nep-cba New Economics Papers
on Central Banking
Issue of 2015‒12‒08
25 papers chosen by
Maria Semenova
Higher School of Economics

  1. Macroprudential Policy: What Does It Really Mean By Lopez, Claude; Markwardt, Donald; Savard, Keith
  2. The macroeconomic effects of low and falling inflation at the zero lower bound By Stefano Neri; Alessandro Notarpietro
  3. Firmer foundations for a stronger European Banking Union By Dirk Schoenmaker
  4. Macroprudential and Monetary Policy Interaction: a Brazilian perspective By Fabia A. de Carvalho; Marcos R. de Castro
  5. The limitations of policy coordination in the euro area under the European Semester By Zsolt Darvas; Alvaro Leandro
  6. Taylor rules, central bank preferences and inflation targeting By Juan Paez-Farrell
  7. Inflation targeting in developing economies revisited By John Thorton
  8. Dynamic hierarchical models for monetary transmission By Paolo Giudici; Laura Parisi
  9. Financial Stability Paper No. 35: Measuring the macroeconomic costs and benefits of higher UK bank capital requirements - By Brooke, Martin; Bush, Oliver; Edwards, Robert; Ellis, Jas; Francis, Bill; Harimohan, Rashmi; Neiss, Katharine; Siegert, Caspar
  10. "The Two Approaches to Money: Debt, Central Banks, and Functional Finance" By Giuseppe Mastromatteo; Lorenzo Esposito
  11. Measurement Errors and Monetary Policy: Then and Now By Amir-Ahmadi, Pooyan; Matthes, Christian; Wang, Mu-Chun
  12. Excess reserves and monetary policy normalization By Armenter, Roc; Lester, Benjamin
  13. Dynamic Effects of Monetary Policy Shocks on Macroeconomic Volatility By Haroon Mumtaz; Konstantinos Theodoridis
  14. Macroprudential supervision: from theory to policy By Dirk Schoenmaker; Peter Wierts
  15. Monetary Policy in a Developing Country: Loan Applications and Real Effects By Charles Abuka; Ronnie K. Alinda; Camelia Moniou; Jose-Luis Peydro; Andrea Filippo Presbitero
  16. The relevance or otherwise of the central bank’s balance sheet By Miles, David; Schanz, Jochen
  17. Sovereign Default: The Role of Expectations By Pedro Teles; Juan Nicolini; Gaston Navarro; Joao Ayres
  18. Macroprudential Policy in a DSGE Model: anchoring the countercyclical capital buffer By Leonardo Nogueira Ferreira; Márcio Issao Nakane
  19. The shocks matter: improving our estimates of exchange rate pass-through By Forbes, Kristin; Hjortsoe, Ida; Nenova, Tsvetelina
  20. Financial Sector Interconnectedness and Monetary Policy Transmission By Alessandro Barattieri; Maya Eden; Dalibor Stevanovic
  21. Perils of quantitative easing By McMahon, Michael; Peiris, Udara; Polemarchakis, Herakles
  22. Answers to Five Questions Related to U.S. Monetary Policy By Bullard, James B.
  23. Monetary and Macroprudential Policies under Fixed and Variable Interest Rates By Margarita Rubio
  24. Quantitative Easing in an Open Economy : Prices, Exchange Rates and Risk Premia By Peiris, M.Udara; Polemarchakis, Herakles
  25. Does the CAMEL bank ratings system follow a procyclical pattern? By Papanikolaou, Nikolaos I.; Wolff, Christian C

  1. By: Lopez, Claude; Markwardt, Donald; Savard, Keith
    Abstract: As many central banks contemplate the normalization of monetary policy, their focus is turning to the promise of macroprudential policy as a tool to manage possible future systemic risk in financial markets. Janet Yellen and Mario Draghi, among others, are pinning much of their hopes for managing financial stability in the context of Basel III on macroprudentialism. Despite central banks’ clear intention that this policy will play a significant role in developed economies, few policymakers or financial players know what macroprudential policy is, much less how to assess its efficacy or necessity. The paper is a shorter version of a report on the same subject. It aims to clarify the concept of macroprudential policy for a broader audience, cultivating a better understanding of these tools and their implications for broader monetary policy going forward.
    Keywords: Macroprudential, Systemic Risk
    JEL: E6 F3
    Date: 2015–10
  2. By: Stefano Neri (Bank of Italy); Alessandro Notarpietro (Bank of Italy)
    Abstract: This paper assesses the macroeconomic consequences of a prolonged period of low and falling inflation when monetary policy is constrained by the zero lower bound (ZLB) on short-term nominal interest rates, the private sector is indebted in nominal terms (debt deflation mechanism) and nominal wages are downward rigid. Cost-push shocks that in normal circumstances would reduce inflation and stimulate output have contractionary effects on economic activity, once the ZLB interacts with the debt deflation mechanism. The contractionary effects are larger and more persistent when nominal wages cannot be reduced and when the private sector is highly indebted.
    Keywords: DSGE models, zero lower bound, debt-deflation channel, down- ward nominal wage rigidities.
    JEL: E21 E31 E37 E52
    Date: 2015–11
  3. By: Dirk Schoenmaker
    Abstract: Highlights The move to European Banking Union involving the supervision and resolution of banks at euro-area level was stimulated by the sovereign debt crisis in the euro area in 2012. However, the long-term objective of Banking Union is dealing with intensified cross-border banking. The share of the assets of national banking systems that come from other EU countries was rising before the financial and economic crisis of 2007, but went into decline thereafter in the context of a general retrenchment of international banking. Most recent data, however, suggests the decline has been halted. About 14 percent of the assets of banks in Banking Union come from other EU countries, while about a quarter of the assets of the top 25 banks in the Banking Union are held in other EU countries. While a crisis-prevention framework for the euro area has largely been completed, the crisis-management framework remains incomplete, potentially creating instability. There is no governance mechanism to resolve disputes between different levels of crisis-management agencies, and incentives to promote optimum oversight are lacking. Most importantly, risk-sharing mechanisms do not adequately address the sovereign-bank loop, with a lack of clarity about the divide between bail-in and bail-out. To complete Banking Union, the lender-of-last-resort and deposit insurance functions should move to the euro-area level, breaking the sovereign-bank loop. A fully-fledged single deposit insurance (and resolution) fund should be favoured over a reinsurance scheme for reasons of cost and simplicity.
    Date: 2015–11
  4. By: Fabia A. de Carvalho; Marcos R. de Castro
    Abstract: This paper discusses the interaction between monetary and macroprudential policy in Brazil under both normative and positive perspectives. We investigate optimal combinations of simple, implementable macroprudential and monetary policy rules that react to the financial cycle using a DSGE model built to reproduce Brazilian particularities, and estimated with Bayesian techniques with data from the inflation targeting regime. We also investigate whether recent macroprudential policy announcements that targeted credit variables had important spillover effects on variables targeted by monetary policy in Brazil. To this end, we use a rich daily panel of private inflation forecasts surveyed by the Central Bank of Brazil’s Investor Relations Office and investigate the impact of announcements of macroprudential policy changes on the gap between inflation forecasts and the inflation target. The paper also presents an overview of the challenges facing macroprudential policy in Brazil after the global financial crisis and glimpses at a few important future challenges
    Date: 2015–11
  5. By: Zsolt Darvas; Alvaro Leandro
    Abstract: This paper was requested by the European Parliament’s Economic and Monetary Affairs Committee for the Economic Dialogue with the President of the Eurogroup, 10 November 2015. It was originally published under the title "Economic policy coordination in the euro area under the European Semester". This document is also available on Economic and Monetary Affairs Committee homepage. Copyright remains with the European Union. Highlights The European Semester is a yearly process of the European Union to improve economic policy coordination and ensure the implementation of the EU’s economic rules. Each Semester concludes with recommendations for the euro area as a whole and for each EU member state. We show that implementation of recommendations was poor at the beginning of the Semester in 2011, and has deteriorated since. The European Semester is not particularly effective at enforcing even the EU’s fiscal and macroeconomic imbalance rules. We find that euro-area recommendations with tangible economic goals are not well reflected in the recommendations issued to member states. Finally, we review various proposals to improve the efficiency of the European Semester and conclude that while certain steps could be helpful, policy coordination will likely continue to have major limitations. Executive Summary This paper assesses economic policy coordination in the euro area under the European Semester. In sections 2 and 3, we make a positive (and not normative) assessment by taking Council recommendations made in the context of the European Semester as given and evaluating their implementation and consistency, without assessing their desirability. Section 4, which assesses options to improve compliance with the recommendations, is by definition more subjective. The key conclusion of section 2, which analyses the implementation of European Semester recommendations in comparison with OECD Going for Growth recommendations, is that the European Semester is not effective - Implementation of recommendations given under the European Semester was modest (40 percent in the EU according to our indicator) at its inception in 2011. In spite of the efforts made to improve the European Semester in recent years the implementation index steadily fell to 29 percent by 2014. Euro-area countries, for which policy coordination should be stronger in principle, implemented their recommendations only somewhat more than non-euro area countries (31 percent versus 23 percent for the 2014 recommendations), while the implementation rate fell steadily in both country groups from 2011-14. The rate of implementation of recommendations related to the Stability and Growth Pact (SGP) is typically higher (44 percent on average in 2012-14) than the implementation of recommendations related to the Macroeconomic Imbalance Procedure (32 percent in 2012-14) and other recommendations (29 percent in 2012-14). Even though SGP recommendations have the strongest legal basis, the average 44 percent implementation rate cannot be regarded as large, while the EIP implementation rate is even lower, suggesting that the European Semester is not particularly effective in enforcing the EU’s fiscal and macroeconomic imbalance rules. Despite huge efforts by European institutions to coordinate economic policies within the European Semester, the rate of implementation of these recommendations is not higher than the rate of implementation of the OECD’s unilateral recommendations. Overlaps between the European Semester and OECD recommendations only partly explain this similarity. OECD reform responsiveness rates were practically the same in 2013-14 and in 2007-08, suggesting that reform efforts have not increased compared to the pre-crisis period. Countries tend to undertake more reforms when they are under a financial assistance programme, experience market pressure or face high unemployment. Yet even in those countries, reform momentum fades once the situation normalises. Section 3 takes the 2015 recommendations for the euro area as given and assesses their consistency with the country-specific recommendations (CSRs) to the five largest member states. Our general conclusion is that the 2015 euro-area recommendations with tangible economic goals are not well reflected in the recommendations issued to member states (with the exception of reforming services markets) - On the 2015 euro-area recommendations with tangible economic goals, we conclude that - The reference to the euro-area aggregate fiscal stance is not much more than empty rhetoric. How the optimal aggregate fiscal stance should be determined is not defined. The Council recommends that the aggregate fiscal stance should be in line with sustainability risks and cyclical conditions, but it does not even state what this aggregate stance is. There is no top-down approach to determine national fiscal stances that correspond with the optimal aggregate, and it is therefore accidental if the sum of country-specific fiscal stances corresponds with the optimal aggregate fiscal stance.
    Date: 2015–11
  6. By: Juan Paez-Farrell (Department of Economics, University of Sheffield)
    Abstract: The objective of this paper is to infer the policy preferences of three inflation targeting central banks, Australia, Canada and New Zealand, using an estimated New Keynesian small open economy model. While I assume that the monetary authorities optimise, I depart from previous research by assuming that monetary policy is implemented via simple Taylor-type rules, as suggested by most of the empirical literature. I then derive the weights in the objective function that make the resulting optimal interest rate rule coincide with its estimated counterpart. Therefore, from the central bank’s point of view, actual policy is optimal.
    Keywords: Small open economies; monetary policy; policy preferences; Taylor rule; inverse opti-mal control; inflation targeting
    JEL: E52 E58 E61 F41
    Date: 2015–11
  7. By: John Thorton (Bangor University)
    Abstract: In a recent paper, Gonalvez and Salles (2008) (G-S) report that developing countries adopting the inflation targeting regime experienced greater drops in inflation and GDP growth volatility than non-inflation targeting developing countries. In this paper, I find that the G-S results do not hold up when their analytical framework is employed in the context of a more rational and larger sample of developing countries that controls for the comparability of monetary regimes as suggested by Ball (2010). In particular, adoption of an IT regime did not help reduce inflation and growth volatility in developing countries compared to the average experience with other monetary regimes and was no more advantageous in these regards than the adoption of a hard or crawling peg exchange rate regime.
    Keywords: inflation targeting, monetary regimes, developing economies
    JEL: E4 E5
    Date: 2015–07
  8. By: Paolo Giudici (Department of Economics and Management, University of Pavia); Laura Parisi (Department of Economics and Management, University of Pavia)
    Abstract: Monetary policies, either actual or perceived, cause changes in monetary interest rates. These changes impact the economy through financial institutions, which react to changes in the monetary rates with changes in their administered rates, on both deposits and lendings. The dynamics of administered bank interest rates in response to changes in money market rates is thus essential to examine the impact of monetary policies on the economy. Chong et al. (2006) proposed an error correction model to study such impact, using data previous to the recent financial crisis. Parisi et al. (2015) analyzed the Chong error correction model, extended it and proposed an alternative, simpler to interpret, one-equation model, and applied it to the recent time period, characterized by close-to-zero monetary rates. In this paper we extend the previous models in a dynamic sense, modelling monetary transmission effects by means of dynamic linear models. The main contribution of this work consists in a novel methodology that provides a mechanism to identify the time dynamics of interest rates, linking them to monetary rates and to macroeconomic, country-specific variables. In addition, it introduces a predictive performance assessment methodology, which allows to compare the proposed models on a fair ground. From an applied viewpoint, the paper applies the proposed models to interest rates on different loans, showing how the monetary policy and the specific situation of each country differently impact lendings, not only across countries but also across time.
    Keywords: Forecasting Bank Interest Rates, Dynamic Time Series Models, Hierarchical Models
    Date: 2015–11
  9. By: Brooke, Martin (Bank of England); Bush, Oliver (Bank of England); Edwards, Robert (Bank of England); Ellis, Jas (Bank of England); Francis, Bill (Bank of England); Harimohan, Rashmi (Bank of England); Neiss, Katharine (Bank of England); Siegert, Caspar (Bank of England)
    Abstract: The baseline bank capital requirements in the United Kingdom are being set to comply with agreed international standards established in Basel III (as implemented in Europe through CRD IV). The minimum Tier 1 requirement to be met at all times is 6% of risk-weighted assets, comprised of at least 4.5% Common Equity Tier 1 and at most 1.5% Additional Tier 1 capital. Internationally-agreed buffers, on top of this minimum, can be used to absorb losses under stress. This paper assesses whether these baseline requirements are appropriate for the United Kingdom, given the characteristics of the banking system and economy, and taking into account other areas of regulatory change such as liquidity requirements, structural reform and, most notably, the recent development of a bank resolution regime and requirements for additional capacity to absorb losses in resolution. In November, G20 leaders endorsed standards agreed by the financial Stability Board for global systemically important banks to meet a minimum amount of Total Loss-Absorbing Capacity (TLAC). In December, the Bank of England will, in line with statutory requirements, consult on proposals for additional loss-absorbing capacity for other UK banks. This paper uses a framework that measures and compares the macroeconomic costs and benefits of higher bank capital requirements. The economic benefits derive from the reduction in the likelihood and costs of financial crises. The economic costs are mainly related to the possibility that they might lead to higher bank lending rates which dampen investment activity and, in turn, potential output.
    Keywords: Bank Capital; Bank Supervision; Financial Stability
    JEL: G01 G18
    Date: 2015–12–01
  10. By: Giuseppe Mastromatteo; Lorenzo Esposito
    Abstract: The scientific reassessment of the economic role of the state after the crisis has renewed interest in Abba Lerner's theory of functional finance (FF). A thorough discussion of this concept is helpful in reconsidering the debate on the nature of money and the origin of the business cycle and crises. It also allows a reevaluation of many policy issues, such as the Barro-Ricardo equivalence, the cause of inflation, and the role of monetary policy. FF, throwing a different light on these issues, can provide a sound foundation for discussing income, fiscal, and monetary policy rules in the right context of flexibility in the management of national budgets, assessing what kind of policies should be awarded priority, and the effectiveness of tackling the crisis with the different part of public budget. It also allows us to understand ways of increasing efficiency through public investment while reducing the total operational costs of firms. In the specific context of the eurozone, FF is useful for assessing the institutional framework of the euro and how to improve it in the face of protracted low growth, deflation, and weak public finances.
    Keywords: Crisis; Functional Finance; Debt; Growth; Sustainability of Public Finance; Central Bank Independence
    JEL: B22 E62 E63
    Date: 2015–11
  11. By: Amir-Ahmadi, Pooyan (Goethe University Frankfurt); Matthes, Christian (Federal Reserve Bank of Richmond); Wang, Mu-Chun (University of Hamburg)
    Abstract: Should policymakers and applied macroeconomists worry about the difference between real-time and final data? We tackle this question by using a VAR with time-varying parameters and stochastic volatility to show that the distinctionbetween real-time data and final data matters for the impact of monetary policy shocks: The impact on final data is substantially and systematically different (in particular, larger in magnitude for different measures of real activity) from theimpact on real-time data. These differences have persisted over the last 40 years and should be taken into account when conducting or studying monetary policy.
    Keywords: real-time data; time-varying parameters; stochastic volatility; impulse responses
    Date: 2015–11–05
  12. By: Armenter, Roc (Federal Reserve Bank of Philadelphia); Lester, Benjamin (Federal Reserve Bank of Philadelphia)
    Abstract: In response to the Great Recession, the Federal Reserve resorted to several unconventional policies that drastically altered the landscape of the federal funds market. The current environment, in which depository institutions are flush with excess reserves, has forced policymakers to design a new operational framework for monetary policy implementation. We provide a parsimonious model that captures the key features of the current federal funds market, along with the instruments introduced by the Federal Reserve to implement its target for the federal funds rate. We use this model to analyze the factors that determine rates and volumes as well as to identify the conditions such that monetary policy implementation will be successful. We also calibrate the model and use it as a quantitative benchmark for applied analysis, with a particular emphasis on understanding how the market is likely to respond as policymakers raise the target rate.
    Keywords: Excess reserves; Federal funds market; Federal funds rate
    JEL: E42 E43 E52 E58
    Date: 2015–09–15
  13. By: Haroon Mumtaz (Queen Mary University of London); Konstantinos Theodoridis (Bank of England, and Lancaster University)
    Abstract: We use a simple New Keynesian model, with firm specific capital, non-zero steady-state inflation, long-run risks and Epstein-Zin preferences to study the volatility implications of a monetary policy shock. An unexpected increases in the policy rate by 150 basis points causes output and inflation volatility to rise around 10% above their steady-state standard deviations. VAR based empirical results support the model implications that contractionary shocks increase volatility. The volatility effects of the shock are driven by agents' concern about the (in)ability of the monetary authority to reverse deviations from the policy rule and the results are re-enforced by the presence of non-zero trend inflation.
    Keywords: DSGE, Non-linear SVAR, New Keynesian, Non-zero steady state inflation, Epstein-Zin preferences, Stochastic volatility
    JEL: E30 E40 E52 C11 C13 C15 C50
    Date: 2015–11
  14. By: Dirk Schoenmaker; Peter Wierts
    Abstract: HIGHLIGHTS Financial supervision focuses on the aggregate (macroprudential) in addition to the individual (microprudential). But an agreed framework for measuring and addressing financial imbalances is lacking. We propose a holistic approach for the financial system as a whole, beyond banking. Building on our model of financial amplification, the financial cycle is the key variable for measuring financial imbalances. The cycle can be curbed by leverage restrictions that might vary across countries and sectors. Macroprudential supervision has been discussed since the onset of the great financial crisis, but policymakers are still slow on the ground. While the current monetary policy stance of quantitative easing may be needed to stimulate subdued growth, the risk of financial booms is increasing. We make concrete policy proposals for the design of macroprudential instruments to simplify the current framework and make it more consistent.
    Date: 2015–11
  15. By: Charles Abuka (Bank of Uganda); Ronnie K. Alinda (Bank of Uganda); Camelia Moniou (International Monetary Fund (IMF)); Jose-Luis Peydro (ICREA-Universitat Pompeu Fabra,CREI, Barcelona GSE and CEPR.); Andrea Filippo Presbitero (International Monetary Fund, Universit… Politecnica delle Marche - MoFiR)
    Abstract: We examine the bank lending channel in Uganda, a developing country where monetary policy transmission may be impaired by weaknesses in the contracting environment, shallow financial markets, and a concentrated banking system. Our analysis employs a supervisory loan-level dataset and focuses on a short period during which the policy rate rose by 1,000 basis points and then came down by 1,100 basis points. We find that an increase in interest rates reduces the supply of bank credit both on the extensive and intensive margins, and there is significant pass-through to retail lending rates. We document a strong bank balance sheet channel, as the lending behavior of banks with high capital and liquidity is different from that of banks with low capital and liquidity. Finally, we show the impact of monetary policy on real activity across districts depends on banking sector conditions. Overall, our results indicate significant real effects of the bank lending channel in developing countries.
    Keywords: Bank balance sheet channel, Bank lending channel, Developing countries, Monetary policy transmission
    JEL: E42 E44 E52 E58
    Date: 2015–12
  16. By: Miles, David (Monetary Policy Committee Unit, Bank of England); Schanz, Jochen (Monetary Policy Committee Unit, Bank of England)
    Abstract: This paper explores the impacts on an economy of a central bank changing the size and composition of its balance sheet. One of the ways in which such asset purchases could influence prices and demand is via portfolio balance effects. We develop and calibrate a simple OLG model in which risk-averse households hold money and bonds to insure against risk. Central bank asset purchases have the potential to affect households’ choices by changing the composition and return of their asset portfolios. We find that the effect is weak, and that its size depends on how fiscal policy is conducted. That is not to say that the big expansion of central bank balance sheets in recent years has been ineffective. Our finding is rather that the portfolio balance channel evaluated in an environment of normally functioning (though nonetheless incomplete) asset markets is weak. That is not inconsistent with the evidence that large-scale asset purchases by central banks since 2008 have had significant effects, because those purchases were made when financial markets were, to varying extents, dysfunctional. Nonetheless our results are relevant to those purchases because they may be unwound in an environment where financial markets are no longer dysfunctional.
    Keywords: Unconventional monetary policy; quantitative easing.
    JEL: E51 E52
    Date: 2015–12–01
  17. By: Pedro Teles (Banco de Portugal, Universidade Catolica); Juan Nicolini (Federal Reserve Bank of Minneapolis); Gaston Navarro (New York University); Joao Ayres (University of Minnesota)
    Abstract: The standard model of sovereign default, as in Aguiar and Gopinath (2006) or Arellano (2008), is consistent with multiple equilibrium interest rates. Some of those equilibria resemble the ones identified by Calvo (1988) where default is likely because rates are high, and rates are high because default is likely. The model is used to simulate equilibrium movements in sovereign bond spreads that resemble sovereign debt crisis. It is also used to discuss lending policies similar to the ones announced by the European Central Bank in 2012.
    Date: 2015
  18. By: Leonardo Nogueira Ferreira; Márcio Issao Nakane
    Abstract: The 2007-8 world financial crisis highlighted the deficiency of the regulatory framework in place at the time. Thenceforth many papers have been assessing the introduction of macroprudential policy in a DSGE model. However, they do not focus on the choice of the variable to which the macroprudential instrument must respond - the anchor variable. In order to fulfil this gap, we input different macroprudential rules into the DSGE with a banking sector proposed by Gerali et al. (2010), and estimate its key parameters using Bayesian techniques applied to Brazilian data. We then rank the results using the unconditional expectation of lifetime utility as of time zero as the measure of welfare: the larger the welfare, the better the anchor variable. We find that credit growth is the variable that performs best
    Date: 2015–11
  19. By: Forbes, Kristin (Monetary Policy Committee Unit, Bank of England); Hjortsoe, Ida (Monetary Policy Committee Unit, Bank of England); Nenova, Tsvetelina (Monetary Policy Committee Unit, Bank of England)
    Abstract: A major challenge for monetary policy has been predicting how exchange rate movements will impact inflation. We propose a new focus: incorporating the underlying shocks that cause exchange rate fluctuations when evaluating how these fluctuations ‘pass through’ into import and consumer prices. We show that in a standard open-economy model the relationship between exchange rates and prices depends on the shocks which cause the exchange rate to move. Then we develop an SVAR framework for a small open economy that relies on both short-run and long-run identification restrictions consistent with our theoretical model. Applying this framework to the United Kingdom, we find that the response of both import and consumer prices to exchange rate fluctuations depends on what caused the fluctuations. For example, exchange rate pass-through is relatively large in response to domestic monetary policy shocks, but smaller in response to domestic demand shocks. This framework helps explain why pass-through can change over time, including why sterling’s post-crisis depreciation caused a sharper increase in prices than expected and sterling’s recent appreciation has had a more muted effect.
    Keywords: Exchange rate pass-through; import prices; consumer prices; inflation; vector autoregression.
    JEL: E31 F41
    Date: 2015–12–01
  20. By: Alessandro Barattieri; Maya Eden; Dalibor Stevanovic
    Abstract: We document that, in the U.S., the share of financial assets that have a direct counterpart in the financial system has increased by between 15.8 and 21.8 percentage points during the period 1952-2011. Using a SVAR and a FAVAR, we find that, during the same period, the impulse responses of several real and financial variables to monetary policy shocks dampened. To relate these two trends, we present a stylized model that illustrates how interbank trading can reduce the sensitivity of lending to the entrepreneur's net worth, thus affecting the transmission mechanism of monetary policy through the credit channel.
    Keywords: Financial sector interconnectedness, monetary policy transmission mechanism
    JEL: E44 E52 G20
    Date: 2015
  21. By: McMahon, Michael (University of Warwick, CEPR, CAGE (Warwick), CEP (LSE), CfM (LSE) and CAMA (ANU)); Peiris, Udara (CEF, National Research University Higher School of Economics, Russian Federation.); Polemarchakis, Herakles (University of Warwick)
    Abstract: Quantitative easing compromises the control of the central bank over the stochastic path of inflation
    Keywords: Quantitative easing ; credit easing ; in flation JEL Classification Numbers: D50 ; E31 ; E52
    Date: 2015
  22. By: Bullard, James B. (Federal Reserve Bank of St. Louis)
    Abstract: During an event hosted by the Fort Smith Chamber of Commerce and the University of Arkansas – Fort Smith, 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—on global uncertainty, U.S. financial conditions, labor markets, inflation and the dollar.
    Date: 2015–11–20
  23. By: Margarita Rubio
    Abstract: In this paper, I analyze the ability of monetary policy to stabilize both the macroeconomy and nancial markets under two different scenarios: fixed and variable-rate mortgages. I develop and solve a New Keynesian dynamic stochastic general equilibrium model that features a housing market and a group of constrained individuals who need housing collateral to obtain loans. A given share of constrained households borrows at a variable rate, while the rest borrows at a fixed rate. I consider two alternative ways of introducing a macroprudential approach to enhance nancial stability: one in which monetary policy, using the interest rate as an instrument, responds to credit growth; and a second one in which the macroprudential instrument is instead the loan-to-value ratio (LTV). Results show that when rates are variable, a countercyclical LTV rule performs better to stabilize financial markets than monetary policy. However, when they are fixed, even though monetary policy is less effective to stabilize the macroeconomy, it does a good job to promote financial stability.
    Keywords: Fixed/Variable-rate mortgages, monetary policy, macroprudential policy, LTV, housing market, collateral constraint
    Date: 2015
  24. By: Peiris, M.Udara (International College of Economics and Finance, National Research University-Higher School of Economics, Moscow, Russia and Department of Economics, University of Warwick); Polemarchakis, Herakles (Department of Economics, University of Warwick)
    Abstract: Explicit targets for the composition of assets traded by governments are necessary for fiscal-monetary policy to determine the stochastic paths of inflation or exchange rates; this is the case even if fiscal policy is non-Ricardian.Targets obtain with the traditional conduct of monetary policy and Credit Easing, but not with inconventional policy and Quantitative Easing. The composition of the portfolios traded by monetary-fiscal authorities determines premia in asset and currency markets Key words: quantitative easing ; exchange rates JEL classication numbers: E50 ; F41.
    Date: 2015
  25. By: Papanikolaou, Nikolaos I.; Wolff, Christian C
    Abstract: The financial crisis which erupted in 2007-8 has illustrated the disruptive effects of procyclicality. The phenomenon of procyclicality refers to the mutually reinforcing interactions between the financial system and the real economy that tend to amplify business cycle fluctuations. These fluctuations can cause or exacerbate turbulences in the financial system and this explains why supervisory and regulatory authorities are so much concerned in mitigating the degree of procyclicality. In this study, we focus on the ratings system of the U.S. banking institutions and test how these are linked to the phenomenon of procyclicality. More concretely, we empirically investigate the sensitivity of CAMEL ratings system, which is used by the U.S. authorities to monitor the conditions in the banking market, to the fluctuations of economic cycle. Our results reveal that the overall state of the U.S. economy and CAMEL ratings are positively correlated. We find that CAMEL ratings largely depend on the course of the business cycle as they are lower during economic upturns and higher during economic downturns. This is to say that the performance and risk-taking behaviour of banks is rated higher when the conditions in the economy are favourable and lower when the economic environment is weak. This very important and rather unknown source of procyclicality should be taken into serious consideration by authorities.
    Keywords: CAMELS ratings; financial crisis; financial stability; procyclicality
    JEL: C13 C20 C50 D02 G21 G28
    Date: 2015–11

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