nep-cba New Economics Papers
on Central Banking
Issue of 2016‒06‒14
eleven papers chosen by
Maria Semenova
Higher School of Economics

  1. The interaction of monetary and macroprudential policies in economic stabilisation By Silvo, Aino
  2. On the Nexus of Monetary Policy and Financial Stability: Effectiveness of Macroprudential Tools in Building Resilience and Mitigating Financial Imbalances By H. Evren Damar; Miguel Molico
  3. Quantitative Easing and Financial Stability By Michael Woodford
  4. Is there a need for additional monetary stimulus? Insights from the original Taylor Rule By Alcidi, Cinzia; Busse, Matthias; Gros, Daniel
  5. The effects of ratings-contingent regulation on international bank lending behavior: Evidence from the Basel 2 accord By Hasan, Iftekhar; Kim, Suk-Joong; Wu, Eliza
  6. Do we need a stable funding ratio? Banks’ funding in the global financial crisis By Lallour, Antoine; Mio, Hitoshi
  7. Investigating the Effect of U.S. Monetary Policy Normalization on the ASEAN-4 Economies By Willem THORBECKE
  8. Macroprudential Policy and Financial Stability in the Arab Region By Ananthakrishnan Prasad; Heba Abdel Monem; Pilar Garcia Martinez
  9. Estimating the impact of monetary policy on inequality in China By Sánchez-Fung, José R.

  1. By: Silvo, Aino
    Abstract: I analyse the dynamics of a New Keynesian DSGE model where the financing of investments is affected by a moral hazard problem. I solve for jointly Ramsey-optimal monetary and macroprudential policies. I find that when a financial friction is present in addition to the standard nominal friction, the optimal policy can replicate the first-best if the social planner can conduct both monetary and macroprudential policy to control both inflation and the level of investments. Using monetary policy alone is not enough to fully stabilise the economy: it leads to a policy trade-off between stabilising inflation and the output gap. When policy follows simple rules instead, the source of fluctuations is highly relevant for the choice of the appropriate policy mix.
    Keywords: monetary policy, macroprudential policy, financial frictions
    JEL: E32 E44 E52 G28
    Date: 2016–02–10
  2. By: H. Evren Damar; Miguel Molico
    Abstract: This paper reviews the Canadian and international evidence of the effectiveness of macroprudential policy measures in building resilience and mitigating financial imbalances. The analysis concludes that these measures have broadly achieved their goal of increasing the overall resilience of the financial system to the buildup of imbalances and increasing the financial system’s ability to withstand adverse shocks. However, evidence of their effectiveness in providing countercyclical stabilization by curbing credit growth (“leaning against the financial cycle”) is limited. Among the different types of macroprudential measures, those that are “sectoral” in nature and/or those that target borrowers are most effective in leaning against the financial cycle. Overall, the observed effectiveness of macroprudential tools in addressing systemic risk implies that these policies can be complementary to monetary policy in achieving the goals of macroeconomic and financial stability.
    Keywords: Credit and credit aggregates, Financial stability, Financial system regulation and policies
    JEL: E51 E58 G18 G28
    Date: 2016
  3. By: Michael Woodford
    Abstract: The massive expansion of central-bank balance sheets in response to recent crises raises important questions about the effects of such "quantitative easing" policies, both their effects on financial conditions and on aggregate demand (the intended effects of the policies), and their possible collateral effects on financial stability. The present paper compares three alternative dimensions of central bank policy — conventional interest-rate policy, increases in the central bank's supply of safe (monetary) liabilities, and macroprudential policy (possibly implemented through discretionary changes in reserve requirements) — showing in the context of a simple intertemporal general-equilibrium model why they are logically independent dimensions of variation in policy, and how they jointly determine financial conditions, aggregate demand, and the severity of the risks associated with a funding crisis in the banking sector. In the proposed model, each of the three dimensions of policy can be used independently to influence aggregate demand, and in each case a more stimulative policy also increases financial stability risk. However, the policies are not equivalent, and in particular the relative magnitudes of the two kinds of effects are not the same. Quantitative easing policies increase financial stability risk (in the absence of an offsetting tightening of macroprudential policy), but they actually increase such risk less than either of the other two policies, relative to the magnitude of aggregate demand stimulus; and a combination of expansion of the central bank's balance sheet with a suitable tightening of macroprudential policy can have a net expansionary effect on aggregate demand with no increased risk to financial stability. This suggests that quantitative easing policies may be useful as an approach to aggregate demand management not only when the zero lower bound precludes further use of conventional interest-rate policy, but also when it is not desirable to further reduce interest rates because of financial stability concerns.
    JEL: E44 E52
    Date: 2016–05
  4. By: Alcidi, Cinzia; Busse, Matthias; Gros, Daniel
    Abstract: Central banks in the developed world are being misled into fighting the perceived dangers of a ‘deflationary spiral’ because they are looking at only one indicator: consumer prices. This Policy Brief finds that while consumer prices are flat, broader price indices do not show any sign of impending deflation: the GDP deflator is increasing in the US, Japan and the euro area by about 1.2-1.5%. Nor is the real economy sending any deflationary signals either: unemployment is at record lows in the US and Japan, and is declining in the euro area while GDP growth is at, or above potential. Thus, the overall macroeconomic situation does not give any indication of an imminent deflationary spiral. In today’s high-debt environment, the authors argue that central banks should be looking at the GDP deflator and the growth of nominal GDP, instead of CPI inflation. Nominal GDP growth, as forecasted by the major official institutions, remains robust and is in excess of nominal interest rates. They conclude that if the ECB were to set the interest rate according to the standard rules of thumb for monetary policy, which take into account both the real economy and price developments of broader price indicators, it would start normalising its policy now, instead of pondering over additional measures to fight deflation, which does not exist. In short, economic conditions are slowly normalising; so should monetary policy.
    Date: 2016–04
  5. By: Hasan, Iftekhar; Kim, Suk-Joong; Wu, Eliza
    Abstract: We investigate the effects of credit ratings-contingent financial regulation on foreign bank lending behavior. We examine the sensitivity of international bank flows to debtor countries’ sovereign credit rating changes before and after the implementation of the Basel 2 risk-based capital regulatory rules. We study the quarterly bilateral flows from G-10 creditor banking systems to 77 recipient countries over the period Q4:1999 to Q2:2013. We find direct evidence that sovereign credit re-ratings that lead to changes in risk-weights for capital adequacy requirements have become more significant since the implementation of Basel 2 rules for assessing banks’ credit risk under the standardized approach. This evidence is consistent with global banks acting via their international lending decisions to minimize required capital charges associated with the use of ratings-contingent regulation. We find evidence that banking regulation induced foreign lending has also heightened the perceived sovereign risk levels of recipient countries, especially those with investment grade status. Keywords: cross-border banking, sovereign credit ratings, Basel 2, rating-contingent financial regulation
    JEL: E44 F34 G21 H63
    Date: 2014–11–17
  6. By: Lallour, Antoine (Bank of England); Mio, Hitoshi (Bank of Japan)
    Abstract: We use data from the recent global financial crisis to study the importance of several structural funding metrics in characterising banks’ resilience. We find that structural funding ratios, including the Basel Committee’s Net Stable Funding Ratio (NSFR) which will soon become a new requirement, would have helped detect, back in 2006, which banks were to subsequently fail, even controlling for the banks’ solvency ratios. Their predictive power seems to come from the liability side and in particular from the fact that they count retail deposits as a highly stable funding source. Indeed, a deposits-to-assets ratio would outperform the other structural metrics we investigated as failure predictors for this crisis. Our findings suggest that this crisis was a crisis of banks’ funding structures.
    Keywords: Banking; bank regulation; deposits; funding;
    JEL: G01 G18 G21
    Date: 2016–05–20
  7. By: Willem THORBECKE
    Abstract: U.S. monetary policy normalization is triggering capital outflows in the Association of South East Asian Nations (ASEAN). Using an event study, this paper reports that capital-intensive firms, the financial sector, and small firms in ASEAN are exposed to these outflows. Capital outflows also cause exchange rate depreciations that improve the price competitiveness of exports. To gauge this effect, this paper estimates price and income elasticities for ASEAN exports. The results indicate that a 10% exchange rate depreciation will increase ASEAN labor-intensive exports by 8%. ASEAN firms should use the tailwind provided by weaker exchange rates to increase exports.
    Date: 2016–05
  8. By: Ananthakrishnan Prasad; Heba Abdel Monem; Pilar Garcia Martinez
    Abstract: Several characteristics of the structure of the Arab economies, their economic policy framework, and their banking systems make macroprudential policy a particular relevant tool. For most oil exporters, heavy reliance on the extractive sector for generating fiscal revenues and export earnings translates into increased vulnerabilities to oil price shocks. In the case of oil importers, relatively small external and fiscal buffers make them highly vulnerable to shocks. This paper discusses the experience of Arab countries in implementing macroprudential policies and contains recommendations to strengthen their macroprudential framework.
    Date: 2016–05–20
  9. By: Sánchez-Fung, José R.
    Abstract: ​The paper estimates the impact of monetary policy on income inequality in China. The empirical modelling finds that a battery of monetary indicators, including a monetary overhang measure derived from a money demand equation, and the change in the unemployment rate lead to increases in the Gini coefficient. However, only unemployment is statistically significant. The lack of significance of the monetary indicators is robust to alternative specifications with variability in nominal aggregate demand instead of unemployment.
    Keywords: monetary policy, inequality, inflation, unemployment, China
    JEL: E52 D31
    Date: 2015–05–13
    Date: 2016
    Date: 2016

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