nep-cba New Economics Papers
on Central Banking
Issue of 2016‒09‒18
28 papers chosen by
Maria Semenova
Higher School of Economics

  1. The Effect of Financial Regulation Mandate on Inflatin Bias: A Dynamic Panel Approach By Diana Lima; Ioannis Lazopoulos; Vasco Gabriel
  2. The Effectiveness of Central Bank Forward Guidance under Inflation and Price-Level Targeting By Cole, Stephen J.
  3. Re-vitalizing Money Demand in the Euro Area: Still Valid at the Zero Lower Bound By Christian Dreger; Dieter Gerdesmeier; Barbara Roffia
  4. Money, Asset Prices and the Liquidity Premium By Lee, Seungduck
  5. Unconventional monetary policy in a small open economy By Margaux MacDonald; Michal Popiel
  6. Currency Misalignments in emerging and developing countries: reassessing the role of Exchange Rate Regimes By Cécile Couharde; Carl Grekou
  7. A Welfare Analysis of Macroprudential Policy Rules in the Euro Area By Jean-Christophe Poutineau; Gauthier Vermandel
  8. The Impact of Alternative Transitions to Normalized Monetary Policy By Serguei Maliar; John Taylor; Lilia Maliar
  9. Is the ECB unconventional monetary policy effective? By Inês Pereira
  10. The Signaling Effect of Raising Inflation By Jean Barthélemy; Eric Mengus
  11. Monetary policy transmission in an open economy: new data and evidence from the United Kingdom By Cesa-Bianchi, Ambrogio; Thwaites, Gregory; Vicondoa, Alejandro
  12. Quantitative Easing and the Liquidity Channel of Monetary Policy By Lucas Herrenbrueck
  13. Unemployment Persistence, Inflation and Monetary Policy in A Dynamic Stochastic Model of the Phillips Curve By George Alogoskoufis
  14. The Coevolution of Money Markets and Monetary Policy, 1815–2008 By Clemens Jobst; Stefano Ugolini
  15. The Impact of Macroeconomic News on the Euro-Dollar Exchange Rate By Alberto Caruso
  16. Recent Trends in Cross-currency Basis By Fumihiko Arai; Yoshibumi Makabe; Yasunori Okawara; Teppei Nagano
  17. Regime Shifts in India's Monetary Policy Response Function. By Kumawat, Lokendra; Bhanumurthy, N. R.
  18. Financial Safety Nets By Julien Bengui; Javier Bianchi; Louphou Coulibaly
  19. Do Loan-to-Value Ratio Regulation Changes Affect Canadian Mortgage Credit? By Kronick, Jeremy
  20. Monetary Policy and Durable Goods By Miles Kimball; Christopher House; Christoph Boehm; Robert Barsky
  21. Optimal Bailout of Systemic Banks By Charles Nolan; Plutarchos Sakellaris; John D. Tsoukalas
  22. Spillovers of the ECB's non-standard monetary policy into CESEE economies By Alessio Ciarlone; Andrea Colabella
  23. Quantitative Easing in the Euro Area: The Dynamics of Risk Exposures and the Impact on Asset Prices. By R. S.J. Koijen; F. Koulischer; B. Nguyen; M. Yogo
  24. Sovereign Debt Portfolios, Bond Risks, and the Credibility of Monetary Policy By Wenxin Du; Carolin E. Pflueger; Jesse Schreger
  25. Deposit Insurance in General Equilibrium By Hans Gersbach; Volker Britz; Hans Haller
  26. On the optimal design of a Financial Stability Fund By à rpád à brahám; Eva Carceles-Poveda; Yan Liu; Ramon Marimon
  27. The theory of unconventional monetary policy By Farmer, Roger; Zabczyk, Pawel
  28. Optimal Monetary Policy in a Collateralized Economy By Gary Gorton; Ping He

  1. By: Diana Lima (Central Bank of Portugal); Ioannis Lazopoulos (University of Surrey); Vasco Gabriel (University of Surrey)
    Abstract: Central banks in charge of banking regulation are less aggressive in their inflation mandate since tight monetary policy conditions could have an adverse effect on the stability of the banking system. Due to the conflict between the two mandates, it has been argued that banking supervisory powers should be assigned to an independent authority to avoid ination bias and enhance social welfare. The rst part of the paper develops a theoretical model that assesses the interaction between different policy transmission channels, namely the credit channel and the banks' balance sheet channel. Focusing on a mandate where central banks are also responsible for banking supervision, cases where the price and financial stabilisation objectives are complementary or conflicting are identfied, highlighting the role of policy instruments and types of macroeconomic shocks on welfare. The second part of the paper empirically assesses whether central banks' combined mandates lead to an inflation bias problem using panel data for 25 industrialised countries from 1975 to 2012. The estimation results show that, once we control for relevant policy and institutional factors (such as the presence of inflation targeting and deposit insurance schemes), the separation of banking supervision and monetary policy does not have a significant effect on inflation outcomes.
    Date: 2016–05
  2. By: Cole, Stephen J. (Department of Economics Marquette University)
    Abstract: This paper examines the effectiveness of central bank forward guidance under inflation and price-level targeting monetary policies. The results show that the attenuation of the effects of forward guidance can be solved if a central bank switches from inflation targeting to price-level targeting. Output and inflation respond more favorably to forward guidance with price-level targeting than inflation targeting. A monetary policy rule that aggressively reacts to inflation and includes interest rate inertia narrows the performance gap between the two policy regimes. However, forward guidance with price-level targeting is still preferred to forward guidance with inflation targeting after performing multiple robustness checks.
    Keywords: Forward Guidance, In ation Targeting, Price-Level Targeting, Monetary Policy
    JEL: E30 E31 E50 E52 E58 E60
    Date: 2016–08
  3. By: Christian Dreger; Dieter Gerdesmeier; Barbara Roffia
    Abstract: The analysis of monetary developments have always been a cornerstone of the ECB’s monetaryanalysis and, thus, of its overall monetary policy strategy. In this respect, money demandmodels provide a framework for explaining monetary developments and assessing price stabilityover the medium term. It is a well-documented fact in the literature that, when interestrates are at the zero lower bound, the analysis of money stocks become even more importantfor monetary policy. Therefore, this paper re-investigates the stability properties of M3 demandin the euro area in the light of the recent economic crisis. A cointegration analysis isperformed over the sample period 1983 Q1 and 2015 Q1 and leads to a well-identified modelcomprising real money balances, income, the long term interest rate and the own rate of M3holdings. The specification appears to be robust against the Lucas critique of a policy dependentparameter regime, in the sense that no signs of breaks can be found when interest ratesreach the zero lower bound. Furthermore, deviations of M3 from its equilibrium level do notpoint to substantial inflation pressure at the end of the sample. Excess liquidity models turnout to outperform the autoregressive benchmark, as they deliver more accurate CPI inflationforecasts, especially at the longer horizons. The inclusion of unconventional monetary policymeasures does not contradict these findings.
    Keywords: Euro area money demand, inflation forecasts, unconventional monetary policy
    JEL: E41 E44 E52 G11 G15
    Date: 2016
  4. By: Lee, Seungduck
    Abstract: This paper examines the effect of monetary policy on the liquidity premium, i.e., the market value of the liquidity services that financial assets provide. To guide the empirical analysis, I set up a monetary search model in which bonds provide liquidity services in addition to money. The theory predicts that money supply and the nominal interest rate are positively correlated with the liquidity premium, but the latter is negatively correlated with the bond supply. The empirical analysis over the period from 1946 and 2008 confirms the theoretical findings. This indicates that liquid bonds are substantive substitutes for money and the opportunity cost of holding money plays a key role in asset price determination. The model can rationalize the existence of negative nominal yields, when the nominal interest rate is low and liquid bond supply decreases.
    Keywords: asset price, money search model, liquidity, liquidity premium, money supply
    JEL: E31 E41 E51 E52 G12
    Date: 2016–08
  5. By: Margaux MacDonald (Queen's University); Michal Popiel (Queen's University)
    Abstract: This paper investigates the effects of unconventional monetary policy in Canada. We use recently proposed methods to construct a shadow interest rate that captures monetary policy at the zero lower bound (ZLB) and estimate a small open economy Bayesian structural vector autoregressive (B-SVAR) model. Controlling for the US macroeconomic and monetary policy variables, we find that Canadian unconventional monetary policy increased Canadian output by 0.23% per month on average between April 2009 and June 2010. Our empirical framework also allows us to quantify the effects of US unconventional monetary policy, which raised US and Canadian output by 1.21% and 1.94% per month, respectively, on average over the 2008--2015 period.
    Keywords: small open economy, unconventional monetary policy, Bayesian structural VAR, zero lower bound, international monetary policy transmission
    JEL: E52 E58 F42
    Date: 2016–09
  6. By: Cécile Couharde; Carl Grekou
    Abstract: This paper re-examines empirically the relationship between exchange rate regimes and currency misalignments in emerging and developing countries. Using alternative de facto exchange rate regime classifications over the period 1980-2012, it finds strong evidence that performance of exchange rate regimes is conditional on the de facto classification. In particular, this paper shows that the effect of monetary arrangements on currency misalignments depends critically on the ability of these classification schemes to capture adequately dysfunctional monetary regimes.
    Keywords: Currency misalignments; Exchange rate regimes; Emerging and developing countries.
    JEL: C23 F31 F33
    Date: 2016
  7. By: Jean-Christophe Poutineau (CREM - Centre de Recherche en Economie et Management - UR1 - Université de Rennes 1 - Université de Caen Basse-Normandie - CNRS - Centre National de la Recherche Scientifique); Gauthier Vermandel (PSL - PSL Research University, LEDa - Laboratoire d'Economie de Dauphine - Université Paris-Dauphine)
    Abstract: In an estimated DSGE model of the European Monetary Union that accounts for financial differences between core and peripheral countries, we find that country-adjusted macroprudential measures lead to significant welfare gains with respect to a uniform macroprudential policy rule that reacts to union wide financial developments. However, peripheral countries are the winners from the implementation of macroprudential measures while core countries incur welfare losses, thus questioning the interest of adopting coordinated macroprudential measures with peripheral countries.
    Keywords: Bayesian Estimation,DSGE Two-Country Model,Macroprudential policy,Euro Area,Financial Accelerator
    Date: 2016–05–12
  8. By: Serguei Maliar (Santa Clara University); John Taylor (Stanford University); Lilia Maliar (Stanford University)
    Abstract: We investigate the effects of a regime shift in monetary policy on macroeconomic variables and welfare in the context of a model with staggered price setting and a Taylor rule. The studied economy is nonstationary because the parameters in the Taylor rule may change over time. We analyze how such time-dependent monetary policy can affect economy. In particular, the EFP allows us to study questions like "Should the Fed normalize policy now or later?"; "Should the Fed normalize policy gradually or all at once?"; and , "Should the Fed announce the regime shift publicly in advance?". We also assess the effects of anchoring inflation expectations of economic agents. Finally, we consider the effects of the zero lower bound (ZLB) on nominal interest rates, and we analyze and compare different transitions out of the ZLB
    Date: 2016
  9. By: Inês Pereira (Erasmus School of Economics)
    Abstract: After the financial crisis in 2008, many central banks began to use unconventional monetary policy in order to boost the effective transmission of monetary policy and to provide additional direct monetary stimulus to the economy. This study will make use of an event study to analyse the impact of those unconventional monetary policies implemented by the European Central Bank on nominal and real long-term interest rates. The long-term interest rates being considered are the 10-year government bond yield, the 5 and 10-year corporate bond yield (AAA and BBB) and the 5y5y swap forward rate for the Eurozone. The results show that unconventional monetary policy conducted by the ECB had a significant effect on real and nominal and long-term interest rates. This effect can be more persistent for a specific group of countries during some announcements, namely the 4th of September of 2014 announcement significantly lowered the 10-year government bond yield and BBB 5-year bond yield for Portugal and the remaining PIIGS.
    Keywords: Inflation expectations, Unconventional monetary policy, European Central Bank, Long-term interest rates, Event study
    JEL: G14 E42 E44
    Date: 2016–09
  10. By: Jean Barthélemy (Département d'économie); Eric Mengus (HEC Paris - Recherche - Hors Laboratoire)
    Abstract: This paper argues that central bankers should raise inflation when anticipating liquidity traps to signal their credibility to forward guidance policies. As stable inflation in normal times either stems from central banker's credibility, e.g. through reputation, or from his aversion to inflation, the private sector is unable to infer the central banker's type from observing stable inflation, jeopardizing the efficiency of forward guidance policy. We show that this signaling motive can justify level of inflation well above 2% but also that the low inflation volatility during the Great Moderation was insufficient to ensure fully efficient forward guidance when needed.
    Keywords: Forward guidance; Inflation; Signaling
    JEL: E31 E52 E65
    Date: 2016–08
  11. By: Cesa-Bianchi, Ambrogio (Bank of England); Thwaites, Gregory (Bank of England); Vicondoa, Alejandro (European University Institute)
    Abstract: This paper constructs a new series of monetary policy surprises for the United Kingdom and estimates their effects on macroeconomic and financial variables, employing a high-frequency identification procedure. First, using local projections methods, we find that monetary policy has persistent effects on real interest rates and breakeven inflation. Second, employing our series of surprises as an instrument in a SVAR, we show that monetary policy affects economic activity, prices, the exchange rate, exports and imports. Finally, we implement a test of overidentifying restrictions, which exploits the availability of the narrative series of monetary policy shocks computed by Cloyne and Huertgen (2014), and find no evidence that either set of shocks contains any endogenous response to macroeconomic variables.
    Keywords: Monetary policy transmission; external instrument; high-frequency identification; structural VAR; local projections
    JEL: E31 E32 E43 E44 E52 E58
    Date: 2016–09–02
  12. By: Lucas Herrenbrueck (Simon Fraser University)
    Abstract: How do central bank purchases of illiquid assets affect interest rates and the real economy? In order to answer this question, I construct a parsimonious and very flexible general equilibrium model of asset liquidity. In the model, households are heterogeneous in their asset portfolios and demand for liquidity, and asset trade is subject to frictions. I find that open market purchases of illiquid assets are fundamentally different from helicopter drops: asset purchases stimulate private demand for consumption goods at the expense of demand for assets and investment goods, while helicopter drops do the reverse. A temporary program of quantitative easing can therefore cause a "hangover" of elevated yields and depressed investment after it has ended. When assets are already scarce, further purchases can crowd out the private flow of funds and cause high real yields and disinflation, resembling a liquidity trap. In the long term, lowering the stock of government debt reduces the supply of liquidity but increases the capital-output ratio, with ambiguous consequences for output itself.
    Date: 2016
  13. By: George Alogoskoufis (Athens University of Economics and Business)
    Abstract: This paper puts forward an alternative “new Keynesian” dynamic stochastic general equilibrium model of aggregate fluctuations. The model is characterized by one period nominal wage contracts and endogenous persistence of deviations of unemployment from its natural rate. Aggregate fluctuations are analyzed under both a Taylor nominal interest rate rule and under the assumption of optimal discretionary monetary policy. Under both types of monetary policy, the persistence of unemployment results in persistent inflation as the central bank responds to deviations of unemployment from its natural rate. Econometric evidence from the United States since the 1890s cannot reject the main predictions of the model.
    Keywords: Aggregate Fluctuations, Unemployment Persistence, Inflation, Monetary Policy, Insiders Outsiders, Natural Rate
    JEL: E3 E4 E5
    Date: 2016–03
  14. By: Clemens Jobst (OeNB - The Oesterreichische Nationalbank - The Oesterreichische Nationalbank); Stefano Ugolini (LEREPS - Laboratoire d'Etude et de Recherche sur l'Economie, les Politiques et les Systèmes Sociaux - UT1 - Université Toulouse 1 Capitole - UT2 - Université Toulouse 2 - Institut d'Études Politiques [IEP] - Toulouse - École Nationale de Formation Agronomique - ENFA)
    Abstract: Money market structures shape monetary policy design, but the way central banks perform their operations also has an impact on the evolution of money markets. This is important, because microeconomic differences in the way the same macroeconomic policy is implemented may be non-neutral. In this paper, we take a panel approach in order to investigate both directions of causality. Thanks to three newly-collected datasets covering ten countries over two centuries, we ask (1) where, (2) how, and (3) with what results interaction between money markets and central banks has taken place. Our findings allow establishing a periodization singling out phases of convergence and divergence. They also suggest that exogenous factors – by changing both money market structures and monetary policy targets – may impact coevolution from both directions. This makes sensible theoretical treatment of the interaction between central bank policy and market structures a particularly complex endeavor.
    Keywords: Central banking,Money markets,Monetary policy implementation
    Date: 2016–06
  15. By: Alberto Caruso
    Abstract: This paper studies the effect of macroeconomic "news" (market now-cast errors related to the flow of data releases on macroeconomic fundamentals) on the daily USD/EUR exchange rate. I consider a large number of real-time macroeconomic announcements from both the US and the euro-zone, and the related market expectations as reported by Bloomberg. For the euro-zone I also study country level announcements for the four biggest economies (Germany, France, Italy, Spain). The results for the whole sample (1999-2012) show that both the "news" associated with euro-zone releases and those associated with US ones have a significant impact on the USD/EUR exchange rate. However, the effect of the euro-zone "news" has become larger since the 2008 crisis and it is now more sizeable than that of the US "news".
    Keywords: macroeconomic news; exchange rate; event studies; real-time data
    JEL: E44 E47 F31 G14
    Date: 2016–09
  16. By: Fumihiko Arai (Bank of Japan); Yoshibumi Makabe (Bank of Japan); Yasunori Okawara (Bank of Japan); Teppei Nagano (Bank of Japan)
    Abstract: The cross-currency basis, which is the basis spread added mainly to the U.S. dollar London Interbank Offered Rate (USD LIBOR) when the USD is funded via foreign exchange (FX) swaps using the Japanese yen or the euro as a funding currency, has been widening globally since the beginning of 2014. This development is driven by (1) increased demands for U.S. dollars resulting from a divergence in the monetary policy between the U.S. and other advanced countries, (2) global banks' reduced appetite for market-making and arbitrage due to regulatory reforms, and (3) the decrease in the supply of U.S. dollars from foreign reserve managers/sovereign wealth funds against the background of declines in commodity prices and emerging currency depreciations.
    Date: 2016–09–09
  17. By: Kumawat, Lokendra (Ramjas College, Delhi University); Bhanumurthy, N. R. (National Institute of Public Finance and Policy)
    Abstract: The objectives of monetary policy have always been a topic of intensive debate. This debate has resurfaced during the past few years. In India too monetary policy-making appears to have undergone significant change during the last two decades and has also been responding to changing macroeconomic environment. Against this backdrop an attempt has been made in this paper to model the monetary policy response function for India, for the period April 1996 to July 2015. Using 91-day Treasury bill rate as the policy rate, we find that the monetary policy has been responsive to inflation rate, output gap and exchange rate changes during this period. We find substantial time-varying behavior in the reaction function. The regime shift tests show that the transition is driven by inflation gap as well as exchange rate changes. Highly complex nature of dynamics of interest rate does not allow us to estimate many models, but the models estimated show that the monetary policy responds to inflation gap as well as exchange rate changes. Another important finding is that there is a high degree of inertia in the policy rates.
    Keywords: Monetary policy ; reaction function ; smooth transition regression ; India.
    JEL: E52 C22
    Date: 2016–09
  18. By: Julien Bengui; Javier Bianchi; Louphou Coulibaly
    Abstract: In this paper, we study the optimal design of financial safety nets under limited private credit. We ask when it is optimal to restrict ex ante the set of investors that can receive public liquidity support ex post. When the government can commit, the optimal safety net covers all investors. Introducing a wedge between identical investors is inefficient. Without commitment, an optimally designed financial safety net covers only a subset of investors. Compared to an economy where all investors are protected, this results in more liquid portfolios, better social insurance, and higher ex ante welfare. Our result can rationalize the prevalent limited coverage of safety nets, such as the lender of last resort facilities.
    JEL: E58 E61 G28
    Date: 2016–09
  19. By: Kronick, Jeremy
    Abstract: ABSTRACT: This paper investigates the relationship in the Canadian housing market between loan-to-value (“LTV”) ratios and residential mortgage credit over the 1981-2012 time period. More specifically, I look to determine whether LTV ratio regulation provides a mechanism with which to slow down the potentially overheated Canadian housing market. Due to the endogeneity of many macroeconomic variables, I use a structural vector autoregression (“SVAR”) to investigate this question. Results indicate that three of the four major LTV regulation changes that occurred during this timeframe either had insignificant effects on mortgage credit, or caused it to move contrary to expectations. Only the 2008 tightening of LTV was weakly significant. Therefore, regulation changes to LTV ratios are unlikely to be successful in slowing down the overheated housing market in Canada, which may force central bankers to use broader monetary policy or other forms of macroprudential regulation.
    Keywords: Mortgage credit, macroprudential regulation, loan-to-value, monetary policy, Canada
    JEL: E52 G21 G28
    Date: 2015–04–30
  20. By: Miles Kimball (University of Michigan); Christopher House (University of Michigan); Christoph Boehm (University of Michigan); Robert Barsky (Department of Economics)
    Abstract: We analyze monetary policy in a New Keynesian model with durable and non-durable goods, each with a separate degree of price rigidity. Durability has profound implications for the business cycle properties of the model and its response to interest rate interventions. Since utility depends on the service flow from the stock of durables, the flow demand for new durables is inherently sensitive to temporary changes in the relevant real interest rate. For a sufficiently long-lived “ideal†durable, we obtain an intriguing variant of the well-known “divine coincidence —in this case, the output gap depends only on inflation in the durable goods sector. We use numerical methods to verify the robustness of this analytical result for a broader class of model parameterizations. We then analyze the optimal Taylor rule for this economy. If the monetary authority places a high weight on stabilizing aggregate inflation then it is optimal to respond to sectoral inflation in direct proportion to the sectoral shares of economic activity. However, if the monetary authority wants to stabilize the aggregate output gap, it puts disproportionate weight on inflation in durable goods prices.
    Date: 2016
  21. By: Charles Nolan; Plutarchos Sakellaris; John D. Tsoukalas
    Abstract: Following the recent global nancial crisis, there have been many sig- ni cant changes to nancial regulatory policies. These may have re- duced the likelihood and future cost of the next crisis. However, they have not addressed the central dilemma in nancial regulation which is that governments cannot commit not to bail out banks and other - nancial rms. We develop a simple model to re ect this dilemma, and argue that some form of penalty structure imposed on key decision- makers post-bailout is necessary to address it.
    Keywords: Financial Crisis, Bank bail-outs, Systemic risk, Macropru- dential policy
    JEL: E2 E3
    Date: 2016–06
  22. By: Alessio Ciarlone (Banca d'Italia); Andrea Colabella (Banca d'Italia)
    Abstract: In this paper we provide evidence that the effects of the ECB’s asset purchase programmes spill over into CESEE countries, contributing to easing their financial conditions both in the short and in the long term through different transmission channels. In the short term, a number of variables in CESEE financial markets appear to respond to news related to the ECB’s non-standard policies by moving in the expected direction. Over a longer-term horizon, we found that cross-border portfolio and banking capital flows towards CESEE economies have been ffected by both the announcement and the actual implementation of the ECB’s asset purchase programmes, pointing to the existence of a portfolio rebalancing and a banking liquidity channel.
    Keywords: unconventional monetary policy, ECB, Central and Eastern Europe, international spillovers, event study
    JEL: C32 C33 E52 E58 F32 F36
    Date: 2016–09
  23. By: R. S.J. Koijen; F. Koulischer; B. Nguyen; M. Yogo
    Abstract: We use new data on security-level portfolio holdings of institutional investors and households in the euro area to understand the impact of the ongoing asset purchase programme of the European Central Bank (ECB) on the dynamics of risk exposures and on asset prices. We develop a tractable measurement framework to quantify the dynamics of euro-area duration, sovereign and corporate credit, and equity risk exposures as the programme evolves. We propose an instrumental-variables estimator to identify the impact of central bank purchases on sovereign bonds on sovereign bond yields. Our results suggest that the foreign sector sells most in response to the programme, followed by banks and mutual funds, while the purchases of insurance companies and pension funds are positively related to purchases by the ECB.
    Keywords: Quantitative Easing, Flow of Risk, Portfolio Rebalancing, Risk Concentration.
    JEL: E52 E58 G2 G15
    Date: 2016
  24. By: Wenxin Du; Carolin E. Pflueger; Jesse Schreger
    Abstract: Nominal debt provides consumption-smoothing benefits if it can be inflated away during recessions. However, we document empirically that countries with more countercyclical inflation, where nominal debt provides better consumption-smoothing, issue more foreign-currency debt. We propose that monetary policy credibility explains the currency composition of sovereign debt and nominal bond risks in the presence of risk-averse investors. In our model, low credibility governments inflate during recessions, generating excessively countercyclical inflation in addition to the standard inflationary bias. With countercyclical inflation, investors require risk premia on nominal debt, making nominal debt issuance costly for low credibility governments. We provide empirical support for this mechanism, showing that countries with higher nominal bond-stock betas have significantly larger nominal bond risk premia and borrow less in local currency.
    JEL: E4 F3 G12 G15
    Date: 2016–09
  25. By: Hans Gersbach (ETH Zurich, Switzerland); Volker Britz (ETH Zurich, Switzerland); Hans Haller (Virginia Polytechnic Institute)
    Abstract: We study the consequences and optimal design of bank deposit insurance in a general equilibrium model. The model involves two production sectors. One sector is financed by issuing bonds to risk-averse households. Firms in the other sector are monitored and financed by banks. Households fund banks through deposits and equity. Deposits are explicitly insured by a de- posit insurance fund. Any remaining shortfall is implicitly guaranteed by the government. The deposit insurance fund charges banks a premium per unit of deposits whereas the government finances any necessary bail-outs by lump-sum taxation of households. When the deposit insurance premium is actuarially fair or higher than actuarially fair, two types of equilibria emerge: One type of equilibria supports the socially optimal (Arrow-Debreu) allo- cation, and the other type does not. In the latter case, bank lending is too large relative to equity and the probability that the banking system collapses is positive. Next, we show that a judicious combination of deposit insurance and reinsurance eliminates all non-optimal equilibrium allocations.
    Keywords: Financial intermediation, deposit insurance, capital structure, general equilibrium, reinsurance
    JEL: D53 E44 G2
    Date: 2016–09
  26. By: à rpád à brahám; Eva Carceles-Poveda; Yan Liu; Ramon Marimon
    Date: 2016
  27. By: Farmer, Roger (UCLA, Department of Economics); Zabczyk, Pawel (Bank of England)
    Abstract: This paper is about the effectiveness of qualitative easing, a form of unconventional monetary policy that changes the risk composition of the central bank balance sheet with the goal of stabilizing economic activity. We construct a general equilibrium model where agents have rational expectations and there is a complete set of financial securities, but where some agents are unable to participate in financial markets. We show that a change in the risk composition of the central bank’s balance sheet will change equilibrium asset prices and we prove that, in our model, a policy in which the central bank stabilizes non-fundamental fluctuations in the stock market is Pareto improving and self-financing.
    Keywords: Unconventional monetary policy; qualitative easing; central bank balance sheet; portfolio balance effects
    JEL: E02 G11 G21
    Date: 2016–09–02
  28. By: Gary Gorton; Ping He
    Abstract: In the last forty or so years the U.S. financial system has morphed from a mostly insured retail deposit-based system into a system with significant amounts of wholesale short-term debt that relies on collateral, and in particular Treasuries, which have a convenience yield. In the new economy the quality of collateral matters: when Treasuries are scarce, the private sector produces (imperfect) substitutes, mortgage-backed and asset-backed securities (MBS). When the ratio of MBS to Treasuries is high, a financial crisis is more likely. The central bank’s open market operations affect the quality of collateral because the bank exchanges cash for Treasuries (one kind of money for another). We analyze optimal central bank policy in this context as a dynamic game between the central bank and private agents. In equilibrium, the central bank sometimes optimally triggers recessions to reduce systemic fragility.
    JEL: E02 E42 E44 E5 E52
    Date: 2016–09

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