|
on Central Banking |
| By: | Lindé, Jesper; Smets, Frank; Wouters, Rafael |
| Abstract: | In this paper we discuss a number of challenges for structural macroeconomic models in the light of the Great Recession and its aftermath. It shows that a benchmark DSGE model that shares many features with models currently used by central banks and large international institutions has difficulty explaining both the depth and the slow recovery of the Great Recession. In order to better account for these observations, the paper analyses three extensions of the benchmark model. First, we estimate the model allowing explicitly for the zero lower bound constraint on nominal interest rates. Second, we introduce time-variation in the volatility of the exogenous disturbances to account for the non-Gaussian nature of some of the shocks. Third and finally, we extend the model with a financial accelerator and allow for time-variation in the endogenous propagation of financial shocks. All three extensions require that we go beyond the linear Gaussian assumptions that are standard in most policy models. We conclude that these extensions go some way in accounting for features of the Great Recession and its aftermath, but they do not suffice to address some of the major policy challenges associated with the use of non-standard monetary policy and macroprudential policies. |
| Keywords: | and VAR models; DSGE; Financial Frictions; great recession; macroprudential policy; Monetary policy; Open economy.; Regime-Switching; zero lower bound |
| JEL: | E52 E58 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11405&r=cba |
| By: | Michael Hachula; Michele Piffer; Malte Rieth |
| Abstract: | We study the macroeconomic effects of unconventional monetary policy in the euro area using structural vector autoregressions, identified with an external instrument. The instrument is the common unexpected variation in euro area sovereign spreads for different maturities on policy announcement days. We first show that expansionary monetary surprises are effective at lowering public and private interest rates and increasing economic activity, consumer prices, and inflation expectations. We also find, however, that the shocks lead to a rise in primary public expenditures, a divergence of consumer prices within the union, and a widening of internal trade balances. |
| Keywords: | Central banks, structural VAR with external instruments, fiscal policy, monetary union |
| JEL: | E52 E58 E63 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1596&r=cba |
| By: | Ricardo Reis |
| 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. Also published as a CEPR discussion paper and an NBER working paper. |
| Keywords: | new-style central banks; unconventional monetary policy |
| JEL: | E44 E58 E63 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:67210&r=cba |
| By: | Benigno, Pierpaolo |
| Abstract: | Well-designed central banks can uniquely determine a stable inflation rate following either active Taylor's rules or interest-rate pegs. They should receive an initial transfer of capital, hold only risk-free assets, rebate their income to the treasury. This system prevents permanent liquidity traps and inflationary spirals without further need of treasury's support beyond the initial capitalization. Instead, if the central bank engages in purchases of risky securities, fiscal support is required to uniquely back the value of money. Absent treasury's support and with a risky composition of assets, inflationary spirals and deflationary traps can develop due to self-fulfilling expectations or credit events. |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11402&r=cba |
| By: | Svetlana Makarova |
| Abstract: | The main scope of the paper is to evaluate the hypothesis that the monetary policy of the European Central Bank leads to convergence in bank-induced effects in inflation forecast uncertainty for euro area countries. Inflation forecast uncertainty is measured by the root mean squared pseudo ex-post errors of inflation forecasts net of the ARCH-GARCH effects. A bootstrap-type test is proposed for testing convergence of growth of the cross-country uncertainty ratio, understood as the fraction of the estimated policy effects in inflation uncertainty. Results obtained from monthly data for 16 countries for the period January 1991 to November 2014 and with forecast horizons from 1 to 18 months show strong evidence of such convergence among the euro area countries to a common leve |
| Keywords: | inflation ex-post uncertainty, monetary policy, country effects, inflation forecasting |
| JEL: | F14 F43 O57 |
| Date: | 2016–07–19 |
| URL: | http://d.repec.org/n?u=RePEc:eea:boewps:wp2016-5&r=cba |
| By: | Mirna Dumièiæ (The Croatian National Bank, Croatia) |
| Abstract: | Notwithstanding the rapid growth in the popularity of and the increasing number of research papers on macroprudential policy, the general public still has a relatively unclear perception of this concept. The main purpose of this paper is to explain briefly the most important concepts related to macroprudential policy and describe its objectives. Emphasis is put on explaining the main stages of a macroprudential cycle, the relationship between macroprudential policy and other economic policies and the costs and benefits of macroprudential regulations. |
| Keywords: | macroprudential policy, financial stability, systemic risks |
| JEL: | E52 E58 E61 |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:hnb:survey:18&r=cba |
| By: | Annalisa Bucalossi (Bank of Italy); Antonio Scalia (Bank of Italy) |
| Abstract: | Using estimates of the Basel III leverage ratio, we show the rapid convergence of banks in the euro area towards levels well above the preliminary 3 per cent threshold. Contrary to predictions that the new requirement might interfere with the conduct of monetary policy and its transmission via the money market, throughout 2014 we find that leverage-constrained banks have decreased neither Eurosystem refinancing nor trading volume on repo markets. We measure the extent to which banks in the euro area have until now benefited from improvements in their regulatory capital, the low reporting frequency of the leverage ratio, and the favourable treatment of repo and derivatives trades with central counterparties in calculating the ratio, achieving an average of 5 per cent at end-June 2015. This level is likely to fall to around 4.5 per cent by March 2017, as a consequence of the Eurosystem Asset Purchase Programme, which causes an expansion of banks’ balance sheets and, therefore, an increase in the denominator of the leverage ratio. |
| Keywords: | Basel III, leverage ratio, central bank operations, European banks, repo market |
| JEL: | E58 G21 G28 G1 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_347_16&r=cba |
| By: | Kara, Gazi |
| Abstract: | Despite the extensive attention that the Basel capital adequacy standards have received internationally, significant variation exists in the implementation of these standards across countries. Furthermore, a significant number of countries increase or decrease the stringency of capital regulations over time. The paper investigates the empirical determinants of the variation in the data based on the theories of bank capital regulation. The results show that countries with high average returns to investment and a high ratio of government ownership of banks choose less stringent capital regulation standards. Capital regulations may also be less stringent in countries with more concentrated banking sectors. |
| Keywords: | Capital Requirements ; Basel Capital Accord ; Financial regulation ; International policy coordination |
| JEL: | G21 G28 F33 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2016-57&r=cba |
| By: | Anthony Diercks (Federal Reserve Board) |
| Abstract: | In this study I examine the welfare implications of monetary policy by constructing a novel production-based asset pricing New Keynesian model. I find that the Ramsey optimal monetary policy yields an inflation rate above 3.5% and inflation volatility close to 1.5%. The same model calibrated to a counterfactually low equity premium implies an optimal inflation rate close to zero and inflation volatility less than 10 basis points, consistent with much of the existing literature. Relatively higher optimal inflation is due to the greater welfare costs of recessions associated with matching the equity premium. The standard optimal policy that focuses on stabilizing inflation tends to amplify long-run risk. Furthermore, the interest rate rule that comes closest to matching the dynamics of the optimal Ramsey policy puts a sizable weight on capital growth along with the price of capital, as it emphasizes reducing long-run risk. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:207&r=cba |
| By: | Calomiris, Charles W. (Columbia University); Jaremski, Matthew (Colgate University); Park, Haelim (Office of Financial Research, Department of Treasury); Richardson, Gary (Federal Reserve Bank of Richmond) |
| Abstract: | Reducing systemic liquidity risk related to seasonal swings in loan demand was one reason for the founding of the Federal Reserve System. Existing evidence on the post-Federal Reserve increase in the seasonal volatility of aggregate lending and the decrease in seasonal interest rate swings suggests that it succeeded in that mission. Nevertheless, less than 8 percent of state-chartered banks joined the Federal Reserve in its first decade. Some have speculated that nonmembers could avoid higher costs of the Federal Reserve’s reserve requirements while still obtaining access indirectly to the Federal Reserve discount window through contacts with Federal Reserve members. We find that individual bank attributes related to the extent of banks’ ability to mitigate seasonal loan demand variation predict banks’ decisions to join the Federal Reserve. Consistent with the notion that banks could obtain indirect access to the discount window through interbank transfers, we find that a bank’s position within the interbank network (as a user or provider of liquidity) predicts the timing of its entry into the Federal Reserve System and the effect of Federal Reserve membership on its lending behavior. We also find that indirect access to the Federal Reserve was not as good as direct access. Federal Reserve member banks saw a greater increase in lending than nonmember banks. |
| JEL: | G21 G28 N22 |
| Date: | 2016–07–06 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:16-06&r=cba |
| By: | Carlson, Mark A. (Bank for International Settlements and Board of Governors of the Federal Reserve System); Wheelock, David C. (Federal Reserve Bank of St. Louis) |
| Abstract: | The 1960s and 1970s witnessed rapid growth in the markets for new money market instruments, such as negotiable certificates of deposit (CDs) and Eurodollar deposits, as banks and investors sought ways around various regulations affecting funding markets. In this paper, we investigate the impacts of the deregulation and integration of the money markets. We find that the pricing and volume of negotiable CDs and Eurodollars issued were influenced by the availability of other short-term safe assets, especially Treasury bills. Banks appear to have issued these money market instruments as substitutes for other types of funding. The integration of money markets and ability of banks to raise funds using a greater variety of substitutable instruments has implications for monetary policy. We find that, when deregulation reduced money market segmentation, larger open market operations were required to produce a given change in the federal funds rate, but that the pass through of changes in the funds rate to other market rates was also greater. |
| Keywords: | money markets; deregulation; market integration; monetary policy implementation; Eurodollars; Regulation Q |
| JEL: | E50 G18 N22 |
| Date: | 2016–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2016-015&r=cba |
| By: | Francis Breedon; Philip Turner |
| Abstract: | Most quantitative easing programmes primarily involve central banks acquiring government liabilities in return for central bank reserves. In all cases this process is undertaken by purchasing these liabilities in the secondary market rather than directly from the government. Yet the only practical difference between secondary market purchases and bilateral central bank/Treasury operations is the transactions costs involved in market operations. This paper quantifies the significant cost of this round-trip transaction - government issuance of liabilities and then central bank purchase of those liabilities in the secondary market. |
| Keywords: | Quantitative Easing, auctions, bond interest rates, central bank balance sheets, exit strategy |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:571&r=cba |
| By: | Josip Tica (Faculty of Economics and Business, University of Zagreb); Tomislav Globan (Faculty of Economics and Business, University of Zagreb); Vladimir Arčabić (Faculty of Economics and Business, University of Zagreb) |
| Abstract: | In this paper we use an innovative methodological approach to investigate how the classic Mundell-Flemming trilemma monetary policy mix is affected by global financial integration ("dilemma" hypothesis), accumulation of international reserves ("quadrilemma" hypothesis) and foreign exchange rate exposure of developing, emerging and transition countries. In order to compare competing policy mix hypotheses within the single methodological framework we use two threshold variables simultaneously in a dynamic panel threshold model. Thresholds values are endogenously estimated using a grid search. Exchange rate stability index is used as a primary threshold variable and international reserves, financial openness and foreign currency exposure are rotated as secondary threshold variables. Results imply that there are significant differences between fixed and flexible exchange rate regimes even at the high levels of financial integration and that transmission of international business cycle might be a consequence of an exchange rate regime choice (due to foreign currency exposure) of developing and emerging countries and not a consequence of inability to implement counter-cyclical monetary policy. |
| Keywords: | Mundell-Fleming, Dillemma vs. trilemma, Foreign currency exposure, Qaudrilemma, Panel threshold model |
| JEL: | F15 F31 F41 E42 |
| Date: | 2016–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:zag:wpaper:1603&r=cba |