nep-cba New Economics Papers
on Central Banking
Issue of 2016‒08‒28
sixteen papers chosen by
Maria Semenova
Higher School of Economics

  1. Political Foundations of the Lender of Last Resort: A Global Historical Narrative By Calomiris, Charles; Flandreau, Marc; Laeven, Luc
  2. Monetary Policy and Indeterminacy after the 2001 Slump By Firmin Doko Tchatoka; Nicolas Groshenny; Qazi Haque; Mark Weder
  3. Financial Stability and Optimal Interest-Rate Policy By Ajello, Andrea; Laubach, Thomas; Lopez-Salido, J. David; Nakata, Taisuke
  4. Impact of the asset purchase programme on euro area government bond yields using market news By De Santis, Roberto A.
  5. Have monetary data releases helped markets to predict the interest rate decisions of the European Central Bank? By Jung, Alexander
  6. Assessing the costs and benefits of capital-based macroprudential policy By Behn, Markus; Gross, Marco; Peltonen, Tuomas
  7. The Global Financial Cycle, Monetary Policies and Macroprudential Regulations in Small, Open Economies By Gregory Bauer; Gurnain Pasricha; Rodrigo Sekkel; Yaz Terajima
  8. The invisible hand of the government: “Moral suasion” during the European sovereign debt crisis By Ongena, Steven; Popov, Alexander; Van Horen, Neeltje
  9. The limits of model-based regulation By Behn, Markus; Haselmann, Rainer; Vig, Vikrant
  10. Two Models of FX Market Interventions: The Cases of Brazil and Mexico By Tobal Martín; Yslas Renato
  11. Monetary policy, the financial cycle and ultralow interest rates By Juselius, Mikael; Borio, Claudio; Disyatat, Piti; Drehmann, Mathias
  12. The Role of Capital Requirements and Credit Composition in the Transmission of Macroeconomic and Financial Shocks By Oscar Valencia; Daniel Osorio; Pablo Garay
  13. International Aspects of Central Banking : Diplomacy and Coordination By Kahn, Robert B.; Meade, Ellen E.
  14. The effects of a central bank's inflation forecasts on private sector forecasts: Recent evidence from Japan By Masazumi Hattori; Steven Kong; Frank Packer; Toshitaka Sekine
  15. From Chronic Inflation to Chronic Deflation: Focusing on Expectations and Liquidity Disarray Since WWII By Guillermo A. Calvo
  16. Is Inflation Persistence Different in Reality? By Nikolaos Antonakakis; Juncal Cunado; Luis A. Gil-Alana; Rangan Gupta

  1. By: Calomiris, Charles; Flandreau, Marc; Laeven, Luc
    Abstract: This paper offers a historical perspective on the evolution of central banks as lenders of last resort (LOLR). Countries differ in the statutory powers of the LOLR, which is the outcome of a political bargain. Collateralized LOLR lending as envisioned by Bagehot (1873) requires five key legal and institutional preconditions, all of which required political agreement. LOLR mechanisms evolved to include more than collateralized lending. LOLRs established prior to World War II, with few exceptions, followed policies that can be broadly characterized as implementing "Bagehot's Principles" : seeking to preserve systemic financial stability rather than preventing the failure of particular banks, and limiting the amount of risk absorbed by the LOLR as much as possible when providing financial assistance. After World War II, and especially after the 1970s, generous deposit insurance and ad hoc bank bailouts became the norm. The focus of bank safety net policy changed from targeting systemic stability to preventing depositor loss and the failure of banks. Statutory powers of central banks do not change much over time, or correlate with country characteristics, instead reflecting idiosyncratic political histories.
    Keywords: bank runs; central banks; economic history; Financial crises; lender of last resort
    Date: 2016–08
  2. By: Firmin Doko Tchatoka (School of Economics, University of Adelaide); Nicolas Groshenny (School of Economics, University of Adelaide); Qazi Haque (School of Economics, University of Adelaide); Mark Weder (School of Economics, University of Adelaide)
    Abstract: This paper estimates a New Keynesian model of the U.S. economy over the period following the 2001 slump, a period for which the adequacy of monetary policy is intensely debated. To relate to this debate, we consider alternative inflation series in the estimation. We find that only when measuring inflation with core PCE monetary policy appears to have been reasonable and sufficiently active to rule out indeterminacy. We then relax the assumption that inflation in the model is measured by a single indicator and re-formulate the artificial economy as a factor model where the theoryÂ’s concept of inflation is the common factor to the empirical inflation series. We find that CPT and PCE provide better indicators of the latent concept while core PCE is less informative. Finally, we allow for positive trend inflation and the emerging results complement our previous findings. Again, even with these extensions, the only instance in which we can confidently rule out indeterminacy is when we measure inflation with core PCE.
    Keywords: Indeterminacy, Taylor Rules, Trend Infl?ation, Great Deviation.
    JEL: E32 E52 E58
    Date: 2016–07
  3. By: Ajello, Andrea; Laubach, Thomas; Lopez-Salido, J. David; Nakata, Taisuke
    Abstract: We study optimal interest-rate policy in a New Keynesian model in which the economy can experience financial crises and the probability of a crisis depends on credit conditions. The optimal adjustment to interest rates in response to credit conditions is (very) small in the model calibrated to match the historical relationship between credit conditions, output, inflation, and likelihood of financial crises. Given the imprecise estimates of key parameters, we also study optimal policy under parameter uncertainty. We find that Bayesian and robust central banks will respond more aggressively to financial instability when the probability and severity of financial crises are uncertain.
    Keywords: Financial crises ; Financial stability and risk ; Leverage ; Monetary policy ; Optimal policy
    JEL: E43 E52 E58 G01
    Date: 2016–08
  4. By: De Santis, Roberto A.
    Abstract: Assessing the impact of the Asset Purchase Programme (APP) by the European Central Bank (ECB) on euro area sovereign yields is challenging, because the monetary policy announcement in January 2015 was already implicitly communicated to the market in the second half of 2014. Therefore, to identify the APP for the euro area, we rely upon Bloomberg news on euro area APP. The econometric results suggest that the impact of APP on euro area long-term sovereign yields is sizeable, albeit the programme was announced at a time of low fi?nancial distress. Most of the impact took place before the purchases took place with the vulnerable countries bene?fiting most. JEL Classification: E43, E52, E58, G14
    Keywords: APP, quantitative easing, sovereign yields
    Date: 2016–07
  5. By: Jung, Alexander
    Abstract: This paper examines whether monetary data releases by the European Central Bank (ECB) have provided markets with additional clues about the future course of its monetary policy. It conducts a novel econometric approach based on a combination of an Ordered Probit model explaining future policy rate changes (sample 2000 to 2014) and the Vuong test for model selection. Overall, our results suggest that information contained in press releases on monetary developments for the euro area has helped markets in forming their expectations on the next monetary policy decision. JEL Classification: C34, D78, E52, E58
    Keywords: communication, monetary analysis, predictability, Probit model, Vuong test
    Date: 2016–07
  6. By: Behn, Markus; Gross, Marco; Peltonen, Tuomas
    Abstract: We develop an integrated Early Warning Global Vector Autoregressive (EW-GVAR) model to quantify the costs and benefits of capital-based macroprudential policy measures. Our findings illustrate that capital-based measures are transmitted both via their impact on the banking system's resilience and via indirect macro-financial feedback effects. The feedback effects relate to dampened credit and asset price growth and, depending on how banks move to higher capital ratios, can account for up to a half of the overall effectiveness of capital- based measures. Moreover, we document significant cross-country spillover effects, especially for measures implemented in larger countries. Overall, our model helps to understand how and through which channels changes in capitalization affect bank lending and the wider economy and can inform policy makers on the optimal calibration and timing of capital-based macroprudential instruments. JEL Classification: G01, G21, G28
    Keywords: cost-benefit analysis, early-warning system, GVAR, macroprudential policy
    Date: 2016–07
  7. By: Gregory Bauer; Gurnain Pasricha; Rodrigo Sekkel; Yaz Terajima
    Abstract: This paper analyzes the implications of the global financial cycle for conventional and unconventional monetary policies and macroprudential policy in small, open economies such as Canada. The paper starts by summarizing recent work on financial cycles and their growing correlation across borders. The resulting global financial cycle may be followed by a financial crisis that is quite costly. The cycle causes time variation in global risk premia in fixed income, equity and foreign exchange markets. In turn, time-varying global risk premia affect the transmission mechanisms of both conventional and unconventional monetary policies in small, open economies. While there are large costs associated with financial crises, the paper summarizes new work showing that the central banks’ leaning against the effects of the global financial cycle would typically be too costly. The paper concludes with some suggestions for the formation of macroprudential policies that are designed to offset the financial imbalances that grow during the boom phase of the cycle.
    Keywords: International financial markets; Financial stability; Housing; Monetary policy framework
    JEL: E42 E43 E44 E52 F41
    Date: 2016
  8. By: Ongena, Steven; Popov, Alexander; Van Horen, Neeltje
    Abstract: Using proprietary data on banks’ monthly securities holdings, we find that during the European sovereign debt crisis, domestic banks in fiscally stressed countries were considerably more likely than foreign banks to increase their holdings of domestic sovereign bonds in months with relatively high domestic sovereign bond issuance. This effect is stronger for state?owned banks and for banks with low initial holdings of domestic sovereign bonds, and it is not fuelled by Central Bank liquidity provision. Our results point to a “moral suasion” mechanism, and cannot be explained by concurrent risk?shifting, carry?trading, regulatory compliance, or shocks to investment opportunities. JEL Classification: F34, G21, H63
    Keywords: sovereign debt
    Date: 2016–07
  9. By: Behn, Markus; Haselmann, Rainer; Vig, Vikrant
    Abstract: In this paper, we investigate how the introduction of sophisticated, model-based capital regulation affected the measurement of credit risk by financial institutions. Model-based regulation was meant to enhance the stability of the financial sector by making capital charges more sensitive to risk. Exploiting the introduction of the model-based approach in Germany and the richness of our loan-level data set, we show that (1) internal risk estimates employed for regulatory purposes systematically underpredict actual default rates by 0.5 to 1 percentage points; (2) both default rates and loss rates are higher for loans that were originated under the model-based approach, while corresponding risk-weights are significantly lower; and (3) interest rates are higher for loans originated under the model-based approach, suggesting that banks were aware of the higher risk associated with these loans and priced them accordingly. Counter to the stated objective of the reform, financial institutions have lower capital charges and at the same time experience higher loan losses. Further, we document that large banks benefited from the reform as they experienced a reduction in capital charges and consequently expanded their lending at the expense of smaller banks that did not introduce the model-based approach. Overall, our results highlight that if the challenges that accompanies complex regulation are too high simpler rules may increase the efficacy of financial regulation. JEL Classification: G01, G21, G28
    Keywords: Basel regulation, capital regulation, complexity of regulation, internal ratings
    Date: 2016–07
  10. By: Tobal Martín; Yslas Renato
    Abstract: This paper empirically compares the implications of two distinct models of FX intervention, within the context of Inflation Targeting Regimes. For this purpose, it applies the VAR methodology developed by Kim (2003) to the cases of Mexico and Brazil. Our results can be summarized in three points. First, FX interventions have had a short-lived effect on the exchange rate in both economies. Second, the Brazilian model of FX intervention entails higher inflationary costs and this result cannot be entirely explained by differences in the level of pass-through. Third, each model is associated with a different interaction between exchange rate and interest rate setting (conventional monetary policies).
    Keywords: Foreign exchange intervention; Exchange rate pass-through; Exchange rate regime; Monetary policy coordination
    JEL: F31 E31 E52
    Date: 2016–08
  11. By: Juselius, Mikael; Borio, Claudio; Disyatat, Piti; Drehmann, Mathias
    Abstract: Do the prevailing unusually and persistently low real interest rates reflect a decline in the natural rate of interest as commonly thought? We argue that this is only part of the story. The critical role of financial factors in influencing medium-term economic fluctuations must also be taken into account. Doing so for the United States yields estimates of the natural rate that are higher and, at least since 2000, decline by less. As a result, policy rates have been persistently and systematically below this measure. Moreover, we find that monetary policy, through the financial cycle, has a long-lasting impact on output and, by implication, on real interest rates. Therefore, a narrative that attributes the decline in real rates primarily to an exogenous fall in the natural rate is incomplete. The influence of monetary and financial factors should not be ignored. Exploiting these results, an illustrative counterfactual experiment suggests that a monetary policy rule that takes financial developments systematically into account during both good and bad times could help dampen the financial cycle, leading to higher output even in the long run.
    Keywords: natural interest rate, financial cycle, monetary policy, credit, business cycle
    JEL: E32 E40 E44 E50 E52
    Date: 2016–08–10
  12. By: Oscar Valencia (Banco de la República de Colombia); Daniel Osorio (Banco de la República de Colombia); Pablo Garay
    Abstract: This paper builds a general equilibrium model that incorporates banks, financial frictions, default and a capital requirements. Ex-ante heterogeneous households decide how much to save or borrow for the sake of consumption (consumer credit) or the provision of housing services(mortgages). These choices are subject to borrowing limits, which depend on the value of real estate assets (for mortgages) or labour income (for consumer loans). The model includes final goods producers who must borrow in order to finance working capital/labour requirements (business credit borrowing) and intermediate good producers subject to nominal rigidities. Saving and borrowing are intermediated by a bank facing different capital requirements for each credit category. Any shock that has an impact on bank capital (for instance, a default shock) directly affects the bank’s income, the cost of external finance and, eventually, interest rates on loans. Changes in interest rates have second-round effects on labour and consumption through the borrowing limits. Simulations of the model suggest that the business cycle properties of credit and credit quality for each credit category are consistent with what is observed in the data. Classification JEL: E5, G21, G28
    Keywords: DSGE Models; Financial Frictions; Macroprudential Policy
    Date: 2016–08
  13. By: Kahn, Robert B.; Meade, Ellen E.
    Abstract: In this paper, we discuss the evolution of central bank interactions since the early 1970s following the breakdown of the managed exchange-rate system that was negotiated at Bretton Woods. We review the most important forums or organizations through which central banks have engaged in diplomacy. We then discuss the mobilization of coordination through diplomacy using three examples over the past 30 years: the Plaza Accord in 1985 negotiated by the G-5; the response to the Asian financial crisis in 1997-98, led by the International Monetary Fund (IMF) with heavy participation from G-7 finance ministries and central banks; and the response to the global financial crisis that began in 2007. For each of these examples, we provide the economic circumstances at the time, discuss how the response was mobilized, and evaluate its success. Our main conclusion is that the relationship-building that is inherent in multilateral interaction has provided a springboard for coordination in times of stress or crisis. Moreover, crises matter in that they can be turning points in terms of the actions taken and the countries included in the dialogue; thus, the groupings themselves are to some extent endogenous to events. Finally, we use the lens of diplomacy and coordination to trace out the path for central bank diplomacy going forward.
    Keywords: Central bank coordination ; Global financial institutions ; International monetary system
    JEL: F33 E58 F55
    Date: 2016–07–30
  14. By: Masazumi Hattori (Hitotsubashi University); Steven Kong (Bank for International Settlements); Frank Packer (Bank for International Settlements); Toshitaka Sekine (Bank of Japan)
    Abstract: How central banks can best communicate to the market is an increasingly important topic in the central banking literature. With ever greater frequency, central banks communicate to the market through the forecasts of prices and output with the purposes of reducing uncertainty; at the same time, central banks generally rely on a publicly stated medium-term inflation target to help anchor expectations. This paper aims to document how much the release of the forecasts of one major central bank, the Bank of Japan (BOJ), has influenced private sector expectations of inflation, and whether the degree of influence depends to any degree on the adoption of an inflation target (IT). Consistent with earlier studies, we find the central bank's forecasts to be quite influential on private sector forecasts. In the case of next year forecasts, their impact continues into the IT regime. Thus, the difficulties of aiming at an inflation target from below do not necessarily diminish the influence of the central bank's inflation forecasts.
    Keywords: central bank communication; Bank of Japan; inflation forecast; inflation targeting
    JEL: E31 E52 E58
    Date: 2016–08–15
  15. By: Guillermo A. Calvo
    Abstract: The paper discusses policy relevant models, going from (1) chronic inflation in the 20th century after WWII, to (2) credit sudden stop episodes that got exacerbated in Developed Market economies after the 2008 Lehman crisis, and appear to be associated with chronic deflation. The discussion highlights the importance of expectations and liquidity, and warns about the risks of relegating liquidity to a secondary role, as has been the practice in mainstream macro models prior to the Great Recession.
    JEL: E31 E41 E42 E44
    Date: 2016–08
  16. By: Nikolaos Antonakakis (Webster University, Wien, Austria and University of Portsmouth, Portsmouth, United Kingdom); Juncal Cunado (University of Navarra, Pamplona, Spain); Luis A. Gil-Alana (University of Navarra, Pamplona, Spain); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria)
    Abstract: This study examines the inflation persistence using both online and official price indexes in Argentina, Brazil, China, Japan, Germany, South Africa, the UK and the US, using fractional integration technique. The main results suggest that the degree of persistence, estimated by the long-memory parameter, is smaller when using online price indexes (believed to be a more realistic measure of inflation), mainly in the cases of Argentina, Brazil, China and the UK. Monetary policy implications are discussed.
    Keywords: Official and online inflation indexes, fractional integration, persistence
    JEL: C22 E43 G12
    Date: 2016–08

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