nep-cba New Economics Papers
on Central Banking
Issue of 2015‒12‒20
seventeen papers chosen by
Maria Semenova
Higher School of Economics

  1. IW monetary outlook October 2015. Low inflation: A challenge for central banks By Hüther, Michael; Demary, Markus
  2. IW monetary outlook December 2015: Weak credit growth hinders eurozone inflation to increase By Hüther, Michael; Demary, Markus
  3. Financial regulatory transparency: new data and implications for EU policy By Mark Copelovitch; Christopher Gandrud; Mark Hallerberg
  4. Enhancing Bank Supervision in Asia: Lessons Learned from the Financial Crisis By Zamorski, Michael; Lee, Minsoo
  5. The Determinants of Systemic Banking Crises A Regulatory Perspective By Michael Wosser
  6. Volatility effects of news shocks in (B)RE models with optimal monetary policy By Offick, Sven; Wohltmann, Hans-Werner
  7. Does easing monetary policy increase financial instability? By Cesa-Bianchi, Ambrogio; Rebucci, Alessandro
  8. Monetary-fiscal policy interaction and fiscal inflation: A tale of three countries By Kliem, Martin; Kriwoluzky, Alexander; Sarferaz, Samad
  9. Currency-based measures targeting banks - Balancing national regulation of risk and financial openness By Annamaria de Crescenzio; Marta Golin; Anne-Christelle Ott
  10. Monetary Policy and Indeterminacy after the 2001 Slump By Firmin Doko Tchakota; Nicolas Groshenny; Qazi Haque; Mark Weder
  11. Inflation targeting or Exchange Rate Targeting: Which Framework Supports The Goal of Price Stability in Emerging Market Economics? By Nora Abu Asab; Juan Carlos Cuestas; Alberto Montagnoli
  12. Quantitative and Qualitative Monetary Easing and Long-Term Interest Rates: The Effects through the Stock of "Net Supply" and Maturity Structure of Japanese Government Bonds By Ichiro Fukunaga; Naoya Kato
  13. Banking Stability Index: New EU countries after Ten Years of Membership By Kristína Kočišová; Daniel Stavárek
  14. Foreign Exchange Interventions, Capital Controls and Monetary Policy: The Case of China By Hao Jin
  15. Writing off, Restructuring or Refinancing the Debt? The IMF’s role in the Greek Debt Crisis By P. Manasse
  16. Loan Loss Provisioning, Income Smoothing, Signaling, Capital Management and Procyclicality: Does IFRS Matter? Empirical Evidence from Nigeria By Ozili, Peterson K
  17. Long Run Macroeconomic and Sectoral Determinants of Systemic Banking Crises By Michael Wosser

  1. By: Hüther, Michael; Demary, Markus
    Abstract: The European Central Bank (ECB) as well as the Federal Reserve Bank (Fed) are currently challenged by inflation below their inflation targets. While the Eurozone recovery is still anemic, the US economy is growing and the labor market improved, such that the Fed now fulfills one target of its dual mandate of stabilizing inflation and maximum employment. While consumer price inflation is low in the US, core inflation remained stable in during the last year. Because of the improved labor market towards near full employment we expect the Fed to conduct an interest rate lift-off. Given the current effective federal funds rate of 0.14 percent, an increase of the federal funds target corridor to 0.25 to 0.50 percent in December 2015 seems possible without endangering growth. It will be a strong signal that the Fed is confident that the economic recovery is strong enough to bring inflation back to its target value in the next year. However, we expect the Fed to abstain from further interest increases until the second half of next year due to the still low inflation rate. [...]
    Abstract: Niedrige Inflationsraten fordern die Geldpolitik der Europäischen Zentralbank (EZB) und der Federal Reserve Bank (Fed) heraus. Während die wirtschaftliche Erholung der Eurozone immer noch schleppend verläuft, wächst die US-Wirtschaft robust und der US-Arbeitsmarkt verbesserte sich soweit Richtung Vollbeschäftigung, dass die Fed ein Ziel ihres dualen Mandats nun erfüllt. Während die US-Inflation immer noch niedrig ist, verhielt sich die Kerninflationsrate aber stabil. Eine Zinserhöhung durch die Fed ist zu erwarten. Die effektive Federal Funds Rate von aktuell 0,14 Prozent erlaubt eine Ausweitung des Zielkorridors auf 0,25 bis 0,50 Prozent, ohne dass das Wirtschaftswachstum beeinträchtigt würde. Eine Zinserhöhung wäre zudem ein star-kes Signal, dass die Fed die wirtschaftliche Erholung für ausreichend befindet und dass sie eine Rückkehr der Inflation zu ihren Zielwert im kommenden Jahr erwartet. Es ist aber aufgrund der niedrigen Inflationsrate wenig wahrscheinlich, dass die Fed in der ersten Hälfte des kommenden Jahres ihren Leitzinskorridor noch einmal aus-weiten wird bzw. den traditionellen Durchschnittszielwert wiedereinführen wird. [...]
    JEL: E31 E52 E58
    Date: 2015
  2. By: Hüther, Michael; Demary, Markus
    Abstract: While the ECB still struggles with an impaired bank lending channel of monetary transmission, the Fed successfully fought the labor market slack that was caused by the great recession of 2008. Due to the improved labor market, the Fed can now start its gradual interest rate lift-off. The ECB will increase its stance of policy accommodation instead, since low interest rates still do not translate into higher inflation. On the contrary, inflation and interest rates are decreasing in tandem. The reason for the impaired monetary transmission channel was originally the banking and sovereign debt crisis in the Eurozone, but the impairment of monetary transmission is now caused by banks’ reduction in risk-weighted assets, which are an effect of the implementation of the new Basel III capital ratios. Instead of lending to businesses and households banks increased their exposure to sovereigns. This effect is due to the preferential treatment of sovereign debt in bank regulation and is exacerbated by the low interest rate environment. As long as credit growth does not contribute to the growth of money, reducing interest rates even further will not bring inflation back to its target value. [...]
    JEL: E31 E52 E58
    Date: 2015
  3. By: Mark Copelovitch; Christopher Gandrud; Mark Hallerberg
    Abstract: Highlights International financial institutions have promoted financial regulatory transparency, or the publication by supervisors of financial industry data. Financial regulatory transparency enhances market stability and increases democratic legitimacy. We introduce a new index of financial regulatory data transparency - the FRT Index. It measures how countries report to international financial institutions basic macro-prudential data about their financial systems. The Index covers 68 high-income and emerging-market economies over 22 years (1990-2011). We find a number of striking trends over this period. European Union members are generally more opaque than other high-income countries. This finding is especially relevant given efforts to create an EU capital markets union. Globally, financial regulatory data transparency has increased. However, there is considerable variation. Some countries have become significantly more transparent, while others have become much more opaque. Reporting tends to decline during financial crises. We propose that the EU institutions take on a greater role in coordinating and possibly enforcing reporting of bank and non-bank institution data. Similar to the United States, a reporting requirement should be part of any EU general deposit insurance scheme. Financial regulatory transparency refers to the availability of financial industry data made public by supervisors. It has been lauded as a measure to enhance market stability (Arnone et al, 2007) and democratic legitimacy (Gandrud and Hallerberg, 2015). As with fiscal transparency, which concerns the availability of public sector financial data, and monetary policy transparency, which concerns the data monetary policymakers use to set interest rates, international financial institutions have promoted regulatory transparency. Following the East Asian crisis of the late 1990s, the International Monetary Fund (IMF) included transparency in its 1999 Code of Good Practices on Transparency in Monetary and Financial Policies1 and introduced data dissemination standards for making financial data available beginning in 19962. Similar to its measures to promote fiscal transparency, the IMF has established a Financial Sector Assessment Program (FSAP), under which it conducts voluntary reviews of the stability of financial sectors and the development of those sectors. ‘Transparency’ is one key consideration within this programme. While it is up to the country in question to approve publication of the IMF’s FSAP review, most are publicly available online, and they usually include a review of the extent to which a given country observes the Fund’s standards and codes3. The Basel Committee for Banking Supervision added regulatory transparency to its Core Principles for Effective Banking Supervision in 2006. Within the European Union, the European Banking Authority (EBA) has made a number of recent attempts to promote regulatory transparency, as have other EU financial sector institutions such as the the European Central Bank (ECB) and the European Insurance and Occupational Pensions Authority (EIOPA). We discuss these initiatives in more detail below, but there is currently no measure of transparency that is broadly comparable across countries or that captures whether supervisors make public macro-prudential data. In order to address this gap in measuring regulatory transparency, we introduce a new international financial regulatory data transparency index. We call it the Financial Regulatory Transparency (FRT) Index. The FRT Index measures whether countries report core macro-prudential data about their financial systems to international financial institutions like the IMF and World Bank. The Index currently covers 68 high-income and emerging market economies over 22 years (1990-2011). The FRT Index is freely available for download at - https -// Why regulatory transparency is important Regulatory transparency is important in the context of several ongoing political debates. Regulatory transparency is connected to greater liberalisation of financial markets in other parts of the world, and it can strengthen a capital markets union by making the financial sector more efficient. Gelos and Wei (2005) find that international investors invest less and capital flight is greater during crises in opaque countries. Copelovitch et al (2015) find that countries with greater regulatory transparency pay lower rates of interest on their sovereign bonds when debt burdens increase. The logic for this finding is straightforward - investors have a better understanding of what is going on in a country’s banking sector when regulatory transparency is high, and they are less nervous about implicit liabilities to the government accounts from the financial sector, liabilities which typically go unreported in government budgets (see Irwin, 2015). Despite the significant benefits of regulatory transparency – including enhancing the efficiency of financial markets and reducing sovereign borrowing costs – the so-called Five Presidents’ Report on Completing Europe's Economic and Monetary Union (Juncker, 2015), in which the presidents of the EU institutions suggest a way forward for the euro area, is curiously silent on the need for transparency in the section ‘Towards a Financial Union’.
    Date: 2015–12
  4. By: Zamorski, Michael (South East Asian Central Banks); Lee, Minsoo (Asian Development Bank)
    Abstract: The global financial crisis underlined that sound and effective bank regulation is vital to financial stability. Assessments of the global financial crisis invariably point to ineffective finance regulation and supervision as the main reasons for the onset of the crisis and its severity. In particular, lapses in banking regulation contributed significantly to the outbreak. The crisis reflected the failure of regulatory authorities to keep pace with financial innovation. Bank supervision had been weak by any measure. Supervisors did not conduct regular onsite bank inspections or examinations of sufficient depth. They did not properly implement risk-based supervision, and they failed to identify shortcomings in banks’ risk-management methods, governance structures, and risk cultures. Meanwhile, offsite surveillance systems rely too heavily on banks’ self-reported data to effectively monitor risk. Banking regulation is the primary safeguard against financial instability, but it should be supplemented by macroprudential policies and other new policy instruments now available to regulatory authorities.
    Keywords: Basel Committee’s core principles; finance regulation and supervision; global financial crisis; macroprudential policy
    JEL: G01 G18 G21 G28
    Date: 2015–08–12
  5. By: Michael Wosser (Department of Economics, Finance and Accounting, Maynooth University.)
    Abstract: Using a sample of 75 developed and emerging economies covering the period 1998-2011 we show that the enhanced Basel III Accord variables Tier-1 capital and the new liquidity measure known as the Net Stable Funding Ratio (NSFR), when measured in levels, do not feature as systemic banking crisis determinants. Neither does distance from the minimum standard, in either direction, matter. However the compound annual growth rate of Tier-1 capital is shown to be significantly associated with overall financial-services stability. Certain aspects of the regulatory environment are shown to contribute positively towards systemic risk mitigation whereas others do not. For example by restricting the breadth of trading activities permitted to banks, banking sectors are made stable. However regimes where capital adequacy standards are rigorously enforced are no more robust than their less strictly-enforced counterparts.
    Keywords: Systemic Banking Crises; Determinants; Basel III Accord; Regulations; Regulatory Framework; Stability; Early Warning System
    JEL: G21 G28
    Date: 2015
  6. By: Offick, Sven; Wohltmann, Hans-Werner
    Abstract: This paper studies the volatility implications of anticipated cost-push shocks (i.e. news shocks) in a New Keynesian model under optimal unrestricted monetary policy with forward-looking rational expectations (RE) and backward-looking boundedly rational expectations (BRE). If the degree of backward-looking price setting behavior is sufficiently small (large), anticipated cost-push shocks lead to a higher (lower) volatility in the output gap and in the central bank's loss than an unanticipated shock of the same size. The inversion of the volatility effects of news shocks between rational and boundedly rational expectations follows from the inverse relation between the price-setting behavior and the optimal monetary policy. By contrast, if the central bank does not optimize and follows a standard Taylor-type rule and the price setters are purely (forward-) backward-looking, the volatility of the economy is (increasing with) independent of the anticipation horizon. The volatility results for the inflation rate are ambiguous.
    Keywords: Anticipated shocks,Optimal monetary policy,Bounded rationality,Volatility
    JEL: E32 E52
    Date: 2015
  7. By: Cesa-Bianchi, Ambrogio (Bank of England); Rebucci, Alessandro (Bank of England)
    Abstract: This paper develops a model featuring both a macroeconomic and a financial friction that speaks to the interaction between monetary and macroprudential policy and to the role of US monetary and regulatory policy in the run up to the Great Recession. There are two main results. First, real interest rate rigidities in a monopolistic banking system increase the probability of a financial crisis (relative to the case of flexible interest rate) in response to contractionary shocks to the economy, while they act as automatic macroprudential stabilizers in response to expansionary shocks. Second, when the interest rate is the only available policy instrument, a monetary authority subject to the same constraints as private agents cannot always achieve a (constrained) efficient allocation and faces a trade-off between macroeconomic and financial stability in response to contractionary shocks. An implication of our analysis is that the weak link in the US policy framework in the run up to the Global Recession was not excessively lax monetary policy after 2002, but rather the absence of an effective second policy instrument aimed at preserving financial stability.
    Keywords: Macroprudential policies; monetary policy; financial crises; frictions; interest rate rigidities.
    JEL: E44 E52 E61
    Date: 2015–12–11
  8. By: Kliem, Martin; Kriwoluzky, Alexander; Sarferaz, Samad
    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 crosscountry 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
  9. By: Annamaria de Crescenzio; Marta Golin; Anne-Christelle Ott
    Abstract: This paper presents and analyses new datasets of de jure Currency-Based Measures (CBMs) directed at banks in a sample of 49 countries between 2005 and 2013. These measures are bank regulations that apply a discrimination−e.g. a less favourable treatment−on the basis of the currency of an operation, typically foreign currencies. The new data shows that CBMs have been increasingly used in the post-crisis period, including for macro-prudential purposes. In particular, some Emerging Market Economies, including some OECD countries, have increasingly resorted to and tightened their CBMs, especially to manage capital inflows. Information from these new datasets is also matched with measures on countries’ inability to borrow in domestic currency on international markets, defined as the original sin concept. With the exception of China, only countries suffering from original sin used and tightened CBMs on banks’ foreign exchange liabilities.
    Keywords: capital flows, foreign currency, financial stability, banking regulations, macroprudential policy, capital controls
    JEL: C82 E58 F3 G28
    Date: 2015–12–10
  10. By: Firmin Doko Tchakota (School of Economics, University of Adelaide.); Nicolas Groshenny (School of Economics, University of Adelaide.); Qazi Haque (School of Economics, University of Adelaide.); Mark Weder (School of Economics, University of Adelaide.)
    Abstract: This paper estimates a New Keynesian model of the U.S. economy over the period following the 2001 slump, a period for which the adequacy of monetary policy is intensely debated. To relate to this debate, we consider three alternative empirical inflation indicators in the estimation. When using CPI or PCE, we find support for the view that the Federal Reserve's policy was extra easy and may have led to equilibrium indeterminacy. The interpretation changes when using core PCE and monetary policy appears to have been reasonable and sufficiently active to rule out indeterminacy. We then relax the assumption that inflation in the model is measured by a single indicator. We re-formulate the artificial economy as a factor model where the theory's concept of inflation is the common factor to the three empirical inflation series. We find that CPI and PCE provide better indicators of the latent concept while core PCE is less informative. Again, this procedure cannot dismiss indeterminacy.
    Keywords: Great Deviation, Indeterminacy, Taylor Rules
    JEL: E32 E52 E58
    Date: 2015–12
  11. By: Nora Abu Asab (Department of Economics, University of Sheffield); Juan Carlos Cuestas (Department of Economics, University of Sheffield); Alberto Montagnoli (Department of Economics, University of Sheffield)
    Abstract: We investigate the relationship between inflation and inflation uncertainty under inflation targeting and a conventional fixed exchange rate system and the impact of each regime on inflation and inflation uncertainty over the span from 1980:01 to 2014:06. The results from GARCH in mean models reveal that, under the two monetary regimes, inflation increases inflation uncertainty and inflation uncertainty raises inflation. This positive bi-directional relationship between inflation and inflation uncertainty provides evidence of the importance of non-discretionary monetary policies. Both regimes appear effective in reducing inflation uncertainty in the long-run which suggests the importance of monetary regimes as signalling devices for inflation expectations. The fixed exchange rate regime has no impact on average inflation and inflation inertia, while inflation targeting has been successful at lowering average inflation and inflation persistence of its followers. Nevertheless, the results provide evidence that inflation targeting countries have not benefited equally from inflation targeting.
    Keywords: Inflation Targeting, Fixed Exchange Rate System, GARCH, Monetary Policy, Price Stability
    JEL: C54 C58 E50 E58
    Date: 2015–12
  12. By: Ichiro Fukunaga (Bank of Japan); Naoya Kato (Bank of Japan)
    Abstract: The relationship between the supply-demand structure of government bond markets and long-term interest rates has been studied both theoretically and empirically, motivated by the implementation of large-scale government bond purchases by many central banks in advanced economies. Fukunaga, Kato, and Koeda (2015) examined the effects of changes in the holders and maturity structures of Japanese Government Bonds (JGBs) on the term structure of interest rates and the risk premium on long-term bonds. Using a regression approach and a term structure model approach, they confirmed that the "net supply" of JGBs-that is, the amount outstanding of JGBs issued (supplied) by the government minus that held (demanded) by investors with preferences for particular maturities, including the Bank of Japan (BOJ)-had statistically significant effects on long-term interest rates. They also reported calculations based on the two approaches showing that the BOJ's JGB purchases as part of its Quantitative and Qualitative Monetary Easing (QQE) had substantial effects on the long-term interest rates.
    Keywords: Japanese Government Bonds; Term structure of interest rates; Preferred-habitat investors; Quantitative and Qualitative Monetary Easing
    JEL: E43 E52 G12 H63
    Date: 2015–12–11
  13. By: Kristína Kočišová (Department of Banking and Investments, Faculty of Economics, Technical University of Košice); Daniel Stavárek (Department of Finance and Accounting, School of Business Administration, Silesian University)
    Abstract: Successful development of economy is based on the effective and stable performance of credit institutions, mainly banks. Evaluation of stability and soundness of banks is a complex task that involves a significant number of multidimensional criteria. This paper discusses some of the existing efforts to construct an aggregate financial stability index and brings attempts to construct an aggregate Banking Stability Index (BSI). We try to construct an aggregate index, taking into account indicators of financial strength of banks (performance and capital adequacy) and major risks (credit risk and liquidity risk) affecting banks in the banking system. Based on the international experience an aggregate BSI is then used for evaluation of stability in the European Union (EU) countries, focusing on ten countries that joined EU in 2004. We obtained data from database of the International Monetary Fund. Results showed that in 2014 countries with the most stable banking sectors were Luxembourg and Estonia. On the opposite end of the scale were banking sectors in Spain, Portugal, and Greece. The outcome of the study showed decline of the average banking stability in EU countries during the period of 2005-2008, and its improvement since 2009. The improvement in last years was positively affected mainly by development of the capital adequacy (which may be affected by the gradual implementation of decrees in the field of capital requirements regulation). Results also showed that the countries that joined EU in 2004 were positively affected by accession to EU what is evidenced by the value of BSI, which increased between the years 2004 and 2014.
    Keywords: financial soundness indicators, aggregate index, banking sector, EU countries
    JEL: C20 G21
    Date: 2015–12–10
  14. By: Hao Jin (Indiana University)
    Abstract: China has maintained a closed capital account to the private sector and channeled capital flows through the public sector by foreign exchange interventions. This paper presents an open economy model that incorporates this capital account policy configuration in order to study whether foreign exchange interventions can improve welfare in the presence of capital controls, compared to an open capital account. Furthermore, I analyze how these interventions affect the conduct of monetary policy. I find that optimal interventions improve welfare by strategically managing the terms of trade. In the presence of domestic nominal rigidity, interventions increase welfare even if monetary policy is set optimally. I find monetary policy effectively eliminates domestic price distortions, while foreign exchange interventions efficiently correct terms-of-trade externalities.
    Keywords: Foreign Exchange Interventions; Capital Controls; Monetary Policy; Chinese Economy; Welfare
    Date: 2015–10
  15. By: P. Manasse
    Abstract: This paper looks at the recent debt crisis in Greece and argues that the crisis exemplifies a sequence of systematic mistakes made by International Financial Institutions, mistakes whose consequences had been clearly anticipated at the time of the first bail-out and could have been avoided. I will argue that the “original sin” of international creditors has been that of refinancing, rather than partially writing off, the debt. This mistake has led to excessively restrictive policies, and has ultimately to interventions of bail-out/in much larger than those which would have solved the problem at the outset, causing unnecessary pain to the economy and damaging both creditors’ and debtors’ interests.
    JEL: F33 F34 E65
    Date: 2015–12
  16. By: Ozili, Peterson K
    Abstract: Prior research show that banks have various motivations for influencing loan loss provisions. This study examines these motivations and the behaviour of loan loss provision in relation to the business cycle. After controlling for the impact of Basel regulation on LLP, I find strong evidence for income smoothing, capital management and procyclical LLP behaviour during the voluntary, not mandatory, adoption of IFRS in Nigeria. I find evidence of signaling only after including interaction terms in the model. Additionally, I find that (i) banks increase loan loss provisioning after the implementation of Basel; (ii) banks have some incentive to signal via LLP in the post-IFRS period relative to the pre-IFRS period (iii) banks have joint motivations to manipulate LLP and may face trade-offs in the choice of managing regulatory capital or smoothing income in the post-IFRS period. Overall, I conclude that IFRS reinforces LLP motivations and procyclical patterns. The findings of this paper are relevant to current concerns of accounting standard setters and bank regulators on the current model of loan loss provisioning as well as the on-going debate on the mandatory implementation of IFRS in Nigeria.
    Keywords: Loan loss provision, Earnings Management, Smoothing, Signaling, Bank Capital, Procyclicality, Nigeria
    JEL: G21 G23 O55
    Date: 2015
  17. By: Michael Wosser (Department of Economics, Finance and Accounting, Maynooth University.)
    Abstract: In a panel comprising 61 countries covering the years 1980-2010 we show that macroeconomic variables such as GDP and real-interest rates lose potency as systemic banking crisis determinants when estimated over a full business cycle and that the choice of panel time-span is of high relevance. Using a shorter panel (1998-2011) involving 75 countries, we show that sectoral variables such as Bank Z-Score, private-credit-to-GDP ratio, bank credit-to-deposit ratio and non-performing loan levels represent an improved model-fit over their macroeconomic-focused counterparts, yielding improved in-sample crisis predictions. Whereas sectoral-centric models may over-estimate the likelihood of systemic banking crises this does not constitute a model weakness if not overlooking embryonic crises is the key objective. Future research is facilitated via the establishment of a control cluster of determinants with both sectoral as well as macroeconomic constituents.
    Keywords: Systemic Banking Crises; Determinants; Sectoral variables; Stability
    JEL: G21 G28
    Date: 2015

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