nep-cba New Economics Papers
on Central Banking
Issue of 2015‒12‒28
sixteen papers chosen by
Maria Semenova
Higher School of Economics

  1. Central bank Credibility Before and After the Crisis By Michael D. Bordo; Pierre L. Siklos
  2. A New Dilemma: Capital Controls and Monetary Policy in Sudden Stop Economies By Michael B. Devereux; Eric R. Young; Changhua Yu
  3. Self-Oriented Monetary Policy, Global Financial Markets and Excess Volatility of International Capital Flows By Ryan Banerjee; Michael B. Devereux; Giovanni Lombardo
  4. Preferential Regulatory Treatment and Banks' Demand for Government Bonds By Bonner, Clemens
  5. Measuring the Effects of Unconventional Monetary Policy on Asset Prices By Eric T. Swanson
  6. International Coordination and Precautionary Policies By Joshua Aizenman
  7. Global Constraints on Central Banking: The Case of Turkey By Ahmet Benlialper; Hasan Cömert
  8. State Anti-Crisis Management of Banking Sector: Looking for Optimization Ways and Contemporary Development Trends By Dudin, Mikhail; Sekerin, Vladimir; Smirnova, Olga; Frolova, Evgenia; Sepiashvili, Ekaterina
  9. Inflation and Activity – Two Explorations and their Monetary Policy Implications By Olivier Blanchard; Eugenio Cerutti; Lawrence Summers
  10. Working through the Distribution: Money in the Short and Long Run By Guillaume Rocheteau; Pierre-Olivier Weill; Tsz-Nga Wong
  11. The real effects of capital requirements and monetary policy: evidence from the United Kingdom By De Marco, Filippo; Wieladek, Tomasz
  12. Shocking Language: Understanding the macroeconomic effects of central bank communication By Stephen Hansen; Michael McMahon
  13. Sovereign Debt Default: Are Countries Trapped by Their Own Default History? By Vivian Norambuena
  14. Time-Frequency Relationship between Inflation and Inflation Uncertainty for the U.S.: Evidence from Historical Data By Claudiu T. Albulescu; Aviral Kumar Twari; Stephen M. Miller; Rangan Gupta
  15. Inflation Targeting Does Not Anchor Inflation Expectations: Evidence from Firms in New Zealand By Saten Kumar; Hassan Afrouzi; Olivier Coibion; Yuriy Gorodnichenko
  16. Professors and Bankers: Russia’S State Bank Charters of 1860 and 1894, Economic Expertise and Public Opinion By Igor A. Khristoforov

  1. By: Michael D. Bordo; Pierre L. Siklos
    Abstract: A new measure of credibility is constructed as a function of the differential between observed inflation and some estimate of the inflation rate that the central bank targets. The target is assumed to be met flexibly. Credibility is calculated for a large group of both advanced and emerging countries from 1980 to 2014. Financial crises reduce central bank credibility and central banks with strong institutional determinants tend to do better when hit by a shock of the magnitude of the 2007-2008 financial crisis. The VIX, adopting an inflation target and central bank transparency, are the most common determinants of credibility. Similarly, real economic growth has a significant influence on central bank credibility even in inflation targeting economies. Hence, responding to real economic factors is necessarily detrimental to central bank credibility. Nevertheless, caution is in order about whether monetary authorities should take on broader responsibilities for the financial performance of economies.
    JEL: C31 E31 E58
    Date: 2015–11
  2. By: Michael B. Devereux; Eric R. Young; Changhua Yu
    Abstract: The dangers of high capital flow volatility and sudden stops have led economists to promote the use of capital controls as an addition to monetary policy in emerging market economies. This paper studies the benefits of capital controls and monetary policy in an open economy with financial frictions, nominal rigidities, and sudden stops. We focus on a time-consistent policy equilibrium. We find that during a crisis, an optimal monetary policy should sharply diverge from price stability. Without commitment, policymakers will also tax capital inflows in a crisis. But this is not optimal from an ex-ante social welfare perspective. An outcome without capital inflow taxes, using optimal monetary policy alone to respond to crises, is superior in welfare terms, but not time-consistent. If policy commitment were in place, capital inflows would be subsidized during crises. We also show that an optimal policy will never involve macro-prudential capital inflow taxes as a precaution against the risk of future crises (whether or not commitment is available).
    JEL: E44 E58 F41
    Date: 2015–12
  3. By: Ryan Banerjee; Michael B. Devereux; Giovanni Lombardo
    Abstract: This paper explores the nature of macroeconomic spillovers from advanced economies to emerging market economies (EMEs) and the consequences for independent use of monetary policy in EMEs. We first empirically document the effects of US monetary policy shocks on a sample group of EMEs. A contractionary monetary shock leads a retrenchment in EME capital flows, a fall in EME GDP, and an exchange rate depreciation. We construct a the- oretical model which can help to account for these findings. In the model, macroeconomic spillovers are exacerbated by financial frictions. We assess the extent to which domestic monetary policy can mitigate the negative spillovers from foreign shocks. Absent financial frictions, international spillovers are minor, and an inflation targeting rule represents an ef- fective policy for the EME. With frictions in financial intermediation, however, spillovers are substantially magnified, and an inflation targeting rule has little advantage over an exchange rate peg. However, an optimal monetary policy markedly improves on the performance of naive inflation targeting or an exchange rate peg. Furthermore, optimal policies don’t need to be coordinated across countries. Under the specific set of assumptions maintained in our model, a non-cooperative, self-oriented optimal policy gives results very similar to those of a global cooperative optimal policy.
    JEL: E3 E5 F3 F5 G1
    Date: 2015–11
  4. By: Bonner, Clemens (Tilburg University, Center For Economic Research)
    Abstract: The purpose of this paper is to analyze the impact of preferential regulatory treatment on banks’ demand for government bonds. Using unique transaction-level data, our analysis suggests that preferential treatment in microprudential liquidity and capital regulation significantly increases banks’ demand for government bonds. Liquidity and capital regulation also seem to incentivize banks to substitute other bonds with government bonds. We also find evidence that this "regulatory effect" leads banks to reduce lending to the real economy.
    Keywords: government bonds; financial markets; regulation; liquidity; capital allocation
    JEL: G18 G21 E42
    Date: 2015
  5. By: Eric T. Swanson
    Abstract: I adapt the methods of Gurkaynak, Sack, and Swanson (2005) to estimate two dimensions of monetary policy during the 2009-2015 zero lower bound period in the U.S. I show that, after a suitable rotation, these two dimensions can be interpreted as "forward guidance" and "large-scale asset purchases" (LSAPs). I estimate the sizes of the forward guidance and LSAP components of each FOMC announcement between January 2009 and June 2015, and show that those estimates correspond closely to identifiable features of major FOMC announcements over that period. Forward guidance has relatively small effects on the longest-maturity Treasury yields and essentially no effect on corporate bond yields, while LSAPs have large effects on those yields but essentially no effect on short-term Treasuries. Both types of policies have significant effects on medium-term Treasury yields, stock prices, and exchange rates.
    JEL: E44 E52 E58
    Date: 2015–12
  6. By: Joshua Aizenman
    Abstract: This paper highlights the rare conditions leading to international cooperation, and the reasons why eliciting this cooperation may be beneficial in preventing adverse tail shocks from spiraling into global depressions. In normal times, deeper macro cooperation among countries is associated with welfare gains akin to Harberger’s second-order magnitude triangle, making the odds of cooperation low. When bad tail events induce imminent and correlated threats of destabilizing financial markets, the perceived losses have a first-order magnitude of terminating the total Marshalian surpluses. The apprehension of these losses in times of peril may elicit rare and beneficial macro cooperation. We close the paper by overviewing the obstacles preventing cooperation, and the proliferation of precautionary policies of emerging market economies as a second-best outcome of limited cooperation.
    JEL: F36 F41 F42
    Date: 2015–12
  7. By: Ahmet Benlialper (Department of Economics, İpek University, Ankara, Turkey; Department of Economics, Middle East Technical University, Ankara, Turkey); Hasan Cömert (Department of Economics, Middle East Technical University, Ankara, Turkey)
    Abstract: This study aims to evaluate the developments in Turkish monetary policy after 2002 and understand the constraints on the effectiveness of the Central Bank of the Republic of Turkey (CBRT). The CBRT has significantly altered its monetary policy in response to the crisis. It became much more experimental and aware of challenges it faced. However, the Bank’s ability to exert influence on key variables seems to have been restrained by factors outside of its control. Financial flows exert great influence on key macroeconomic variables that the Bank monitors closely. Furthermore, energy prices are among the key determinants of inflation in Turkey. As a result, the Bank’s influence on growth and inflation through intermediate variables became a daunting task. The magnitude and direction of flows seem to be mainly related to global risk perception determining the worldwide liquidity conditions rather than to domestic factors. Under these conditions central banks may not set their official interest rates independent of interest rates in advanced countries. Indeed, our VAR analysis exercise supports this argument for the Turkish case. Existing policy framework would not produce desired outcomes unless the sources of the problems such as financial flows as the main global constraints on monetary policy are addressed in a much more serious manner.
    Keywords: Central banking, Economic and financial crisis, Capital inflows, the Turkish economy
    JEL: E52 G01 F31 F32 O53
    Date: 2015–12
  8. By: Dudin, Mikhail (Russian Presidential Academy of National Economy and Public Administration); Sekerin, Vladimir (Moscow state university of mechanical engineering); Smirnova, Olga (The Council for the study of productive forces under Ministry of Economic Development of the Russia Fedration and the Russian Academy of Sciences (SOPS)); Frolova, Evgenia (Far Eastern Federal University); Sepiashvili, Ekaterina (Moscow State University of Technology and Management)
    Abstract: The article examines topical issues related to the formation of an effective monetary policy as an element to ensure stability of the banking sector under the conditions of the economic crisis. During the research, the following basic conclusions were drawn. The nature and content of the state anti-crisis management in the banking sector is considered, taking into account current and future changes in the global development of the world economy. The state anti-crisis management in the banking sector should be primarily focused on the control and minimization of the key risks of sustainable national socio-economic development. This is achieved through the systematic use of the monetary policy instruments. Instruments for banking sector regulation are systematized with due consideration of the monetary policy targeting. The choice of instruments for regulating the banking sector, as a rule, is discretionary, thus, the state, represented by bodies of power, when forming approaches to the implementation of effective monetary and macroprudential policies, aimed at ensuring the stability of the banking sector during the economic crisis, should take into account the investment and innovative character of the real economy sector development, as well as social and legal relations in society. Through the buildup of sustainable socio-economic development, as well as the systematization of the regulatory treatment of the banking sector on the basis of monetary policy optimization, author proposes to further improve the development of financial systems of the state as a whole, and the banking sector in particular on the basis of the triple helix model (universities-state-business).In relation to the banking sector, adaptation of the triple helix model means reforming the tripartite institutional interaction by replacement of the real sector with the banking sector, and the public sector – with central bank and the macroprudential oversight bodies.
    Keywords: banking sector, economic crisis, systemic banking crisis, anti-crisis public management, monetary policy, macroprudential regulation, the triple helix model
    JEL: E52 H12
    Date: 2014
  9. By: Olivier Blanchard; Eugenio Cerutti; Lawrence Summers
    Abstract: We explore two issues triggered by the crisis. First, in most advanced countries, output remains far below the pre-recession trend, suggesting hysteresis. Second, while inflation has decreased, it has decreased less than anticipated, suggesting a breakdown of the relation between inflation and activity. To examine the first, we look at 122 recessions over the past 50 years in 23 countries. We find that a high proportion of them have been followed by lower output or even lower growth. To examine the second, we estimate a Phillips curve relation over the past 50 years for 20 countries. We find that the effect of unemployment on inflation, for given expected inflation, decreased until the early 1990s, but has remained roughly stable since then. We draw implications of our findings for monetary policy.
    JEL: E31 E32 E50
    Date: 2015–11
  10. By: Guillaume Rocheteau; Pierre-Olivier Weill; Tsz-Nga Wong
    Abstract: We construct a tractable model of monetary exchange with search and bargaining that features a non- degenerate distribution of money holdings in which one can study the short-run and long-run effects of changes in the money supply. While money is neutral in the long run, a one-time money injection in a centralized market with flexible prices generates an increase in aggregate real balances in the short run, a decrease in the rate of return of money, and a redistribution of consumption levels across agents. The price level in the short run varies in a non-monotonic fashion with the size of the money injection, e.g., small injections can lead to short-run deflation while large injections generate inflation. We extend our model to include employment risk and show that repeated money injections can raise output and welfare when unemployment is high.
    JEL: E0 E4 E52
    Date: 2015–12
  11. By: De Marco, Filippo (Bocconi University); Wieladek, Tomasz (Bank of England)
    Abstract: We study the effect of changes to UK bank-specific capital requirements on small and medium-sized enterprises (SME) from 1999 to 2005. Following a 1% rise in capital requirements, SME asset growth (and investment) contracts by 3.5% to 6.9% (12%) in the first year of a new bank-firm relationship, but this effect declines over time. These results are robust to a number of different fixed effects specifications and measures of capital requirement changes that are orthogonal to balance sheet characteristics by construction. Banks with tight capital buffers are the most significant transmitters of this shock. Monetary policy only affects the asset growth of small bank borrowers, but has a similar impact on the same sectors as capital requirements. There is evidence that these instruments reinforce each other when tightened, but only for small banks. Firms that borrow from multiple banks and operate in sectors with alternative forms of finance are less (equally) affected by changes in capital requirements (monetary policy).
    Keywords: Capital requirements; firm-level data; SMEs; relationship lending; macroprudential and monetary policy
    JEL: G21 G28
    Date: 2015–12–18
  12. By: Stephen Hansen (Departament d'Economia i Empresa (Department of Economics and Business) Universitat Pompeu Fabra (Pompeu Fabra University) Barcelona Graduate School of Economics (Barcelona GSE)); Michael McMahon (Department of Economics University of Warwick; Centre for Macroeconomics (CFM))
    Abstract: We explore how the multi-dimensional aspects of information released by the FOMC has effects on both market and real economic variables. Using tools from computational linguistics, we measure the information released by the FOMC on the state of economic conditions, as well as the guidance the FOMC provides about future monetary policy decisions. Employing these measures within a FAVAR framework, we find that shocks to forward guidance are more important than the FOMC communication of current economic conditions in terms of their effects on market and real variables. Nonetheless, neither communication has particularly strong effects on real economic variables.
    Keywords: Monetary policy, communications, Vector Autoregression
    JEL: E53 E58
    Date: 2015–12
  13. By: Vivian Norambuena
    Abstract: Why are sovereign debt defaults so persistent in some EMEs, even at relatively low levels of external debt? The empirical literature has argued that the country?s record of defaults is the main determinant of the future default risk. However, there are two factors generating the effect from history on the probability of default: state dependence and unobserved heterogeneity. Is a country more likely to default because it has experienced a default in the past (state dependence) or does the country have some previous speci?c characteristics that make it more prone to default (unobserved heterogeneity)? Results indicate that state dependence effects are large. Nevertheless, this paper presents evidence indicating that the omission of unobserved heterogeneity -which accounts for both unobserved and observed time invariant characteristics- has drastic consequences when assessing countries?risk of default. When unobserved het- erogeneity is accounted for there are countries with high risk of default even if negligible levels of debt are assigned to them. Conversely, other countries show a low probability of default even with assigned levels of indebtedness higher than those observed in the sample. Finally, this paper presents evidence suggesting that unobserved heterogeneity could be associated to a set of different historical, political, and cultural factors that have deeply and persistently shaped institutions.
    Date: 2015–12
  14. By: Claudiu T. Albulescu (Management Department, Politehnica University of Timisoara, Romania); Aviral Kumar Twari (Faculty of Management, IBS Hyderabad, IFHE University, India); Stephen M. Miller (Department of Economics, University of Nevada, USA.); Rangan Gupta (Department of Economics, University of Pretoria)
    Abstract: We provide new evidence on the relationship between inflation and its uncertainty in the U.S. on an historical basis, covering the period 1775-2014. First, we use a bounded approach for measuring inflation uncertainty, as proposed by Chan et al. (2013), and we compare the results with the Stock and Watson (2007) method. Second, we employ the wavelet methodology to analyze the co-movements and causal effects between the two series. Our results provide evidence of a relationship between inflation and its uncertainty that varies across time and frequency. First, we show that in the medium- and long-runs, the Freidman–Ball hypothesis holds when the measure of uncertainty is unbounded, while if the opposite applies, the Cukierman–Meltzer reasoning prevails. Second, we discover mixed evidence about the inflation–uncertainty nexus in the short-run, findings which explain the mixed results reported to date in the empirical literature.
    Keywords: historical inflation rate, uncertainty, continuous wavelet transform, bounded series, U.S.
    JEL: C22 E31 N11 N12
    Date: 2015–12
  15. By: Saten Kumar; Hassan Afrouzi; Olivier Coibion; Yuriy Gorodnichenko
    Abstract: We study the (lack of) anchoring of inflation expectations in New Zealand using a new survey of firms. Managers of these firms display little anchoring of inflation expectations, despite twenty-five years of inflation targeting by the Reserve Bank of New Zealand, a fact which we document along a number of dimensions. Managers are unaware of the identities of central bankers as well as central banks’ objectives, and are generally poorly informed about recent inflation dynamics. Their forecasts of future inflation reflect high levels of uncertainty and are extremely dispersed as well as volatile at both short and long-run horizons. Similar results can be found in the U.S. using currently available surveys as shown in Binder (2015).
    JEL: E3 E4 E5
    Date: 2015–12
  16. By: Igor A. Khristoforov (National Research University Higher School of Economics)
    Abstract: The paper considers the role of public opinion and economic expertise in planning and realization of two important Russia’s financial reforms of the nineteenth century: the creation of the State Bank in 1860 and its reform in 1894. It aims at expanding the limits of institutional history and complimenting it with the analysis of ideological and political context. The focus on the images of «ideal» economic development that existed in public imagination as well as in expert opinion enables to look at the financial policy of the 1860s-1890s from a new prospective.
    Keywords: Russian Empire, banking system, reforms, economic expertise.
    JEL: Z
    Date: 2015

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