nep-cba New Economics Papers
on Central Banking
Issue of 2016‒06‒25
thirteen papers chosen by
Maria Semenova
Higher School of Economics

  1. Credibility of History-Dependent Monetary Policies and Macroeconomic Instability By Cateau, Gino; Shukayev, Malik
  2. Theoretical Paradigm on Bank Capital Regulation and its Impact on Bank-Borrower Behavior By Gunakar Bhatta, Ph.D.
  3. Multinational Banks and Supranational Supervision By Calzolari, Giacomo; Colliard, Jean-Edouard; Lóránth, Gyöngyi
  4. The Spillovers, Interactions, and (Un)Intended Consequences of Monetary and Regulatory Policies By Kristin Forbes; Dennis Reinhardt; Tomasz Wieladek
  5. Regulation and Bankers' Incentives By Fabiana Gómez; Jorge Ponce
  6. The ECB`s Monetary Policy: stability without "safe" assets? By Silke Tober
  7. Challenges for the ECB in Times of Deflation By Francesco Saraceno
  8. Are extremely low interest rates really caused by insufficient growth and inflation rather than by ECB policy? By Eric Dor
  9. 'Growth and Welfare Effects of Macroprudential Regulation' By Pierre-Richard Agénor
  10. Risky Banks and Macroprudential Policy for Emerging Economies By Nuguer Victoria; Cuadra Gabriel
  11. Monetary Policy Rules in Emerging Countries: Is There an Augmented Nonlinear Taylor Rule? By Guglielmo Maria Caporale; Abdurrahman Nazif Catik; Mohamad Husam Helmi; Faek Menla Ali; Coskun Akdeniz
  12. Monetary News, U.S. Interest Rate and Business Cycles in Emerging Economies By Vicondoa, Alejandro
  13. Modeling inflation shifts and persistence in Tunisia: Perspectives from an evolutionary spectral approach By Ftiti, Zied; Guesmi, Khaled; Nguyen, Duc Khuong; Teulon, Frédéric

  1. By: Cateau, Gino (Bank of Canada); Shukayev, Malik (University of Alberta, Department of Economics)
    Abstract: This paper evaluates the desirability of history-dependent policy frameworks when the central bank cannot perfectly commit to maintain a level target path. Specifically, we consider a central bank that seeks to implement optimal policy under commitment in a simple New Keynesian model via a price-level (or nominal GDP level) target rule. However, the central bank retains the option to reset its target path if the social cost of not doing so exceeds a certain threshold. We find that endowing the central bank with the discretion to optimally reset its target path weakens the effectiveness of the history dependent framework to stabilize the economy through expectations. The endogenous nature of credibility brings novel results relative to models where the timing of target resets is exogenous. First, the central bank needs a high degree of policy credibility to realize the stabilization benefits associated with committing to a price-level target. In our benchmark calibration, the price-level target must be expected to last for 10 years to bridge three quarters of the welfare gap between discretion and full commitment. Second, there is a possibility of multiple equilibria. Indeed, it is possible to have a high credibility equilibrium where the probability of resetting the target is small. But it is also possible to have a low credibility equilibrium where the target is reset much more frequently leading inflation and output to be permanently more volatile.
    Keywords: monetary policy commitment; price-level targeting; nominal-income targeting; multiple equilibria; policy credibility
    JEL: E31 E52
    Date: 2016–06–08
  2. By: Gunakar Bhatta, Ph.D. (Nepal Rastra Bank)
    Abstract: Bank equity plays an important role in the credit allocation process of financial intermediaries. Financial institutions with higher level of equity are in better position to absorb losses and repay deposits in a timely manner. This relates to the bank capital channel of monetary policy transmission mechanism stating that banks having sound financial health could contribute significantly in transmitting monetary impulses to the real sector. Considering the important role that bank equity plays in shaping the risk taking behavior of financial intermediaries, central banks set the minimum paid-up capital requirement for banks and financial institutions. Though this regulatory requirement is aimed at ensuring the smooth financial intermediation, this could become costlier in extending loans particularly in the times of business cycle fluctuations. A higher capital requirement might also constrain the lending capacity of a bank. Given the conflicting theoretical assumptions on the role of equity capital on financial stability and economic growth, this paper develops a theoretical model examining the relationship between bank equity and its effect on bank-borrower behavior. The theoretical model recommends that higher level of bank equity might be helpful in ensuring financial stability by altering the behavior of the bank and borrower.
    Keywords: Bank, Credit, Capital, Regulation, Stability
    JEL: E51 G00 G21 G32 G38
    Date: 2015–09
  3. By: Calzolari, Giacomo; Colliard, Jean-Edouard; Lóránth, Gyöngyi
    Abstract: We study the supervision of multinational banks (MNBs), allowing for either national or supranational supervision. National supervision leads to insufficient monitoring of MNBs due to a coordination problem between supervisors. Supranational supervision solves this problem and generates more monitoring. However, this increased monitoring can have unintended consequences, as it also affects the choice of foreign representation. Indeed, supranational supervision encourages MNBs to expand abroad using branches rather than subsidiaries, resulting in more pressure on their domestic deposit insurance fund. In some cases, it discourages foreign expansion altogether, so that financial integration paradoxically decreases. Our framework has implications on the design of supervisory arrangements for MNBs, the European Single Supervisory Mechanism being a prominent example.
    Keywords: Banking Union; Cross-border banks; Monitoring; Multinational banks; regulation; Supervision
    JEL: F23 G21 G28 L51
    Date: 2016–06
  4. By: Kristin Forbes; Dennis Reinhardt; Tomasz Wieladek
    Abstract: Have bank regulatory policies and unconventional monetary policies—and any possible interactions—been a factor behind the recent “deglobalisation” in cross-border bank lending? To test this hypothesis, we use bank-level data from the UK—a country at the heart of the global financial system. Our results suggest that increases in microprudential capital requirements tend to reduce international bank lending and some forms of unconventional monetary policy can amplify this effect. Specifically, the UK’s Funding for Lending Scheme (FLS) significantly amplified the effects of increased capital requirements on cross-border lending. Quantitative easing did not appear to have a similar effect. We find that this interaction between microprudential regulations and the FLS can explain roughly 30% of the contraction in aggregate UK cross-border bank lending between mid-2012 and end-2013, corresponding to around 10% of the global contraction in cross-border lending. This suggests that unconventional monetary policy designed to support domestic lending can have the unintended consequence of reducing foreign lending.
    JEL: G21 G28
    Date: 2016–06
  5. By: Fabiana Gómez (University of Bristol); Jorge Ponce (Banco Central del Uruguay)
    Abstract: We formally compare the effects of minimum capital requirements, capital buffers, liquidity requirements and loan loss provisions on the incentives of bankers to exert effort and take excessive risk. We find that these regulations impact differently the behavior of bankers. In the case of investment banks, the application of capital buffers and liquidity requirements makes it more difficult to achieve the first best solution. In the case of commercial banks, capital buffers, reserve requirements and traditional loan loss provisions for expected losses provide adequate incentives to bank managers, although the capital buffer is the most powerful instrument. Counter-cyclical (so-called dynamic) loan loss provisions may provide bank managers with incentives to gamble. The results inform policy makers in the ongoing debate about the harmonization of banking regulation and the implementation of Basel III.
    Keywords: Banking regulation, minimum capital requirement, capital buffer, liquidity requirement, (countercyclical) loan loss provision, commercial banks, investment banks, bankers' incentives, effort, risk; Regulación bancaria, requerimiento mínimo de capital, colchones de capital, requerimientos de liquidez, provisiones (contracíclicas), bancos comerciales, bancos de inversión, incentivos del banquero, esfuerzo, riesgo
    JEL: G21 G28
    Date: 2015
  6. By: Silke Tober
    Abstract: The ECB's expansionary monetary policy has positive effects on the euro area economy. Interest rates have declined further, bank lending is improving, and the euro is weaker. However, inflation remains much too low and aggregate demand too weak for the output gap to close rapidly. Further weakening the euro is not a feasible option. A weaker euro would aggravate global imbalances and impact negatively on less-than-robust global growth. Expansionary fiscal policy therefore needs to add to the effects of monetary policy.The euro area, moreover, suffers a key problem that not only impedes monetary policy effectiveness but also constrains fiscal policy and puts the future stability of the euro area at risk: With the decision to give up on the safe-asset quality of euro area sovereign bonds the euro area is losing a fundamental stability anchor.
    Date: 2016
  7. By: Francesco Saraceno (OFCE)
    Abstract: This paper assesses the performance of the European Central Bank (ECB) during the crisis that started in 2008. The ECB statute is consistent with a view of the economy that was predominant in the 1990s, a view that postulates a very limited role for discretional policies in managing the business cycle. The ECB had therefore to stretch its mandate on several occasions during the crisis to avoid severe outcomes. It was unable to avoid a slow but inexorable slide of the Eurozone towards deflation and a liquidity trap. To restore robust growth, fiscal policy should be used, and institutions should be redesigned away from the Washington Consensus framework that shaped the Maastricht Treaty. Better rules for fiscal governance and a widening of the ECB mandate are proposed.
    Keywords: Employment policy; Economic recession; Low income; Financial market
    Date: 2015
  8. By: Eric Dor (IESEG School of Management)
    Abstract: To fight deflationary pressures in the euro area, the ECB has been conducting exceptional policies, such as negative interest rates on excess reserves of banks on their accounts at the Eurosystem, or massive purchases of assets, essentially public bonds. The interest rate on the main refinancing operations is 0. Targeted long term refinancing operations are going to allow banks to borrow at potentially negative interest rates from the Eurosystem provided that they lend enough to the private sector. All these measures have pushed long term interest rates downward in the euro area. German public bonds yield negative returns for a whole set of maturities. Interest rates on saving accounts in German banks are extremely low. This policy of extremely low rates has been heavily criticized in Germany. The ECB is accused of exaggeratedly lowering the income of savers and retirees whose revenue partly depends on the return of accumulated wealth.
    Date: 2016–05
  9. By: Pierre-Richard Agénor
    Abstract: This paper studies the growth and welfare effects of macroprudential regulation in an overlapping generations model of endogenous growth with banking and agency costs. Indivisible investment projects combine with informational imperfections to create a double moral hazard problem à la Holmström-Tirole and a role for bank monitoring. When the optimal monitoring intensity is endogenously determined, an increase in the reserve requirement rate (motivated by systemic risk considerations) has conflicting effects on investment and growth. The trade-off between ensuring financial stability and promoting economic growth can be internalized by choosing the reserve requirement rate that maximizes growth and welfare. However, the risk of disintermediation means that financial supervision may also need to be strengthened, and the perimeter of regulation broadened, if the optimal required reserve ratio is too high.
    Date: 2016
  10. By: Nuguer Victoria; Cuadra Gabriel
    Abstract: We develop a two-country DSGE model with global banks to analyze the role of cross-border banking flows on the transmission of a quality of capital shock in the United States to emerging market economies (EMEs). Banks face a moral hazard problem for borrowing from households. EME's banks might be risky: they can also be constrained to borrow from U.S. banks. A negative quality of capital shock in the United States generates a global financial crisis. EME's macroprudential policy that targets non-core liabilities makes the domestic economy resilient to the volatility of cross-border banking flows and makes EME's households better-off.
    Keywords: Global banking; emerging market economies; financial frictions; macroprudential policy.
    JEL: G28 E44 F42 G21
    Date: 2016–06
  11. By: Guglielmo Maria Caporale; Abdurrahman Nazif Catik; Mohamad Husam Helmi; Faek Menla Ali; Coskun Akdeniz
    Abstract: This paper examines the Taylor rule in five emerging economies, namely Indonesia, Israel, South Korea, Thailand, and Turkey. In particular, it investigates whether monetary policy in these countries can be more accurately described by (i) an augmented rule including the exchange rate, as well as (ii) a nonlinear threshold specification (estimated using GMM), instead of a baseline linear rule. The results suggest that the reaction of monetary authorities to deviations from target of either the inflation or the output gap varies in terms of magnitude and/or statistical significance across the high and low inflation regimes in all countries. In particular, the exchange rate has an impact in the former but not in the latter regime. Overall, an augmented nonlinear Taylor rule appears to capture more accurately the behaviour of monetary authorities in these countries.
    Keywords: Taylor rule, nonlinearities, emerging countries
    JEL: C13 C51 C52 E52 E58
    Date: 2016
  12. By: Vicondoa, Alejandro
    Abstract: This paper identifies anticipated (news) and unanticipated (surprise) shocks to the U.S. Fed Funds rate using CBOT Fed Funds Future Market and assesses their propagation to emerging economies. Anticipated movements account for 80% of quarterly Fed Funds fluctuations and explain a significant fraction of the narrative monetary policy shocks. An expected 1% increase in the reference interest rate induces a fall of 2% in GDP of emerging economies two quarters before the shock materializes. Unanticipated contractionary shocks also cause a recession. Both shocks have a larger impact in emerging relative to developed economies and the financial channel is the most relevant for their transmission. Anticipation is also relevant to understand the transmission of U.S. real interest rate shocks.
    Keywords: International business cycle, Interest rate, News shocks, Small open economy
    JEL: E32 E52 F41 F44
    Date: 2016
  13. By: Ftiti, Zied; Guesmi, Khaled; Nguyen, Duc Khuong; Teulon, Frédéric
    Abstract: This article examines the dynamic characteristics of the inflation rate in Tunisia over the last two decades, and particularly following the onset of the Arab Spring in 2010 which causes distortions in this country’s monetary policy. We focus on the two specific dimensions of the Tunisian inflation rate: inflation regimes and persistence. We tackle this issue by adopting an evolutionary spectral approach, initially proposed by Priestley and Tong (1973). Our main findings indicate a stable inflation regime in the last 10 years, with an average inflation rate of around 5.5%. It is also found that the Tunisian inflation experienced a high degree of inertia which reflects its gradual responses to shocks. We also discuss the policy implications of these results, which typically require policy-makers to implement sound institutional reforms to reduce inflation.
    Keywords: Inflation, Structural break, Spectral analysis, Inflation persistence
    JEL: C1 C14 C5 C51 E3 E31 E6 E60
    Date: 2014–11–30

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