nep-cba New Economics Papers
on Central Banking
Issue of 2016‒06‒18
thirteen papers chosen by
Maria Semenova
Higher School of Economics

  1. Inflation expectations and monetary policy in Europe By Andreou, Elena; Eminidou, Snezana; Zachariadis, Marios
  2. Central Bank Transparency and the consensus forecast: What does The Economist poll of forecasters tell us? By Emna Trabelsi
  3. How can it work ? On the impact of quantitative easing in the Eurozone By Francesco Saraceno; Roberto Tamborini
  4. The credit channel is alive at the zero lower bound but how does it operate? Firm level evidence on the asymmetric effects of U.S. monetary policy By Uluc Aysun; Kiyoung Jeon; Zeynep Kabukcuoglu
  5. Monetary Policy Transmission in Nepal By Birendra Bahadur Budha
  6. Basel III and recourse to Eurosystem monetary policy operations By Bucalossi, Annalisa; Fonseca Coutinho, Cristina; Junius, Kerstin; Luskin, Alaoishe; Momtsia, Angeliki; Rahmouni-Rousseau, Imene; Sahel, Benjamin; Scalia, Antonio; Schmitz, Stefan; Prior Soares, Rita Isabel; Schobert, Franziska; Wedow, Michael
  7. Risk-based capital requirements and optimal liquidation in a stress scenario By Yann Braouezec; Lakshithe Wagalath
  8. Systemic risk: Time-lags and persistence By Kubitza, Christian; Gründl, Helmut
  9. Shadow banking, financial regulation and animal spirits: An ACE approach By Krug, Sebastian; Wohltmann, Hans-Werner
  10. How economics got it wrong: Formalism, equilibrium modelling and pseudo-optimization in banking regulatory studies By Aldegwy, Mohamed; Thiemann, Matthias
  11. Inflation Dynamics in a Dollarised Economy: The Case of Zimbabwe By William Kavila and Pierre Le Roux
  12. De facto exchange-rate regimes in Central and Eastern European Countries By Simón Sosvilla Rivero; Maria del Carmen Ramos Herrera
  13. Monetary policy according to HANK By Kaplan, Greg; Moll, Benjamin; Violante, Giovanni L.

  1. By: Andreou, Elena; Eminidou, Snezana; Zachariadis, Marios
    Abstract: We use monthly data across fifteen euro-area economies for the period 1985:1-2015:3 to obtain different monetary policy shocks pertaining to more versus less informed individuals. We then investigate how these affect inflation expectations of different types of consumers before and after the incidence of the recent Crisis. Shocks obtained based on the assumption that individuals are well informed can have different impact on inflation expectations as compared to shocks obtained based on the assumption that they are not as informed. Moreover, monetary policy can have different effects on inflation expectations for different types of consumers. Finally, monetary policy has different effects on inflation expectations after as compared to before the incidence of the recent Crisis.
    Keywords: crisis; Inflation expectations; Monetary policy; shocks
    JEL: E31 E52 F41
    Date: 2016–06
  2. By: Emna Trabelsi (ISG - Institut Supérieur de Gestion de Tunis [Tunis] - Université de Tunis [Tunis])
    Abstract: We are interested, in this paper, in studying the effects that central banks exert on private sector forecasts by means of their transparency and communication measures. We analyze the impact of central bank transparency on the accuracy of the consensus forecasts (usually calculated as the mean or the median of the forecasts from a panel of individual forecasters) for a series of macroeconomic variables: inflation, Real output growth and the current account as a share of GDP for 7 advanced economies. Interestingly, while it is found of significance of central bank transparency and communication measures on forecasts themselves, there appear some limits of the same measures when we study their impact on forecast errors. Our findings, indeed, suggest that deviations of the economic forecast data from the realized ones (RGDP and the current account as a share of GDP) are a bit affected by the central bank transparency measures considered in the paper. Inflation forecast errors, especially, are not affected at all by those measures. A possible explanation (among others) could be attributed to the inefficiency of the mean forecasts. Inefficiency of the consensus forecasts is not a new issue from a theoretical point of view, but its empirical relevance is for the first time (to our knowledge) questioned on data extracted from the Economist poll of forecasters. More particularly, our paper extracts practical implications over the effectiveness of transparent announcements in forecast formation process. We rely on two noisy information models, though having different mechanisms (Kim et al, 2001; Morris and Shin, 2002) both of which are consistent with overweighting issue to explain the inefficiency of the consensus forecast.
    Keywords: Economist poll of forecasters,Inefficiency,Consensus forecasts,Communication,Transparency
    Date: 2016
  3. By: Francesco Saraceno (OFCE); Roberto Tamborini
    Abstract: How can the quantitative easing (QE) programme launched in March 2015 by the ECB be successful in the Eurozone (EZ)? What will be its impact on the member countries? And how will it relate to countries' fiscal policies? To address these questions, we use a simple extension of the three-equation New Keynesian model. We modify the benchmark model in two respects: 1) we (re)-introduce an LM money supply and demand equation to capture the fact that the ECB operates at the zero lower bound and hence cannot use a standard Taylor rule; and 2) we extend the model to a two-country framework. The model supports the ECB official view that the channel whereby QE is meant to operate is the reversal of deflationary expectations. It also highlights that instrumental to this goal is the elimination of persistent output gaps, both at the EZ and at the country level, and hence the reduction of country-specific interest-rate spreads -- the "unofficial" objective of the programme. We show that QE, if large enough, can succeed for the EZ as a whole. The ECB nevertheless cannot also close individual countries' output gaps, unless specific and unrealistic conditions are met. In this case fiscal accommodation at the country level should also intervene. We show that QE can enhance the effectiveness of fiscal policy, and therefore conclude that the coordination of fiscal and monetary policies is of paramount importance.
    Keywords: Monetary Policy; ECB; Deflation; Zero-Lower-Bound
    JEL: E3 E4
    Date: 2015–10
  4. By: Uluc Aysun (Department of Economics, College of Business Administration, University of Central Florida); Kiyoung Jeon (Research Department, Bank of Korea); Zeynep Kabukcuoglu (Department of Economics, Villanova School of Business, Villanova University)
    Abstract: We calculate borrowing spreads for over 8,000 U.S. firms and investigate how these are related to the stance of monetary policy. After 2009, we observe, consistent with credit channel theory, a positive relationship between shadow federal funds rates and borrowing spreads for only firms with high borrowing spreads and low quality. Conversely, we find a negative relationship for firms (of high and low quality) with low borrowing spreads. These relationships are reversed for the period before 2008. Our results uncover the distortional effects of monetary policy. Loose monetary policy causes spreads to converge (diverge) across firms after 2009 (before 2008).
    Keywords: credit channel; zero lower bound; firm-level data; shadow rates
    JEL: E44 E51 E52 G10
    Date: 2016–06
  5. By: Birendra Bahadur Budha (Nepal Rastra Bank)
    Abstract: This paper examines the monetary policy transmission in Nepal based on the data for the period 2002-2015. As a first step in the analysis, the paper analyzes the issue of inflation convergence and the monetary independence in the context of the existing exchange rate peg and the capital flow policy of Nepal. The paper employs a number of macro indicators, and alternative empirical strategies based on the peculiarities of Nepal. The results show that the existing exchange rate peg has resulted in the convergence of the Nepalese price level to the Indian price level in the long-run. Despite the peg, there is an evidence of the independence of the Nepalese monetary policy to a large extent. The narrative approach of identifying monetary policy shows the evidence of the bank lending channel, interest rate channel, and the asset price channel of the Nepalese monetary policy though there exists a lag in monetary policy transmission due to high information asymmetry, adjustment costs and the poor financial infrastructure. In addition, the SVAR approach provides the evidence of the monetary policy transmission, in which the effect of the expansionary monetary policy on the gross domestic product decays to zero at about 8 quarters. Moreover, the paper also shows that the money market liquidity is largely guided by the remittance inflows in recent years. The analysis of the money market development indicates the need for the review of the operating procedures and the implementation aspects of the monetary policy. The evidence of monetary transmission channels implies that NRB can use its policy to achieve the specified objectives over certain time horizon.
    Keywords: Monetary policy transmission, Narrative approach, SVAR
    JEL: E42 E52 E58
    Date: 2015–08
  6. By: Bucalossi, Annalisa; Fonseca Coutinho, Cristina; Junius, Kerstin; Luskin, Alaoishe; Momtsia, Angeliki; Rahmouni-Rousseau, Imene; Sahel, Benjamin; Scalia, Antonio; Schmitz, Stefan; Prior Soares, Rita Isabel; Schobert, Franziska; Wedow, Michael
    Abstract: Following the emergence of the financial crisis in August 2007, the Basel Committee on Banking Supervision established in 2010 a new global regulatory framework. In addition to raising capital requirements, it introduced three ratios, two of which set out minimum standards for liquidity and funding risk, i.e. the liquidity coverage ratio and the net stable funding ratio, and one which aims to limit leverage in the banking system, i.e. the leverage ratio. All three ratios can have a number of implications for monetary policy implementation, in particular the liquidity coverage ratio and the net stable funding ratio owing to the special role of central banks in providing liquidity. This paper investigates the extent to which the regulatory initiatives might have already had an impact on banks’ behaviour in Eurosystem monetary policy operations. It also provides an overview of the regulatory state of play and major recent advancements in banks’ compliance with the three Basel III ratios. Based on aggregate data, the empirical evidence generally supports some of the theoretically predicted effects of the three ratios. However, no firm conclusions can be drawn as to whether the introduction of the three ratios could cause a significant change in banks’ recourse to Eurosystem monetary policy operations. This is partly due to the fact that, in aggregate, major developments, such as substantial fluctuations in the recourse to Eurosystem refinancing operations in the years between 2012 and 2015, have been driven by the financial crisis and the gradual recovery from it, as well as by the accommodative stance of monetary policy. JEL Classification: G28, E58
    Keywords: Basel III, liquidity regulation, monetary policy implementation
    Date: 2016–04
  7. By: Yann Braouezec (IESEG School of Management (LEM 9221-CNRS)); Lakshithe Wagalath (IESEG School of Management (LEM 9221-CNRS))
    Abstract: We develop a simple yet realistic framework to analyze the impact of an exogenous shock on a bank's balance-sheet and its optimal response when it is constrained to maintain its risk-based capital ratio above a regulatory threshold. We show that in a stress scenario, capital requirements may force the bank to shrink the size of its assets and we exhibit the bank's optimal strategy as a function of regulatory risk-weights, asset market liquidity and shock size. When financial markets are perfectly competitive, we show that the bank is always able to restore its capital ratio above the required one. However, for banks constrained to sell their loans at a discount and/or with a positive price impact when selling their marketable assets (large banks) we exhibit situations in which the deleveraging process generates a death spiral. We then show how to calibrate our model using annual reports of banks and study in detail the case of the French bank BNP Paribas. Finally, we suggest how our simple framework can be used to design a systemic capital surcharge
    Keywords: Risk-weighted assets (RWA), stress-tests, fire sales, market impact, optimal liquidation, systemic capital surcharge
    Date: 2016–05
  8. By: Kubitza, Christian; Gründl, Helmut
    Abstract: Common systemic risk measures focus on the instantaneous occurrence of triggering and systemic events. However, systemic events may also occur with a time-lag to the triggering event. To study this contagion period and the resulting persistence of institutions' systemic risk we develop and employ the Conditional Shortfall Probability (CoSP), which is the likelihood that a systemic market event occurs with a specific time-lag to the triggering event. Based on CoSP we propose two aggregate systemic risk measures, namely the Aggregate Excess CoSP and the CoSP-weighted time-lag, that reflect the systemic risk aggregated over time and average time-lag of an institution's triggering event, respectively. Our empirical results show that 15% of the financial companies in our sample are significantly systemically important with respect to the financial sector, while 27% of the financial companies are significantly systemically important with respect to the American non-financial sector. Still, the aggregate systemic risk of systemically important institutions is larger with respect to the financial market than with respect to non-financial markets. Moreover, the aggregate systemic risk of insurance companies is similar to the systemic risk of banks, while insurers are also exposed to the largest aggregate systemic risk among the financial sector.
    Keywords: Contagion Period,Spillover Effects,Systemic Risk,Financial Crisis,Financial Markets
    JEL: G01 G14 G15 G20
    Date: 2016
  9. By: Krug, Sebastian; Wohltmann, Hans-Werner
    Abstract: Over the past decades, the framework for financing has experienced a fundamental shift from traditional bank lending towards a broader market-based financing of financial assets. As a consequence, regulated banks increasingly focus on coping with regulatory requirements meaning that the resulting funding gap for the real economy is left to the unregulated part of the financial system, i.e. to shadow banks highly relying on securitization and repos. Unfortunately, economic history has shown that unregulated financial intermediation exposes the economy to destabilizing externalities in terms of excessive systemic risk. The arising question is now whether and how it is possible to internalize these externalities via financial regulation. We aim to shed light on this issue by using an agent-based computational macro-model as experimental lab. The model is augmented with a shadow banking sector representing an alternative investment opportunity for the real sector which shows animal spirit-like, i.e. highly pro-cyclical and myopic, behavior in its investment decision. We find that an unilateral inclusion of shadow banks into the regulatory framework, i.e. without access to central bank liquidity, has negative effects on monetary policy goals, significantly increases the volatility in growth rates and that its disrupting character materializes in increasing default rates and a higher volatility in the credit-to-GDP gap. However, experiments with a full inclusion, i.e. with access to a lender of last resort, lead to superior outcomes relative to the benchmark without shadow banking activity. Moreover, our results highlight the central role of the access to contagion-free, alternative sources of liquidity within the shadow banking sector.
    Keywords: Shadow Banking,Financial Stability,Monetary Economics,Macroprudential Policy,Financial Regulation,Agent-based Macroeconomics
    JEL: E44 E50 G01 G28 C63
    Date: 2016
  10. By: Aldegwy, Mohamed; Thiemann, Matthias
    Abstract: Since the outbreak of the financial crisis, the macro-prudential policy paradigm has gained increasing prominence (Bank of England, 2009; Bernanke, 2011). The dynamics of this shift in the economic discourse, and the reasons this shift has not taken place prior to the crisis have not been addressed systemically. This paper investigates the evolution of the economic discourse on systemic risk and banking regulation to better understand these changes and their timing. Further, we use our sample to inquire whether, and if so, why the economic regulatory studies failed to recommend a reliable banking regulation prior to the crisis. By following a discourse analysis, we establish that the economic discourse on banking regulation has not been suitable for providing the knowledge basis required for a dynamically reliable banking regulation, and we identify the underlying reasons for such failure. These reasons include the obsession of economic discourse with optimization and particular forms of formalism, particularly, partial equilibrium analysis. Further, the economic discourse on banking regulation excludes historical and practitioners' discourses and ignores weak signals. We point out that post-crisis, these epistemological failures of the economic discourse on banking regulation were not sufficiently recognized and that recent attempts to conceptualize systemic risk as a negative externality and to thus price it point to the persistence of formalism, equilibrium thinking and optimization, with their attending dangers.
    Keywords: Sociology of Finance,Optimal Regulation,Dynamic and Reliable Regulation,Banking Regulation,Financial Crisis
    Date: 2016
  11. By: William Kavila and Pierre Le Roux
    Abstract: This paper explores the dynamics of inflation in the dollarised Zimbabwean economy using the Autoregressive Distributed Lag Model (ARDL) with monthly data from 2009:1 to 2012:12. The main determinants of inflation were found to be the US dollar/South African rand exchange rate, international oil prices, inflation expectations and South African inflation rate. During the local currency era, inflation dynamics in Zimbabwe were explained by excess growth in money supply, changes in import and administered prices, unit labour costs and output (Chhibber, Cottani, Firuzabadi and Walton, 1989). According to Makochekanwa (2007), hyperinflation during the same era was attributed to excess money supply growth, lagged inflation and political factors. Coorey, Clausen, Funke, Munoz and Ould-Abdallah (2007) affirmed these findings by identifying excess money supply growth as a source of high inflation in Zimbabwe during the local currency era. In essence, the findings of this study point to a shift in inflation dynamics in Zimbabwe. This shift in inflation dynamics means that policies, which were used to respond to both internal and external shocks that have an impact on price formation, might not be applicable in a dollarised economy.
    Keywords: Inflation, dollarisation, Autoregressive Distributed Lag Model
    JEL: E31 E42 C50
    Date: 2016
  12. By: Simón Sosvilla Rivero (Departamento de Economía Cuantitativa, Facultad de Ciencias Económicas y Empresariales, Universidad Complutense de Madrid.); Maria del Carmen Ramos Herrera (Departamento de Economía Cuantitativa, Facultad de Ciencias Económicas y Empresariales, Universidad Complutense de Madrid.)
    Abstract: This paper attempts to identify implicit exchange rate regimes for currencies of new European Union (EU) countries vis-à-vis the euro. To that end, we apply three sequential procedures that consider the dynamics of exchange rates to data covering the period from 1999:01 to 2012:12. Our results would suggest that implicit bands have existed in many sub-periods for almost all currencies under study. This paper provides new empirical evidence that strengthens the hypothesis of that the implemented policies differ from those announced by the monetary authorities, identifying the existence of de facto fixed monetary systems along large number of sub-periods for different currencies.
    Keywords: Exchange-rate regimes; Implicit fluctuation bands; Exchange rates.
    Date: 2015
  13. By: Kaplan, Greg; Moll, Benjamin; Violante, Giovanni L.
    Abstract: We revisit the transmission mechanism of monetary policy for household consumption in a Heterogeneous Agent New Keynesian (HANK) model. The model yields empirically realistic distributions of household wealth and marginal propensities to consume because of two key features: multiple assets with different degrees of liquidity and an idiosyncratic income process with leptokurtic income changes. In this environment, the indirect effects of an unexpected cut in interest rates, which operate through a general equilibrium increase in labor demand, far outweigh direct effects such as intertemporal substitution. This finding is in stark contrast to small- and medium-scale Representative Agent New Keynesian (RANK) economies, where intertemporal substitution drives virtually all of the transmission from interest rates to consumption. JEL Classification: D14, D31, E21, E52
    Keywords: consumption, earnings kurtosis., heterogeneous agents, inequality, liquidity, monetary policy, new keynesian
    Date: 2016–04

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