nep-cba New Economics Papers
on Central Banking
Issue of 2016‒08‒14
six papers chosen by
Maria Semenova
Higher School of Economics

  1. PLS Finance and Monetary Policy: A New Measure Mooted By Hasan, Zubair
  2. Monetary Policy with 100 Percent Reserve Banking: An Exploration By Edward C. Prescott; Ryan Wessel
  3. A Term Structure of Interest Rates Model with Zero Lower Bound and the European Central Bank's Non-standard Monetary Policy Measures By Viktors Ajevskis
  4. QE in the future: the central bank’s balance sheet in a fiscal crisis By Ricardo Reis
  5. Is Optimal Capital-Control Policy Countercyclical In Open-Economy Models With Collateral Constraints? By Stephanie Schmitt-Grohé; Martín Uribe
  6. Regulatory Reforms and the Dollar Funding of Global Banks: Evidence from the Impact of Monetary Policy Divergence By Tomoyuki Iida; Takeshi Kimura; Nao Sudo

  1. By: Hasan, Zubair
    Abstract: Islam banishes interest. This raises two questions contextual to Central Banking. First, can Islamic banks create credit like the conventional? We shall argue that Islamic banks cannot avoid credit creation; an imperative for staying in the market where they operate in competition with their conventional rivals. Evidently, the interest rate policy would not be applicable to them as a control measure. This leads us to the second question: What could possibly replace the interest rate for Islamic banks? In reply, the paper suggests what it calls a leverage control rate (LCR) as an addition to Central Banks’ credit control arsenal. The proposed rate is derived from the sharing of profit ratio in Islamic banking. It is contended that the new measure has an edge over the old fashioned interest rate instrument which it can in fact replace with advantage. It can possibly be a common measure in a dual system.
    Keywords: Central Banking; Credit creation; leverage control rate. (LCR); Islamic banks; Profit sharing
    JEL: E3 E5
    Date: 2016–01
  2. By: Edward C. Prescott; Ryan Wessel
    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.
    JEL: E4 E5 E6
    Date: 2016–07
  3. By: Viktors Ajevskis (Bank of Latvia)
    Abstract: This paper proposes a ZLB/shadow rate term structure of interest rates model with both unobservable factors and those of non-standard monetary policy measures. The non-standard factors include the ECB's holdings of APP and LTROs as well as their weighted average maturities. The model is approximated by the Taylor series expansion and estimated by the extended Kalman filter, using the sample from July 2009 to September 2015. The results show that the 5-year OIS rate at the end of September 2015 was about 60 basis points lower than it would have been in the case of the absence of the non-standard monetary policy measures.
    Keywords: term structure of interest rates, lower bound, non-linear Kalman filter, non-standard monetary policy measures
    JEL: C24 C32 E43 E58 G12
    Date: 2016–08–03
  4. 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.
    JEL: E44 E58 E63
    Date: 2016–07
  5. By: Stephanie Schmitt-Grohé; Martín Uribe
    Abstract: This paper contributes to a literature that studies optimal capital control policy in open economy models with pecuniary externalities due to flow collateral constraints. It shows that the optimal policy calls for capital controls to be lowered during booms and to be increased during recessions. Moreover, in the run-up to a financial crisis optimal capital controls rise as the contraction sets in and reach their highest level at the peak of the crisis. These findings are at odds with the conventional view that capital controls should be tightened during expansions to curb capital inflows and relaxed during contractions to discourage capital flight.
    JEL: E44 F41
    Date: 2016–08
  6. By: Tomoyuki Iida (Bank of Japan); Takeshi Kimura (Bank of Japan); Nao Sudo (Bank of Japan)
    Abstract: Deviations from the covered interest rate parity (CIP), the premium paid to the U.S. dollar (USD) supplier in the foreign exchange swap market, have long attracted the attention of policy makers, since they often accompany a banking crisis. In this paper, we document the emergence of the new drivers of CIP deviations taking the place of banks f creditworthiness and assess their roles. We first provide theoretical evidence to show that monetary policy divergence between the Federal Reserve and other central banks widens CIP deviations, and that regulatory reforms such as stricter leverage ratios raise the sensitivity of CIP deviations to monetary policy divergence by increasing the marginal cost of global banks f USD funding. We then empirically examine whether the data accords with our theory, and find that monetary policy divergence has recently emerged as an important driver that boosts CIP deviation. We also show that regulatory reforms have brought about dual impacts on the global financial system. By increasing the sensitivity of CIP deviations to various shocks, the stricter financial regulations have limited banks f excessive gsearch for yield h activities resulting from monetary policy divergence, and have thereby contributed to financial stability. However, the impact of severely adverse shocks in the asset management sector is amplified by the stricter financial regulations and is transmitted to the FX swap market and beyond, inducing non-U.S. banks to further cut back on their USD-denominated lending.
    Keywords: FX swap market; Monetary policy divergence; Regulatory reform; Financial stability
    JEL: F39 G15 G18
    Date: 2016–08–05

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