nep-cba New Economics Papers
on Central Banking
Issue of 2016‒07‒09
twelve papers chosen by
Maria Semenova
Higher School of Economics

  1. Financial factors and monetary policy: Determinacy and learnability of equilibrium By Paul Kitney
  2. Prudential regulation in an artificial banking system By Curto, José Dias; Quinaz, Pedro Miguel Mateus Dias
  3. Changes in Prudential Policy Instruments ---- A New Cross-Country Database By Cerutti, Eugenio; Correa, Ricardo; Fiorentino, Elisabetta; Segalla, Esther
  6. Monetary Versus Macroprudential Policies: Causal Impacts of Interest Rates and Credit Controls in the Era of the UK Radcliffe Report By David Aikman; Oliver Bush; Alan M. Taylor
  7. Monetary Policy with 100 Percent Reserve Banking: An Exploration By Prescott, Edward C.; Wessel, Ryan
  8. Reserve requirements and optimal Chinese stabilization policy By Chang, Chun; Liu, Zheng; Spiegel, Mark M.; Zhang, Jingyi
  9. De facto exchange-rate regimes in Central and Eastern European Countries By Simón Sosvilla Rivero; Maria del Carmen Ramos Herrera
  10. How Successful Are Banking Sector Reforms in Emerging Market Economies? Evidence from Impact of Monetary Policy on Levels and Structures of Firm Debt in India By Bhaumik, Sumon K.; Kutan, Ali M.; Majumdar, Sudipa
  11. Monetary policy and economic growth in Kenya:The role of money supply and interest rates By Nyorekwa, Enock Twinoburyo; Odhiambo, Nicholas Manya
  12. The Effectiveness of Monetary Policy in South Africa under Inflation Targeting: Evidence from a Time-Varying Factor-Augmented Vector Autoregressive Model By Goodness C. Aye; Mehmet Balcilar; Rangan Gupta

  1. By: Paul Kitney
    Abstract: This paper contributes to the debate whether central banks should respond to asset prices, credit spreads and other financial factors in setting monetary policy, by evaluating determinacy and expectational stability of equilibria under various monetary policy rules. With adaptive learning, beliefs constitute an additional set of state variables, which may require more than a response to inflation, that has traditionally been argued in the literature as sufficient to achieve central bank objectives under rational expectations. Furthermore, financial frictions are introduced by extending the determinacy and adaptive learning methodology embodied in Bullard and Mitra (2002) and Bullard and Mitra (2007), beyond the New Keynesian modelling framework by incorporating a Financial Accelerator (Bernanke, Gertler and Gilchrist 1999). A key result is that monetary policy rules responding to lagged asset prices and credit volume have less desirable determinacy and learnability characteristics than responding to current asset prices and credit spreads. This conclusion dovetails with recent research such as Gilchrist and Zakrajsek (2011) and Gilchrist and Zakrajsek (2012), who show that signals derived from credit spreads contain information which help explain business cycle fluctuations and demonstrate that a credit spread augmented monetary policy rule dampens cycle variability. Another result is that the conclusions in both Bullard and Mitra (2002) and Bullard and Mitra (2007) are robust to a New Keynesian model with financial frictions.
    Keywords: DSGE, financial frictions, learning, determinacy, e-stability, expectations, asset prices, credit spreads, financial factors, monetary policy, Taylor rule
    JEL: E43 E44 E50 E52 E58
    Date: 2016–07
  2. By: Curto, José Dias; Quinaz, Pedro Miguel Mateus Dias
    Abstract: This study constitutes an exploratory analysis of the economic role of banks under different prudential frameworks. It considers an agent-based computational model populated by consumers, firms, banks and a central bank whose out-of-equilibrium interactions replicate the conjunct dynamics of a banking system, a financial market and the real economy. A calibrated version of the model is shown to provide an intelligible account of several recurrent economic phenomena and it can be a privileged ground for policy analysis. The authors' investigation provides a relevant methodological contribution to the field of banking research and sheds new light into the role of banks and their prudential regulation. Specifically, the results suggest that banks are key economic agents. Through their financial intermediation activity, credit institutions facilitate investment and promote growth.
    Keywords: agent-based computational model,financial intermediation,prudential policy,bank regulation
    JEL: C63 G28
    Date: 2016
  3. By: Cerutti, Eugenio; Correa, Ricardo; Fiorentino, Elisabetta; Segalla, Esther
    Abstract: This paper documents the features of a new database that focuses on changes in the intensity in the usage of several widely used prudential tools, taking into account both macro-prudential and microprudential objectives. The database coverage is broad, spanning 64 countries, and with quarterly data for the period 2000Q1 through 2014Q4. The five types of prudential instruments in the database are: capital buffers, interbank exposure limits, concentration limits, loan to value (LTV) ratio limits, and reserve requirements. A total of nine prudential tools are constructed since some useful further decompositions are presented, with capital buffers divided into four sub-indices: general capital requirements, real state credit specific capital buffers, consumer credit specific capital buffers, and other specific capital buffers; and with reserve requirements divided into two sub-indices: domestic currency capital requirements and foreign currency capital requirements. While general capital requirements have the most changes from the cross-country perspective, LTV ratio limits and reserve requirements have the largest number of tightening and loosening episodes. We also analyze the instruments’ usage in relation to the evolution of key variables such as credit, policy rates, and house prices, finding substantial differences in the patterns of loosening or tightening of instruments in relation to business and financial cycles.
    Keywords: Macroprudential policies ; Microprudential policies ; Financial cycles
    JEL: E43 E58 G18 G28
    Date: 2016–06
  4. By: Elisabetta Montanaro (Ragnar Nurkse School of Innovation and Governance, Tallinn University of Technology)
    Abstract: The post-crisis political and theoretical developments have produced a profound reappraisal of central banks’ mandate in achieving and maintaining financial stability. This evolution has had important consequences for the institutional architecture of financial supervision and for the role assigned to central banks within it. The paper aims to analyse the rationale of this evolution and to what extent it has characterised the reforms introduced by EU countries after the crisis. The empirical analysis confirms the wider mandate for financial stability given to EU central banks, mainly in those countries whose structural vulnerabilities arise from high degree of financialisation. The reforms associated to this process always result from political choices: in this respect, the different path towards the new architecture, which has characterised the UK and Germany can be taken as the two most interesting cases. They show the complex interactions between political pressure, resistance and ambitions of the various existing authorities, and the country’s heritage, which characterise every stage of institutional reform, especially where significant supervisory failures have been found.
    Keywords: models of financial supervision; twin-peaks; central banks; financial reforms; Bank of England; Bundesbank; EU countries
    JEL: E58 G01 G28
    Date: 2016–01–30
  5. By: Mario Tonveronachi (Ragnar Nurkse School of Innovation and Governance, Tallinn University of Technology)
    Abstract: Europe is at a critical crossroads for the evolution of its overall political and institutional design. Its founding goal, the creation of the internal single market, is consistent neither with the existing setup, nor with the direction recently impressed to that evolution. The inconsistency between the fiscal, monetary and financial regulatory framework and the construction of the single market cannot be solved by reforming the EU treaties simply because there is no agreement on the new design. Following Minsky’s analysis, we single out the weaknesses and fragilities of that framework when the heterogeneous reality of the EU is taken into account. While constraints on fiscal and monetary reforms derive from the existing treaties, for financial regulation they come from mixing the international approach, which makes financial stability dependent on the financial morphology freely determined by financial markets, with the belief that the EU integration will come from the operation of private interests. We show that the current approach to financial regulation fails on both regards. Complying with the existing EU treaties, we propose a reform of ECB operations that would create the single financial market, at least for the euro area, and allow a reform of the existing fiscal rules capable of converting the current deflationary stance into a reflationary one. To complete the strengthening of the systemic cushions of safety, following the Minskyan approach a radical reform of financial regulation is presented that would combine higher financial resilience with finance more closely serving national economies. The three reforms would critically contribute to the consistency of the euro area design and make its membership attractive for the non-euro EU countries that currently strongly oppose entering into it, at least for those that do not want to go on playing the inshore-offshore game.
    Keywords: EU, Euro Area, ECB, fiscal rules, monetary policy, financial regulation
    JEL: E58 E61 G18 F02 F45 G18
    Date: 2016–01–30
  6. By: David Aikman; Oliver Bush; Alan M. Taylor
    Abstract: We have entered a world of conjoined monetary and macroprudential policies. But can they function smoothly in tandem, and with what effects? Since this policy cocktail has not been seen for decades, the empirical evidence is almost non-existent. We can only fix this shortcoming in a historical laboratory. The Radcliffe Report (1959), notoriously skeptical about the efficacy of monetary policy, embodied views which led the UK to a three-decade experiment of using credit controls alongside conventional changes in the central bank interest rate. These non-price tools are similar to policies now being considered or used by macroprudential policymakers. We describe these tools, document how they were used by the authorities, and craft a new, largely hand-collected dataset to help estimate their effects. We develop a novel identification strategy, which we term Factor-Augmented Local Projection (FALP), to investigate the subtly different impacts of both monetary and macroprudential policies. Monetary policy acted on output and inflation broadly in line with consensus views today, but credit controls had markedly different effects and acted primarily to modulate bank lending.
    JEL: E50 G18 N14
    Date: 2016–06
  7. By: Prescott, Edward C. (Federal Reserve Bank of Minneapolis); Wessel, Ryan (Arizona State University)
    Abstract: We explore monetary policy in a world without fractional reserve banking. In our world, banks are purely transaction institutions. Money is a form of government debt that bears interest, which can be negative as well as positive. Services of money are a factor of production. We show that the national accounts must be revised in this world. Using our baseline economy, we determine a balanced growth path for a set of money interest rate policy regimes. Besides this interest rate, the only policy variable that differs across regimes is the labor income tax rate. Within this set of policy regimes, there is a balanced growth welfare-maximizing regime. We show that Friedman monetary satiation without deflation is possible in this world. We also examine a set of inflation rate targeting regimes. Here, the only other policy variable that differs across regimes is the inflation rate.
    Keywords: 100 percent reserve banking; Money in production function; Interest rate targeting; Inflation rate targeting; Friedman monetary satiation
    JEL: E00 E40 E50 E60
    Date: 2016–06–22
  8. By: Chang, Chun (Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University); Liu, Zheng (Federal Reserve Bank of San Francisco); Spiegel, Mark M. (Federal Reserve Bank of San Francisco); Zhang, Jingyi (Shanghai Advanced Institute, Shanghai Jiao Tong University)
    Abstract: We build a two-sector DSGE model of the Chinese economy to study the role of reserve requirement policy for capital reallocation and business cycle stabilization. In the model, state-owned enterprises (SOEs) have lower average productivity than private firms, but they have superior access to bank loans because of government guarantees. Private firms rely on “shadow” bank financing. Commercial banks are subject to reserve requirement regulations but shadow banks are not. Our framework implies a tradeoff for reserve requirement policy: Increasing the required reserve ratio acts as a tax on SOE activity and reallocates resources to private firms, raising aggregate productivity. This reallocation is supported by empirical evidence. However, raising reserve requirements also increases the incidence of costly SOE failures. Under our calibration, reserve requirement policy can be complementary to interest rate policy for stabilizing macro fluctuations and improving welfare.
    JEL: D81 E21 P31
    Date: 2016–06–09
  9. 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
  10. By: Bhaumik, Sumon K. (University of Sheffield); Kutan, Ali M. (Southern Illinois University Edwardsville); Majumdar, Sudipa (Middlesex University, Dubai)
    Abstract: Many emerging markets have undertaken significant financial sector reforms especially in their banking sectors that have been quite critical for both financial development and real economic activity. In this paper, we investigate the success of banking reforms in India where significant banking reforms have been introduced since 1990s. Using the argument that well-functioning credit markets would reflect a bank channel for monetary policy at work, we test whether a change in monetary policy has predictable impact on borrowing behaviour of several types of firms, including business group affiliated, unaffiliated private firms, state-owned firms and foreign firms. The empirical results suggest that unaffiliated private firms have the most vulnerable to monetary policy stance during tight policy regimes. We also find that during tight monetary policy regimes, smaller firms are much more affected by monetary policy than large firms. In an easy money regime, monetary policy and the associated change in interest rate does not affect change in bank credit, change in total debt and the proportion of bank credit in total debt for any of the firms. We discuss the policy implications of the findings.
    Keywords: banking reforms, monetary policy, credit markets, bank debt, debt structure
    JEL: E52 G21 G28 G32 O16
    Date: 2016–06
  11. By: Nyorekwa, Enock Twinoburyo; Odhiambo, Nicholas Manya
    Abstract: Using the autoregressive distributed lag (ARDL) bounds testing approach; this paper examines the short-run and long-run impact of monetary policy on economic growth in Kenya for the period 1973 to 2013. The paper uses both the broad money supply and the 3-month Treasury bill rate as proxies of monetary policy. Both short-run and long-run empirical results support monetary policy neutrality, implying that monetary policy has no effect on economic growth ??? both in the short run and in the long run. This could be due to the fact that the increasing fiscal deficits funded domestically in Kenya could have weakened the transmission of monetary policy actions into the real economy. The study recommends that policies aimed at improving the institutional and regulatory environment for the financial sector and monetary policy conduct should be pursued in Kenya. There is also a need for improvement in policy coordination, particularly monetary and fiscal policies.
    Keywords: Kenya,Money supply,intrerest rates and economic growth
    Date: 2016–06
  12. By: Goodness C. Aye (Department of Economics, University of Pretoria); Mehmet Balcilar (Department of Economics, Eastern Mediterranean University and Department of Economics, University of Pretoria); Rangan Gupta (Department of Economics, University of Pretoria)
    Abstract: This paper examines the transmission mechanism of shocks to monetary policy in South Africa using quarterly data from 1980:1 to 2012:4. We also in addition identify demand and supply shocks. Our analyses are based on a factor-augmented vector autoregression with time-varying coefficients and stochastic volatility (TVP-FAVAR), which allows us to simultaneously analyse the changing impulse responses of a set of 177 macroeconomic variables. Our results based on the impulse response functions, are consistent with economic theory as we observe no price puzzle that is often associated with the standard VAR models. We find evidence of modest time variation in the transmission of shocks. Overall, the macroeconomic variables seemed to have responded slightly more to the monetary policy shocks in the post -2000 (inflation targeting) sub-period than the pre-2000 period, albeit the differences in the effects are statistically insignificant. Demand shocks are found to have contributed more to changes in macroeconomic variables in South Africa than monetary policy and supply shocks. Our results suggest the need for a more efficient role of the monetary authority as this will both improve its credibility and greater economic stability.
    Date: 2016

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