nep-cba New Economics Papers
on Central Banking
Issue of 2016‒07‒02
twelve papers chosen by
Maria Semenova
Higher School of Economics

  1. Sovereign risk and bank risk-taking By Ari, Anil
  2. A note on imperfect credibility By Ippei Fujiwara; Timothy Kam; Takeki Sunakawa
  4. Bail in or Bail out? The Atlante example from a systemic risk perspective By Paolo Giudici; Laura Parisi
  5. Time-varying volatility, financial intermediation and monetary policy By Sandra Eickmeier; Norbert Metiu; Esteban Prieto
  6. The impact of unconventional monetary policy on the sovereign bank nexus within and across EU countries. A time-varying conditional correlation analysis By Giulio Cifarelli; Giovanna Paladino
  7. Raising an Inflation Target : The Japanese Experience with Abenomics By De Michelis, Andrea; Iacoviello, Matteo
  8. Time-Varying Persistence of Inflation: Evidence from a Wavelet-Based Approach By Heni Boubaker; Giorgio Canarella; Rangan Gupta; Stephen M. Miller
  9. Inflation targeting and exchange rate volatility in emerging markets By Cabral,Rene; Carneiro,Francisco Galrao; Mollick,Andre Varella
  10. Loan supply shocks in Macedonia: a Bayesian SVAR approach with sign restrictions By Rilind Kabashi; Katerina Suleva
  11. Credit Channel of Monetary Policy Transmission in Russia By Leontieva, E.A.; Perevyshin, Y.N.
  12. The Econometric Estimation of the Macroeconomic Effects of the Shock of Monetary Policy for the Russian Economy By Vashchelyuk, N.V.; Polbin, Andrey; Trunin, Pavel

  1. By: Ari, Anil
    Abstract: In European countries recently hit by a sovereign debt crisis, the share of domestic sovereign debt held by the national banking system has sharply increased, raising issues in their economic and financial resilience, as well as in policy design. This paper examines these issues by analyzing the banking equilibrium in a model with optimizing banks and depositors. To the extent that sovereign default causes bank losses also independently of their holding of domestic government bonds, under-capitalized banks have an incentive to gamble on these bonds. The optimal reaction by depositors to insolvency risk imposes discipline, but also leaves the economy susceptible to self-fulfilling shifts in sentiments, where sovereign default also causes a banking crisis. Policy interventions face a trade-off between alleviating funding constraints and strengthening incentives to gamble. Liquidity provision to banks may eliminate the good equilibrium when not targeted. Targeted interventions have the capacity to eliminate adverse equilibria. JEL Classification: E44, E58, F34, G21, H63
    Keywords: bank risk-taking, Eurozone, financial constraints, sovereign debt crises
    Date: 2016–04
  2. By: Ippei Fujiwara; Timothy Kam; Takeki Sunakawa
    Abstract: We explore how outcomes of optimal monetary policy with loose commitment (Schaumburg and Tambalotti, 2007; Debortoli and Nunes, 2010) can be observationally equivalent, or interpretable as outcomes of deeper optimal policy under sustainable plans (Chari and Kehoe, 1990). Both interpretations of "imperfect credibility" in optimal monetary policy design are attempts to rationalize outcomes that lie in between the conventional extremes of optimal policy under commitment and under discretion. In a standard monetary-policy framework, when we match impulse responses of inflation and the output gap to large enough markup shocks, we find that a small probability (1 - a = 0.05) of replanning in the quasi/loose commitment world corresponds to N = 18 in the N-period punishment optimal sustainable monetary policy, in terms of observable outcomes. For plausible cases of loose-commitment model economies (with a between 0.77 and 1) we can find an observationally equivalent sustainable-plan economy indexed by some N.
    Keywords: imperfect credibility, monetary policy, sustainable policy
    JEL: E52 E58 E61
    Date: 2016–06
  3. By: Maria Gerhardt; Rudi Vander Vennet (-)
    Abstract: During the financial crisis, European governments implemented emergency rescue packages to support struggling banks. No less than 114 European banks benefited from goverment support in the period 2007 to 2013. We investigate the financial condition of banks before and after receiving state support by running logit regressions. Our results indicate that the equity ratio is the decisive indicator to predict distress. Bank-specific variables, such as loan provision, nonperforming loans and bank size also perform well in detecting bank bailouts. Surprisingly, the aided banks hardly improve their performance indicators after they have been rescued but maintain similar risk profiles/business models.
    Keywords: Bank bailout, state aid, financial crisis, logit analysis
    JEL: G21 G28
    Date: 2016–05
  4. By: Paolo Giudici (Department of Economics and Management, University of Pavia); Laura Parisi (Department of Economics and Management, University of Pavia)
    Abstract: Giudici and Parisi (2016) have proposed a novel econometric approach that measures systemic risk as a probabilistic "add-on" to the idiosyncratic probability of default of an economic sector (sovereign, corporate or bank). In this contribution we extend their approach to financial institutions and, doing so, we investigate the relative advantage, in terms of systemic risk, of a bail-in versus a bail-out scenario. We apply our methods to the Italian bail-out private intervention scheme named Atlante. The results show that the bail-out of a troubled bank and, specifically of the Banca Popolare di Vicenza, is more convenient for the smaller, safer and highly correlated banks.
    Date: 2016–06
  5. By: Sandra Eickmeier; Norbert Metiu; Esteban Prieto
    Abstract: We document that expansionary monetary policy shocks are less effective at stimulating output and investment in periods of high volatility compared to periods of low volatility, using a regime-switching vector autoregression. Exogenous policy changes are identified by adapting an external instruments approach to the non-linear model. The lower effectiveness of monetary policy can be linked to weaker responses of credit costs, suggesting a financial accelerator mechanism that is weaker in high volatility periods. To rationalize our robust empirical results, we use a macroeconomic model in which financial intermediaries endogenously choose their capital structure. In the model, the leverage choice of banks depends on the volatility of aggregate shocks. In low volatility periods, financial intermediaries lever up, which makes their balance sheets more sensitive to aggregate shocks and the financial accelerator more effective. On the contrary, in high volatility periods banks decrease leverage, which renders the financial accelerator less effective; this in turn decreases the ability of monetary policy to improve funding conditions and credit supply, and thereby to stimulate the economy. Hence, we provide a novel explanation for the non-linear effects of monetary stimuli observed in the data, linking the effectiveness of monetary policy to the procyclicality of leverage.
    Keywords: Monetary policy, credit spread, non-linearity, intermediary leverage, financial accelerator
    JEL: C32 E44 E52
    Date: 2016–05
  6. By: Giulio Cifarelli (Dipartimento di Scienze per l'Economia e l'Impresa); Giovanna Paladino
    Abstract: We investigate the time varying dynamics of the linkages between sovereign and bank default risks over the period 2006-2015, using the credit default swap (CDS) spreads of the bonds of major international banks and of sovereign issuers as indicators of risk within four major European countries. The nexus between bank risk in core countries and sovereign risk of peripheral countries is also analyzed, under the hypothesis that higher bond yields and preferential treatment of bond issued by euro sovereigns under Basle II may have favored the stocking of peripheral sovereign bonds in core bank portfolios. The use of a time-varying regime switching correlation analysis, the STCC-GARCH, allows to identify the economic variable behind the state shifts, the so-called “transition variable†, and to date precisely the changes in the size of the correlations that are due to shocks (viz. the Lehman crisis, the evolution of the Greek crisis) or to unconventional monetary policies such as Quantitative Easing and TLTRO.
    Keywords: CDS spreads, Unconventional monetary policy, STCC-GARCH correlation analysis
    JEL: E43 E52 F36 C32
    Date: 2016
  7. By: De Michelis, Andrea; Iacoviello, Matteo
    Abstract: This paper draws from Japan’s recent monetary experiment to examine the effects of an increase in the inflation target during a liquidity trap. We review Japanese data and examine through a VAR model how macroeconomic variables respond to an identified inflation target shock. We apply these findings to calibrate the effect of a shock to the inflation target in a new-Keynesian DSGE model of the Japanese economy. We argue that imperfect observability of the inflation target and a separate exchange rate shock are needed to successfully account for the behavior of nominal and real variables in Japan since late 2012. Our analysis indicates that Japan has made some progress towards overcoming deflation, but further measures are needed to raise inflation to 2 percent in a stable manner.
    Keywords: Abenomics ; Credibility ; Deflation ; Inflation target ; Japan ; Monetary policy
    JEL: E31 E32 E47 E52 E58 F31 F41
    Date: 2016–05
  8. By: Heni Boubaker (IPAG LAB, IPAG Business School, France); Giorgio Canarella (University of Nevada, Las Vegas, USA); Rangan Gupta (Department of Economics, University of Pretoria); Stephen M. Miller (University of Nevada, Las Vegas, USA)
    Abstract: We propose a new long-memory model with a time-varying fractional integration parameter, evolving non-linearly according to a Logistic Smooth Transition Autoregressive (LSTAR) specification. To estimate the time-varying fractional integration parameter, we implement a method based on the wavelet approach, using the instantaneous least squares estimator (ILSE). The empirical results show the relevance of the modeling approach and provide evidence of regime change in inflation persistence that contributes to a better understanding of the inflationary process in the US. Most importantly, these empirical findings remind us that a "one-size-fits-all" monetary policy is unlikely to work in all circumstances.
    Keywords: Time-varying long-memory, LSTAR model, MODWT algorithm, ILSE estimator
    JEL: C13 C22 C32 C54 E31
    Date: 2016–06
  9. By: Cabral,Rene; Carneiro,Francisco Galrao; Mollick,Andre Varella
    Abstract: The paper investigates the relevance of the exchange rate on the reaction function of the central banks of 24 emerging market economies for the period 2000Q1 to 2015Q2. This is done by first employing fixed-effects ordinary least squares and then system generalized method of the moments techniques. Under fixed effects, the exchange rate is found to be an important determinant in the reaction function of emerging market economies. Allowing for the endogeneityof inflation, output gap, and exchange rate, the exchange rate remains a positive and significant determinant, but less quantitatively relevant across inflation-targeting countries. When the sample is partitioned into targeting and nontargeting countries, the exchange rate remains relevant in the reaction function of the latter group. The results remain robust to splitting the sample at the time of the financial crisis of 2007?09 and suggest that, after the crisis, the central banks of emerging market economies responded only to inflation movements in the interest rate reaction function.
    Keywords: Currencies and Exchange Rates,Debt Markets,Economic Theory&Research,Economic Stabilization,Emerging Markets
    Date: 2016–06–20
  10. By: Rilind Kabashi (National Bank of the Republic of Macedonia); Katerina Suleva (National Bank of the Republic of Macedonia)
    Abstract: This paper analyses the effects of loan supply, as well as aggregate demand, aggregate supply and monetary policy shocks between 1998 and 2014 in Macedonia using a structural Vector Auto Regression with sign restrictions and Bayesian estimation. The main results indicate that loan supply shocks have no significant effect on loan volumes and lending rates, as well as on economic activity and prices. The effects of monetary policy on lending activity are fairly limited, although there is some evidence that it affects lending rates more than loan volumes. Monetary policy shocks have strong effects on inflation, while the central bank reacts strongly to adverse shocks hitting the economy. Baseline results are fairly robust to several extensions and robustness checks. According to historical decomposition, the lending activity was supporting economic growth before and during the crisis, but its contribution became negative during the recovery and it was a drag on growth until the end of the period. Pre-crisis GDP growth is mostly explained by the supportive interest rate of the main monetary policy instrument. However, the restrictive policy during the crisis for the purposes of maintaining monetary policy goals was associated with a fall in GDP, while the policy became supportive again during the early stages of the recovery. Policy rates in the recent years mostly reflect subdued lending activity and aggregate supply factors, which the central bank tries to counteract with a more accommodative policy.
    Keywords: loan supply, monetary policy, Bayesian VAR, sign restrictions, Macedonia
    JEL: C11 C32 E51 E52
    Date: 2016–05
  11. By: Leontieva, E.A. (Russian Presidential Academy of National Economy and Public Administration (RANEPA), Gaidar Institute for Economic Policy); Perevyshin, Y.N. (Russian Presidential Academy of National Economy and Public Administration (RANEPA))
    Abstract: This study investigates the transmission of monetary policy onto retail bank interest rates in Russia. The paper reviews theoretical approaches of interest rate pass-through, the reasons for its incompleteness. Our estimates, based on ECM, show incomplete interest rate pass-through from MIACR to retail deposit rates in Russia in 2010-2014. The possible reasons of incomplete interest rate pass-through are imperfect substitution between bank deposits and other types of savings and weak competition within the Russian banking sector. Also we analyze how monetary policy of The Central Bank of Russian Federation influences the bank lending in Russia in 2010-2014. We use two approaches: cointegration analysis of macroeconomic data and panel regression on individual banks balance data. We show that monetary policy instruments (interest rate on auction REPO and volumes of refinancing operations) have affected bank lending at that time.
    Keywords: monetary policy, market interest rates, commercial banks, banking loans, interest rate pass-through, credit channel
    JEL: E52 E51 E58 E43 C32 C33 G21
    Date: 2015–03–04
  12. By: Vashchelyuk, N.V. (Russian Presidential Academy of National Economy and Public Administration (RANEPA)); Polbin, Andrey (Russian Presidential Academy of National Economy and Public Administration (RANEPA), Gaidar Institute for Economic Policy); Trunin, Pavel (Russian Presidential Academy of National Economy and Public Administration (RANEPA), Gaidar Institute for Economic Policy)
    Abstract: The paper is devoted to identifying the shock of monetary policy and evaluating its impact on the main macroeconomic variables of the Russian economy with the help of the structural vector autoregression model. According to the results monetary policy shocks have a significant impact on the real sector of the Russian economy in the short term period and on the nominal variables (interest rates, price level, lending). Positive monetary policy shock leads to a temporary increase in output, the volume of lending, as well as to a reduction in nominal interest rates on loans. At the same time the contribution of monetary policy shocks to the variance of macroeconomic variables is small.
    Keywords: monetary policy, macroeconomic variables, Russian economy
    Date: 2016–03–21

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