkrise im Euroraum haben Schwachstellen in der Eigenkapitalregulierung der Banken offengelegt. So waren Banken anfällig für Stress in den Interbankenmärkten und den Märkten für europäische Staatsanleihen, wodurch deren Kreditvergabe an die Wirtschaft geschwächt wurde. Insbesondere die Kreditvergabe an kleine und mittelständische Unternehmen fand in Krisenzeiten nur restriktiv statt. Die Europäische Kommission hat die Bankenregulierung gestärkt, indem sie die Basel-III-Vorschläge in Form der Capital Requirements Regulation (CRR) und der Capital Requirements Directive IV (CRD IV) in europäisches Recht umgesetzt hat. [...]
    JEL: G2 G21
    Date: 2015
  5. By: Chakraborty, Lekha (National Institute of Public Finance and Policy)
    Abstract: It is often emphasised that seigniorage financing of public sector deficits is technically a "free lunch" if the economy has not attained the full employment levels. However, conservative macroeconomic policies in many emerging and developing economies, especially in the last two decades, have moved away from seigniorage financing to debt financing of deficits to give greater autonomy to the central banks. Against this backdrop, the paper analyses the fiscal and monetary policy co-ordination in India by constructing a fiscal seigniorage Laffer curve. If such a curve exists, it is possible to derive a seigniorage-maximizing inflation rate to estimate the optimal level of seigniorage financing of deficits. The illustrative estimates from the Indian data using error correction mechanism models confirm the possibility of a fiscal seigniorage Laffer curve.
    Keywords: Fiscal-Monetary Policy Co-ordination ; Seigniorage ; Fiscal Deficits ; Error Correction Mechanism ; Seigniorage Laffer Curve
    JEL: E52 E58 E62 E63 H62
    Date: 2015–09
  6. By: Pietro Cova (Bank of Italy); Patrizio Pagano (The World Bank); Massimiliano Pisani (Bank of Italy)
    Abstract: This paper evaluates the domestic and international macroeconomic effects of purchases of domestic long-term sovereign bonds by the Eurosystem. To this end, we calibrate a five-country dynamic general equilibrium model of the world economy. According to our results, the sovereign bond purchases would generate an increase in economic activity and in inflation in the euro area of about one percentage point in the first two years by inducing a fall in the long-term interest rates and an increase in liquidity. International spillovers may be nontrivial and expansionary, depending on the monetary policy stance of the partner countries and on the response of international relative prices.
    Keywords: DSGE models, open-economy macroeconomics, non-standard monetary policy, zero lower bound
    JEL: E43 E44 E52 E58
    Date: 2015–09
  7. By: Ramos Francia Manuel; Noriega Antonio E.; Rodríguez-Pérez Cid Alonso
    Abstract: We construct inflation pressure indicators based on the long-run relationship that exists between monetary aggregates and prices, once it is adequately adjusted to account for the scale of transactions, as well as the opportunity cost of holding money. To that end, an extensive long-run econometric analysis of money demand is carried out for Mexico using the monetary aggregate M1. Based on it, two indicators are calculated, the money gap and the m* indicator. Such gap measures deviations of real M1 from its relationship with its long-run determinants. The m* indicator is based on the estimation of the price index which is congruent with the quantity of M1 in the economy once it is adjusted for the long-run tendency of its determinants considering its long-run coefficients. Our results indicate that monetary policy has been congruent with the inflation target of Banco de México.
    Keywords: Money demand; Inflation; Money gap; Autoregressive distributed lag model; Cointegration; General-to-specific; Stability; Structural change.
    JEL: C22 C32 E31 E41 E51
    Date: 2015–07
  8. By: Dong He (The International Monetary Fund); Eric Wong (Hong Kong Monetary Authority); Andrew Tsang (Hong Kong Monetary Authority); Kelvin Ho (Hong Kong Monetary Authority)
    Abstract: This paper presents a theoretical model in which the supply of international dollar credit by a global bank is responsive to unconventional monetary policies (UMPs) both in the US and its home country, the functioning of the FX swap market and the bank's default risk. The theoretical model is tested using two unique confidential datasets. The results suggest that the contractionary effect of US monetary normalisation on global liquidity would be partly offset by the expansionary effect of UMPs in Japan and the euro-area. However, a stress testing exercise shows that global liquidity would be seriously disrupted if normalisation of monetary policy in the US leads to financial market dislocation, in particular in the FX swap market. Finally, this study finds that global banks' risk-taking attitude, credit risk exposure, and the business model of their overseas offices are important factors affecting how dollar credit supplied by international banks would respond to UMPs.
    Date: 2015–09
  9. By: Michal Moszynski (Nicolaus Copernicus University, Poland)
    Abstract: The global economic crisis and the crisis in the euro zone exposed the deep differences of opinion between German economists and scientists from Anglo-Saxon countries. The German approach conceptually differs in the views on the strategies and tools of anti-crisis policy, especially fiscal stimulus in the Keynesian-style, quantitative easing monetary policy of the ECB, the question of financial assistance to Greece and restructuring its debt. The other areas of difference are the approach to the rules in macroeconomic policy, fiscal consolidation, and interpretation of current account surplus. Given the size and performance of the German economy it is important to understand the reasons for these opposites, which constitute the research goal of this article. Considerations are based on the thesis that ordoliberal thought still has a strong impact on the practice of macroeconomic policy in Germany and also at the European level. The analysis is built on the short overview of ideological foundations of the German social market economy and its most important postulates, which then will be applied for interpretation of intellectual distinctions between economists from Germany and other countries in the theoretical and practical dimensions of the economic policy observed in Europe. The methodology includes the critical literature studies and the comparative analysis of macroeconomic policy through the prism of economic thought.
    Keywords: Germany, macroeconomic policy, ordoliberalism, rules, economic order
    JEL: B25 E61 H12
    Date: 2015–10
  10. By: Matthias Morys (Department of Economics, University of York)
    Abstract: We add a historical and regional dimension to the debate on the Greek debt crisis. Analysing the 1841-1939 exchange-rate experience of Greece, Bulgaria, Romania and Serbia/Yugoslavia, we find surprising parallels to the present: repeated cycles of entry to and exit from gold, government debt build-up and default, and financial supervision by West European countries. Periods of stable exchange-rates were more short-lived than in any other part of Europe as a result of “fiscal dominance”, i.e., a monetary policy subjugated to the treasury’s needs. Granger causality tests show that patterns of fiscal dominance were only broken under financial supervision, when strict conditionality scaled back the influence of treasury; only then were central banks able to pursue a rule-bound monetary policy and, in turn, stabilize their exchange-rates. Fiscal institutions have remained weak in the case of Greece and are at the heart of the current crisis. A lesson for today might be that the EU-IMF programmes – with their focus on improving fiscal capacity and made effective by conditionality similar to the earlier South-East European experience – remain the best guarantor of continued Greek EMU membership. Understandable public resentment against “foreign intrusion” needs to be weighed against their potential to secure the long-term political and economic objective of exchange-rate stabilisation.
    Keywords: fiscal dominance, gold standard, financial supervision, South-East Europe
    JEL: N13 N14 N23 N24 E63 F34
    Date: 2015–09
  11. By: Pancrazi, Roberto (Department of Economics University of Warwick); Seoane, Hernan D (Department of Economics, Universidad Carlos III de Madrid,); Vukotic, Marija (Department of Economics University of Warwick)
    Abstract: In this paper we examine the impact of bailout policies in small open economies that are subject to financial frictions. We extend standard endogenous default models in two ways. First, we augment the government’s choice set with a bailout option. In addition to the standard choice of defaulting or repaying the debt, a government can also choose to ask for a third-party bailout, which comes at a cost of an imposed borrowing limit. Second, we introduce financial frictions and a financial intermediation channel, which tie conditions on the private credit market to the conditions on the sovereign credit market. This link has been very strong in European countries during the recent sovereign crisis. We find that the existence of a bailout option reduces sovereign spreads and, through the described link, private credit rates as well. The implementation of a rescue program reduces output losses and increases welfare, measured in consumption equivalent terms. Moreover, bailout benefits emerge even when a government only has the option of asking for a bailout, but does not take advantage of it.
    Keywords: Default ; Sovereign Spread ; Private Spread ; Bailouts
    JEL: E44 F32 F34
    Date: 2015
  12. By: Liu, Zhuoshi (China Investment Corporation); Vangelista, Elisabetta (UK Debt Management Office); Kaminska, Iryna (Bank of England); Relleen, Jon (Bank of England)
    Abstract: Market-based measures of inflation expectations can be derived either from the difference between yields on nominal and inflation-linked government bonds or from inflation swap rates. These measures are important indicators of the outlook for inflation and are monitored regularly by the United Kingdom’s Monetary Policy Committee (MPC), alongside other measures of inflation expectations such as those based on surveys. However, the market rates we observe are not perfect measures of expected future inflation. Moreover, in the United Kingdom inflation-linked market instruments reference RPI inflation, whereas the MPC’s target is CPI inflation of 2%. To better extract useful information about expectations for CPI inflation, we develop a no-arbitrage term structure model to decompose the forward inflation curve into: measures of CPI inflation expectations; the expected spread between expected RPI and CPI inflation (the RPI/CPI inflation ‘wedge’); and estimates of risk premia. We then further decompose risk premia estimates into inflation risk premia and liquidity risk premia. We show that long-horizon expectations of CPI inflation, as implied by our model, fell in the 1990s after the introduction of inflation targeting and the creation of the MPC and have since remained fairly stable at around 2%. Our model also suggests that the large falls in measures of implied inflation based on index-linked gilts after the financial crisis were to a large extent the result of changes in liquidity premia in inflation-linked gilt prices.
    Keywords: Affine arbitrage-free dynamic term structure model; breakeven inflation; inflation expectations; risk premia; funding liquidity; survey expectations
    JEL: C40 E31 E43 E52 G12
    Date: 2015–09–25
  13. By: Noriega Antonio E.; Ramos Francia Manuel; Rodríguez-Pérez Cid Alonso
    Abstract: This paper presents an econometric analysis of the demand for the monetary aggregate M1 in Mexico. Using cointegration techniques, we identify both a stable long-run relationship between M1 and its determinants, and a statistically sound single-equation error-correction model. Results are used to carry out the following simple applications: (1) empirical determination of the value and stability of dual inflationary equilibria, given the observed seigniorage levels; (2) calculation of the seigniorage maximizing inflation rate, and (3) analysis of the potential relationship between a measure of excess money and inflation. Results indicate that the low inflation equilibrium is stable, and that the excess money indicator shows, in retrospective, some capacity in predicting inflationary pressures.
    Keywords: Demand for money; seigniorage; inflation; dual inflationary equilibria; cointegration; general to specific; money gap.
    JEL: C22 C32 E31 E41 H62
    Date: 2015–07
  14. By: Elías Albagli; Alberto Naudon; Rodrigo Vergara
    Date: 2015–08
  15. By: Georgiadis, Georgios
    Abstract: This paper assesses the global spillovers from identified US monetary policy shocks in a global VAR model. US monetary policy generates sizable output spillovers to the rest of the world, which are larger than the domestic effects in the US for many economies. The magnitude of spillovers depends on the receiving country’s trade and financial integration, de jure financial openness, exchange rate regime, financial market development, labor market rigidities, industry structure, and participation in global value chains. The role of these country characteristics for the spillovers often differs across advanced and non-advanced economies and also involves non-linearities. Furthermore, economies which experience larger spillovers from conventional US monetary policy also displayed larger downward revisions of their growth forecasts in spring 2013 when the Federal Reserve upset markets by discussing tapering off quantitative easing. The results of this paper suggest that policymakers could mitigate their economies’ vulnerability to US monetary policy by fostering trade integration as well as domestic financial market development, increasing the flexibility of exchange rates, and reducing frictions in labor markets. Other policies - such as inhibiting financial integration, industrialisation and participation in global value chains - might mitigate spillovers from US monetary policy, but are likely to reduce long-run growth. JEL Classification: F4, E5, C3
    Keywords: Mixed cross-section global VAR, spillovers, US monetary policy
    Date: 2015–09
  16. By: Filip, Bogdan Florin
    Abstract: The paper starts from the premise of the organic integration of the financialmonetary components, with their corresponding interrelations, within the macroeconomic system and from their role in ensuring the normal operation of the entire system. In this respect, it is invoked the impact of some financial-monetary components' functioning, with possible malfunctions reflected on the economic stability, and specific factors that determine financialmonetary instability. The development of research focuses on the analysis of some relevant manifestations of financial-monetary instability, marked by major imbalances expressed themselves, synthetically, through high variations of some specific indicators: inflation rate, bank loans interest rate, foreign exchange rate, etc. In this framework, most of the paper consists in econometric analysis, made through the prism of relations of determining that involve main factors generating financial-monetary instability, on the background of the conditions in Romania, in 2008-2013. There are taken so into calculations data for the previously mentioned indicators, considered as dependent variables, on the one hand, respectively those representing GDP, the NPLs volume, M2 monetary aggregate etc., considered as determinant factors and variables, on the other hand. On this basis, there are outlined conclusions and suggested some possibilities to counteract the financial-monetary instability.
    Keywords: Financial Monetary Imbalances; Inflation Rate; Exchange Rate, Interest Rate On Bank Loans; Non-Performing LoansLength: 49 pages
    JEL: C23 E63 G01
    Date: 2014–12
  17. By: Butt, Nicholas; Churm, Rohan; McMahon, Michael; Morotz, Arpad; Schanz, Jochen
    Abstract: We test whether quantitative easing (QE), in addition to boosting aggregate demand and inflation via portfolio rebalancing channels, operated through a bank lending channel (BLC) in the UK. Using Bank of England data together with an instrumental variables approach, we find no evidence of a traditional BLC associated with QE. We show, in a simple framework, that the traditional BLC is diminished if the bank receives 'flighty' deposits (deposits that are likely to quickly leave the bank). We show that QE gave rise to such flighty deposits which may explain why we find no evidence of a BLC.
    Keywords: bank lending channel; monetary policy; Quantitative Easing
    JEL: E51 E52 G20
    Date: 2015–10
  18. By: Duarte, Fernando M. (Federal Reserve Bank of New York); Zabai, Anna (Bank for International Settlements)
    Abstract: We propose a new interest rate rule that implements the optimal equilibrium and eliminates all indeterminacy in a canonical New Keynesian model in which the zero lower bound on nominal interest rates (ZLB) is binding. The rule commits to zero nominal interest rates for a length of time that increases in proportion to how much past inflation has deviated—either upward or downward—from its optimal level. Once outside the ZLB, interest rates follow a standard Taylor rule. Following the Taylor principle outside the ZLB is neither necessary nor sufficient to ensure uniqueness of equilibria. Instead, the key principle is to respond strongly enough to deviations of past inflation from optimal levels by sufficiently increasing the amount of time interest rates are promised to be kept at zero.
    Keywords: zero lower bound; ZLB; liquidity trap; New Keynesian model; indeterminacy; monetary policy; Taylor rule; Taylor principle; interest rate rule; forward guidance
    JEL: E43 E52 E58
    Date: 2015–10–01
  19. By: Carlos Arteta; M. Ayhan Kose; Franziska Ohnsorge; Marc Stocker
    Abstract: The U.S. Federal Reserve (Fed) is expected to start raising policy interest rates in the near term and thus commence a tightening cycle for the first time in nearly a decade. The taper tantrum episode of May-June 2013 is a reminder that even a long anticipated change in Fed policies can trigger substantial financial market volatility in Emerging and Frontier Market Economies (EFEs). This paper provides a comprehensive analysis of the potential implications of the Fed tightening cycle for EFEs. We report three major findings: First, since the tightening cycle will take place in the context of a robust U.S. economy, it could be associated with positive real spillovers to EFEs. Second, while the tightening cycle is expected to proceed smoothly, there are risks of a disorderly adjustment of market expectations. The sudden realization of these risks could lead to a significant decline in EFE capital flows. For example, a 100 basis point jump in U.S. long-term yields could temporarily reduce aggregate capital flows to EFEs by up to 2.2 percentage point of their combined GDP. Third, in anticipation of the risks surrounding the tightening cycle, EFEs should prioritize monetary and fiscal policies that reduce vulnerabilities and implement structural policy measures that improve growth prospects.
    Keywords: Federal Reserve, liftoff, tightening, interest rates, monetary policy, emerging markets, frontier markets, capital flows, sudden stops, crises.
    JEL: E52 E58 F30 G15
    Date: 2015–10
  20. By: Bullard, James B. (Federal Reserve Bank of St. Louis)
    Abstract: October 2, 2015. In a speech to the Shadow Open Market Committee in New York, St. Louis Fed President James Bullard discussed the orthodox view of current monetary policy, which emphasizes that the FOMC's objectives are close to being met while monetary policy settings remain far from normal, along with three challenges to that view, which relate to strict inflation targeting, low real interest rates and globalization. He concluded that the U.S. economy will likely experience better outcomes if the monetary policy orthodoxy is preserved as the guiding principle.
    Date: 2015–10–02
  21. By: Piti Disyatat; Phurichai Rungcharoenkitkul
    Abstract: Has financial globalisation compromised central banks' ability to manage domestic financial conditions? This paper tackles this question by studying the dynamics of bond yields encompassing 31 advanced and emerging market economies. To gauge the extent to which external financial conditions complicate the conduct of monetary policy, we isolate a "contagion" component by focusing on comovements in measures of bond return risk premia that are unrelated to economic fundamentals. Our contagion measure is designed to more accurately capture spillovers driven by exogenous global shifts in risk preference or appetite. The analysis reaches several conclusions that run counter to popular presumptions based on comovements in bond yields. In particular, emerging market economies appear to be much less susceptible to global contagion than advanced economies, and the overall sensitivities to contagion have not increased post-crisis.
    Keywords: Monetary policy, financial spillovers, contagion, interest rates, trilemma, bond risk premium, capital flows
    Date: 2015–10
  22. By: Javier Bianchi; Enrique G Mendoza
    Abstract: Collateral constraints widely used in models of financial crises feature a pecuniary externality: Agents do not internalize how borrowing decisions taken in "good times" affect collateral prices during a crisis. We show that agents in a competitive equilibrium borrow more than a financial regulator who internalizes this externality. We also find, however, that under commitment the regulator's plans are time-inconsistent, and hence focus on studying optimal, time-consistent policy without commitment. This policy features a state-contingent macroprudential debt tax that is strictly positive at date t if a crisis has positive probability at t + 1. Quantitatively, this policy reduces sharply the frequency and magnitude of crises, removes fat tails from the distribution of returns, and increases social welfare. In contrast, constant debt taxes are ineffective and can be welfare-reducing, while an optimized "macroprudential Taylor rule" is e effective but less so than the optimal policy.
    Keywords: Financial crises, macroprudential policy, systemic risk, collateral constraints
    Date: 2015–10
  23. By: Santiago Justel; Andrés Sansone
    Abstract: This paper investigates the exchange rate pass-through (ERPT) to different price indices in Chile. The analysis is carried out with a vector autoregressive (VAR) model with block exogeneity restrictions. Models were estimated using monthly data for Chile from January 1987 to December 2013. Average pass-through ratio to total CPI is estimated to be between 0.1 and 0.2 in the medium term. These results indicate a lower ERPT after the adoption of inflation targeting. Moreover, from 2002 onwards the effect of an exchange rate movement takes around four quarters to pass-through completely, compared to one to two years for the full sample.
    Date: 2015–02
  24. By: Jorg Bibow
    Abstract: This study assesses the European Central Bank's (ECB) crisis management performance and potential for crisis resolution. The study investigates the institutional and functional constraints that delineate the ECB's scope for policy action under crisis conditions, and how the bank has actually used its leeway since 2007--or might do so in the future. The study finds that the ECB may well stand out positively when compared to other important euro-area or national authorities involved in managing the euro crisis, but that in general the bank did "too little, too late" to prevent the euro area from slipping into recession and protracted stagnation. The study also finds that expectations regarding the ECB's latest policy initiatives may be excessively optimistic, and that proposals featuring the central bank as the euro's savior through even more radical employment of its balance sheet are misplaced hopes. Ultimately, the euro's travails can only be ended and the euro crisis resolved by shifting the emphasis toward fiscal policy; specifically, by partnering the ECB with a "Euro Treasury" that would serve as a vehicle for the central funding of public investment through the issuance of common Euro Treasury debt securities.
    Keywords: Monetary Policy, Currency Union, ECB, Lender of Last Resort, Euro Crisis, Banking Union
    JEL: E42 E44 E52 E58 E61
    Date: 2015–09
  25. By: Carrera, Cesar (Banco Central de Reserva del Perú); Ledesma, Alan (UC Santa Cruz)
    Abstract: We forecast 18 groups of individual components of the Consumer Price Index (CPI) using a large Bayesian vector autoregressive model (BVAR) and then aggregate those forecasts in order to obtain a headline inflation forecast (bottom-up approach). De Mol et al. (2006) and Banbura et al. (2010) show that BVAR's forecasts can be significantly improved by the appropriate selection of the shrinkage hyperparameter. We follow Banbura et al. (2010)'s strategy of "mixed priors," estimate the shrinkage parameter, and forecast inflation. Our findings suggest that this strategy for modeling outperform the benchmark random walk as well as other strategies for forecasting inflation.
    Date: 2015–07
  26. By: Nasha Ananchotikul; Dulani Seneviratne
    Abstract: Given the heavy reliance on bank lending as the main source of financing in most Asian economies, banks could potentially play a pivotal role in monetary policy transmission. However, we find that Asia’s bank lending channel or, more broadly, credit channel of domestic monetary policy is not very strong at the aggregate level. Using bank-level data for nine Asian economies during 2000–2013, we show that heterogeneity of bank characteristics (e.g., ownership type, financial position), degree of foreign bank penetration of the domestic banking sector, and global financial conditions all have a bearing on the response of domestic credit to changes in domestic monetary policy, and may account for the apparently weak credit channel at aggregate level.
    Keywords: Monetary transmission mechanism;Asia;Emerging markets;Banks;Loans;Financial systems;Banking sector;Globalization;Monetary policy;Monetary policy transmission; bank lending channel; financial globalization
    Date: 2015–09–28
  27. By: Michele Loberto (Bank of Italy); Chiara Perricone (LUISS Guido Carli)
    Abstract: Although the average inflation rate of developed countries in the postwar period has been greater than zero, much of the extensive literature on monetary policy has employed models that assume zero steady-state inflation. In comparing four estimated medium-scale NK DSGE models with real and nominal frictions, we seek to shed light on the quantitative implications of omitting trend inflation, that is, positive steady-state inflation. We compare certain population characteristics and the IRFs for the four models by applying two loss functions based on a point distance criterion and on a distribution distance criterion, respectively. Finally, we compare the RMSE forecasts. We repeat the analysis for three sub-periods: the Great Inflation, the Great Moderation and the union of the two periods. We do not find clear evidence for always preferring a model that uses trend inflation.
    Keywords: new Keynesian DSGE, trend inflation, loss function, entropy
    JEL: C1 C5 E4 E5
    Date: 2015–09

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