nep-cba New Economics Papers
on Central Banking
Issue of 2015‒11‒15
twenty papers chosen by
Maria Semenova
Higher School of Economics

  1. The Costs of Implementing a Unilateral One-Sided Exchange Rate Target Zone By Hertrich, Markus
  2. International spillovers in inflation expectations By Ciccarelli, Matteo; García, Juan Angel
  3. What drives long-run inflation expectations? By Stefano Eusepi; Emanuel Moench; Bruce Preston; Carlos Carvalho
  4. Monetary Policy and Bank Risk-taking: Evidence from Emerging Economies By Wu, Ji; Jeon, Bang Nam; Chen, Minghua; Wang, Rui
  5. Can Foreign Exchange Intervention Stem Exchange Rate Pressures from Global Capital Flow Shocks? By Olivier Blanchard; Gustavo Adler; Irineu de Carvalho Filho
  6. Five Questions on U.S. Monetary Policy By Bullard, James B.
  7. State-Aid, Stability and Competition in European Banking By Fiordelisi, Franco; Mare, Davide Salvatore; Molyneux, Philip
  8. Alternative Indicator of Monetary Policy Stance for Macedonia By Magdalena Petrovska; Ljupka Georgievska
  9. Monetary/Fiscal Policy Mix and Asset Prices By Howard Kung; Gonzalo Morales; Francesco Bianchi
  10. Get ready for the Fed lift-off: The role of macroprudential policy By F. Gulcin Ozkan; D. Filiz Unsal
  11. Inflation and Activity: Two Explorations and Their Monetary Policy Implications By Olivier Blanchard; Eugenio Cerutti; Lawrence H. Summers
  12. Islamic monetary policy: Is there an alternative of interest rate? By Uddin, Md Akther; Halim, Asyraf
  13. GENDER AND CENTRAL BANKING By Ibrahima Diouf; Dominique Pépin
  14. Working Paper – WP/15/04- Vulnerability to Normalization of Global Financing Conditions- An Operational Approach By Shakill Hassan; Merrisa Paul; Siobhan Redford
  15. Working Paper - WP/14/01- Monetary Policy and Heterogeneous Inflation Expectations in South Africa By Alain Kabundi; Eric Schaling; Modeste Some
  16. Working Paper – WP/15/02- Speculative Flows, Exchange Rate Volatility and Monetary Policy- the South African Experience By Shakill Hassan
  17. Working Paper – WP/14/09- Variance Bounds as Thresholds for ‘Excessive’ Currency Volatility- Inflation Targeting Emerging Economies By Shaista Amod; Shakill Hassan
  18. Working Paper – WP/15/01- Labour Market and Monetary Policy in South Africa By Nicola Viegi
  19. Essays on banking and financial innovation By Gong, Di
  20. Essays in financial stability and public policy By Horváth, Bálint

  1. By: Hertrich, Markus
    Abstract: In the aftermath of the recent financial crisis, the central banks of small open economies such as the Czech National Bank and the Swiss National Bank (SNB) both implemented a unilateral one-sided exchange rate target zone vis-a-vis the euro currency to counteract deflationary pressures. Recently, the SNB abandoned its minimum exchange rate regime of CHF 1.20 per euro, arguing that after having analyzed the costs and benefits of this non-standard exchange rate policy measure, it was no longer sustainable. This paper proposes a model that allows central banks to estimate ex-ante the costs of implementing and maintaining a unilateral one-sided target zone and to monitor these costs during the period where it is enforced. The model also offers central banks a tool to identify the right timing for the discontinuation of a minimum exchange rate regime. An empirical application to the Swiss case shows the actual size of these costs and reveals that these costs would have been substantial without the abandonment of the minimum exchange rate regime, which accords with the official statements of the SNB.
    Keywords: Foreign exchange reserves, minimum exchange rate, reflected geometric Brownian motion, target zone costs, Swiss National Bank
    JEL: E42 E52 E58 E6 E63 F33
    Date: 2015
  2. By: Ciccarelli, Matteo; García, Juan Angel
    Abstract: This paper investigates the factors behind developments in inflation expectations in euro area, the U.S. and the U.K. over the sample 2005-2015. Our analysis unveils the presence of a quantitatively important spillover from euro area long-term inflation expectations onto international ones, in particular the U.S., since August 2014. This finding has some important implications. From a policy perspective, it contributes to explain the somewhat puzzling declines in financial indicators of inflation expectations since the autumn 2014 (Yellen, 2015). From a research perspective, our findings suggest that the relatively weak performance of term-structure models (and other econometric models) to explain developments in long-term inflation expectations in major economic areas over 2014-15 may be due to the omission of international factors. These two dimensions may well carry a significant weight on the on-going and future debate on monetary policy normalisation in major central banks. JEL Classification: C11, C52, E31
    Keywords: deflation, global inflation, Inflation expectations, international spillovers
    Date: 2015–10
  3. By: Stefano Eusepi (Federal Reserve Bank of New York); Emanuel Moench (Deutsche Bundesbank); Bruce Preston (Melbourne University); Carlos Carvalho (PUC-Rio)
    Abstract: According to both central bankers and economic theory, anchored inflation expectations are key to successful monetary policymaking. Yet, we know very little about the drivers of inflation expectations -- especially about the long run. We explore a simple model of expectations formation and inflation determination in which the sensitivity of long-run inflation expectations to short-run inflation surprises is state-dependent. Price-setting agents act as econometricians trying to learn about average long-run inflation. They set sticky prices according to their views about future inflation, which hence feed into actual inflation. As in Marcet and Nicolini (2003), agents' estimates of long-run inflation move slowly in normal times, as they keep adding observations to the sample they consider. However, after being surprised repeatedly/largely enough, agents discard old observations and put more weight on recent developments. As a result, long-run inflation expectations become more sensitive to short-run news. We estimate the model using only short-run inflation forecasts from surveys, and find that it produces long-run forecasts that track survey measures quite closely. The estimated model has several uses: 1) It can tell a story of how inflation expectations got unhinged in the 1970s; it can also be used to construct a counterfactual history of inflation under anchored long-run expectations. 2) At any given point in time, it can be used to compute the probability of inflation or deflation scares. 3) If embedded into an environment with explicit monetary policy, it can also be used to study the role of policy in shaping the expectations formation mechanism.
    Date: 2015
  4. By: Wu, Ji (Research Institute of Economics and Management); Jeon, Bang Nam (School of Economics); Chen, Minghua (Research Institute of Economics and Management); Wang, Rui (Research Institute of Economics and Management)
    Abstract: This paper addresses the impact of monetary policy on banks’ risk-taking by using the bank-level panel data from more than 1000 banks in 33 emerging economies during 2000-2012. We find that, consistent with the proposition of the “bank risk-taking channel” of monetary policy transmission, banks’ riskiness increases when monetary policy is eased. Bank risk-taking amid expansionary monetary policy is more conspicuous in small and less liquid banks, and in countries with a stronger deposit insurance scheme and a fixed exchange rate regime. We also find that the monetary policy-bank risk nexus is dampened in more concentrated banking markets and when monetary policy is more transparent.
    Keywords: Monetary policy; Bank risk-taking; Emerging economies
    JEL: E44 E52 G21
    Date: 2015–11–10
  5. By: Olivier Blanchard (Peterson Institute for International Economics); Gustavo Adler (International Monetary Fund); Irineu de Carvalho Filho (International Monetary Fund)
    Abstract: Many emerging-market economies have relied on foreign exchange intervention (FXI) in response to gross capital inflows. In this paper, we study whether FXI has been an effective tool to dampen the effects of these inflows on the exchange rate. To deal with endogeneity issues, we look at the response of different countries to plausibly exogenous gross inflows, and explore the cross-country variation of FXI and exchange rate responses. Consistent with the portfolio balance channel, we find that larger FXI leads to less exchange rate appreciation in response to gross inflows.
    Keywords: foreign exchange intervention, exchange rate, capital flows, gross capital flows
    JEL: E42 E58 F31 F40
    Date: 2015–11
  6. By: Bullard, James B. (Federal Reserve Bank of St. Louis)
    Abstract: During the St. Louis Regional Chamber Financial Forum, St. Louis Fed President James Bullard said that any decision on whether to increase the policy rate from near-zero levels will be data-dependent. He also discussed five key questions for the FOMC; they relate to global uncertainty, U.S. financial conditions, labor markets, inflation and the dollar.
    Date: 2015–11–06
  7. By: Fiordelisi, Franco; Mare, Davide Salvatore; Molyneux, Philip
    Abstract: What is the relationship between bank fragility and competition during a period of market turmoil? Does market power in European banking involve extra-gains after discounting for the cost of government intervention? We answer these questions in the context of Eurozone banking over 2005-2012 and show that greater market power increases bank stability implying aggregate extra-gains of 57% of EU12 gross domestic product for the banking sector after discounting for the costs associated with government intervention. The negative influence of competition on bank stability is non-monotonic and reverses for lower degrees of competition. Capital injections, guarantees and asset relief measures elicit greater bank soundness.
    Keywords: Bank Stability, Prudential Regulation, Competition, Global Financial Crisis, European Banking Union, Government Bailouts
    JEL: C23 G21 G28
    Date: 2015–09
  8. By: Magdalena Petrovska (National Bank of the Republic of Macedonia); Ljupka Georgievska (National Bank of the Republic of Macedonia)
    Abstract: This paper applies a SVAR model which combines different monetary policy instruments to construct an alternative indicator of monetary policy stance in Macedonia. It employs the approach introduced by Bernanke and Mihov (1998) of isolating monetary policy shocks from the whole set of monetary policy instruments that otherwise react to real developments. The residuals from such VAR are cleaned from the central bank’s reaction function and represent true monetary policy innovations. Furthermore, we solve the interdependence among different monetary policy instruments contained in the residuals by developing a structural model. We use the model to extract unanticipated policy stance, as an alternative view on the monetary policy.
    Keywords: SVAR, Monetary policy stance, Monetary framework
    JEL: E50 E52
    Date: 2015–07
  9. By: Howard Kung (London Business School); Gonzalo Morales (University of British Columbia); Francesco Bianchi (Cornell University)
    Abstract: This paper estimates monetary and fiscal policy rules using a New Keynesian model that allows for changes in the monetary/fiscal policy mix, generates a sizeable bond risk premia, and takes into account the effects of the zero lower bound.
    Date: 2015
  10. By: F. Gulcin Ozkan; D. Filiz Unsal
    Abstract: This paper explores how best a small open economy can defend against a foreign interest rate rise, such as the impending Fed lift-off. We find that a broad based macroprudential policy is the mosteffective tool in containing fluctuations arising from the interest rate shock, hence yielding the lowest loss in welfare.
    Keywords: Foreign interest rates; emerging markets; monetary pol-icy; macroprudential measures; capital controls.
    JEL: E5 F3 F4 G1
    Date: 2015–10
  11. By: Olivier Blanchard (Peterson Institute for International Economics); Eugenio Cerutti (International Monetary Fund); Lawrence H. Summers (Harvard University)
    Abstract: We explore two issues triggered by the global financial crisis. First, in most advanced countries, output remains far below the pre-recession trend, suggesting hysteresis. Second, while inflation has decreased, it has decreased less than anticipated, suggesting a breakdown of the relation between inflation and activity. To examine the first, we look at 122 recessions over the past 50 years in 23 countries. We find that a high proportion of them have been followed by lower output or even lower growth. To examine the second, we estimate a Phillips curve relation over the past 50 years for 20 countries. We find that the effect of unemployment on inflation, for given expected inflation, decreased until the early 1990s but has remained roughly stable since then. We draw implications of our findings for monetary policy.
    Keywords: Recessions, Hysteresis, Phillips Curve, Monetary Policy
    JEL: E31 E32 E50
    Date: 2015–11
  12. By: Uddin, Md Akther; Halim, Asyraf
    Abstract: At the advent of global financial crisis conventional monetary policy has failed to regulate the money market and the consequence of which was seen in the global financial and capital market. This paper takes an attempt to give a brief outline of how Islamic monetary policy can be a sustainable alternative to the conventional. In order to understand Islamic monetary policy better we went back to early Islamic period and discussed how money was evolved and monetary policy was performed at that time. Reemergence of Islamic economic system in the latter half of the last century encouraged scholars in this field to have a fresh look at this issue. Comparative analysis shows that Islamic monetary policy can adopt many conventional instruments which are in line with the Shariah guidance such as: Legal Reserve Ratio, Credit Rationing, Selective credit control, Issue of directive, and Moral suasion etc. As interest rate, the key tool of conventional monetary policy regulation, is prohibited in Islamic economic system, the need for sustainable alternative is the order of the day. Unfortunately, Islamic banks and financial institutions set their benchmark based on London Interbank Offered Rate (LIBOR) which raises doubt and controversy of the uniqueness of Islamic finance. Literature shows that this a growing field of knowledge and many theoretical works have been conducted in this area but little empirical work, moreover, very few on alternative benchmark for Islamic economic system. By analyzing literature we propose in our study that GDP growth rate adjusted for inflation can be set as a benchmark for money market instrument and reference for financial and capital market as we argue GDP growth rates reflect real balanced growth potential of an economy as it is correlated with national income, savings, inflation, exchange rate and investment compare to real interest rate, which is fixed in the money market and does not take into account the real sector.
    Keywords: Monetary Policy, Islamic Monetary Policy, Real Interest Rate, GDP Growth Rate, Inflation, Real Exchange Rate, Gross Savings, Foreign Direct Investment and Gross National Income
    JEL: A1 E4 N1
    Date: 2015–02–04
  13. By: Ibrahima Diouf (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers); Dominique Pépin (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers)
    Abstract: Female Central Bank chairs represent but a tiny minority. To understand why, this article analyzes socioeconomic and socio-political characteristics of the countries where females have chaired Central Banks. Then, it suggests that gender differences in preferences as regards monetary policy goals may have some influence. This hypothesis is based on an empirical analysis showing that female Central Bank chairs focus more than their male colleagues on achieving the price stability goal. This means, then, that females are more resistant than males to political pressures. Finally, it concludes that gender differences in degree of conservatism, may be an explanatory factor in female underrepresentation in the Central Bank chairs.
    Keywords: monetary policy ,gender gap,Central Bank,conservatism,female underrepresentation
    Date: 2015–11
  14. By: Shakill Hassan; Merrisa Paul; Siobhan Redford
    Abstract: A simple ratio of foreign exchange reserves to the gross external financing requirement (GEFR) largely explains the cross-sectional variation in exchange rate depreciation over the taper tantrum in 2013. We update the ratio for a set of emerging markets, and compare current to previous exposure. South Africa’s relative position barely changed between mid-2013 and early 2015. In contrast, India rapidly increased its ratio of reserves-to-GEFR through improvements in each component of the indicator; and forcefully reduced inflation. We document a reduction in high-frequency reactions of the rupee to FOMC meetings. Reducing vulnerability to imminent tightening in US monetary policy requires, above all, reducing the external financing requirement and/or increasing the stock of reserves.
    Date: 2015–10–29
  15. By: Alain Kabundi; Eric Schaling; Modeste Some
    Abstract: This paper examines the relationship between inflation and inflation expectations of analysts, business, and trade unions in South Africa during the inflation targeting (IT) regime. We consider inflation expectations based on the Bureau of Economic Research (BER) quarterly survey observed from 2000Q1 to 2013Q1. We estimate inflation expectations of individual agents as the weighted average of lagged inflation and the inflation target. The results indicate that expectations are heterogeneous across agents. Expectations of price setters (business and unions) are closely related to each other and are higher than the upper bound of the official target band, while expectations of analysts are within the target band. In addition, expectations of price setters are somewhat related to lagged inflation and the opposite is true for analysts. The results reveal that the SARB has successfully anchored expectations of analysts but that price setters have not sufficiently used the focal point implicit in the inflation targeting regime. The implication is that the SARB may be pushed to accommodate private agents’ expectations.
    Date: 2014–02–19
  16. By: Shakill Hassan
    Abstract: Long-term real exchange rate volatility raises the risks associated with investment in the tradable sector, and it is detrimental to long-term growth. Short-term volatility can however be hedged; reduces the currency’s attractiveness as a carry trade target; induces necessary caution against the build-up of liabilities denominated in foreign currency;  helps maintain the scope for independent monetary policy; and, through rapid up and down movements, it can help reduce prolonged misalignment and long-run volatility.Capital flow variability affects exchange rate volatility; restrictions (e.g., as adopted in Brazil) on the level of inflows do not necessarily reduce the variability of inflows. Measures of external vulnerability have a strong association with emerging market currencies’ sensitivity to global flows. South Africa’s external financing requirement leaves its currency vulnerable, and points to unused scope for foreign exchange reserve accumulation. (Existing restrictions on outflows by residents could also vary depending on the size and direction of non-resident inflows.) Macro fundamentals matter for long-run rand behaviour. Upper variance bounds implied by fundamentals are not systematically breached at low frequencies.Speculative carry inflows can be destabilizing, and may reduce the effectiveness and scope for independent monetary policy – depending on the responsiveness of domestic credit growth to capital inflows. In South Africa, this responsiveness has been comparatively low (under QE-driven liquidity). Yields at the short end of the South African term structure of interest rates are significantly responsive to the domestic factors which affect the (domestic) monetary policy stance. Changes in long-term yields are however highly responsive to changes in global yields, but not more so than long yields in advanced economies.Low and stable inflation serves a counter-speculative role. It permits low nominal interest rates (and interest differentials), which reduces the rand’s appeal as a speculative target, without the repression of negative real interest rates.  Low interest differentials are associated (cross-section) with low exchange rate volatility.
    Date: 2015–02–13
  17. By: Shaista Amod; Shakill Hassan
    Abstract: At what level does a currency’s volatility become ‘excessive’, in a concrete sense? Any claim that an exchange rate is excessively volatile needs a benchmark for ‘normal’ variability. We compute variance bounds implied by exchange rate models as the norm, for a set of particularly volatile emerging market currencies; and find that long-run exchange rate volatility does not breach the upper bound implied by the present value of underlying fundamentals - for each currency in our sample, except the Brazilian real. However, nominal exchange rate variances get closer to implied upper bounds under inflation targeting. We also find a reduction in real exchange rate misalignment under inflation targeting.
    Date: 2014–12–02
  18. By: Nicola Viegi
    Abstract: This paper analyses the influence of the South African labour market on the conduct of monetary policy. Because of the weak response of wages to changes in employment, the South African Reserve Bank is confronted by an unfavourable short run unemployment-inflation trade off that complicates the implementation of the inflation targeting framework. First we provide some reduced form evidence by estimating a form of the traditional wage Phillips curve, showing the weak relationship between wage dynamics and unemployment in South Africa. We then confirm this result by presenting an estimation of a structural model of the South African economy and give a quantitative assessment of the constraint imposed by the labour market on monetary policy. Finally we interpret these results in a strategic framework, analysing the role that inflation targeting might play in either improving coordination, or worsening the interaction between trade unions and Central Bank objectives.
    Date: 2015–02–12
  19. By: Gong, Di (Tilburg University, School of Economics and Management)
    Abstract: This dissertation consists of three chapters. Chapters 2 and 3 examine the ex-ante motivation and the ex-post impact of securitization. Departing from the traditional literature of bank-specific drivers for securitization, I investigate the tax incentive for securitization in a cross country setting. In addition, unlike the prior micro studies of the impacts of securitization, for instance, the adverse selection in the securitization market and so forth, I study the macro impact of<br/>securitization on real economy. Another strand of my research focuses on banking regulation, especially macroprudential regulation. I am particularly interested in the fact that banks may ex-ante take risk in anticipation of regulatory forbearance in a systemic banking crisis and its implication for macroprudential regulation. Consequently, chapter 4 analyzes systemic risk-taking at banks in the presence of “too-manyto-fail” bailout guarantee. In sum, shedding light on securitization and systemic risk-taking in the banking sector, this dissertation contributes to the policy debate on bank regulation. <br/>
    Date: 2015
  20. By: Horváth, Bálint (Tilburg University, School of Economics and Management)
    Abstract: This dissertation is a collection of essays in two areas of financial stability. The first part deals with systemic risk in the banking sector. First, it asks whether countercyclical macroprudential policy tools can be an effective way of reducing cyclicality in bank lending. The main finding is that these policies can be counterproductive and may incentivize more intertwined banks, and hence, endanger financial stability. The next paper investigates, and provides some evidence of, the possibility that banks actively change their portfolios in order to<br/>influence the likelihood of joint bank failure. <br/>The second part of this dissertation studies the connection between public finance and financial stability. Chapter 4 looks into the interaction between bank capital regulation and taxation and finds that banks trade off leverage risk against portfolio risk in response to a higher corporate income tax rates. Finally, Chapter 5 analyses banks’ excessive holdings of domestic government debt as one of the sources of the interrelatedness of public finance and bank stability. Two possible explanations of banks’ home bias are tested: voluntary government<br/>bond hoarding and government induced bond buying.<br/>
    Date: 2015

This nep-cba issue is ©2015 by Maria Semenova. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.