nep-cba New Economics Papers
on Central Banking
Issue of 2016‒02‒29
23 papers chosen by
Maria Semenova
Higher School of Economics

  1. Interaction between monetary policy and bank regulation: lessons for the ECB By Marek D¹browski
  2. Does Lack of Financial Stability Impair the Transmission of Monetary Policy? By Acharya, Viral V.; Imbierowicz, Björn; Steffen, Sascha; Teichmann, Daniel
  3. A Stochastic Dominance Approach to the Basel III Dilemma: Expected Shortfall or VaR? By Chang, C-L.; Jiménez-Martín, J.A.; McAleer, M.J.; Pérez-Amaral, T.
  4. Forward guidance and "lower for longer": The case of the ECB By Bletzinger, Tilman; Wieland, Volker
  5. Taming the Basel leverage cycle By Christoph Aymanns; Fabio Caccioli; J. Doyne Farmer; Vincent W.C. Tan
  6. The Banking Regulatory Bubble and How to Get out of It By Giovanni Ferri; Doris Neuberger
  7. Efficient Bailouts? By Bianchi, Javier
  8. The Federal Reserve as global lender of last resort, 2007-2010 By Lawrence Broz
  9. The "Mystery of the Printing Press" Monetary Policy and Self-fulfilling Debt Crises By Corsetti, Giancarlo; Dedola, Luca
  10. Decomposing Euro Area Sovereign Debt Yields into Inflation Expectations and Expected Real Interest Rates By Mirdala, Rajmund
  11. Trend Fundamentals and Exchange Rate Dynamics By Florian Huber; Daniel Kaufmann
  12. Predetermined Exchange Rate, Monetary Targeting, and Inflation Targeting Regimes By Shigeto Kitano
  13. Current Account and Real Exchange Rate Changes: The Impact of Trade Openness By Davide Romelli; Cristina Terra; Enrico Vasconcelos
  14. The Equity Premium, Long-Run Risk, & Optimal Monetary Policy By Diercks, Anthony M.
  15. Trend growth, unemployment and optimal monetary policy By Lechthaler, Wolfgang; Tesfaselassie, Mewael
  16. О некоторых успехах ЦБ России в 2015 году By BLINOV, Sergey
  17. Forecasting Inflation using Survey Expectations and Target Inflation: Evidence for Brazil and Turkey By Altug, Sumru G.; Cakmakli, Cem
  18. On the Redistributional Effects of Long-Run Inflation in a Cash-in-Advance Economy By Kakar, Venoo
  19. Sovereign yields and the risk-taking channel of currency appreciation By Boris Hofmann; Ilhyock Shim; Hyun Song Shin
  20. Inflation persistence in African countries: Does inflation targeting matter? By Phiri, Andrew
  21. Systemic risk and the optimal seniority structure of banking liabilities By Spiros Bougheas; Alan Kirman
  22. Monetary transmission in Africa: a review of official sources By McKenzie, Rex A
  23. Modelling long-run exchange rates in Botswana: a fundamental equilibrium approach By Odhiambo, Nicholas M.; Njindan Iyke , Bernard

  1. By: Marek D¹browski
    Abstract: The European Central Bank (ECB) recently became engaged in macro-prudential policies and the micro-prudential supervision of the largest Euro area banks. These new tasks should help complete financial integration, and make the Euro area more resilient to financial instability risks. However, the multiplicity of mandates and instruments involves a risk of their inconsistency which could compromise the ECB’s core price-stability mandate as well as its independence. The experience of central banks during the recent global financial crisis confirms that such risks are not purely hypothetical.
    Keywords: monetary policy, macro-prudential policy, banking regulation, banking supervision, money multiplier, money velocity, financial stability, European Central Bank
    JEL: E51 E52 E58 G01 G18 G28
    Date: 2016–02
  2. By: Acharya, Viral V.; Imbierowicz, Björn; Steffen, Sascha; Teichmann, Daniel
    Abstract: We investigate the transmission of central bank liquidity to bank deposit and loan spreads of European firms over the January 2006 to June 2010 period. When the European Central Bank (ECB) allocated liquidity to banks in a competitive tender at the beginning of the crisis, higher “aggregate” central bank liquidity (i.e. the total liquidity in the banking system that is held at the ECB) reduces bank deposit rates of low risk banks but has no effect on deposit rates of high risk banks or on corporate loan spreads of high or low risk banks. After the ECB started to fully allot all liquidity requested by banks via its refinancing operations on October 8, 2008, an increase in liquidity decreases deposit rates of both high and low risk banks. While loan spreads of low risk banks decrease, those of high risk banks remain unchanged also under full allotment of liquidity. We find that borrowers of high risk banks refinance term loans drawing down loan commitments. They have lower payouts, lower capital expenditures and lower asset growth compared with borrowers of low risk banks. Our results suggest a differential transmission of central bank liquidity of low versus high risk banks, and an impaired transmission to corporate borrowers of high risk banks.
    Keywords: Central Bank Liquidity, Corporate Deposits, ECB, Financial Crisis, Loans
    JEL: E43 E58 G01 G21
    Date: 2015–06
  3. By: Chang, C-L.; Jiménez-Martín, J.A.; McAleer, M.J.; Pérez-Amaral, T.
    Abstract: __Abstract__ The Basel Committee on Banking Supervision (BCBS) (2013) recently proposed shifting the quantitative risk metrics system from Value-at-Risk (VaR) to Expected Shortfall (ES). The BCBS (2013) noted that “a number of weaknesses have been identified with using VaR for determining regulatory capital requirements, including its inability to capture tail risk” (p. 3). For this reason, the Basel Committee is considering the use of ES, which is a coherent risk measure and has already become common in the insurance industry, though not yet in the banking industry. While ES is mathematically superior to VaR in that it does not show “tail risk” and is a coherent risk measure in being subadditive, its practical implementation and large calculation requirements may pose operational challenges to financial firms. Moreover, previous empirical findings based only on means and standard deviations suggested that VaR and ES were very similar in most practical cases, while ES could be less precise because of its larger variance. In this paper we find that ES is computationally feasible using personal computers and, contrary to previous research, it is shown that there is a stochastic difference between the 97.5% ES and 99% VaR. In the Gaussian case, they are similar but not equal, while in other cases they can differ substantially: in fat-tailed conditional distributions, on the one hand, 97.5%-ES would imply higher risk forecasts, while on the other, it provides a smaller down-side risk than using the 99%-VaR. It is found that the empirical results in the paper generally support the proposals of the Basel Committee.
    Keywords: Stochastic dominance, Value-at-Risk, Expected Shortfall, Optimizing strategy, Basel III Accord
    JEL: G32 G11 G17 C53 C22
    Date: 2015–05–01
  4. By: Bletzinger, Tilman; Wieland, Volker
    Abstract: A number of contributions to research on monetary policy have suggested that policy should be asymmetric near the lower bound on nominal interest rates. As inflation and economic activity decline, policy should ease more aggressively than it would in the absence of the lower bound. As activity recovers and inflation picks up, the central bank should act to keep interest rates lower for longer than without the bound. In this note, we investigate to what extent the policy easing implemented by the ECB since summer 2013 mirrors the rate recommendations of a simple policy rule or deviates from it in a way that indicates a "lower for longer" approach to policy near zero interest rates.
    Keywords: European Central Bank; forward guidance; interest rates; Monetary policy; zero bound
    JEL: E43 E47 E52 E58
    Date: 2016–02
  5. By: Christoph Aymanns; Fabio Caccioli; J. Doyne Farmer; Vincent W.C. Tan
    Abstract: Effective risk control must make a tradeoff between the microprudential risk of exogenous shocks to individual institutions and the macroprudential risks caused by their systemic interactions. We investigate a simple dynamical model for understanding this tradeoff, consisting of a bank with a leverage target and an unleveraged fundamental investor subject to exogenous noise with clustered volatility. The parameter space has three regions: (i) a stable region, where the system always reaches a fixed point equilibrium; (ii) a locally unstable region, characterized by cycles and chaotic behavior; and (iii) a globally unstable region. A crude calibration of parameters to data puts the model in region (ii). In this region there is a slowly building price bubble, resembling a “Great Moderation”, followed by a crash, with a period of approximately 10-15 years, which we dub the Basel leverage cycle. We propose a criterion for rating macroprudential policies based on their ability to minimize risk for a given average leverage. We construct a one parameter family of leverage policies that allows us to vary from the procyclical policies of Basel II or III, in which leverage decreases when volatility increases, to countercyclical policies in which leverage increases when volatility increases. We find the best policy depends critically on three parameters: The average leverage used by the bank; the relative size of the bank and the fundamentalist, and the amplitude of the exogenous noise. Basel II is optimal when the exogenous noise is high, the bank is small and leverage is low; in the opposite limit where the bank is large or leverage is high the optimal policy is closer to constant leverage. We also find that systemic risk can be dramatically decreased by lowering the leverage target adjustment speed of the banks.
    Keywords: Financial stability; capital regulation; systemic risk
    JEL: G11 G20
    Date: 2015–07
  6. By: Giovanni Ferri (LUMSA University); Doris Neuberger (University of Rostock)
    Abstract: We claim that we currently live in a banking regulatory bubble. We review how: i) banking intermediation theory hinges on dealing with borrower-lender asymmetry of information; ii) instead, the presence of complete information is the keystone of the finance theory. Next, we document how finance theory prevailed over banking intermediation theory in shaping banking regulation: This appalling contradiction is the true culprit behind lower credit standards, mounting systemic risk in banking, and macroeconomic debt overhang. Consequently, we discuss actions that, by restoring the consistency of banking regulation with the theory of banking intermediation, would make banking sounder.
    Keywords: Asymmetric Information; Relationship Lending vs. Transactional Lending; Efficient Markets Hypothesis; Banking Regulation Inconsistencies; Basel II.
    JEL: G01 G14 G21 G28
    Date: 2014–05
  7. By: Bianchi, Javier (Federal Reserve Bank of Minneapolis)
    Abstract: We develop a quantitative equilibrium model of financial crises to assess the interaction between ex-post interventions in credit markets and the buildup of risk ex ante. During a systemic crisis, bailouts relax balance sheet constraints and mitigate the severity of the recession. Ex ante, the anticipation of such bailouts leads to an increase in risk-taking, making the economy more vulnerable to a financial crisis. We find that moral hazard effects are limited if bailouts are systemic and broad-based. If bailouts are idiosyncratic and targeted, however, this makes the economy significantly more exposed to financial crises.
    Keywords: Bailouts; Moral hazard; Credit crunch; Financial shocks; Macroprudential policy
    JEL: E32 E44 F40 G18
    Date: 2016–01–19
  8. By: Lawrence Broz
    Abstract: Passage of the Dodd-Frank financial reform bill, in conjunction with a Supreme Court ruling supporting a Freedom of Information Act request, required the Federal Reserve (Fed) to disclose bank-specific information about its emergency lending during the financial crisis. The disclosures revealed the extent to which the Fed had served as a global lender of last resort, providing dollar liquidity to foreign banks and foreign central banks. I exploit these unanticipated disclosures on two levels. First, I use the disclosed information to evaluate the motivations behind the Fed's global lending during the crisis. My findings indicate that the Fed supported foreign banks in countries in which U.S. money center banks had high loan exposures, which suggests that the Fed served the interests of major U.S. banks. Second, I explore the congressional response to the revelation of the Fed's massive global lending. I analyze an "Audit the Fed" vote in the House of Representatives that would end the Fed's confidentiality about the banks and countries it supports and reduce its monetary policy independence. I find the influence of U.S. money center banks also extends to Congress by way of campaign contributions: contributions from these banks significantly reduce the likelihood that a representative will vote in favor of the bill. In addition, I find that right-wing representatives were substantially more likely than their left-wing peers to support the bill, which suggests that new congressional coalitions are forming on the role of the Fed in the (global) economy.
    Keywords: Sovereign Default; Debt Crises; Political Survival; Networks; Voter Behavior.
    JEL: R21
    Date: 2015–01–08
  9. By: Corsetti, Giancarlo; Dedola, Luca
    Abstract: We study the mechanism by which unconventional (balance-sheet) monetary policy can rule out self-fulfilling sovereign default in a model with optimizing but discretionary fiscal and monetary policymakers. By purchasing sovereign debt, the central bank effectively swaps risky government paper for monetary liabilities only exposed to inflation risk, thus yielding a lower interest rate. We characterize a critical threshold for central bank purchases beyond which, absent fundamental fiscal stress, the government strictly prefers primary surplus adjustment to default. Since default may still occur for fundamental reasons, however, the central bank faces the risk of losses on sovereign debt holdings, which may generate inefficient inflation. This risk does not undermine the credibility of a backstop, nor the ability of a central bank to pursue its inflation objectives when the latter enjoys fiscal backing or fiscal authorities are sufficiently averse to inflation.
    Keywords: Inflationary financing; Lender of last resort; Seigniorage; Sovereign risk and default
    JEL: E58 E63 H63
    Date: 2016–02
  10. By: Mirdala, Rajmund
    Abstract: Quantitative easing conducted by European central bank to fight persisting risks of deflation is drawing an attention of increasing number of empirical studies. Moreover, effectiveness of monetary policy at near zero inflation rates reveals lot of issues on whether interest rates really have a lower bound around zero percent. As a result, traditional views on the role of inflation expectations and expected real interest rates in the long-term interest rates determination face the challenge of fundamental revision. In the paper we analyze relative contributions of inflation expectations and expected real interest rates to long-term interest rates on government bonds leading path as well as their responses to both types of shocks in the Euro Area member countries using SVAR methodology. We also decompose long-term interest rates into transitory and permanent components. Our research revealed considerable differences in the role of inflation expectations and expected real interest rates shocks in determining long-term interest rates between core and periphery countries of the Euro Area. The crisis period even intensified this trend.
    Keywords: interest rates, inflation expectations, economic crisis, SVAR, variance decomposition, impulse-response function
    JEL: C32 E43 F41
    Date: 2015–09
  11. By: Florian Huber (Department of Economics, Vienna University of Economics and Business); Daniel Kaufmann (KOF Swiss Economic Institute, ETH Zurich)
    Abstract: We estimate a multivariate unobserved components stochastic volatility model to explain the dynamics of a panel of six exchange rates against the US Dollar. The empirical model is based on the assumption that both countries' monetary policy strategies may be well described by Taylor rules with a time-varying inflation target, a time-varying natural rate of unemployment, and interest rate smoothing. The estimates closely track major movements along with important time series properties of real and nominal exchange rates across all currencies considered. The model generally outperforms a benchmark model that does not account for changes in trend inflation and trend unemployment.
    Keywords: Exchange rate models, trend inflation, natural rate of unemployment, Taylor rule, unobserved components stochastic volatility model
    JEL: F31 E52 F41 C5 E31
    Date: 2016–01
  12. By: Shigeto Kitano (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)
    Abstract: Many works analyzing the Mundell-Fleming dictum compare the predetermined exchange rate regime and the monetary targeting regime under flexible exchange rates. Reflecting on the fact that many emerging market countries have shifted to the regime of inflation targeting, this paper aims to extend the literature to include the inflation targeting regime. The results of our analysis show that the interest rule with an inflation target is superior (or at least equal) to the two abovementioned regimes in absorbing both real and monetary shocks.
    Keywords: Optimal exchange rate regimes, Predetermined exchange rate, Flexible exchange rate, The Mundell-Fleming dictum, Small open economy
    JEL: E42 E58 F31 F41 O24
    Date: 2011–08
  13. By: Davide Romelli (Essec Business School, THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - Université de Cergy Pontoise); Cristina Terra (THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - Université de Cergy Pontoise, Essec Business School); Enrico Vasconcelos (Banco Central do Brasil)
    Abstract: This article investigates the impact of trade openness on the relationship between current account and real exchange rates, during episodes of sudden stops and of abrupt exchange rate depreciations. Using data for developed and emerging economies for the period 1970-2011, we nd that more open economies are associated with lower exchange rate depreciations during sudden stops. We also provide evidence that, during abrupt exchange rate depreciation episodes, economies that are more open to trade experience a larger change in current account and trade balance. In other words, our results indicate that improvements in current account and trade balance are accompanied by a smaller exchange rate depreciation in more open economies. These fi ndings are robust to di fferent measures of openness to trade and methodologies of identifying sudden stops and abrupt exchange rate depreciations.
    Keywords: trade openness, sudden stops, exchange rate depreciation
    Date: 2015–09–29
  14. By: Diercks, Anthony M. (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: In this study I examine the welfare implications of monetary policy by constructing a novel New Keynesian model that properly accounts for asset pricing facts. I find that the Ramsey optimal monetary policy yields an inflation rate above 3.5% and inflation volatility close to 1.5%. The same model calibrated to a counterfactually low equity premium implies an optimal inflation rate close to zero and inflation volatility less than 10 basis points, consistent with much of the existing literature. Relatively higher optimal inflation is due to the greater welfare costs of recessions associated with matching the equity premium. Additionally, the second order approximation allows monetary policy to have positive welfare effects on the labor share of income. I show that this channel is generally absent in standard macroeconomic models that do not take risk into account. Furthermore, the interest rate rule that comes closest to matching the dynamics of the optimal Ramsey policy puts a sizable weight on capital growth along with the price of capital, as it emphasizes stabilizing the medium to long term over the very short run.
    Keywords: Asset Pricing; Long-run risk; Monetary policy
    Date: 2015–09–21
  15. By: Lechthaler, Wolfgang; Tesfaselassie, Mewael
    Abstract: We analyze the implications of changes in the trend growth rate for optimal monetary policy in the presence of search and matching unemployment. We show that trend growth in itself does not generate a trade-off for the monetary authority, but that it interacts importantly with the inefficiencies stemming from the labor market. Higher trend growth exacerbates the inefficiencies of the labor market and therefore calls for larger deviations from price stability.
    Keywords: trend growth,trend inflation,unemployment
    JEL: E12 E24 E52
    Date: 2015
  16. By: BLINOV, Sergey
    Abstract: Money supply statistics based on the Year 2015 results show that «money starvation» is coming to an end in Russia. That has always been truly indicative of exit from the crisis. The depth of money supply decline in 2015 (it declined by 11%) proved to have been the smallest one in the whole history of post-Soviet Russia. This constitutes a relative success of the policy conducted by the Central Bank of Russia. The reason for this success is that it has been keeping positive growth rates of the nominal money supply and keeping inflation under control. Continuation of such policy would mean independence of economic growth in Russia of oil prices.
    Keywords: Monetary Policy, Central Banking, Interest Rates, Economic Growth, Money Supply
    JEL: E31 E32 E40 E51 E52 E58 E65 G01 N10 O11
    Date: 2016–02–13
  17. By: Altug, Sumru G.; Cakmakli, Cem
    Abstract: In this paper, we formulate a statistical model of inflation that combines data on survey expectations and the inflation target set by central banks.. Our model produces inflation forecasts that are aligned with survey expectations, thereby integrating the predictive power of the survey expectations together with the baseline model. We further incorporate the inflation target set by the monetary authority to examine the effectiveness of monetary policy in forming inflation expectations and therefore, predicting inflation accurately. Results indicate superior predictive power of the proposed framework compared to the model without survey expectations as well as several popular benchmarks such as the backward and forward looking Phillips curves and naive forecasting rule.
    Keywords: Inflation forecasting; inflation targeting; state space models; survey-based expectation; term structure of inflation expectations
    JEL: C32 C51 E31 E37
    Date: 2015–02
  18. By: Kakar, Venoo
    Abstract: This paper analyzes the redistributional effects of long-run inflation on income, wealth and consumption in the United States in a model economy with heterogeneous agents where money is introduced via a cash-in-advance constraint. A calibrated version of our model is able to generate patterns of income inequality that are very similar to those observed in the United States. On an aggregate level, the cost of 5% inflation is 2.5% consumption. On an disaggregate level, uniform monetary transfers by the central bank result in inflation acting as a progressive tax on consumption.
    Keywords: Consumption, Inequality, Inflation, Heterogeneity
    JEL: E21 E31 E4 E5 E52
    Date: 2014–05–03
  19. By: Boris Hofmann; Ilhyock Shim; Hyun Song Shin
    Abstract: Currency appreciation against the US dollar is associated with the compression of emerging market economy (EME) sovereign yields. We find that this yield compression is due to reduced risk premiums rather than expectations of interest rates already priced into forward rates. We explore a model which ties together dollar credit to EME corporates, sovereign tail risks and global investor portfolio adjustments driven by economic capital constraints. Consistent with our model, we find no empirical association between currency appreciation and sovereign spreads when we use the trade-weighted effective exchange rate that is unrelated to the US dollar.
    Keywords: bond spread, capital flow, credit risk, emerging market, exchange rate
    Date: 2016–01
  20. By: Phiri, Andrew
    Abstract: This study investigates inflation persistence in annual CPI inflation collected between 1994 and 2014 for 46 African countries. We group these countries into panels according to whether they are inflation targeters or not and conduct estimations for pre and post inflation targeting periods. Interestingly enough, we find that inflation persistence was much higher for inflation targeters in periods before adopting their inflation targeting regimes and inflation persistence dropped by 40 percent for these countries after adopting the policy frameworks. For non-inflation targeters inflation persistence has increased by almost 290 percent between the two time periods.
    Keywords: African countries; Developing countries; Inflation persistence; Inflation targeting; Panel data.
    JEL: C1 C5
    Date: 2016–02–01
  21. By: Spiros Bougheas (School of Economics, University of Nottingham); Alan Kirman (Faculte de Droit et de Sciences Politiques, Aix-Marseille Université)
    Abstract: The paper argues that systemic risk must be taken into account when designing optimal bankruptcy procedures in general, and priority rules in particular. Allowing for endogenous formation of links in the interbank market we show that the optimal policy depends on the distribution of shocks and the severity of fire sales.
    Keywords: Banks; Priority rules; Systemic Risk
    JEL: G21 G28
    Date: 2016–01
  22. By: McKenzie, Rex A (Kingston University London)
    Abstract: This paper focuses on the subject of monetary transmission in Africa. It begins with a report on the effects of the financial crisis of 2008 in Africa. In the countries with more developed financial systems, the financial channel proved to be the most important in transmitting the crisis. In the more peripheral countries, the trade channel proved to be the most important. Where countries were able to withstand the global shock coming from the financial crisis, they did so with a diversified group of trading partners in fast growing economies. The paper then turns to examine three post crisis institutional developments and asks how a) an increased momentum towards regional integration, b) the rise of Pan African banking and, c) an increase in cross border flows, are affecting the monetary transmission mechanism (MTM) in Africa. It is clear from the literature that the rise of Pan African banking and the regionalization thrust of the authorities are deepening the financial channels between countries. But, with respect to cross border flows, the huge size of deposits maintained by Africa’s BIS reporting banks suggests relatively low levels of bank intermediation and competition. Thus, the benefits that are assumed to accrue as a result of increased cross border flows are withdrawn from the local economy and stored up in the BIS banks. We know large deposits reflect the expectations of the deposit holders. But beyond that, very little is known about the role of expectations and the workings of the expectations channel in monetary transmission in Africa. Even less is known about how such expectations would interact with those formed as a result of operations in the large informal sectors which characterise African macro economies. Until research can bridge this gap, the increasing cross border flows with the large deposits held in BIS banks form the basis for yet another explanation for the historical weakness of the MTM in Africa.
    Keywords: Africa; Economic Development; Monetary Policy; Central Banking
    JEL: E50 E60 G10 O16
    Date: 2015–09–16
  23. By: Odhiambo, Nicholas M.; Njindan Iyke , Bernard
    Abstract: In this paper, we have estimated the equilibrium real exchange rate for Botswana. We have also reviewed the exchange rate regimes pursued by Botswana from independence to date. The evidence suggests that Botswana operated a fixed exchange rate without adjustable pegs from 1966-1976; a fixed exchange with adjustable pegs from 1976-1980; and a fixed exchange with a currency basket from 1980 to date. From the ARDL bounds testing procedure, we found that the fundamental determinants of the equilibrium real exchange rate in Botswana are: the terms of trade and trade openness. The actual real exchange rate appears to have deviated significantly from the equilibrium exchange rate. Perhaps more worrying is the fact that our estimated speed of adjustment is very slow. This means that significant deviations are not corrected fast enough annually. Policymakers in Botswana are encouraged to pursue policies, which could raise the adjustment parameter, in order to avoid excess misalignments, when going forward.
    Keywords: Real Exchange Rate, Equilibrium Exchange Rate, Botswana
    Date: 2015–08

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