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on Central Banking |
| By: | Orphanides, Athanasios |
| Abstract: | Under ordinary circumstances, the fiscal implications of central bank policies tend to be seen as relatively minor and escape close scrutiny. The global financial crisis of 2008, however, demanded an extraordinary response by central banks which brought to light the immense power of central bank balance sheet policies as well as their major fiscal implications. Once the zero lower bound on interest rates is reached, expanding a central bank's balance sheet becomes the central instrument for providing additional monetary policy accommodation. However, with interest rates near zero, the line separating fiscal and monetary policy is blurred. Furthermore, discretionary decisions associated with asset purchases and liquidity provision, as well as with lender-of-last-resort operations benefiting private entities, can have major distributional effects that are ordinarily associated with fiscal policy. In the euro area, discretionary central bank decisions can have immense distributional effects across member states. However, decisions of this nature are incompatible with the role of unelected officials in democratic societies. Drawing on the response to the crisis by the Federal Reserve and the ECB, this paper explores the tensions arising from central bank balance sheet policies and addresses pertinent questions about the governance and accountability of independent central banks in a democratic society. |
| Keywords: | central bank accountability; central bank governance; central bank independence; lender of last resort; loss sharing; monetary financing; Quantitative easing; rules vs discretion. |
| JEL: | E52 E58 E61 G01 H12 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11383&r=cba |
| By: | Christopher McDonald; Craig Thamotheram; Shaun P. Vahey; Elizabeth C. Wakerly |
| Abstract: | We consider the fundamental issue of what makes a “good” probability forecast for a central bank operating within an inflation targeting framework. We provide two examples in which the candidate forecasts comfortably outperform those from benchmark specifications by conventional statistical metrics such as root mean squared prediction errors and average logarithmic scores. Our assessment of economic significance uses an explicit loss function that relates economic value to a forecast communication problem for an inflation targeting central bank. We analyse the Bank of England’s forecasts for inflation during the period in which the central bank operated within a strict inflation targeting framework in our first example. In our second example, we consider forecasts for inflation in New Zealand generated from vector autoregressions, when the central bank operated within a flexible inflation targeting framework. In both cases, the economic significance of the performance differential exhibits sensitivity to the parameters of the loss function and, for some values, the differentials are economically negligible. |
| Keywords: | Forecasting inflation, Inflation targeting, Cost-loss ratio, Forecast evaluation, Monetary policy |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2016-40&r=cba |
| By: | Eusepi, Stefano (Federal Reserve Bank of New York); Preston, Bruce (University of Melbourne) |
| Abstract: | New Keynesian theory identifies a set of principles central to the design and implementation of monetary policy. These principles rely on the ability of a central bank to manage expectations precisely, with policy prescriptions typically derived under the assumption of perfect information and full rationality. However, the challenging macroeconomic environment bequeathed by the financial crisis has led many to question the efficacy of monetary policy, and, particularly, to question whether central banks can influence expectations with as much control as previously thought. In this paper, we survey the literature on monetary policy design under imperfect knowledge and asses to what degree its policy prescriptions deviate from the rational expectations benchmark. |
| Keywords: | monetary policy; expectations formation; learning |
| JEL: | E31 E32 E52 |
| Date: | 2016–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:782&r=cba |
| By: | Faure, Salomon; Gersbach, Hans |
| Abstract: | We develop a general equilibrium model to study money creation by private banks and examine the impact of monetary policy and capital regulation. There are two production sectors, financial intermediation, aggregate shocks, safe deposits, and two types of money creation: private deposits when banks grant loans to firms or to other banks and central bank money when the central bank grants loans to private banks. We show that in the baseline model, equilibria yield the first-best level of money creation and lending, regardless of the monetary policy or capital regulation. If we add price rigidities coupled with the zero lower bound, there may be no equilibrium with banks, but under normal economic conditions, an adequate combination of monetary policy and capital regulation can restore the existence of equilibria and efficiency. Finally, we show that Forward Guidance and capital regulation can only avoid a slump in money creation and lending if economic conditions are sufficiently favorable. |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11368&r=cba |
| By: | Jinill KIM; Francisco RUGE-MURCIA |
| Abstract: | This paper studies the positive and normative implication of extreme shocks for monetary policy. The analysis is based on a small-scale new Keynesian model with sticky prices and wages where shocks are drawn from asymmetric generalized extreme value (GEV) distributions. A nonlinear perturbation of the model is estimated by the simulated method of moments. Under both the Taylor and Ramsey policies, the central bank responds nonlinearly and asymmetrically to shocks. The trade-off between targeting a gross ináation rate above 1 as insurance against extreme shocks and strict price stability is unambiguously decided in favour of strict price stability. |
| Keywords: | extreme value theory, nonlinear models, skewness risk, monetary policy, third-order perturbation, simulated method of moments |
| JEL: | E4 E5 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:mtl:montec:09-2016&r=cba |
| By: | Rogers, John H.; Scotti, Chiara; Wright, Jonathan H. |
| Abstract: | We assess the relationship between monetary policy, foreign exchange risk premia and term premia at the zero lower bound. We estimate a structural VAR including U.S. and foreign interest rates and exchange rates, and identify monetary policy shocks through a method that uses these surprises as the crucial external instrument" that achieves identification without having to use implausible short-run restrictions. This allows us to measure effects of policy shocks on expectations, and hence risk premia. U.S. monetary policy easing shocks lower domestic and foreign bond risk premia, lead to dollar depreciation and lower foreign exchange risk premia. We present some evidence that U.S. monetary policy easing surprises at the ZLB shift options-implied skewness in the direction of dollar depreciation and also reduce the demand for the liquidity of short-term U.S. Treasuries. Both of these channels should lower foreign exchange risk premia. |
| Date: | 2016–05–31 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1172&r=cba |
| By: | Nlemfu Mukoko, Jean Blaise |
| Abstract: | This paper analyses the implications of monetary policy changes on the welfare in the U.S economy over the pre-1984 and post-1984 periods. We use a New-Keynesian model with trend inflation based on Ascari, Phaneuf and Sims (2015). First, our results show that the welfare costs respond symmetrically to a rise and a decline in trend inflation, trend growth and the level of volatility of output, output growth and inflation over the sample periods. Second, we find that changes in monetary policy and in trend inflation across the two subsamples play an important role in the shift of macroeconomic variables volatilities unconditionally and conditionally to neutral technology, marginal efficiency of investment and monetary shocks. |
| Keywords: | Welfare, trend in ation, New Keynesian Models |
| JEL: | E31 E32 |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:72479&r=cba |
| By: | Jose E. Gomez-Gonzalez (Banco de la República de Colombia); Julian A. Parra-Polania (Banco de la República de Colombia); Mauricio Villamizar-Villegas (Banco de la República de Colombia) |
| Abstract: | Central banks in emerging countries frequently build-up (diminish) reserves while attempting to depreciate (appreciate) their domestic currencies. Even if these interventions are effective, they often entail various costs. Basu (2012), nonetheless, proposes a model in which the sole announcement of an intervention schedule leads to a desired exchange rate without actually buying or selling foreign currency. In this paper we present a generalization that allows for imperfect credibility of foreign exchange intervention. Namely, market dealers know that the central bank carries strategic incentives when announcing its schedule and may not perfectly believe it. We show that, under this setup, it may be impossible for central banks to achieve the desired exchange rate level without changing their position of international reserves. Classification JEL: F31, E58, G20, D43 |
| Keywords: | Exchange rate, Foreign exchange intervention, Central bank Credibility, Credibility function |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:949&r=cba |
| By: | Carl Grekou |
| Abstract: | Relying on a panel of 73 emerging and developing countries and on de facto exchange rate regimes’ classification —over the 1980-2012 period, we re-examine empirically the relationship between exchange rate regimes and currency misalignments. Overall our results suggest that no exchange rate regime performs better than the others as currency misalignments do not substantially and significantly differ across exchange rate regimes. This finding is in contrast to the different arguments (both theoretical and empirical) in favor or against any particular regime and instead supports the exchange regime neutrality view. |
| Keywords: | Currency misalignments; Exchange rate regimes; Emerging and developing countries |
| JEL: | C23 F31 F33 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2016-26&r=cba |
| By: | Carlos Viana de Carvalho (Department of Economics PUC-Rio); EriC Hsu (UC Berkeley); Fernanda Necchio (FRB San Francisco) |
| Abstract: | The Zero Lower Bound (ZLB) on interest rates is often regarded as an important constraint on monetary policy. To assess how the ZLB affected the Fed's ability to conduct policy, we estimate the effects of Fed communication on yields of different maturities in the pre-ZLB and ZLB periods. Before the ZLB period, communication affects both short- and long-dated yields. In contrast, during the ZLB period, the reaction of yields to communication is concentrated in longer-dated yields. Our findings support the view that the ZLB did not put such a critical constraint on monetary policy, as the Fed retained some ability to affect long-term yields through communication. |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:rio:texdis:649&r=cba |
| By: | Romain Baeriswyl (Swiss National Bank, Boersenstrasse 15, 8022 Zurich, Switzerland); Camille Cornand (Univ Lyon, CNRS, GATE UMR 5824, F-69130 Ecully, France); Bruno Ziliotto (Paris Dauphine University, PSL Research University, Place du Maréchal de Lattre de Tassigny, F-75016 Paris, France) |
| Abstract: | While the central bank observes the market activity to assess economic fundamentals, it shapes the market outcome through its policy interventions. The more the central bank influences the market, the more it spoils the informational content of economic aggregates. How should the central bank act and communicate when it derives its information from observing the market? This paper analyses the optimal central bank's action and disclosure under endogenous central bank's information for three operational frameworks: pure communication, action and communication, and signaling action. When the central bank takes an action, it would be optimal for the central bank to be fully opaque to prevent its disclosure from deteriorating the information quality of market outcomes. However, in the realistic case where central bank's action is observable, it may be optimal to refrain from implementing any action. |
| Keywords: | heterogeneous information, public information, endogenous information, overreaction, transparency, coordination |
| JEL: | D82 E52 E58 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:1623&r=cba |
| By: | Philippe Bacchetta; Kenza Benhima; Yannick Kalantzis |
| Abstract: | In this paper we analyze the implications of a persistent liquidity trap in a monetary model with asset scarcity and price exibility. We show that a liquidity trap leads to an increase in cash holdings and may be associated with a long-term output decline. This long-term impact is a supply-side effect that may arise when agents are heterogeneous. It occurs in particular with a persistent deleveraging shock, leading investors to hold cash yielding a low return. Policy implications differ from shorter-run analyses. Quantitative easing leads to a deeper liquidity trap. Exiting the trap by increasing expected inflation or applying negative interest rates does not solve the asset scarcity problem. |
| Keywords: | Zero lower bound; liquidity trap; asset scarcity; deleveraging |
| JEL: | E40 E22 E58 |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:lau:crdeep:16.12&r=cba |
| By: | Darracq Pariès, Matthieu; Hałaj, Grzegorz; Kok, Christoffer |
| Abstract: | With the aim of reigniting inflation in the euro area, in early 2015 the ECB embarked on a large-scale asset purchase programme. We analyse the macroeconomic effects of the Asset Purchase Programme via the banking system, exploiting the cross-section of individual bank portfolio decisions. For this purpose, an augmented version of the DSGE model of Gertler and Karadi (2013), featuring a segmented banking sector, is estimated for the euro area and combined with a bank portfolio optimisation approach using granular bank level data. An important feature of our modelling approach is that it captures the heterogeneity of banks’ responses to yield curve shocks, due to individual banks’ balance sheet structure, different capital and liquidity constraints as well as different credit and market risk characteristics. The deep parameters of the DSGE model which control the transmission channel of central bank asset purchases are then adjusted to reproduce the easing of lending conditions consistent with the bank-level portfolio optimisation. Our macroeconomic simulations suggest that such unconventional policies have the potential to strongly support the growth momentum in the euro area and significantly lift inflation prospects. The paper also illustrates that the benefits of the measure crucially hinge on banks’ ability and incentives to ease their lending conditions, which can vary significantly across jurisdictions and segments of the banking system. JEL Classification: C61, E52, G11 |
| Keywords: | banking, DSGE, portfolio optimisation, quantitative easing |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20161916&r=cba |
| By: | Homar, Timotej; Kick, Heinrich; Salleo, Carmelo |
| Abstract: | We analyse the SRISK measure with respect to its usage as a benchmark for the ECB/EBA 2014 stress test. By regressing the ECB/EBA stress test impact and the SRISK stress impact on a set of factors that are commonly associated with bank credit losses and bank vulnerability, we find that the ECB/EBA stress impact is consistent with findings in the literature on credit losses. In contrast, the SRISK measure bears much less relation to these factors; it is largely driven by the banks’ leverage ratio. These differences are deeply rooted in the construction of the respective measures. With its focus on losses to bank equity, the SRISK measure appears poorly matched as a benchmark for the supervisory stress test in Europe, which is centred on losses to banks’ total assets. JEL Classification: C21, G01, G21 |
| Keywords: | Asset Quality Review, SRISK, stress test evaluation |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20161920&r=cba |
| By: | Elisabetta Montanaro (Ragnar Nurkse School of Innovation and Governance, Tallinn University of Technology) |
| Abstract: | The EU’s institutional architecture for financial regulation, based upon the principles of decentralisation across countries, segmentation across sectors, and voluntary cooperation among national regulators was clearly unsuitable to deal with overall financial stability risks arising from the internationalisation and conglomeration of financial firms. Oppositions to a true European arrangement for burden-sharing, and potential distributional consequences in the event of a crisis of a cross border bank have been the main hurdle to centralisation at European-level financial supervision. At the same time, the objective to create a levelled playing field in the EU single market has been always considered the necessary condition to promote the openness of national financial markets and cross-border banking. The paper aims to demonstrate that, since a single EU financial regulator in a multi-currency area is definitely a no viable alternative, the banking union’s design is just a partial solution for financial stability problems arising from the fragmentation of the single market in the event of idiosyncratic or systemic banking crises. The analysis performed on non-euro countries’ assessments of the pros and cons in joining the banking union clearly shows that until the fiscal responsibility for financial stability remains at the national level, the regulatory centralisation at the EU level cannot severe the traditional divide between home and host supervisors. |
| Keywords: | EU financial regulation; banking union; non-euro countries; CEE countries; cross-border banking |
| JEL: | F35 F65 G01 G28 |
| Date: | 2016–01–30 |
| URL: | http://d.repec.org/n?u=RePEc:fes:wpaper:wpaper133&r=cba |
| By: | Hatcher, Michael |
| Abstract: | An overlapping generations model is set out in which monetary policy matters for distortionary taxes because unanticipated inflation has real wealth effects on households with nominal government debt. The model is used to study the tax burden under inflation and nominal GDP targeting. Nominal GDP targeting makes taxes less volatile than inflation targeting but raises average taxes. With a quadratic loss function, the expected tax burden is minimized with only indexed debt under inflation targeting, but with both indexed and nominal debt under nominal GDP targeting. Nominal GDP targeting lowers the tax burden relative to inflation targeting (except at very high indexation shares), but this conclusion hinges on risk aversion, productivity persistence and the loss function for the tax burden. |
| Date: | 2016–07–04 |
| URL: | http://d.repec.org/n?u=RePEc:stn:sotoec:1604&r=cba |
| By: | Richardson, Gary (Federal Reserve Bank of Richmond); Van Horn, Patrick (Southwestern University) |
| Abstract: | In 1931, a financial crisis began in Austria, spread to Germany, forced Britain to abandon the gold standard, crossed the Atlantic, and afflicted financial institutions in the United States. This article describes how banks in New York City, the central money market of the United States, reacted to this trans-Atlantic financial disturbance. An array of sources tells a consistent tale. Banks in New York anticipated events in Europe, prepared for them by accumulating substantial reserves, and during the crisis, continued business as usual. New York's leading bankers deliberately and collectively decided on the business-as-usual policy in order to minimize the impact of the panic in the United States. |
| JEL: | E51 E52 E58 G21 G28 N12 N22 |
| Date: | 2016–07–06 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:16-07&r=cba |
| By: | Reis, Ricardo |
| Abstract: | Analysis of quantitative easing (QE) typically focus on the recent past studying the policy's effectiveness during a financial crisis when nominal interest rates are zero. This paper examines instead the usefulness of QE in a future fiscal crisis, modeled as a situation where the fiscal outlook is inconsistent with both stable inflation and no sovereign default. The crisis can lower welfare through two channels, the first via aggregate demand and nominal rigidities, and the second via contractions in credit and disruption in financial markets. Managing the size and composition of the central bank's balance sheet can interfere with each of these channels, stabilizing inflation and economic activity. The power of QE comes from interest-paying reserves being a special public asset, neither substitutable by currency nor by government debt. |
| Keywords: | new-style central banks; Unconventional Monetary Policy |
| JEL: | E44 E58 E63 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11381&r=cba |
| By: | Bar-Ilan, Avner (Department of Economics, University of Haifa); Gliksberg, Baruch (Department of Economics, University of Haifa) |
| Abstract: | This paper studies the scal-monetary response to a sharp increase in the level of the public debt. To that end, we employ a general equilibrium model with distortionary income tax, distortionary nancing, and endogenous capital accumulation. The model is calibrated to the US and EU economies. A main result is that in both economies the QE is superior, welfare-wise, to other policy prescriptions to the problem of explosive debt. A major di¤erence between the EU and the US is that a Taylor rule of tight monetary and scal policy could reduce the US public debt, but given the fundamental properties of the EU economy, this policy cannot achieve this goal in Europe. |
| Keywords: | Distorting Taxes; Fiscal Solvency; La¤er curve in a monetary economy; Liquidity ; Rate of self nancing of tax cuts; Quantitative Easing |
| JEL: | E44 E47 E58 E63 H30 H63 |
| URL: | http://d.repec.org/n?u=RePEc:haf:huedwp:wp201601&r=cba |
| By: | Miguel Faria-e-Castro (New York University); Luis Fonseca (London Business School); Matteo Crosignani (NYU Stern) |
| Abstract: | We analyze some of the potentially unintended consequences of the largest liquidity injection ever conducted by a central bank: the European Central Bank’s three-year Long-Term Refinancing Operations conducted in December 2011 and February 2012. Using an unique dataset on monthly security- and bank-level holdings of government bonds for Portugal, we analyze the impact of this unconventional monetary policy operation on the demand for government debt. We find that: (i) Portuguese banks significantly increased their holdings of domestic government bonds after the announcement of this policy; (ii) This increase in holdings was tilted towards shorter maturities, with banks rebalancing their sovereign debt portfolios towards shorter term bonds. We employ a theoretical framework to argue that domestic banks engaged in a “collateral trade†, which involved the purchase of high yield bonds with maturities shorter than the central bank borrowing in order to mitigate funding liquidity risk. Our model delivers general equilibrium implications that are consistent with the data: the yield curve for the Portuguese sovereign steepens after the announcement, and the timing and characteristics of government bond auctions are consistent with a strategic response by the debt management agency. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:43&r=cba |
| By: | Bennet Berger; Pia Hüttl; Silvia Merler |
| Abstract: | Please see the PDF version of the paper for footnotes, references, and appendices. Highlights The European Union’s Bank Recovery and Resolution Directive foresees a ‘minimum requirement for own funds and eligible liabilities’ (known as MREL) that banks need to comply with in order to ensure the effectiveness of the bail-in tool. The details of how MREL should be constructed in practice are under discussion. We look at alternative ways to compute MREL, showing how the choice of the benchmark metric (risk weighted assets, total assets or leverage exposure) can change the allocation of requirements across banks. We also review MREL in light of the global effort to ensure future resolvability of banks, highlighting some differences with, and inconsistencies in relation to, the Financial Stability Board’s total loss-absorption capacity (TLAC) measure. 1 Introduction The financial and euro-area crises showed how costly it can be for the public sector to take charge of banking sector problems. Between 2007 and 2013, European Union governments provided €836 billion to guarantee bank funding and €448 billion to recapitalise banks1. The Bank Recovery and Resolution Directive (BRRD) was introduced to establish a new framework for resolving banks with reduced involvement of taxpayers in bank rescues. The backbone of the new approach is the bail-in tool, which requires a greater share of the cost of recapitalisation or resolution to be shifted onto private creditors. For bail-in to be effective, the BRRD foresees a minimum requirement for eligible liabilities and own funds (MREL) that banks need to comply with. Effective resolution of banks is however a global priority, and the Financial Stability Board (FSB) set in 2011 a global standard for total loss absorption capacity (TLAC), applying to global systemically important banks (G-SIBs), which needs to be transposed into EU law. How can the design of MREL be made consistent with both TLAC and the requirements of the BRRD? The two concepts have significant conceptual and operational differences and there is a strong rationale for harmonisation, to avoid creating confusion and uncertainty. We briefly review the differences and comment specifically on the choice of the measure through which requirements are expressed - risk-weighted assets or total assets. 2 MREL and TLAC - the background Before embarking on the data analysis, it is useful to briefly review the regulatory background to MREL. Article 45 of the Bank Recovery and Resolution Directive (BRRD) requires that banks hold sufficient bail-in-able liabilities and meet at all times a minimum requirement for own funds and eligible liabilities (MREL). MREL is currently envisaged as a Pillar 2 measure2, ie not a minimum standard but one set individually for each bank. While the concept of MREL is defined in the BRRD, its operational definition is left to the European Banking Authority (EBA)3, which published Regulatory Technical Standards (RTS) on 3 July 2015. These set out an MREL measure that combines a loss-absorption amount and a recapitalisation amount (Figure 1). The first component needs to be sufficient to ensure that losses are absorbed. The EBA argues that the regulatory capital requirements reflect the judgement of the supervisor about the level of unexpected losses that an institution should be able to absorb, so as a baseline, losses equal to capital requirements should be absorbed. Combined buffer requirements foreseen in the Capital Requirements Directive (CRDIV) could be added as could any existing Pillar 2 requirements. The EBA RTS leave discretion to the resolution authority to change these requirements, subject to consultation with the supervisor. In particular, MREL can be adjusted based on the estimated contribution of the Deposit Guarantee Scheme, or to reflect specific features of the institutions, such as business model risk profile or governance. Figure 1 - MREL according to EBA RTS Source - Bruegel, based on EBA RTS. The second component is a recapitalisation amount, which should ensure the institution is able to re-enter the market. For those institutions that can be liquidated credibly and safely, the EBA argues that the recapitalisation amount should be zero. If this is not the case, then the recapitalisation amount should at least enable institutions to comply with the minimum criteria required to obtain the supervisor’s authorisation to operate, so an 8 percent total capital ratio. However, the resolution authority can increase this, if deemed necessary to “maintain sufficient market confidence after resolution” (EBA, 2016). For systemically important institutions – which are unlikely to be easily liquidated or resolved without the use of external funds – the draft RTS require the resolution authority to confirm, as part of its assessment of MREL, that the bank’s resolution plan is compatible with the ‘burden sharing’ clause of the BRRD (Article 44(5)), which prescribes a bail-in amount of 8 percent of total liabilities before any external funds can be accessed. |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polcon:15646&r=cba |
| By: | Mitsuru Katagiri (Bank of Japan) |
| Abstract: | Many central banks implement forward guidance according to an implicit or explicit policy rule in practice, and thus it is expected to influence the economy by changing expectations formation of private agents. In this paper, I investigate the effects of forward guidance particularly via expectations formation by formulating forward guidance as a monetary policy rule in a non-linear new Keynesian model. A quantitative analysis using the U.S. and Japanese data implies that a rule-based forward guidance significantly mitigates a decline in inflation and output growth in a crisis period via changing expectations formation. |
| Keywords: | Forward Guidance; Expectations Formation; Effective Lower Bound; Particle Filter |
| JEL: | E31 E32 E42 E52 |
| Date: | 2016–06–27 |
| URL: | http://d.repec.org/n?u=RePEc:boj:bojwps:wp16e06&r=cba |
| By: | Pietro Alessandrini (Università Politecnica delle Marche, MoFiR); Michele Fratianni (Indiana University, Kelly School of Business, Bloomington US, Univ. Plitecn ica Marche and MoFiR); Luca Papi (Università Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali, MoFiR); Alberto Zazzaro (Università Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali, MoFiR - Ancona, Italy, CSEF, Naples, Italy) |
| Abstract: | The re-regulation wave following the recent financial crisis has contributed to produce a complex system of new rules and controls. The paper argues that the burden of this new regulatory system is asymmetric and penalizing for small banks. This conclusion is corroborated from the preliminary results of a questionnaire on the impact of regulation on different types of Italian banks. Asymmetric effects on banking structure produce related asymmetries on firms and regional economies, in light of the fact that small firms and peripheral regions are highly dependent on bank credit and need strategic proximity of banking structures. When firms and regions are heterogeneous, the review of the literature on different countries and on different periods of time suggests the importance of differentiated banking models. Bank size, organization and governance should be evaluated in relative terms reflecting various heterogeneities of clients and regions. Consequently, a regulatory system should not favor one particular bank type but should aim at achieving a more symmetric distribution of the regulatory burden. |
| Keywords: | banking regulation, local banks, large banks, regions, asymmetries, heterogeneity |
| JEL: | G01 G18 G21 |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wmofir:125&r=cba |
| By: | Gareth W. Peters; Pavel V. Shevchenko; Bertrand Hassani; Ariane Chapelle |
| Abstract: | Recently, Basel Committee for Banking Supervision proposed to replace all approaches, including Advanced Measurement Approach (AMA), for operational risk capital with a simple formula referred to as the Standardised Measurement Approach (SMA). This paper discusses and studies the weaknesses and pitfalls of SMA such as instability, risk insensitivity, super-additivity and the implicit relationship between SMA capital model and systemic risk in the banking sector. We also discuss the issues with closely related operational risk Capital-at-Risk (OpCar) Basel Committee proposed model which is the precursor to the SMA. In conclusion, we advocate to maintain the AMA internal model framework and suggest as an alternative a number of standardization recommendations that could be considered to unify internal modelling of operational risk. The findings and views presented in this paper have been discussed with and supported by many OpRisk practitioners and academics in Australia, Europe, UK and USA, and recently at OpRisk Europe 2016 conference in London. |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1607.02319&r=cba |
| By: | Yuto Iwasaki (Bank of Japan); Sohei Kaihatsu (Bank of Japan) |
| Abstract: | This paper presents a new framework for measuring underlying inflation with multiple core indicators for Japan's consumer price index (CPI). Specifically, a combined core indicator is constructed by applying an econometric method based on dynamic model averaging as a weighted average of individual core indicators. The combined core indicator has time-varying combination weights reflecting changes in the predictive performance of each individual core indicator on a real time basis. Thus, the combined core indicator has the potential to adapt to changes in the nature and sources of price movements. Empirical evidence indicates that the combined core indicator firmly outperforms the individual core indicators over time. In addition, the combination weights for the exclusion-based indicators (e.g., the CPI excluding fresh food) tend to be high when aggregate shocks drive the overall inflation. In contrast, combination weights for the distribution-based indicators (e.g., trimmed mean) tend to be high when idiosyncratic shocks are dominant. |
| Keywords: | Consumer price; Core inflation measure; Dynamic model averaging |
| JEL: | C52 C53 E31 |
| Date: | 2016–06–29 |
| URL: | http://d.repec.org/n?u=RePEc:boj:bojwps:wp16e08&r=cba |
| By: | Gilbert COLLETAZ; Grégory LEVIEUGE; Alexandra POPESCU |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:leo:wpaper:2409&r=cba |