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on Central Banking |
| By: | Eisenbach, Thomas M. (Federal Reserve Bank of New York); Lucca, David O. (Federal Reserve Bank of New York); Townsend, Robert M. (Massachusetts Institute of Technology) |
| Abstract: | We study bank supervision by combining a theoretical model that distinguishes supervision from regulation and a novel dataset on work hours of Federal Reserve supervisors. We highlight the trade-offs between the benefits and costs of supervision and use the model to interpret the relationship between supervisory efforts and bank characteristics observed in the data. More supervisory resources are spent on larger, more complex, and riskier banks. However, hours increase less than proportionally with bank size, suggesting the presence of technological economies of scale in supervision. The data also show reallocation of supervisory hours at times of stress and in the post-2008 enhanced supervisory framework for large banks, providing evidence of constraints on supervisory resources. Finally, we show theoretically the limits to assessing supervisory success based on ex post outcomes, as well as benefits of ex ante commitment policies. |
| Keywords: | bank supervision; bank regulation; monitoring; time use |
| JEL: | D82 G21 G28 |
| Date: | 2016–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:769&r=cba |
| By: | Zineddine Alla; Raphael A. Espinoza; Atish R. Ghosh |
| Abstract: | This paper analyzes the use of unconventional policy instruments in New Keynesian setups in which the ‘divine coincidence’ breaks down. The paper discusses the role of a second instrument and its coordination with conventional interest rate policy, and presents theoretical results on equilibrium determinacy, the inflation bias, the stabilization bias, and the optimal central banker’s preferences when both instruments are available. We show that the use of an unconventional instrument can help reduce the zone of equilibrium indeterminacy and the volatility of the economy. However, in some circumstances, committing not to use the second instrument may be welfare improving (a result akin to Rogoff (1985a) example of counterproductive coordination). We further show that the optimal central banker should be both aggressive against inflation, and interventionist in using the unconventional policy instrument. As long as price setting depends on expectations about the future, there are gains from establishing credibility by using any instrument that affects these expectations. |
| Date: | 2016–03–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:16/58&r=cba |
| By: | William R. Cline (Peterson Institute for International Economics) |
| Abstract: | This study provides new estimates of the likely economic losses from banking crises. It also provides new estimates of the economic cost of increasing bank capital requirements, based on the author’s earlier estimate (Cline 2015) of the empirical magnitude of the Modigliani-Miller effect in which higher capital reduces unit cost of equity capital. The study applies previous official estimates (BCBS 2010a) of the impact of higher capital on the probability of banking crises to derive a benefits curve for additional capital, which is highly nonlinear. The benefit and cost curves are examined to identify the socially optimal level of bank capital. This optimum is estimated at about 7 percent of total assets, with a more cautious alternative (75th percentile) at about 8 percent, corresponding to about 12 and 14 percent of riskweighted assets, respectively. These levels are, respectively, about one-fourth to one-half higher than the Basel III capital requirements for the large global systemically important banks (G-SIBs). |
| Keywords: | Financial Regulation, Bank Capital Requirements, Capital Structure |
| JEL: | E44 G21 G28 G32 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:iie:wpaper:wp16-6&r=cba |
| By: | Stephanos Papadamou; Moïse Sidiropoulos; Eleftherios Spyromitros |
| Abstract: | Inspired from a simple theoretical macroeconomic model, proposed by Ozkan et al. (2010), which shows a positive link between public debt issues and central bank independence, we empirically investigate if central bank independence affects the way that net stock of government securities and public debt are altered by important macroeconomic variables. Our research has been focused on various levels of independence of the central bank of 22 countries from 1992 to 2000, where significant changes in the index of independence for a large number of central banks have been occurred. By applying dynamic panel data analysis, we show that central bank independence has a significant impact on the effects of deficit, GDP growth and government bonds yield on government bond issues and public debt. The latter result implies that higher levels of central bank independence make countries more affected by market conditions. |
| Keywords: | Central bank independence, public debt, panel data. |
| JEL: | E52 E58 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2016-15&r=cba |
| By: | Kang Dae Woong (Princeton University); Nick Ligthart (College of Europe in Bruges, Belgium); Ashoka Mody (Princeton University) |
| Abstract: | As the financial crisis gathered momentum in 2007, the United States Federal Reserve brought its policy interest rate aggressively down from 5¼ percent in September 2007 to virtually zero by December 2008 In contrast, although facing the same economic and financial stress, the European Central Bank’s first action was to raise its policy rate in July 2008. The ECB began lowering rates only in October 2008 once near global financial meltdown left it with no choice. Thereafter, the ECB lowered rates slowly, interrupted by more hikes in April and July 2011. We use the “abnormal†increase in stock prices—the rise in the stock price index that was not predicted by the trend in the previous 20 days—to measure the market’s reaction to the announcement of the interest rate cuts.Stock markets responded favorably to the Fed interest rate cuts but, on average, they reacted negatively when the ECB cut its policy rate The Fed’s early and aggressive rate cuts established its intention to provide significant monetary stimulus. That helped renew market optimism, consistent with the earlier economic recovery.In contrast, the ECB started building its shelter only after the storm had started. Markets interpreted even the simulative ECB actions either as “too little, too late†or as signs of bad news. We conclude that by recognizing the extraordinary nature of the circumstances, the Fed’s response not only achieved better economic outcomes but also enhanced its credibility. The ECB could have acted similarly and stayed true to its mandate. The poorer economic outcomes will damage the ECB’s long-term credibility |
| JEL: | E5 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:pri:cepsud:248&r=cba |
| By: | Haufler, Andreas; Maier, Ulf |
| Abstract: | Several countries have recently introduced national capital standards exceeding the internationally coordinated Basel III rules, thus suggesting a `race to the top' in capital standards. We study regulatory competition when banks are heterogeneous and give loans to firms that produce output in an integrated market. In this setting capital requirements change the pool quality of banks in each country and inflict negative externalities on neighboring jurisdictions by shifting risks to foreign taxpayers and by reducing total credit supply and output. Non-cooperatively set capital standards are higher than coordinated ones when governments care equally about bank profits, taxpayers, and consumers. |
| Keywords: | regulatory competition; capital requirements; bank heterogeneity |
| JEL: | G28 F36 H73 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:27700&r=cba |
| By: | Dieter Nautz; Aleksei Netsunajev; Till Strohsal; |
| Abstract: | This paper introduces structural VAR analysis as a tool for investigating the anchoring of inflation expectations. We show that U.S. consumers’ inflation expectations are anchored in the long run because macro-news shocks are long-run neutral for long-term inflation expectations. The identification of structural shocks helps to explain why inflation expectations deviate from the central bank’s target in the short run. Our results indicate that the recent decline of long-term inflation expectations does not result from deanchoring macro-news but can be attributed to downward adjustments of consumers’ expectations about the central bank’s inflation target. |
| Keywords: | Inflation Expectations, Michigan Survey, Structural VAR, Markov Switching Heteroskedasticity |
| JEL: | E31 E52 E58 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2016-015&r=cba |
| By: | Richard G. Anderson; Michael Bordo; John V. Duca |
| Abstract: | This study offers a single, consistent model that tracks the velocity of broad money (M2) since 1929, including the Great Depression, the global financial crisis, and the Great Recession. The model emphasizes the roles of changes in uncertainty and risk premia, financial innovation, and major banking regulations. Our findings suggest an enhanced role of a broad, liquid money aggregate as a policy guide during crises and their unwinding. Following crises, policymakers face the challenge of not only unwinding their balance sheet so as to prevent excess reserves from fueling a surge in M2, but also countering a fall in the demand for money as risk premia return to normal amid velocity shifts stemming from relevant financial reforms. |
| JEL: | E41 E50 G11 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22100&r=cba |
| By: | Sargsyan Hayk |
| Abstract: | A well-functioning monetary policy transmission mechanism is a guarantee for a successful monetary policy, therefore examination of the impacts of its main determinants in Armenia was of a great interest, and served as an inspiration for the given research. Following the research objectives, a proxy variable for the strength of monetary pass-through in Armenia was estimated, and then the resulted variable was used in an empirical model to assess the long-run and short run relationship with its main factors. |
| JEL: | E52 E58 |
| Date: | 2016–03–18 |
| URL: | http://d.repec.org/n?u=RePEc:eer:wpalle:16/02e&r=cba |
| By: | Martin Feldkircher (Oesterreichische Nationalbank (OeNB)); Florian Huber (Department of Economics, Vienna University of Economics and Business) |
| Abstract: | In this paper we compare the transmission of a conventional monetary policy shock with that of an unexpected decrease in the term spread, which mirrors quantitative easing. Employing a time-varying vector autoregression with stochastic volatility, our results are two-fold: First, the spread shock works mainly through a boost to consumer wealth growth, while a conventional monetary policy shock affects real output growth via a broad credit / bank lending channel. Second, both shocks exhibit a distinct pattern over our sample period. More specifically, we find small output effects of a conventional monetary policy shock during the period of the global financial crisis and stronger effects in its aftermath. This might imply that when the central bank has left the policy rate unaltered for an extended period of time, a policy surprise might boost output particularly strongly. By contrast, the spread shock has affected output growth most strongly during the period of the global financial crisis and less so thereafter. This might point to diminishing effects of large scale asset purchase programs. |
| Keywords: | Unconventional monetary policy, transmission channel, Bayesian TVP-SV-VAR |
| JEL: | C32 E52 E32 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwwuw:wuwp222&r=cba |
| By: | Asonuma, Tamon; Trebesch, Christoph |
| Abstract: | Sovereign debt restructurings can be implemented preemptively - prior to a payment default. We code a comprehensive new dataset and find that preemptive restructurings (i) are frequent (38% of all deals 1978-2010), (ii) have lower haircuts, (iii) are quicker to negotiate, and (iv) see lower output losses. To rationalize these stylized facts, we build a quantitative sovereign debt model that incorporates preemptive and post-default renegotiations. The model improves the fit with the data and explains the sovereign’s optimal choice: preemptive restructurings occur when default risk is high ex-ante, while defaults occur after unexpected bad shocks. Empirical evidence supports these predictions. |
| Keywords: | Sovereign Debt; Default; Debt Restructuring; Crisis Resolution |
| JEL: | F34 F41 H63 |
| Date: | 2015–11–07 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:26563&r=cba |
| By: | Reinhart, Carmen M.; Trebesch, Christoph |
| Abstract: | Two centuries of Greek debt crises highlight the pitfalls of relying on external financing. Since its independence in 1829, the Greek government has defaulted four times on its external creditors – with striking historical parallels. Each crisis is preceded by a period of heavy borrowing from foreign private creditors. As repayment difficulties arise, foreign governments step in, help to repay the private creditors, and demand budget cuts and adjustment programs as a condition for the official bailout loans. Political interference from abroad mounts and a prolonged episode of debt overhang and financial autarky follows. We conclude that these cycles of external debt and dependence are a perennial theme of Greek history, as well as in other countries that have been “addicted” to foreign savings. |
| JEL: | F3 G01 H6 N10 N13 N14 |
| Date: | 2015–10–18 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:26562&r=cba |
| By: | Potjagailo, Galina |
| Abstract: | I analyze spillover effects from Euro area monetary policy shocks to thirteen EU countries outside the Euro area, i.e., ten countries from Central and Eastern Europe (CEE) and three Western EU members. The analysis is based on a FAVAR model with two blocks which exploits a large cross-country data set covering real activity variables, prices and financial variables. An expansionary Euro area monetary policy shock raises production in most non-Euro area countries. Somewhat larger and more instantaneous responses of production are observed in small open economies with fixed exchange rate regimes, where foreign demand effects are particularly strong. In addition, a Euro area monetary expansion leads to declines in interest rates and reductions in uncertainty in most non-Euro area countries. The spillovers on uncertainty are more pronounced in economies with flexible exchange rates, where the degree of financial market openness tends to be higher and where exchange rate appreciations further enhance risk taking by cushioning debt burdens from foreign currency loans. Finally, spillover effects on prices are heterogeneous across countries and behave asymmetrically in most CEE countries. |
| Keywords: | monetary policy,Euro area,Central and Eastern Europe,exchange rate regime,financial transmission,FAVAR |
| JEL: | C33 E52 E58 F42 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwkwp:2033&r=cba |
| By: | Michelle Lewis (Reserve Bank of New Zealand) |
| Abstract: | Inflation expectations play an important role in monetary policy, where well-anchored expectations make it easier than otherwise to achieve the inflation target. This Note uses various surveyed measures of inflation expectations and yield curve modelling techniques to develop a framework for monitoring inflation expectations. From the resulting expectations curves, measures of the perceived inflation target focus and the expected time for inflation to return to target are estimated. |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbans:2016/01&r=cba |
| By: | Douglas W. Diamond; Anil K Kashyap |
| Abstract: | We study a modification of the Diamond and Dybvig (1983) model in which the bank may hold a liquid asset, some depositors see sunspots that could lead them to run, and all depositors have incomplete information about the bank’s ability to survive a run. The incomplete information means that the bank is not automatically incentivized to always hold enough liquid assets to survive runs. Regulation similar to the liquidity coverage ratio and the net stable funding ratio (that are soon be implemented) can change the bank’s incentives so that runs are less likely. Optimal regulation would not mimic these rules. |
| JEL: | E44 G01 G18 G21 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22053&r=cba |
| By: | Thibaut Duprey; Benjamin Klaus; Tuomas Peltonen |
| Abstract: | This paper introduces a new methodology to date systemic financial stress events in a transparent, objective and reproducible way. The financial cycle is captured by a monthly country-specific financial stress index. Based on a Markov-switching model, high financial stress regimes are identified, and a simple algorithm is used to select those episodes of financial stress that are associated with a substantial negative impact on the real economy. By applying this framework to 27 European Union countries, the paper is a first attempt to provide a chronology of systemic financial stress episodes in addition to the expert-detected events that are currently available. |
| Keywords: | Business fluctuations and cycles, Central bank research, Econometric and statistical methods, Economic models, Financial markets, Financial stability, Financial system regulation and policies, Monetary and financial indicators |
| JEL: | C54 G01 G15 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:16-11&r=cba |
| By: | Stephanos Papadamou; Moïse Sidiropoulos; Eleftherios Spyromitros |
| Abstract: | This paper addresses the issue of impacts of central banks’ conservativeness/independence on stock market volatility. Using a simple theoretical macroeconomic model, we analytically find a positive link between stock prices volatility and central bank conservativeness. By applying panel data analysis on a set of 29 countries from 1998 to 2005, sufficient evidence for this positive relationship is provided using two different measures of stock market volatility. |
| Keywords: | Central bank independence, stock market volatility, panel data. |
| JEL: | E52 E58 G1 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2016-14&r=cba |
| By: | Carlos Viana de Carvalho (Department of Economics PUC-Rio); André D. Vilela (Banco Central do Brasil) |
| Abstract: | We estimate a dynamic, stochastic, general equilibrium model of the Brazilian economy taking into account the transition from a currency peg to inflation targeting that took place in 1999. The estimated model exhibits quite different dynamics under the two monetary regimes. We use it to produce counterfactual histories of the transition from one regime to another, given the estimated history of structural shocks. Our results suggest that maintaining the currency peg would have been too costly, as interest rates would have had to remain at extremely high levels for several quarters, and GDP would have collapsed. Accelerating the pace of nominal exchange rate devaluations after the Asian Crisis would have lead to higher inflation and interest rates, and slightly lower GDP. Finally, the first half of 1998 arguably provided a window of opportunity for a smooth transition between monetary regimes. |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:rio:texdis:647&r=cba |
| By: | Michele Piffer |
| Abstract: | This paper uses a structural VAR model to study the effect of monetary policy on the delinquency rate of business loans and consumer credit. The VAR is identified using at the same time several external instruments, which cover different approaches from the literature. Delinquency rates, defined as the rate of loans whose repayment is overdue for more than a month relative to total loans, are found to decrease in response to a monetary expansion. The results are consistent with a general equilibrium effect formalized in the paper using a standard model of optimal defaults. According to the model, the decrease in defaults is driven by the fact that monetary expansions increase aggregate demand and push up profits and income, thereby improving the repayment possibility of borrowers. |
| Keywords: | Monetary shocks, risk-taking channel, SVAR with external instruments |
| JEL: | E52 E58 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1559&r=cba |
| By: | Joshua Aizenman |
| Abstract: | This paper takes stock of the history of the European Monetary Union (EMU) and pegged exchange-rate regimes in recent decades, pointing out the need to reshape the optimal currency area (OCA) criteria into the twenty-first century. While contributions from the 1960s regarding the OCA remain relevant, they were written during the Bretton Woods system when financial integration among countries was low and banks were heavily regulated. The post-Bretton Woods greater financial integration and under-regulated financial intermediation have increased the cost of sustaining a currency area and other forms of fixed exchange-rate regimes. A key lesson learned from financial crises is that fast-moving asymmetric financial shocks interacting with real distortions pose a grave threat to the stability of currency areas and fixed exchange-rate regimes. Thus, the odds of a successful currency area depend on the viability of effective institutions and policies that deal with adjustment to asymmetric shocks. The financial crises of recent decades illustrate that the endogeneity of the OCA is time dependent, and that deeper trade and financial integration impacts the stability of the OCA in differential ways. Members of a currency union with closer financial links may accumulate asymmetric balance-sheet exposure over time, becoming more susceptible to sudden-stop crises. In a phase of deepening financial ties, countries may end up with more correlated business cycles. Down the road, debtor countries that rely on financial inflows to fund structural imbalances may be exposed to devastating sudden-stop crises, subsequently reducing the correlation of business cycles between currency area’s members, possibly ceasing the gains from membership in a currency union. A currency union of developing countries anchored to a leading global currency stabilizes inflation at a cost of inhibiting the use of monetary policy to deal with real and financial shocks. Currency unions with low financial depth and low financial integration of its members may be more stable at a cost of inhibiting the growth of sectors depending on bank funding. Similar trade-offs apply to other forms of fixed exchange-rate regimes. |
| JEL: | F15 F33 F4 F41 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22097&r=cba |
| By: | Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Turkey ; Department of Economics, University of Pretoria, South Africa ; IPAG Business School, France); Riza Demirer (Department of Economics & Finance, Southern Illinois University Edwardsville, USA.); Rangan Gupta (Department of Economics, University of Pretoria); Reneé van Eyden (Department of Economics, University of Pretoria) |
| Abstract: | This paper examines the role of U.S. economic policy uncertainty on the effectiveness of monetary policy in the Euro area. Using a structural Interacted Vector Autoregressive (IVAR) model conditional on high and low levels of U.S. economic policy uncertainty, we find that uncertainty regarding policy changes in the U.S. dampens the effect of monetary policy shocks in the Euro area, with both price and output reacting more significantly to monetary policy shocks when the level of U.S. policy uncertainty is low. We argue that the U.S. government’s actions regarding policy changes in the U.S. is a source of uncertainty for Euro area investors and high levels of policy uncertainty that spill over from the U.S. drive Euro area investors to adopt a wait-and-see approach, leading to a relatively weaker (and sometimes insignificant) response of price and output to monetary tightening in the Euro area. The findings underscore the importance of market integration and coordination of economic policy changes on the effectiveness of monetary policy on the macroeconomy on both sides of the Atlantic. Our results thus, provide evidence in favour of the policy ineffectiveness hypothesis in the Euro area contingent on the economic policy uncertainty of the U.S. |
| Keywords: | Economic Policy Uncertainty, Monetary Policy, Interacted Structural Vector Autoregressive Model |
| JEL: | C32 C51 C54 E30 E31 E32 E52 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201620&r=cba |
| By: | Sarunas Girdenas (Department of Economics, University of Exeter) |
| Abstract: | We consider a New-Keynesian model with ?financial and labour market frictions where ?firms borrowing is limited by the enforcement constraint. The wage is set in a bargaining process where the fi?rm?s shareholder and worker share the production surplus. As debt service is considered to be a part of production costs, ?firms borrow to reduce the surplus which allows to lower the wage. We study the model?s response to ?nancial shock under two Taylor-type interest rate rules: ?first one responds to in?ation and borrowing, second - to in?ation and unemployment. We have found that the second rule delivers better policy in terms of the welfare measure. Additionally, we show that the feedback on unemployment in this rule depends on the extent of workers? bargaining power. |
| Keywords: | Labour Market Frictions, Financial Frictions, Optimal Monetary Policy, Monetary Policy Rules. |
| JEL: | E52 E43 E24 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:exe:wpaper:1601&r=cba |
| By: | Peña, Guillermo |
| Abstract: | This paper employs a new dataset of 36 EU and OECD countries for the period 1961–2012 to test the importance of economic inequality in banking crises and to find new determinants of them. We estimated a panel logit model with population-averaged results, capturing the most relevant crisis determinants in the literature. By analyzing the impact of inequality on the risk of a banking crisis, we found a new transmission channel of inequality to a financial recession via deficit and obtained a significant and robust positive impact of inequality on the bank crisis probability. We also found evidence that distance to USA, France and Japan decreases the likelihood of a financial crisis. Finally, and contrary to the theory, we found a new determinant that increases the likelihood of a crisis: the accumulated experience of VAT. |
| Keywords: | Banking Crisis, Inequality, Geographical Distance, VAT experience, Post-Keynesian Economics |
| JEL: | E12 G01 H25 H62 I32 |
| Date: | 2016–03–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:70093&r=cba |
| By: | Faia, Ester; Weder, Beatrice |
| Abstract: | The design of resolution regimes for global groups has been the central theme since the global financial crisis. No model rationalized the optimal design of bail-in regimes and their welfare consequences. We do so in a model with strategically optimizing authorities and banks. We model three regimes: cooperative-SPE (Single Point of Entry), uncooperative-SPE and MPE (Multiple Points of Entry). Welfare losses in each regime depend on the degree of banks' liabilities home bias. SPE cooperative generally minimizes losses since authorities internalize cross-country spillovers, unless groups are highly decentralized. High capital requirements by acting as discipline devise reduce losses and blur the difference between regimes. SPE has however unintended consequences: under cooperation it increases financial re-trenchment in previously segmented markets (by the same token it stimulates integration in well integrated markets), under non-cooperation subsidiarization emerges as an endogenous outcome. |
| Keywords: | financial retrenchment; financial spillover; global financial architecture; recovery and resolution planing; single point of entry; strategic regulatory interaction |
| JEL: | F3 G18 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11171&r=cba |
| By: | Stefan Avdjiev; Elod Takats |
| Abstract: | We demonstrate that currency networks in cross-border bank lending have a significant impact on the size, distribution and direction of international monetary policy spillovers. Using the recently enhanced BIS international banking statistics, which simultaneously provide information on the lender, borrower and currency composition of cross-border bank claims, we map the major currency networks in international banking. Next, we show that during the 2013 Fed taper tantrum, exposure to dollar lending was associated with safe haven flows to the United States, virtually unchanged flow dynamics vis-à-vis other advanced economies, and strong outflows from emerging markets. Furthermore, this pattern was shaped by interbank lending rather than by lending to non-banks. |
| Keywords: | Currency networks, cross-border banking flows, international monetary policy spillovers |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:549&r=cba |
| By: | Adolfo Barajas; Ralph Chami; Christian Ebeke; Anne Oeking |
| Abstract: | Despite welfare and poverty-reducing benefits for recipient households, remittance inflows have been shown to entail macroeconomic challenges; producing Dutch Disease-type effects through their upward (appreciation) pressure on real exchange rates, reducing the quality of institutions, delaying fiscal adjustment, and ultimately having an indeterminate effect on long-run growth. The paper explores an additional challenge, for monetary policy. Although they expand bank balance sheets, providing a stable flow of interest-insensitive funding, remittances tend to increase banks’ holdings of liquid assets. This both reduces the need for an interbank market and severs the link between the policy rate and banks’ marginal costs of funds, thus shutting down a major transmission channel. We develop a stylized model based on asymmetric information and a lack of transparent borrowers and undertake econometric analysis providing evidence that increased remittance inflows are associated with a weaker transmission. As independent monetary policy becomes impaired, this result is consistent with earlier findings that recipient countries tend to favor fixed exchange rate regimes. |
| Keywords: | Remittances;Monetary policy;Worker’s Remittances, lending channel, banking sector, bank balance sheets, balance sheets, exchange, General, Fiscal and Monetary Policy in Development, All Countries, banking sector., |
| Date: | 2016–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:16/44&r=cba |
| By: | Pinar Yesin |
| Abstract: | This paper empirically evaluates the predictive performance of the International Monetary Fund's (IMF) exchange rate assessments with respect to future exchange rate movements. The assessments of real trade-weighted exchange rates were conducted from 2006 to 2011, and were based on three state-of-the-art exchange rate models with a medium-term focus which were developed by the IMF. The empirical analysis using 26 advanced and emerging market economy currencies reveals that the 'diagnosis' of undervalued or overvalued currencies based on these models has significant predictive power with respect to future exchange rate movements, with one model outperforming the other two. The models are better at predicting future exchange rate movements in advanced and open economies. Controlling for the exchange rate regime does not increase the predictive power of the assessments. Furthermore, the directional accuracy of the IMF assessments is found to be higher than market expectations. |
| Keywords: | Exchange rate models, exchange rate assessment, predictability, equilibrium exchange rates. |
| JEL: | C53 F31 F37 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2016-02&r=cba |
| By: | Paolo Giudici (Department of Economics and Management, University of Pavia); Peter Sarlin (Hanken School of Economics); Alessandro Spelta (Department of Economics and Finance, Catholic University Milan) |
| Abstract: | To capture systemic risk related to network structures, this paper introduces a measure that complements direct exposures with common exposures, as well as compares these to each other. Trying to address the interconnected nature of financial systems, researchers have recently proposed a range of approaches for assessing network structures. Much of the focus is on direct exposures or market-based estimated networks, yet little attention has been given to the multivariate nature of systemic risk, indirect exposures and overlapping portfolios. In this regard, we rely on correlation network models that tap into the multivariate network structure, as a viable means to assess common exposures and complement direct linkages. Using BIS data, we compare correlation networks with direct exposure networks based upon conventional network measures, as well as we provide an approach to aggregate these two components for a more encompassing measure of interconnectedness. |
| Keywords: | Bank of International Settlements data, Correlation networks, Exposure networks |
| JEL: | G01 C58 C63 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:pav:demwpp:demwp0118&r=cba |