nep-cba New Economics Papers
on Central Banking
Issue of 2016‒01‒18
fourteen papers chosen by
Maria Semenova
Higher School of Economics

  1. Financial Stability and Macroprudential Policy: A Structural Model Evaluation of an Emerging Economy By Horacio Aguirre; Emilio Blanco
  2. Taming Macroeconomic Instability: Monetary and Macro Prudential Policy Interactions in an Agent-Based Model By Lilit Popoyan; Mauro Napoletano; Andrea Roventini
  3. Shocking language: Understanding the macroeconomic effects of central bank communication By Hansen, Stephen; McMahon, Michael
  4. Global Liquidity and Monetary Policy Autonomy By Stefan Angrick
  5. What are monetary policy shocks? By Qureshi, Irfan
  6. How effective is macroprudential policy during financial downturns? Evidence from caps on banks̕ leverage By Manuel Buchholz
  7. Asset prices regime-switching and the role of inflation targeting monetary policy By Chatziantoniou, Ioannis; Filis, George; Floros, Christos
  8. Systemic Risk-Taking Channel of Domestic and Foreign Monetary Policy By João Barata Ribeiro Blanco Barroso; Sergio Rubens Stancato de Souza; Solange Maria Guerra
  9. The Evasive Predictive Ability of Core Inflation By Pincheira, Pablo; Selaive, Jorge; Nolazco, Jose Luis
  10. Real effective exchange rates comovements and the South African currency By Raputsoane, Leroi
  11. Stationarity and persistence of the term premia in the Polish money market By Michał Markun; Anna Mospan
  13. What is the Monetary Standard By Hetzel, Robert L.
  14. Bank Efficiency and Interest Rate Pass-Through: Evidence from Czech Loan Products By Tomas Havranek; Zuzana Irsova; Jitka Lesanovska

  1. By: Horacio Aguirre (Central Bank of Argentina); Emilio Blanco (Central Bank of Argentina)
    Abstract: We build a small structural open economy model, augmented to depict the credit market and interest rate spreads (distinguishing by credit to Örms and families); monetary policy with sterilized intervention in the foreign exchange market; and macroprudential policy as capital requirements. We estimate the model using Bayesian techniques with quarterly data for Argentina in 2003-2011; it can be extended to other emerging economies, allowing for comparative empirical analysis. Results indicate that shocks to lending rates and spread weigh on macroeconomic variables; likewise, the credit market is a§ected by macroeconomic shocks. Capital requirements, beyond their strictly prudential role, appear to have contributed to lower volatility of key variables such as output, prices, credit and interest rates. The interaction of monetary policy, foreign exchange intervention and prudential tools appears to be synergic: counting on a larger set of tools helps dampen volatility of both macroeconomic and Önancial system variables, taking into account the type of shocks faced during the estimation period.
    Keywords: macroprudential policy, semi-structural model, Bayesian estimation
    JEL: E17 E51 E52 E58
    Date: 2016–01
  2. By: Lilit Popoyan; Mauro Napoletano; Andrea Roventini
    Abstract: We develop an agent-based model to study the macroeconomic impact of alternative macro prudential regulations and their possible interactions with different monetary policy rules. The aim is to shed light on the most appropriate policy mix to achieve the resilience of the banking sector and foster macroeconomic stability. Simulation results show that a triple-mandate Taylor rule, focused on output gap, inflation and credit growth, and a Basel III prudential regulation is the best policy mix to improve the stability of the banking sector and smooth output fluctuations. Moreover, we consider the different levers of Basel III and their combinations. We find that minimum capital requirements and counter-cyclical capital buffers allow to achieve results close to the Basel III first-best with a much more simplified regulatory framework. Finally, the components of Basel III are nonadditive: the inclusion of an additional lever does not always improve the performance of the macro prudential regulation.
    Keywords: macro prudential policy; Basel III regulation; financial stability; monetary policy; agent-based computational economics
    Date: 2015–12–16
  3. By: Hansen, Stephen (Universitat Pompeu Fabra and GSE); McMahon, Michael (IMF-STI, University of Warwick, CEPR, CAGE (Warwick), CfM (LSE), and CAMA (ANU))
    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 ; communication ; Vector Autoregression.
    JEL: E52 E58
    Date: 2015
  4. By: Stefan Angrick
    Abstract: This paper examines the monetary policy constraints facing economies on a fixed peg or managed float regime, contrasting the Mundell-Fleming Trilemma view against the Compensation view commonly found at central banks. While the former holds that foreign exchange inflows and outflows affect the domestic money base, constraining monetary policy under non-floating regimes unless capital controls are adopted, the latter purports that endogenous sterilisation of foreign exchange flows invalidates this trade-off. The predictions of both theories are empirically evaluated for five East Asian economies using central bank balance sheets, vector error correction models and impulse response functions. The findings indicate that the dynamics for the economies studied correspond more closely to the Compensation view than the Trilemma view, suggesting that it is a sustained loss of foreign ex-change reserves that imposes a relevant constraint on autonomy rather than the adoption of a non-floating exchange rate regime.
    Keywords: central banking, balance sheets, monetary policy, exchange rates, policy autonomy
    JEL: E51 E58 F41
    Date: 2015
  5. By: Qureshi, Irfan (Department of Economics University of Warwick)
    Abstract: I decompose deviations of the Federal funds rate from a Taylor type monetary policy rule into exogenous monetary policy shocks and a time-varying inflation target. I show that the role of exogenous shocks may be exaggerated in a fixed inflation target model, and a large fraction of business cycle fluctuations attributed to them may actually be due to changes in the inflation target. A time-varying inflation target explains approximately half of the volatility normally attributed to these deviations, and consequently more than a quarter of the fluctuations in the business cycle. This contributes approximately 39% additional inflation volatility during the Great Inflation. I show that shocks to the inflation target imply a lower sacrifice ratio compared to exogenous changes in the interest rate and therefore propose a gradual adjustment of the inflation target in order to achieve monetary policy objectives.
    Keywords: Time-varying monetary policy ; inflation volatility ; sacrifice ratio
    JEL: E30 E31 E50 E52 E58
    Date: 2015
  6. By: Manuel Buchholz
    Abstract: This paper investigates the effect of a macroprudential policy instrument, caps on banks’ leverage, on domestic credit to the private sector since the Global Financial Crisis. Applying a difference-in-differences approach to a panel of 69 advanced and emerging economies over 2002–2014, we show that real credit grew after the crisis at considerably higher rates in countries which had implemented the leverage cap prior to the crisis. This stabilising effect is more pronounced for countries in which banks had a higher pre-crisis capital ratio, which suggests that after the crisis, banks were able to draw on buffers built up prior to the crisis due to the regulation. The results are robust to different choices of subsamples as well as to competing explanations such as standard adjustment to the pre-crisis credit boom
    Keywords: macroprudential policies, domestic credit, financial crisis
    JEL: E51 E58 G21 G28
    Date: 2015–12–30
  7. By: Chatziantoniou, Ioannis; Filis, George; Floros, Christos
    Abstract: This paper provides the empirical framework to assess whether UK monetary policy shocks induce both the UK housing market and the UK stock market to remain at a high-volatility (risk) environment. The Markov regime switching modelling approach is employed in order to identify two distinct environments for each market; namely, a high-risk environment and a low-risk environment, while a probit model is employed in order to test whether monetary policy shocks provide this predictive information regarding the current state of both markets under consideration. Our findings indicate that monetary policy shocks do indeed have predictive power on the stock market. In addition, in both asset markets there is a key role for inflation. Results are important especially within the framework of the inflation targeting monetary policy regime.
    Keywords: United Kingdom, Inflation targeting, Markov regime switching, Forecasting, Asset prices
    JEL: C22 E52 G1
    Date: 2015
  8. By: João Barata Ribeiro Blanco Barroso; Sergio Rubens Stancato de Souza; Solange Maria Guerra
    Abstract: The paper investigates the impact of domestic and foreign monetary policy on two systemic risk indicators in Brazil, namely, the Default Correlation and the DebtRank, which summarize, respectively, the joint default probability of financial institutions and the contagion through the interbank market given a default event. Results show that the domestic policy rate has a robust and statistically significant inverse relation with systemic risk, consistent with the risk-taking channel of monetary policy extended here for correlated risks and network externalities. Results are similar for the foreign policy rate, although not statistically significant in the most recent sample, consistent with a lesser role of banks in the transmission of foreign shocks. Results are also similar for reserve requirement rates, but not statistically significant, consistent with its operation on a narrower transmission channel
    Date: 2016–01
  9. By: Pincheira, Pablo; Selaive, Jorge; Nolazco, Jose Luis
    Abstract: We explore the ability of traditional core inflation –consumer prices excluding food and energy– to predict headline CPI annual inflation. We analyze a sample of OECD and non-OECD economies using monthly data from January 1994 to March 2015. Our results indicate that sizable predictability emerges for a small subset of countries. For the rest of our economies predictability is either subtle or undetectable. These results hold true even when implementing an out-of-sample test of Granger causality especially designed to compare forecasts from nested models. Our findings partially challenge the common wisdom about the ability of core inflation to forecast headline inflation, and suggest a careful weighting of the traditional exclusion of food and energy prices when assessing the size of the monetary stimulus.
    Keywords: Inflation, Forecasting, Time Series, Monetary Policy, Core Inflation
    JEL: E3 E31 E37 E4 E43 E44 E5 E52
    Date: 2016–01–06
  10. By: Raputsoane, Leroi
    Abstract: The study analyses comovement between the real effective exchange rate of South Africa and those of a sample of countries that include the world’s major economies as well as emerging and developing economies. The comovement is examined over the short and long term as well as pre and post the recent global financial crisis. The results show that, although the real effective exchange rate of South Africa shows some comovement with those of the selected countries, such comovement is mixed and inconsistent. Currencies that belong to a similar grouping in terms of economic development and geographical location display both positive and negative comovement with the real effective exchange rate of South Africa. There is also no consistency in the comovement between the real effective exchange rate of South Africa and those of the selected countries pre and post the recent financial crisis. The results further show that the comovement between the real effective exchange rate of South Africa and those of some of the selected sample of countries is stronger between the trend component than it is between the cyclical component.
    Keywords: Comovements, Real effective exchange rate , Financial crisis
    JEL: C11 C22 F31 F4 F42
    Date: 2016–01–05
  11. By: Michał Markun; Anna Mospan
    Abstract: The present paper examines the term premia in the interbank money market in Poland. We use analyst surveys to proxy interest rate expectations and forward rate agreement (FRA) market data to construct term premia. We consider the term premia at shorter and longer horizons. Both premia follow autoregressive, stationary processes of low orders. The longer term premium is higher and more volatile than the shorter one; moreover, it is also characterized by substantially higher persistence. Our findings provide direct evidence against the efficient markets hypothesis (EMH) at the short end of the Polish yield curve and indicate areas of potential ineffectiveness of the monetary policy transmission mechanism.
    Keywords: short-term interest rate, expectations, term premium, persistence, surveys,Poland
    JEL: C83 E43 E58 G23
    Date: 2015
  12. By: Benjamin Eden (Vanderbilt University); Maya Eden (World Bank)
    Abstract: This paper studies the possibility of using financial regulation that prohibits the use of money substitutes as a tool for mitigating the adverse effects of deviations from the Friedman rule. We establish that when inflation is not too high regulation aimed at eliminating money substitutes improves welfare by economizing on transaction costs. The gains from regulation depend on the distribution of income and on the level of direct taxation. The area under the demand for money curve is equal to the welfare cost of inflation only when there are no direct taxes and no proportional intermediation costs: otherwise, the area under the demand curve overstates the welfare cost of inflation when money substitutes are not important and understates the welfare cost when money substitutes are important.
    Keywords: Welfare cost of inflation, Liquidity, Regulations of money substitutes
    JEL: E0
    Date: 2016–01–11
  13. By: Hetzel, Robert L. (Federal Reserve Bank of Richmond)
    Abstract: The monetary standard emerges out of the interaction of monetary policy with the structure of the economy. Characterization of the monetary standard thus requires specification of a model of the economy with a central bank reaction function. Such a specification raises all the fundamental issues of identification in macroeconomics.
    JEL: E50
    Date: 2015–11–09
  14. By: Tomas Havranek; Zuzana Irsova; Jitka Lesanovska
    Abstract: An important component of monetary policy transmission is the pass-through from financial market interest rates, directly influenced or targeted by central banks, to the rates that banks charge firms and households. Yet the available evidence on the strength and speed of the pass-through is mixed and varies across countries, time periods, and even individual banks. We examine the pass-through mechanism using a unique data set of Czech loan and deposit products and focus on bank-level determinants of pricing policies, especially cost efficiency, which we estimate employing both stochastic frontier and data envelopment analysis. Our main results are threefold: First, the long-term pass-through was close to complete for most products before the financial crisis, but has weakened considerably afterward. Second, banks that provide high rates for deposits usually charge high loan markups. Third, cost-efficient banks tend to delay responses to changes in the market rate, smoothing loan rates for their clients.
    Keywords: Bank pricing policies, cost efficiency, data envelopment analysis, monetary transmission, stochastic frontier analysis
    JEL: E43 E58 G21
    Date: 2015–11

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