nep-cba New Economics Papers
on Central Banking
Issue of 2015‒11‒21
twenty papers chosen by
Maria Semenova
Higher School of Economics

  1. Maintaining Central-Bank Financial Stability under New-Style Central Banking By Robert E. Hall; Ricardo Reis
  2. Monetary-Fiscal Policy Interaction and Fiscal Inflation: A Tale of Three Countries By Martin Kliem; Alexander Kriwoluzky; Samad Sarferaz
  3. Regulation and Reputation By Martin Kuncl; Kinda Hachem
  4. Deposit insurance in times of crises : safe haven or regulatory arbitrage? By Kleimeier S.; Qi S.; Sander H.
  5. Quantitative Easing as a Policy Tool Under the Effective Lower Bound By Abeer Reza; Eric Santor; Lena Suchanek
  6. US Monetary Policy in a Globalized World By Jesus Crespo Cuaresma; Gernot Doppelhofer; Martin Feldkircher; Florian Huber
  7. A Comprehensive Evaluation of Measures of Core Inflation for Canada By Mikael Khan; Louis Morel; Patrick Sabourin
  8. Forward Guidance at the Effective Lower Bound: International Experience By Karyne B. Charbonneau; Lori Rennison
  10. What determines the extent of real exchange rate misalignment in developing countries? By Ridha R. Nouira; Khalid Sekkat
  11. When Is Foreign Exchange Intervention Effective? Evidence from 33 Countries By Marcel Fratzscher; Oliver Goede; Lukas Menkhoff; Lucio Sarno; Tobias Stöhr
  12. How does macroprudential regulation change bank credit supply? By Dimitrios Tsomocos; Alexandros Vardoulakis; Anil Kashyap
  13. Do Interest Rates Affect the Exchange Rate under Capital Controls? An event study of Iceland’s experience with capital controls By Ágúst Arnórsson; Gylfi Zoega
  14. Effects of US Quantitative Easing on Emerging Market Economies By Saroj Bhattarai; Arpita Chatterjee; Woong Yong Park
  15. The Effect of ECB Monetary Policies on Interest Rates and Volumes By Paul Hubert; Jérôme Creel; Mathilde Viennot
  16. An Appraisal of Floating Exchange Rate Regimes in Latin America By Roberto Frenkel
  17. When is macroprudential policy effective? By Chris McDonald
  18. Modeling Systemic Risk with Correlated Stochastic Processes By Paolo Giudici; Laura Parisi
  19. Do regulations and supervision shape the capital crunch effect of large banks in the EU? By Malgorzata Olszak; Mateusz Pipien; Iwona Kowalska; Sylwia Roszkowska
  20. Correlation of exchange rates and gold standard regime during World War 1 (In French) By Samuel MAVEYRAUD; François CHOUNET

  1. By: Robert E. Hall (Hoover Institution); Ricardo Reis
    Abstract: Since 2008, the central banks of advanced countries have borrowed trillions of dollars from their commercial banks in the form of interest-paying reserves and invested the proceeds in portfolios of risky assets. We investigate how this new style of central banking affects central banks’ solvency. A central bank is insolvent if its requirement to pay dividends to its government exceeds its income by enough to cause an unending upward drift in its debts to commercial banks. We consider three sources of risk to central banks: interest-rate risk (the Federal Reserve), default risk (the European Central Bank), and exchange-rate risk (central banks of small open economies). We find that a central bank that pays dividends equal to a standard concept of net income will always be solvent—its reserve obligations will not explode. In some circumstances, the dividend will be negative, meaning that the government is making a payment to the bank. If the charter does not provide for payments in that direction, then reserves will tend to grow more in crises than they shrink in normal times. To prevent this buildup, the charter needs to provide for makeup reductions in payments from the bank to the government. We compute measures of the financial strength of central banks, and discuss how different institutions interact with quantitative easing policies to put these banks in less or more danger of instability. We conclude that the risks to financial stability are real in theory, but remote in practice today.
    JEL: E42 E58
    Date: 2015–07
  2. By: Martin Kliem (Deutsche Bundesbank, Frankfurt am Main, Germany); Alexander Kriwoluzky (Martin-Luther-Universit¨at Halle-Wittenberg and Halle Institute for Economic Research (IWH) Halle, Germany); Samad Sarferaz (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: We study the impact of the interaction between fiscal and monetary policy on the low-frequency relationship between the fiscal stance and inflation using cross-country data from 1965 to 1999. In a first step, we contrast the monetary-fiscal narrative for Germany, the U.S. and Italy with evidence obtained from simple regression models and a time-varying VAR. We find that the low-frequency relationship between the fiscal stance and inflation is low during periods of an independent central bank and responsible fiscal policy and more pronounced in times of high fiscal budget deficits and accommodative monetary authorities. In a second step, we use an estimated DSGE model to interpret the low-frequency measure structurally and to illustrate the mechanisms through which fiscal actions affect inflation in the long run. The findings from the DSGE model suggest that switches in the monetary-fiscal policy interaction and accompanying variations in the propagation of structural shocks can well account for changes in the low-frequency relationship between the fiscal stance and inflation.
    Keywords: Time-Varying VAR, Inflation, Public Deficits
    JEL: E42 E58 E61
    Date: 2015–10
  3. By: Martin Kuncl (Bank of Canada); Kinda Hachem (University of Chicago)
    Abstract: Bail-in bonds are gaining a lot of attention among bank regulators. In principle, these bonds raise the hurdle for a government bailout by converting into loss-absorbing capital once the issuing bank runs into trouble. We show that imposing bail-in requirements on all banks can actually increase the need for a bailout. In our model, the probability that a bank runs into trouble depends on the bank's individual state and an aggregate state. Individual states are private information but banks can provide signals to investors by offering bail-in bonds with implicit guarantees against conversion. The bond itself appears as a bail-in bond on the issuer's balance sheet while the guarantee is booked off balance sheet until the bond converts. Naturally, bail-in bonds with implicit guarantees are only traded if investors believe that banks will honor the guarantees. Our model reveals a network effect which (1) lowers the cost of honoring guarantees and (2) generates more implicit guarantees than would be sustainable in a pure reputation equilibrium. An implicit guarantee is only discovered when the issuer is weak so, in a model with aggregate shocks, regulatory promises to punish guarantees are less credible when guarantees are widespread. At the same time, because individual shocks are also present, signaling motives for offering an implicit guarantee are strongest when the regulator is expected to start triggering conversions. Bail-in bonds with implicit guarantees thus proliferate precisely when they undermine the bail-in purpose. Once the bonds start to convert, the guarantees drain liquidity from bank balance sheets and a sizable bailout may be needed to shore up the banking system.
    Date: 2015
  4. By: Kleimeier S.; Qi S.; Sander H. (GSBE)
    Abstract: This paper examines the impact of deposit insurance DI schemes on bilateral cross-border deposits. Our results suggest that not only the existence of explicit DI, but also DI design features, which reflect its credibility have an impact on cross-border deposits, and that the relative differences between reporting and depositor countries also matter. More importantly, in times of crises, depositors rely more on DI in general, but DI acts primarily as a Safe Haven rather than enabling Regulatory Arbitrage. During the global financial crisis of 2008/09 the emergency actions of bank country governments, which supply and maintain these safe havens, have led to substantial relocations of cross-border deposits.
    Keywords: International Lending and Debt Problems; General Financial Markets: Government Policy and Regulation;
    JEL: F34 G18
    Date: 2015
  5. By: Abeer Reza; Eric Santor; Lena Suchanek
    Abstract: This paper summarizes the international evidence on the performance of quantitative easing (QE) as a monetary policy tool when conventional policy rates are constrained by the effective lower bound (ELB). A large body of evidence suggests that expanding the central bank’s balance sheet through large-scale asset purchases can provide effective stimulus under the ELB. Transmission channels for QE are broadly similar to those of conventional policy, notwithstanding some important but subtle differences. The effectiveness of QE may be affected by imperfect pass-through to asset prices, possible leakage through global capital reallocation, a reduced impact through the bank lending channel, and diminishing returns to additional rounds of QE. Although the benefits of QE appear, so far, to outweigh the costs, at some point this may be reversed. The exact “effective quantitative bound” where the costs of QE become larger than the benefits is as yet unknown. The summary of the evidence, however, suggests that QE is indeed an “adequate” substitute for monetary policy at the ELB, rather than a “perfect” one.
    Keywords: Central bank research, International topics, Monetary policy framework, Transmission of monetary policy
    JEL: N10 E52 E58 E61 E65
    Date: 2015
  6. By: Jesus Crespo Cuaresma (Department of Economics, Vienna University of Economics and Business); Gernot Doppelhofer (Norwegian School of Economics); Martin Feldkircher (Oesterreichische Nationalbank); Florian Huber (Department of Economics, Vienna University of Economics and Business; Oesterreichische Nationalbank)
    Abstract: We analyze the interaction between monetary policy in the US and the global economy proposing a new class of Bayesian global vector autoregressive models that accounts for time-varying parameters and stochastic volatility (TVP-SV-GVAR). Our results suggest that US monetary policy responds to shocks to the global economy, in particular to global aggregate demand and monetary policy shocks. On the other hand, US-based contractionary monetary policy shocks lead to persistent international output contractions and a drop in global inflation rates, coupled with rising interest rates in advanced economies and a real depreciation of currencies with respect to the US dollar. We find considerable evidence for heterogeneity in the spillovers across countries, as well for changes in the transmission of monetary policy shocks over time.
    Keywords: Global vector autoregression, time-varying parameters, stochastic volatility, monetary policy, international spillovers
    JEL: C30 E52 F41
    Date: 2015–11
  7. By: Mikael Khan; Louis Morel; Patrick Sabourin
    Abstract: This paper evaluates the usefulness of various measures of core inflation for the conduct of monetary policy. Traditional exclusion-based measures of core inflation are found to perform relatively poorly across a range of evaluation criteria, in part due to their inability to filter unanticipated transitory shocks. In contrast, measures such as the trimmed mean and the common component of CPI perform favorably, since they better capture persistent price movements and tend to move with macroeconomic drivers. All measures of core inflation, however, have limitations – consequently, there is merit in monitoring a set of measures. Moreover, core inflation measures are best viewed as complements to, rather than substitutes for, the thorough analysis of inflation and capacity pressures that informs the monetary policy process.
    Keywords: Inflation and prices, Monetary policy framework
    JEL: E31 E52
    Date: 2015
  8. By: Karyne B. Charbonneau; Lori Rennison
    Abstract: Forward guidance is one of the policy tools that a central bank can implement if it seeks to provide additional monetary stimulus when it is operating at the effective lower bound (ELB) on interest rates. It became more widely used during and after the global financial crisis. This paper reviews the international experience, based on the six central banks that have used forward guidance when operating at the ELB, in order to assess its effectiveness and the potential risks associated with its implementation. We distinguish between three distinct types of forward guidance (qualitative, time contingent and state contingent) and discuss the channels through which forward guidance operates. Overall, we find that forward guidance can be an effective tool at the ELB when clearly communicated and perceived as credible. Though evidence from the literature is somewhat mixed—since the specific effects vary across economies, episodes and type of guidance—it has generally been found to be effective in (1) lowering expectations of the future path of policy rates, (2) improving the predictability of short-term yields over the near term and (3) changing the sensitivity of financial variables to economic news. However, as with other monetary policy tools, the benefits of forward guidance need to be weighed against the costs. Those costs are mainly associated with potential loss of credibility and increased financial stability risks. Moreover, the international experience with forward guidance under conditions of negative ELBs and interest rates is limited to date.
    Keywords: Monetary policy framework, Monetary policy implementation, Transmission of monetary policy, Uncertainty and monetary policy
    JEL: E43 E52 E58 E6
    Date: 2015
  9. By: Renata Karkowska (University of Warsaw, Faculty of Management)
    Abstract: We measure a systemic risk faced by European banking sectors using the CoVaR measure. We propose the conditional value-at-risk (CoVaR) for measuring a spillover risk which demonstrates the bilateral relation between the tail risks of two financial institutions. The aim of the study is to estimate the contribution systemic risk of the bank i in the analyzed banking sector of a country in conditions of its insolvency. The study included commercial banks from 8 emerging markets from Europe, which gave a total of 40 banks, traded on the public market, which provided a market valuation of the bank's capital. The conclusions are that the CoVaR seems to be a better measure for systemic risk in the banking sector than the VaR, which is more individual. And banks in developing countries in Europe do not provide significant risk for the banking sector as a whole. But it must be taken into account that some individuals that may find objectionable. Our results hence tend to a practical use of the CoVaR for supervisory purposes.
    Keywords: Systemic Risk, Value at Risk, Risk Spillovers, Banking Sector
    JEL: G01 G10 G20 G28 G38
    Date: 2015–02
  10. By: Ridha R. Nouira; Khalid Sekkat
    Abstract: The paper seeks to explain the extent of real exchange rate misalignment, defined as its deviation from its equilibrium level. It enlarges the traditional analysis, which focuses mainly on the role of nominal exchange rate regimes, to consider the role of the quality of institutions and financial development. The results show that the intermediate regime induces higher and more volatile misalignment than both fixed and float. The fixed regime exhibits a pattern of misalignment similar to the float regime. Inflation pressures and dependence on oil exports are associated with more misalignment. More importantly, persistence in misalignment is an important phenomenon that should be taken into account, better quality of institutions is associated with less misalignment, while financial development seems to have no impact on misalignment.
    Keywords: Determinants; Institutions; Misalignment
    Date: 2015–05
  11. By: Marcel Fratzscher; Oliver Goede; Lukas Menkhoff; Lucio Sarno; Tobias Stöhr
    Abstract: This study examines foreign exchange intervention based on novel daily data covering 33 countries from 1995 to 2011. We find that intervention is widely used and a highly effective policy tool, with a success rate in excess of 80 percent under some criteria. The policy works very well in terms of smoothing the path of exchange rates, and in stabilizing the exchange rate in countries with narrow band regimes. Moving the level of the exchange rate in flexible regimes requires that some conditions are met, including the use of large volumes and that intervention is made public and supported via communication.
    Keywords: Foreign exchange intervention, exchange rate regimes, effectiveness measures, communication, capital controls
    JEL: F31 F33 E58
    Date: 2015
  12. By: Dimitrios Tsomocos (to be added); Alexandros Vardoulakis (Board of Governors of the Federal Reserve System); Anil Kashyap (University of Chicago)
    Abstract: We analyze a variant of the Diamond-Dybvig (1983) model of banking in which savers can use a bank to invest in a risky project operated by an entrepreneur. The savers can buy equity in the bank and save via deposits. The bank chooses to invest in a safe asset or to fund the entrepreneur. The bank and the entrepreneur face limited liability and there is a probability of a run which is governed by the bank's leverage and its mix of safe and risky assets. The possibility of the run reduces the incentive to lend and take risk, while limited liability pushes for excessive lending and risk-taking. We explore how capital regulation, liquidity regulation, deposit insurance, loan to value limits, and dividend taxes interact to offset these frictions. We compare agents welfare in the decentralized equilibrium absent regulation with welfare in equilibria that prevail with various regulations that are optimally chosen. In general, regulation can lead to Pareto improvements but fully correcting both distortions requires more than one regulation.
    Date: 2015
  13. By: Ágúst Arnórsson; Gylfi Zoega
    Abstract: We find that both actual changes and unexpected changes in interest rates affect the average exchange rate in Iceland when the year 2009 is included in the sample that ends in August of this year but not when it is excluded. This early period was characterized by lax capital controls until the autumn of 2009. It follows that, given the moderate changes of interest rates observed in the data, using interest rates to stabilise the exchange rate may work when the capital controls are not effectively enforced but is not as useful when they are enforced. However, it should be noted that large changes in interest rates may have an effect on exchange rates when capital controls are enforced, although such changes never occurred during our sample period.
    Date: 2015–11
  14. By: Saroj Bhattarai (University of Texas at Austin); Arpita Chatterjee (UNSW Business School, UNSW); Woong Yong Park (University of Illinois at Urbana-Champaign)
    Abstract: We estimate international spillover effects of US Quantitative Easing (QE) on emerging market economies. Using a Bayesian VAR on monthly US macroeconomic and financial data, we first identify the US QE shock with non-recursive identifying restrictions. We estimate strong and robust macroeconomic and financial impacts of the US QE shock on US output, consumer prices, long-term yields, and asset prices. The identified US QE shock is then used in a monthly Bayesian panel VAR for emerging market economies to infer the spillover effects on these countries. We find that an expansionary US QE shock has significant effects on financial variables in emerging market economies. It leads to an exchange rate appreciation, a reduction in long-term bond yields, a stock market boom, and an increase in capital inflows to these countries. These effects on financial variables are stronger for the "Fragile Five" countries compared to other emerging market economies. We however do not find significant effects of the US QE shock on output and consumer prices of emerging markets.
    Keywords: US Quantitative Easing, Spillovers, Emerging Market Economies, Bayesian VAR, Panel VAR, Non-recursive Identification, Fragile Five Countries
    JEL: C31 E44 E52 E58 F32 F41 F42
    Date: 2015–11
  15. By: Paul Hubert (OFCE); Jérôme Creel (OFCE); Mathilde Viennot (École normale supérieure - Cachan)
    Abstract: This paper assesses the transmission of ECB monetary policies, conventional and unconventional, to both interest rates and lending volumes or bond issuance for three types of different economic agents through five different markets: sovereign bonds at 6-month, 5-year and 10-year horizons, loans to non-financial corporations, and housing loans to households, during the financial crisis, and for the four largest economies of the Euro Area. We look at three different unconventional tools: excess liquidity, longer-term refinancing operations and securities held for monetary policy purposes following the decomposition of the ECB’s Weekly Financial Statements. We first identify series of ECB policy shocks at the Euro Area aggregate level by removing the systematic component of each series and controlling for announcement effects. We second include these exogenous shocks in countryspecific structural VAR, in which we control for the credit demand side. The main result is that only the pass-through from the ECB rate to interest rates has been effective. Unconventional policies have had uneven effects and primarily on interest rates.
    Keywords: Transmission Channels; Unconventional Monetary Policy; Quantitative Easing; Bank Lending
    Date: 2015–11
  16. By: Roberto Frenkel (Buenos Aires University and CEDES)
    Abstract: The exchange rate regimes are the crucial variable of international economic relations. This paper attempts to evaluate the performance of floating exchange rate regimes in the major Latin American countries.
    Keywords: Central banks and their policies, Current account adjustment, Financial crises, Macroeconomic impact of globalization, Foreign exchange, Exchange rate regimes.
    JEL: E58 F32 G01 F31
    Date: 2015–11
  17. By: Chris McDonald (Reserve Bank of New Zealand)
    Abstract: Previous studies have shown that limits on loan-to- value (LTV) and debt-to-income (DTI) ratios can stabilise the housing market, and that tightening these limits tends to be more effective than loosening them. This paper examines whether the relative effectiveness of tightening vs. loosening macroprudential measures depends on where in the housing cycle they are implemented. I find that tightening measures have greater effects when credit is expanding quickly and when house prices are high relative to income. Loosening measures seem to have smaller effects than tightening, but the difference is negligible in downturns. Loosening being found to have small effects is consistent with where it occurs in the cycle. macroprudential policies.
    Date: 2015–11
  18. By: Paolo Giudici (Department of Economics and Management, University of Pavia); Laura Parisi (Department of Economics and Management, University of Pavia)
    Abstract: In this work we propose a novel systemic risk model, based on stochastic processes and correlation networks. For each country we consider three different spread measures, one for each sector of the economy (sovereign, corporates, banks), and we model each of them as a linear combination of two stochastic processes: a country-specific idiosyncratic component and a common systematic factor. We provide an estimation model for the parameters of the processes and, for each country, we derive the aggregate default probabilities of each sector. Systemic risk is then estimated by means of a network model based on the partial correlations between the estimated processes of all sectors and countries. Our model is applied to understand the time evolution of systemic risk in the economies of the European monetary union, in the recent period. The results show that systemic risk has increased during the crisis years and that, after the crisis, a clear separation between core and peripheral economies has emerged, for all sectors of the economy.
    Date: 2015–11
  19. By: Malgorzata Olszak (Department of Banking and Money Markets, Faculty of Management, University of Warsaw, Poland); Mateusz Pipien (Department of Econometrics and Operations Research, Cracow University of Economics, Poland); Iwona Kowalska (Department of Mathematics and Statistical Methods, Faculty of Management, University of Warsaw, Poland); Sylwia Roszkowska (University of Warsaw, Faculty of Management)
    Abstract: This paper extends the literature on the capital crunch effect by examining the role of public policy for the link between lending and capital in a sample of large banks operating in the European Union. Applying Blundell and Bond (1998) two-step robust GMM estimator we show that restrictions on bank activities and more stringent capital standards weaken the capital crunch effect, consistent with reduced risk taking and boosted bank charter values. Official supervision also reduces the impact of capital ratio on lending in downturns. Private oversight seems to be related to thin capital buffers in expansions, and therefore the capital crunch effect is enhanced in countries with increased market discipline. We thus provide evidence that neither regulations nor supervision at the microprudential level is neutral from a financial stability perspective. Weak regulations and supervision seem to increase the pro-cyclical effect of capital on bank lending.
    Keywords: capital ratio, lending, capital crunch, regulations, supervision, procyclicality
    JEL: E32 G21 G28 G32
    Date: 2015–10
  20. By: Samuel MAVEYRAUD; François CHOUNET
    Abstract: We analyze the phenomenon of contagion between the main European currencies quoted against US dollar during World War 1 (WW1). The studied period goes from the start of WW1 to March 1917, before the entry of the United States into the war (April 1917). Our analysis of exchange rate correlations shows that that Gold Standard Regime has not survived the beginning of WW1.
    Keywords: Gold, exchange rates, World War 1
    JEL: N24 F31
    Date: 2015

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