nep-cba New Economics Papers
on Central Banking
Issue of 2016‒03‒23
23 papers chosen by
Maria Semenova
Higher School of Economics

  1. Cost-Benefit Analysis of Leaning Against the Wind: Are Costs Larger Also with Less Effective Macroprudential Policy? By Lars E.O. Svensson
  2. Liquidity Trap and Optimal Monetary Policy Revisited By Kohei Hasui; Tomohiro Sugo; Yuki Teranishi
  3. Choice of inflation targeting: Some international evidence By Shakhzod Ismailov; Makoto Kakinaka; Hiroaki Miyamoto
  4. Optimal Monetary Policy in the Presence of Sizable Informal Sector and Firm Level Credit Constraint By Waqas Ahmed; Sajawal Khan; Muhammad Rehman
  5. The impact of financial crisis and low inflation environment on short-term inflation expectations in Poland By Tomasz Łyziak
  6. Flexible and Mandatory Banking Supervision By Alessandro De Chiara; Luca Livio; Jorge Ponce
  7. International Channels of Transmission of Monetary Policy and the Mundellian Trilemma By Hélène Rey
  8. Moving in tandem: bank provisioning in emerging market economies By Andres Murcia; Emanuel Kohlscheen
  9. International housing markets, unconventional monetary policy and the zero lower bound By Huber, Florian; Punzi, Maria Teresa
  10. Euro area monetary and fiscal policy tracking design in the time-frequency domain By Crowley, Patrick M.; Hudgins, David
  11. Are monetary unions more synchronous than non-monetary unions? By Crowley, Patrick M.; Trombley, Christopher
  12. The invisible hand of the government: "Moral suasion" during the European sovereign debt crisis By Steven Ongena; Alexander Popov; Neeltje Van Horen
  13. Aggregate Stability in Monetary Economy with Consumption Tax and Taylor Rule By Fujisaki, Seiya
  14. When pegging ties your hands By Nikola Tarashev; Anna Zabai
  15. The EMU and the anchoring of inflation expectations? By Mayes David; Paloviita Maritta; Viren Matti
  16. The tax burden on banks over the period 2006-2014 By Giacomo Ricotti; Marco Burroni; Vincenzo Cuciniello; Elena Padovani; Elena Pisano; Stefania Zotteri
  17. Exchange Rates and Fundamentals: A General Equilibrium Exploration By KANO, Takashi
  18. Strong Sterling Pound and Weak European Currencies in the Crises: Evidence from Covered Interest Parity of Secured Rates By Shin-ichi Fukuda
  19. Optimal Inflation, Average Markups and Asymmetric Sticky Prices By Paczos, Wojtek
  20. Liquidity Regulation and Unintended Financial Transformation in China By Kinda Cheryl Hachem; Zheng Michael Song
  21. Lending Pro-Cyclicality and Macro-Prudential Policy: Evidence from Japanese LTV Ratios By Ono, Arito; Uchida, Hirofumi; Udell, Gregory F.; Uesugi, Iichiro
  22. On the Desirability of Capital Controls By Jonathan Heathcote; Fabrizio Perri
  23. Impacto de política monetaria: una revisión empírica 2000 – 2013 By Anzoategui Zapata, Juan Camilo

  1. By: Lars E.O. Svensson
    Abstract: “Leaning against the wind” (LAW) with a higher monetary policy interest rate may have benefits in terms of lower real debt growth and associated lower probability of a financial crisis but has costs in terms of higher unemployment and lower inflation. LAW has a cost if no crisis occurs, but, importantly, it also has an additional cost if a crisis occurs, because the cost of a crisis is higher if the economy initially is weaker due to LAW. This additional cost, disregarded by the previous literature, is the main part of the costs of LAW. With that additional cost, for existing empirical estimates, costs of LAW exceed benefits by a substantial margin, even if monetary policy is non-neutral and permanently affects real debt. Somewhat surprisingly, less effective macroprudential policy, and generally a credit boom, with resulting higher probability, severity, or duration of a crisis, increases costs of LAW more than benefits, thus making costs exceed benefits by an even larger margin.
    JEL: E52 E58 G01
    Date: 2016–01
  2. By: Kohei Hasui (Kobe University.); Tomohiro Sugo (European Central Bank); Yuki Teranishi (Keio University)
    Abstract: This paper investigates history dependent easing known as a conventional wis- dom of optimal monetary policy in a liquidity trap. We show that, in an economy where the rate of inflation exhibits intrinsic persistence, monetary tightening is earlier as inflation becomes more persistent. This property is referred as early tightening and in the case of a higher degree of inflation persistence, a central bank implements front-loaded tightening so that it terminates the zero interest rate policy even before the natural rate of interest turns positive. As a prominent feature in a liquidity trap, a forward guidance of smoothing the change in inflation rates contributes to an early termination of the zero interest rate policy.
    Keywords: liquidity trap; optimal monetary policy; inflation persistence; early tightening; forward guidance
    JEL: E31 E52 E58 E61
    Date: 2016–02
  3. By: Shakhzod Ismailov (Central Bank of Uzbekistan); Makoto Kakinaka (International University of Japan); Hiroaki Miyamoto (The University of Tokyo)
    Abstract: Inflation targeting has attracted attention to researchers and policy makers since the first attempt in New Zealand in 1990. This paper discusses a country's choice of inflation targeting by examining its driving forces with the dataset of 82 countries. The empirical result shows that countries' decision of adoption of inflation targeting depends highly on their development stage. For high-income or developed countries, the significant motive of monetary authority to choose inflation targeting is the desire to keep or enhance anti-inflation credibility, and inflation targeting could be a natural option under more floats with the absence of nominal exchange rate anchor. On the other hand, low-income or developing countries with the large size of public debts are not likely to choose inflation targeting, so that fiscal fragility would discourage monetary authority to adopt restrictive monetary policy under inflation targeting.
    Keywords: inflation targeting, exchange rate arrangements, anti-inflation credibility, fiscal fragility
    Date: 2016–03
  4. By: Waqas Ahmed (State Bank of Pakistan); Sajawal Khan (State Bank of Pakistan); Muhammad Rehman (State Bank of Pakistan)
    Abstract: We analyze optimality of pro-cyclical monetary policy in the presence of informal sector and firm level constraint. Our findings suggest that in case of export demand shock pro-cyclical monetary policy suits only when shock is severe and domestic firms have high leverage ratio. However, the conventional monetary policy helps cushioning the loss in output when the size of informal sector is significantly large. Furthermore, fixing exchange rate is better policy option if objective is to keep domestic employment or consumption from falling (when negative shock hits the economy). We cannot find any disproportionate impact of monetary policy on informal sector. This may be due to static nature of the model and it might be possible that dynamics of responses of the two sectors to shocks differ significantly.
    Keywords: Informal sector, credit constraint, exchange rate and monetary policy
    JEL: F0 F4 O17 O23 E52
  5. By: Tomasz Łyziak
    Abstract: To what extent financial crisis whose sharp face begun in 2008 and low inflation environment that started in 2013 affect inflation expectations in Poland? Have inflation expectations of the private sector become more forward-looking? Is monetary policy still able to influence expectations as compared with the pre-crisis period? Those are the main questions addressed in this paper. To answer them we analyse survey-based measures of inflation expectations of consumers, enterprises and financial sector analysts. Estimation of simple and extended hybrid models of inflation expectations combined with verification of orthogonality of expectational errors with respect to available information leads us to the conclusion that since 2008 inflation expectations of enterprises and financial sector analysts have become more forward-looking, better exploiting available information and more sensitive to interest rate changes and developments in the real economy. At the same time formation of consumer inflation expectations has not been affected significantly.
    Keywords: Inflation expectations, survey, Poland.
    JEL: D84 E31
    Date: 2016
  6. By: Alessandro De Chiara; Luca Livio; Jorge Ponce
    Abstract: Tighter regulation and more powerful supervision are being enacted after the global financial crisis. Although this trend may have positive welfare effects, it may also impose large social costs due to the strong reliance on supervisory information. We argue that offering banks a Flexible Supervision contract, designed to be chosen by those banks that will otherwise attempt to capture the supervisor, is a mechanism to implement the most efficient regulation under asymmetric information. The result that Flexible Supervision outperforms Mandatory Supervision remains robust to a series of extensions to our baseline model. Policy implications follow directly: Benevolent regulators should enact a Flexible Supervision regime for the less risky, more capitalized and transparent banks in addition to the traditional Mandatory Supervision regime.
    Keywords: banking supervision; regulatory capture
    JEL: G21 G28
    Date: 2016–03
  7. By: Hélène Rey
    Abstract: This lecture argues that the Global Financial Cycle is a challenge for the validity of the Mundellian trilemma. I present evidence that US monetary policy shocks are transmitted internationally and affect financial conditions even in inflation targeting economies with large financial markets. Hence flexible exchange rates are not enough to guarantee monetary autonomy in a world of large capital flows.
    JEL: F3 F33 F41
    Date: 2016–01
  8. By: Andres Murcia; Emanuel Kohlscheen
    Abstract: We study the determinants of loan loss provisions and delinquency ratios based on the balance sheets of 554 banks from emerging market economies (EMEs). We find that provisions in EME banks respond mostly to aggregate variables, and very little to idiosyncratic factors. In particular, the bank-specific credit growth rates — usually thought of as a measure of individual risk-taking — do not explain the level of loan loss provisions. There is some evidence that earnings and the size of the intermediaries have an effect on provisions. The predominant effect however is that provisions and actual losses are negatively related to past economic growth and positively related to past aggregate credit growth. We also estimate the forward and backward-looking component of provisions, finding that provisions respond mainly to past reported losses. These findings suggest that EME banks’ provisioning decisions are highly correlated. Since provisions fall when output grows, macroprudential tools that counter this effect could dampen pro-cyclical behavior.
    Keywords: bank credit, provisions, delinquency, emerging market, pro-cyclicality
    Date: 2016–03
  9. By: Huber, Florian; Punzi, Maria Teresa
    Abstract: In this paper we propose a time-varying parameter VAR model for the housing market in the United States, the United Kingdom, Japan and the Euro Area. For these four economies, we answer the following research questions: (i) How can we evaluate the stance of monetary policy when the policy rate hits the zero lower bound? (ii) Can developments in the housing market still be explained by policy measures adopted by central banks? (iii) Did central banks succeed in mitigating the detrimental impact of the financial crisis on selected housing variables? We analyze the relationship between unconventional monetary policy and the housing markets by using the shadow interest rate estimated by Krippner (2013b). Our findings suggest that the monetary policy transmission mechanism to the housing market has not changed with the implementation of quantitative easing or forward guidance, and central banks can affect the composition of an investor's portfolio through investment in housing. A counterfactual exercise provides some evidence that unconventional monetary policy has been particularly successful in dampening the consequences of the financial crisis on housing markets in the United States, while the effects are more muted in the other countries considered in this study.
    Keywords: Zero Lower Bound,Shadow interest rate,Housing Market,Time-varying parameter VAR
    JEL: C32 E23 E32
    Date: 2016
  10. By: Crowley, Patrick M.; Hudgins, David
    Abstract: This paper first applies the MODWT (Maximal Overlap Discrete Wavelet Transform) to Euro Area quarterly GDP data from 1995 – 2014 to obtain the underlying cyclical structure of the GDP components. We then design optimal fiscal and monetary policy within a large state-space LQ-tracking wavelet decomposition model. Our study builds a MATLAB program that simulates optimal policy thrusts at each frequency range where: (1) both fiscal and monetary policy are emphasized, (2) only fiscal policy is relatively active, and (3) when only monetary policy is relatively active. The results show that the monetary authorities should utilize a strategy that influences the short-term market interest rate to undulate based on the cyclical wavelet decomposition in order to compute the optimal timing and levels for the aggregate interest rate adjustments. We also find that modest emphasis on active interest rate movements can alleviate much of the volatility in optimal government spending, while rendering similarly favorable levels of aggregate consumption and investment. This research is the first to construct joint fiscal and monetary policies in an applied optimal control model based on the short and long cyclical lag structures obtained from wavelet analysis.
    Keywords: discrete wavelet analysis, euro area, fiscal policy, LQ tracking, monetary policy, optimal control
    JEL: C49 C61 C63 C88 E52 E61
    Date: 2015–08–12
  11. By: Crowley, Patrick M.; Trombley, Christopher
    Abstract: Within currency unions, the conventional wisdom is that there should be a high degree of macroeconomic synchronicity between the constituent parts of the union. But this conjecture has never been formally tested by comparing sample of monetary unions with a control sample of countries that do not belong to a monetary union. In this paper we take euro area data, US State macro data, Canadian provincial data and Australian state data — namely real Gross Domestic Product (GDP) growth, the GDP deflator growth and unemployment rate data — and use techniques relating to recurrence plots to measure the degree of synchronicity in dynamics over time using a dissimilarity measure. The results show that for the most part monetary unions are more synchronous than non-monetary unions, but that this is not always the case and particularly in the case of real GDP growth. Furthermore, Australia is by far the most synchronous monetary union in our sample.
    Keywords: business cycles, growth cycles, frequency domain, optimal currency area, macroeconomic synchronization, monetary policy, single currency
    JEL: C49 E32 F44
    Date: 2015–07–31
  12. By: Steven Ongena; Alexander Popov; Neeltje Van Horen
    Abstract: Using proprietary data on banks' monthly securities holdings, we find that during the European sovereign debt crisis, domestic banks in fiscally stressed countries were considerably more likely than foreign banks to increase their holdings of domestic sovereign bonds in months with relatively high domestic sovereign bond issuance. This effect is stronger for state-owned banks and for banks with low initial holdings of domestic sovereign bonds, and it is not fuelled by Central Bank liquidity provision. Our results point to a "moral suasion" mechanism, and they are not driven by concurrent risk-shifting, carry-trading, regulatory compliance, or shocks to investment opportunities.
    Keywords: Sovereign debt; sovereign-bank loop; moral suasion
    JEL: F34 G21 H63
    Date: 2016–03
  13. By: Fujisaki, Seiya
    Abstract: We analyze aggregate stability of a monetary economy with an interest-rate control type of monetary policy and endogenous consumption tax rate under balanced-budget rule, in terms of equilibrium determinacy. We find the effect of the response to income in monetary policy on macroeconomic stability depends on whether the consumption tax rate is adequately high.
    Keywords: aggregate stability, endogenous consumption tax rate, Taylor rule.
    JEL: E52 E62
    Date: 2016–03–03
  14. By: Nikola Tarashev; Anna Zabai
    Abstract: Could a less conservative central bank - one that faces a more severe time inconsistency problem - be less likely to succumb to an attack on a currency peg? Traditional currency-crisis models provide a firm answer: No. We argue that the answer stems from these models' narrow focus on how a central bank's response to a speculative attack affects output and inflation in the short run. The answer may reverse if we recognize that a credible currency peg solves time consistency issues in the long run. As a less conservative central bank stands to benefit more from tying its own hands, it should find a peg more valuable.
    Keywords: currency crises, strategic uncertainty, global games, time inconsistency
    Date: 2016–03
  15. By: Mayes David (Auckland University); Paloviita Maritta (Bank of Finland); Viren Matti (Bank of Finland and Department of Economics, University of Turku)
    Abstract: It has been argued that one advantage of EMU in the EU has been an improvement in the credibility of monetary policy. This paper provides a new way of assessing the credibility of monetary policy by analyzing the dispersion of inflation–unemployment observations over time. In this way, we may reveal whether the short run Phillips curves have shifted due to changes in inflation expectations. This way of analyzing the anchoring of inflation expectations is both simple and free from ambiguities that are related to the choice of the Phillips curve specification and modelling of inflation expectations. The analysis uses data from eleven EMU countries and nine non-EMU countries that are used as points of comparison. The sample periods are 1984-1998 and 1999-2013. The analysis is based on dispersion measures where we use alternative weights for inflation and unemployment and also on a simple Misery index which is just a sum of inflation and unemployment values. The general outcome of the paper is that dispersion (and the Misery index) has decreased during the EMU period. The decrease has, however, been smaller than in control group countries. This implies that while the credibility of monetary policy may have increased under EMU, this just mirrors the general experience in the OECD over the same period.
    Keywords: Misery-index, inflation, unemployment, Phillips curve
    JEL: E31 E61
    Date: 2015–12
  16. By: Giacomo Ricotti; Marco Burroni (Banca d'Italia); Vincenzo Cuciniello (Banca d'Italia); Elena Padovani (Banca d'Italia); Elena Pisano (Banca d'Italia); Stefania Zotteri (Banca d'Italia)
    Abstract: Following the establishment of the Single Supervisory Mechanism (SSM), concerns about having a level playing field become more important due to the heterogeneity in bank taxation rules across Europe: measuring the tax burden can provide a first rough measure of the extent of heterogeneity across countries. After a review of the main differences in banks taxation between Italy, France, Germany, Spain and the UK, the paper provides estimates for the tax burden and deferred tax assets in these countries over the years 2006-2014; the impact of differences in taxation on bank profitability is also examined. Moreover, the paper carries out a more in-depth analysis of Italian banks by considering both individual balance sheet data and aggregate tax return data. The impact of tax measures on financial stability and on profitability is further analysed. The comparative analysis points to a wide heterogeneity across countries in the tax treatment of the banking sector. This suggests that it would be advantageous to explore possible ways to make the tax systems of the countries participating in the SSM more homogeneous; a first step could be to harmonize tax bases.
    Keywords: banking, taxation
    JEL: G21 H25 H87 K34
    Date: 2016–02
  17. By: KANO, Takashi
    Abstract: Engel and West (2005) claim that the observed near random-walk behavior of nominal exchange rates is an equilibrium outcome of a present-value model of a partial equilibrium asset approach when economic fundamentals follow exogenous first-order integrated processes and the discount factor approaches one. Subsequent empirical studies further confirm this proposition by estimating discount factors close to one under distinct identification schemes. In this paper, I argue that the unit market discount factor creates a theoretical trade-off within a neoclassical, two-country, incomplete-market monetary model; on the one hand, the unit discount factor generates near random-walk nominal exchange rates, while, on the other hand, it counterfactually implies perfect consumption risk sharing as well as flat money demand. Bayesian posterior simulation exercises based on post-Bretton Woods data from Canada and the United States reveal difficulties in reconciling the equilibrium random-walk proposition within the canonical model; in particular, the market discount factor is identified as being much smaller than one.
    Keywords: Exchange rate, Present-value model, Economic fundamental, Random walk, Two-country model, Incomplete market, Cointegrated TFPs, Perfect risk sharing
    JEL: E31 E37 F41
    Date: 2016–03–07
  18. By: Shin-ichi Fukuda
    Abstract: In the post Lehman period, the interest rate of the US dollar became low on the forward contract because of“flight to quality” to the international currency. However, in the Euro crisis, that of the Sterling pound became equally low, while the other European currencies such as the Danish kroner increased its liquidity premium. By using secured rates, the following analysis examines why the Sterling pound and the Danish kroner showed asymmetric features in deviations from the covered interest parity (CIP) condition. The regression results suggest that there was a structural break in the determinants of the deviations across the European currencies in the two crises. Currency-specific money market risk was critical in explaining the deviations in the global financial crisis (GFC), while EU banks’ credit risk and market risk were useful in explaining the deviations in the Euro crisis. In particular, EU banks’ credit risk and market risk had asymmetric effect on the deviations. The asymmetry explains different features between the Sterling pound and the Danish kroner.
    JEL: F36 G12 G15
    Date: 2016–01
  19. By: Paczos, Wojtek
    Abstract: In state-of-the-art New Keynesian model firms are monopolistically competitive and prices are sticky. However, the average markup resulting from the monopolistic competition is usually assumed away either by production subsidy or by the zero-inflation steady state. Also, in models of an open economy the same level of price stickiness is assumed for both countries. In this paper I study the optimal rate of inflation in a two country model keeping the average markup and allowing price stickiness to differ between countries. There are two channels that govern the optimal rate of inflation. First, with local currencies an inflation tax is partly imposed on the foreign country, so it is optimal to inflate. Second, the average markup constitutes a cost of holding money so it is optimal to deflate, to compensate this cost. The paper has four novel findings: 1) in the local currencies regime the first motive dominates and the optimal inflation is positive. 2) In a monetary union the first motive is absent and the optimal inflation is negative and below the Friedman rule. 3) A monetary union improves global welfare even when stickiness is different in two countries. However, when this difference is large, only one country (the one with higher stickiness) benefits from the integration. 4) A monetary union can be welfare improving for each of both countries, if a transfer is introduced from the more sticky to the more flexible country of (depending on the parameters up to) 2% of its GDP.
    Keywords: Monetary Union, International Spillovers, Monetary Policy
    JEL: E52 F41 F42
    Date: 2016
  20. By: Kinda Cheryl Hachem; Zheng Michael Song
    Abstract: China increased bank liquidity standards in the late 2000s. The interbank market became tighter and more volatile and credit soared, contrary to expectations. To explain this, we argue that shadow banking developed among Chinaʼs small and medium-sized banks to evade the higher liquidity standards. The shadow banks, which were not subject to interest rate ceilings on traditional bank deposits, then poached deposits from big commercial banks. In response, big banks used their substantial interbank market power to restrict credit to the shadow banks and increased their lending to non-financials. A calibration of our unified framework generates a quantitatively important credit boom and higher and more volatile interbank interest rates as unintended consequences of higher liquidity standards.
    JEL: E44 G28
    Date: 2016–01
  21. By: Ono, Arito; Uchida, Hirofumi; Udell, Gregory F.; Uesugi, Iichiro
    Abstract: Using a unique micro dataset compiled from the real estate registry in Japan, we examine more than 400,000 loan-to-value (LTV) ratios for business loans to draw implications for the efficacy of caps on LTV ratios as a macro-prudential policy measure. We find that the LTV ratio exhibits counter-cyclicality through the business cycle. We also find that borrowers obtaining high-LTV loans performed no worse ex-post than those with lower LTV loans. Our findings imply that a fixed cap on LTV ratios might not only be ineffective in curbing loan volume in boom periods but also inhibit well-performing firms from borrowing.
    Keywords: loan-to-value (LTV) ratios, pro-cyclicality, macro-prudential policy, bubble
    JEL: G28 R33 G21 G32
    Date: 2016–02
  22. By: Jonathan Heathcote; Fabrizio Perri
    Abstract: In a standard two country international macro model we ask whether imposing restrictions on international non-contingent borrowing and lending is ever desirable. The answer is yes. If one country imposes capital controls unilaterally, it can generate favorable changes in the dynamics of equilibrium interest rates and the terms of trade, and thereby benefit at the expense of its trading partner. If both countries simultaneously impose capital controls, the welfare effects are ambiguous. We identify calibrations in which symmetric capital controls improve terms of trade insurance against country specific shocks, and thereby increase welfare for both countries.
    JEL: F32 F41 F42
    Date: 2016–01
  23. By: Anzoategui Zapata, Juan Camilo
    Abstract: This paper analyzes for the period 2000 - 2013 the transmission mechanism of monetary policy in Colombia, focusing on how the Bank of the Republic and its inflation targeting strategy affects through the intervention interest rate, the M2 and the consumer loans to total inflation and therefore the purchasing power. This is done through a procedure Johansen cointegration analyzing and short –and long– term vector autoregression model - VECM. For the period of analysis is evidence of price paradox, ie, against increases in the intervention interest rate total inflation responds with a persistent increase. It is also found that for the long term there is an inverse relationship between consumer credit and inflation, the above reflected in a greater financial deepening accompanied by a strong disinflationary policy by the issuer.
    Keywords: Impact of monetary policy, VAR model, inflation, price paradox.
    JEL: E4 E43 E52 E58
    Date: 2015–01–15

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