nep-cba New Economics Papers
on Central Banking
Issue of 2016‒10‒09
25 papers chosen by
Maria Semenova
Higher School of Economics

  1. Monetary Policy and Macroprudential Policy: Rivals or Teammates? By Simona Malovana; Jan Frait
  3. Do Inflation Expectations Granger Cause Inflation? By Stockhammar, Pär; Österholm, Pär
  5. Unemployment Persistence, Inflation and Monetary Policy in A Dynamic Stochastic Model of the Phillips Curve By George Alogoskoufis
  6. Self-fulfilling deflations By Roberto Piazza
  7. Public finances and inflation: the case of Spain By Pablo Hernández de Cos; Samuel Hurtado; Francisco Martí; Javier J. Pérez
  8. Cross-border transmission of emergency liquidity By Kick, Thomas; Koetter, Michael; Storz, Manuela
  9. The Missed Opportunity and Challenge of Capital Regulation By Admati, Anat R.
  10. Optimal monetary policy regime switches By Foerster, Andrew T.; Choi, Jason
  11. The I Theory of Money By Brunnermeier, Markus K.; Sannikov, Yuliy
  12. Benchmarking macroprudential policies: An initial assessment By Domenico Lombardi; Pierre L. Siklos
  13. The Bank Capital Regulation (BCR) Model By Hyejin Cho
  14. Risk or Regulatory Capital? Bringing distributions back in the foreground By Dominique Guegan; Bertrand Hassani
  15. Global macroeconomic effects of exiting from unconventional monetary policy By Pietro Cova; Patrizio Pagano; Massimiliano Pisani
  16. Uncertainty about Federal Reserve Policy and Its Transmission to Emerging Economies: Evidence from Twitter By Tillman, Peter
  17. Who are the forerunners, economists or central bankers? By Ginafranco Tusset
  18. Inflation in the euro area and why it matters By Jakob de Haan; Marco Hoeberichts; Renske Maas; Federica Teppa
  19. Funding quantitative easing to target inflation By Ricardo Reis
  20. Is the European banking system more robust? An evaluation through the lens of the ECB's Comprehensive Assessment By Guillaume Arnould; Salim Dehmej
  21. Asset market response to monetary policy news from SNB press releases By Hüning, Hendrik
  22. Optimal Bailout of Systemic Banks By Charles Nolan; Plutarchos Sakellaris; John D. Tsoukalas
  23. Do bank bailouts reduce or increase systemic risk? the effects of TARP on financial system stability By Roman, Raluca; Berger, Allen N.; Sedunov, John
  24. A hybrid approach to assess systemic risk in financial networks By Daniele Petrone; Vito Latora
  25. The meaning of monetary stability By Pesenti, Amos

  1. By: Simona Malovana; Jan Frait
    Abstract: This paper sheds some light on situations in which monetary and macroprudential policies may interact (and potentially get into conflict) and contributes to the discussion about the coordination of those policies. Using data for the Czech Republic and five euro area countries we show that monetary tightening has a negative impact on the credit-to-GDP ratio and the non-risk-weighted bank capital ratio (i.e. a positive impact on bank leverage), while these effects have strengthened considerably since mid-2011. This supports the view that accommodative monetary policy contributes to a build-up of financial vulnerabilities, i.e. it boosts the credit cycle. On the other hand, the effect of the higher bank capital ratio is associated with some degree of uncertainty. For these and other reasons, coordination of the two policies is necessary to avoid an undesirable policy mix preventing effective achievement of the main objectives in the two policy areas.
    Keywords: Bayesian estimation, financial stability, macroprudential policy, monetary policy, time-varying panel VAR model
    JEL: E52 E58 E61 G12 G18
    Date: 2016–09
  2. By: Karolina Tura-Gawron (Gdansk University of Technology, Gdansk, Poland)
    Abstract: This article presents a comparative study of central paths’ projections of Consumer Price Index (CPI index), core inflation and monetary policy-relevant inflation measure (MPRI) in the central banks of Sweden, Norway and Czech Republic. The analysis refers to the possibility of using core and MPRI inflation projections as a tool (intermediate goal) for the implementation of Svensson’s concept of optimal inflation forecast targeting strategy (IFT) and determines what the chosen central banks are effectively targeting in practice. The study includes a reference of the central paths of the CPI, core inflation and MPRI inflation projections, based on the endogenous rate, to the inflation target. The analysis has allowed us to determine that the central paths of core inflation projections have converged with the inflation target as the time horizon became longer, but still remained medium-term. Such a result is not given for all of the CPI projections. The implications for the implementation of the Svensson’s concept of optimal IFT strategy are that a projection of core inflation may be a typical, operational tool which anchors inflation expectations; as such (as CPI projection), it should be published, treated and used as an intermediate goal of monetary policy.
    Keywords: core inflation, inflation projection, inflation targeting regime, inflation forecast
    JEL: E58 E52 E59
    Date: 2016–02
  3. By: Stockhammar, Pär (National Institute of Economic Research); Österholm, Pär (Örebro University, School of Business)
    Abstract: In this paper, we investigate whether survey measures of inflation expectations in Sweden Granger cause Swedish CPI-inflation. This is done by studying the precision of out-of-sample forecasts from Bayesian VAR models using a sample of quarterly data from 1996 to 2016. It is found that the inclusion of inflation expectations in the models tends to improve forecast precision. However, the improvement is typically small enough that it could be described as economically irrelevant. One exception can possibly be found in the expectations of businesses in the National Institute of Economic Research’s Economic Tendency Survey; when included in the models, these improve forecast precision in a meaningful way at short horizons. Taken together, it seems that the inflation expectations studied here do not provide a silver bullet for those who try to improve VAR-based forecasts of Swedish inflation. The largest benefits from using these survey expectations may instead perhaps be found among analysts and policy makers; they can after all provide relevant information concerning, for example, the credibility of the inflation target or challenges that the central bank might face when conducting monetary policy.
    Keywords: Bayesian VAR; Granger causality; Out-of-sample forecasts
    JEL: C32 F43
    Date: 2016–10–03
  4. By: Karolina Tura-Gawron (Gdansk University of Technology, Gdansk, Poland)
    Abstract: Modern monetary policy focuses on credibility and shaping consumers’ inflation expectations. According to the concept of inflation forecast targeting (IFT), inflation forecasts play a crucial role in the instrument rate decision-making process and may be a specific intermediate target. The aim of the study is to analyse the credibility of inflation forecasts published by the central banks of England, Sweden and Norway. The article presents the proposition of an inflation forecast credibility index. The inflation forecasts’ credibility index may be calculated for all types of inflation forecasts made by central banks, which implement an inflation targeting (IT) regime. It consists of three main elements: the accuracy of the forecasts, the similarity of the forecasts and the inflation forecast deviations from the inflation target. The credibility index has been calculated for the inflation forecasts made by central banks of England, Sweden and Norway. The research conducted shows that most of the inflation forecasts published in selected central banks were credible.
    Keywords: inflation forecasts targeting, inflation forecast, inflation forecast credibility index, inflation expectations
    JEL: E58 E52 E47
    Date: 2016–02
  5. 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
  6. By: Roberto Piazza (Banca d'Italia)
    Abstract: What types of monetary and fiscal policy rules produce self-fulfilling deflationary paths that are monotonic and empirically relevant? This paper presents simple theoretical conditions that guarantee the existence of these paths in a general equilibrium model with sticky prices. These sufficient conditions are weak enough to be satisfied by most monetary and fiscal policy rules. A quantification of the model which combines a real shock à la Hayashi and Prescott (2002) with a simultaneous sunspot that deanchors inflation expectations matches the main empirical features of the Japanese deflationary process during the “lost decade”. The results also highlight the key role of the assumption about the anchoring of inflation expectations for the size of fiscal multipliers and, in general, for any policy analysis.
    Keywords: deflation, liquidity trap, deanchoring, inflation target, sunspot
    JEL: E31 E40 E43
    Date: 2016–09
  7. By: Pablo Hernández de Cos (Banco de España); Samuel Hurtado (Banco de España); Francisco Martí (Banco de España); Javier J. Pérez (Banco de España)
    Abstract: We empirically explore the influence of inflation on fiscal variables in the short, medium and long run, for the case of the Spanish economy, in particular to draw policy lessons for the design of the ongoing process of rebalancing of fiscal accounts. We focus on this topic through the lenses of: (i) the government budget constraint, to assess the influence of inflation on changes in public debt; (ii) accounting decompositions of nominal revenue and expenditure items into their real and price parts; (iii) a large-scale macroeconometric model that contains a detailed fiscal policy block; and (iv) a long-run accounting model on pension expenditure
    Keywords: inflation, public finances, public debt, fiscal consolidation
    JEL: E31 E62 H6
    Date: 2016–09
  8. By: Kick, Thomas; Koetter, Michael; Storz, Manuela
    Abstract: We show that emergency liquidity provision by the Federal Reserve transmitted to non-U.S. banking markets. Based on manually collected holding company structures of international banks, we can identify banks in Germany with access to U.S. facilities via internal capital markets. Using proprietary interest rate data reported to the German central bank, we compare lending and borrowing rates of banks with and without such access. U.S. liquidity shocks cause a significant decrease in the short-term funding costs of German banks with access. Short-term loan rates charged to German corporates also decline, albeit with lags between two and four months. These spillover effects of U.S. monetary policy are confined to short-term rates.
    Keywords: monetary policy transmission,emergency liquidity,internal capital markets,interest rates
    JEL: E52 E58 F23 F38 G01 G21
    Date: 2016
  9. By: Admati, Anat R. (Stanford University)
    Abstract: Capital regulation is critical to address distortions and externalities from intense conflicts of interest in banking and from the failure of markets to counter incentives for recklessness. The approaches to capital regulation in Basel III and related proposals are based on flawed analyses of the relevant tradeoffs. The flaws in the regulations include dangerously low equity levels, complex and problematic system of risk weights that exacerbates systemic risk and adds distortions, and unnecessary reliance on poor equity substitutes. The underlying problem is a breakdown of governance and lack of accountability to the public throughout the system, including policymakers and economists.
    JEL: G21 G28 G32 G38 H81 K23
    Date: 2015–12
  10. By: Foerster, Andrew T. (Federal Reserve Bank of Kansas City); Choi, Jason (Federal Reserve Bank of Kansas City)
    Abstract: Given regime switches in the economy’s growth rate, optimal monetary policy rules may respond by switching policy parameters. These optimized parameters differ across regimes and from the optimal choice under fixed regimes, particularly in the inflation target and interest rate inertia. Optimal switching rules produce welfare gains relative to constant rules, with switches in the implicit real interest rate used for policy and the degree of interest rate inertia producing the largest gains. However, gains from switching rules decrease if the monetary authority trades-off the probability of low rates, or if it may misidentify the regime.
    Keywords: Growth rate; Optimal policy; Regime switching; Taylor rule; Inflation target
    JEL: C63 E31 E52
    Date: 2016–08–01
  11. By: Brunnermeier, Markus K. (Princeton University); Sannikov, Yuliy (Princeton University)
    Abstract: A theory of money needs a proper place for financial intermediaries. Intermediaries create inside money and their ability to take risks determines the money multiplier. In downturns, intermediaries shrink their lending activity and fire-sell assets. Moreover, they create less inside money, exactly at a time when the demand for money rises. The resulting Fisher disinflation hurts intermediaries and other borrowers. The initial shock is amplified, volatility spikes and risk premia rise. Monetary policy is redistributive. An accommodative monetary policy, focused on the assets held by constrained agents, recapitalizes balance sheet-impaired sectors in downturns and hence mitigates these destabilizing adverse feedback effects. However, monetary policy also creates moral hazard in the sense that it cannot provide insurance and control risk-taking separately. Hence, macroprudential policy that controls leverage attains higher welfare than monetary policy alone.
    Date: 2016–01
  12. By: Domenico Lombardi; Pierre L. Siklos
    Abstract: In recognition of the severe consequences of the recent international financial crisis, the topic of macroprudential policy has elicited considerable research effort. The present study constructs, for 46 economies around the globe, an index of the capacity to deploy macroprudential policies. Building on elements that have been the subject of recent research, we develop an index that aims to represent the essence of what constitutes a macroprudential regime. Specifically, the index quantifies: (1) how existing macroprudential frameworks are organized; and (2) how far a particular jurisdiction is from reaching the goals established by the Group of Twenty (G20) and the Financial Stability Board (FSB). The latter is a benchmark that has not been considered in the burgeoning literature that seeks to quantify the role of macroprudential policies.
    Keywords: Central banks, Financial Stability Board, index, macroprudential policy, policy framework
    JEL: E32 E42 E58 E02 F02
    Date: 2016–09
  13. By: Hyejin Cho (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The motivation of this article is to induce the bank capital management solution for banks and regulation bodies on commercial banks. The goal of the paper is intended to mitigate the risk of a banking area and also provide the right incentive for banks to support the real economy.
    Keywords: demand deposit,On-balance-sheet risks and off-balance-sheet risks,portfolio composition,minimum equity capital regulation
    Date: 2015–02
  14. By: Dominique Guegan (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Bertrand Hassani (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper discusses the regulatory requirement (Basel Committee, ECB-SSM and EBA) to measure financial institutions' major risks, for instance Market, Credit and Operational, regarding the choice of the risk measures, the choice of the distributions used to model them and the level of confidence. We highlight and illustrate the paradoxes and the issues observed implementing an approach over another and the inconsistencies between the methodologies suggested and the goal to achieve. This paper make some recommendations to the supervisor and proposes alternative procedures to measure the risks.
    Keywords: risk measures,sub-additivity,level of confidence,extreme value distributions,financial regulation
    Date: 2015–05
  15. By: Pietro Cova (Banca d'Italia); Patrizio Pagano (The World Bank); Massimiliano Pisani (Banca d'Italia)
    Abstract: This paper evaluates the international macroeconomic spillovers from the Eurosystem’s expanded Asset Purchase Programme (APP) under alternative assumptions as regards (i) the unwinding of the asset positions accumulated under the APP and (ii) the normalization of the US monetary policy stance. We simulate a dynamic general equilibrium model of the world economy, calibrated to the Euro area (EA), the US, China, Japan, and the ‘rest of the world’ (RW). Our results are as follows. First, APP expansionary spillovers are dampened if the Eurosystem brings forward the unwinding of its bond holdings because of the lower increase in EA aggregate demand and, therefore, EA imports. The RW is the region most affected because it has the greatest trade integration with the EA. Second, if the US monetary authority announces that it will hold the policy rate constant for a shorter period of time – which dampens the increase in US aggregate demand and, therefore, US imports from the EA – then US spillovers to the EA, while still expansionary, as in the case of a slower normalization of the monetary policy stance, are more modest.
    Keywords: DSGE models, open-economy macroeconomics, non-standard monetary policy, zero lower bound
    JEL: E43 E44 E52 E58
    Date: 2016–09
  16. By: Tillman, Peter (Asian Development Bank Institute)
    Abstract: It is well known that a tightening or easing of the United States’ monetary policy affects financial markets in emerging economies. This paper argues that uncertainty about future monetary policy is a separate transmission channel. We focus on the taper tantrum episode in 2013, a period with an elevated uncertainty about monetary policy, and use a data set that contains 90,000 Twitter messages (“tweets”) on Federal Reserve tapering. Based on this data set, we construct a new index about monetary policy uncertainty using a list of uncertainty keywords. An advantage of this index is that it reflects uncertainty about a specific policy decision. An estimated vector autoregression (VAR) shows that uncertainty shocks lead to a fall in asset prices and a depreciation of local currencies. We also discuss the policy implications of this uncertainty channel of monetary policy transmission.
    Keywords: federal Reserve policy; monetary policy; monetary policy transmission; policy uncertainty; taper tantrum; uncertainty; uncertainty shocks; emerging economies; twitter
    JEL: E32 E44 E52
    Date: 2016–10–06
  17. By: Ginafranco Tusset (University of Padova)
    Abstract: Is it possible to tell whether central banks’ choices are grounded on monetary theories or whether the theories derive from what central bankers have already experimented? This study delves into this issue by adopting an approach that is novel for at least two reasons. First, it involves a lexical comparison between the textual content used by central banks and in economic articles. Second, this comparison is drawn using quantitative tools. In short, the variables measured here are words and segments of text that were submitted to a statistical analysis to identify trends and behaviors in central bankers and economists that would otherwise not be immediately apparent.
    Keywords: Monetary forerunners, Central bankers’ speeches, Monetary approaches, Quantitative history of economic thought.
    JEL: B23 B59 E58
    Date: 2016–09
  18. By: Jakob de Haan; Marco Hoeberichts; Renske Maas; Federica Teppa
    Abstract: This study provides an overview of the academic and policy debates about inflation. It is written in a non-technical way. We aim to explain the role of inflation in monetary policy making for a broad audience. Why do central banks care about inflation? How is inflation measured? Why are inflation expectations so important for monetary policymakers? How are inflation expectations measured? What can central banks do to realize their objective of price stability? These issues are all addressed in the present study, with a focus on the euro area.
    Date: 2016–09
  19. By: Ricardo Reis
    Abstract: The study of quantitative easing (QE) policies has so far focussed on which assets the central bank should buy, and on how it can pursue its targets for real and financial stability. This paper emphasizes instead the funding of QE by central bank liabilities, with an eye on achieving the inflation target. Looking backwards, it shows evidence that post-QE1, the U.S. banking sector became saturated with reserves, so the central bank can control the size of the balance sheet independently of its interest-rate policy. Using options data for U.S. inflation, it shows that while QE1 had an e↵ect on expected inflation, further rounds of QE did not. Looking forward, it estimates the feasibility of keeping the liabilities of the central bank at a high level in terms of a solvency upper bound. Finally, it argues that the central bank’s interest-rate policy is not out of ammunition when it comes to targeting inflation, since there are radical proposals on the composition of its liabilities, their maturity and the way to remunerate them that could be employed.
    JEL: F3 G3
    Date: 2016–09
  20. By: Guillaume Arnould (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, LABEX Refi - ESCP Europe); Salim Dehmej (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, LABEX Refi - ESCP Europe)
    Abstract: The results of the Comprehensive Assessment (CA) conducted by the ECB seem to attest the soundness of the European banking system since only 8 of 130 assessed banks still need to raise €6 billion. However it would be a mistake to conclude that non failing banks are completely healthy. Using data provided by the ECB and the ECB and the EBA after the CA, we assess the capital shortfalls for each banks by considering the transitional arrangements, an implementation of Basel III sovereign debt requirements and an enhancement of the leverage ratio. In addition we show, that if the CA has been a very complex exercise, it is not the best lens through which the soundness of the eurozone banking system should be evaluated. The assumptions used for the Asset Quality Review (AQR) and the stress-tests lead to week scenarios and requirements that undermine the reliability of the results. Finally we show that the low profitability, the massive dividend distribution and the incurred fines, give rise to concern on the ability of eurozone banks to meet the incoming capital requirements.
    Keywords: Basel III,Financial stability,stress tests,banking,financial regulation
    Date: 2015–07
  21. By: Hüning, Hendrik
    Abstract: This paper analyses the effects of Swiss National Bank (SNB) communication on asset prices. It distinguishes between different monetary policy news contained in press releases following a monetary policy decision. Employing a latent variable approach and event-study methods, I find that medium- and long-term bond yields respond to changes in the communicated inflation and GDP forecasts as well as to the degree of pessimism expressed in press releases. Exchange rates mainly react to changes in the GDP forecast while stocks do not react to SNB communication on monetary policy announcement days. Additionally, short-term expectations about the future path of the policy rate are driven by the communicated inflation forecast. The results underline the role of qualitative news next to quantitative forecasts in influencing market expectations and asset prices.
    Keywords: monetary policy communication,asset markets
    JEL: E43 E52 G12
    Date: 2016
  22. By: Charles Nolan (University of Glasgow); Plutarchos Sakellaris (Athens University of Economics and Business); John D. Tsoukalas (University of Glasgow)
    Abstract: Following the recent global nancial crisis, there have been many significant changes to financial regulatory policies. These may have reduced the likelihood and future cost of the next crisis. However, they have not addressed the central dilemma in financial regulation which is that governments cannot commit not to bail out banks and other financial rms. We develop a simple model to reflect 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, Macroprudential policy
    JEL: E2 E3
    Date: 2016–09
  23. By: Roman, Raluca (Federal Reserve Bank of Kansas City); Berger, Allen N.; Sedunov, John
    Abstract: Theory suggests that bank bailouts may either reduce or increase systemic risk. This paper is the first to address this issue empirically, analyzing the U.S. Troubled Assets Relief Program (TARP). Difference-in-difference analysis suggests that TARP significantly reduced contributions to systemic risk, particularly for larger and safer banks located in better local economies. This occurred primarily through a capital cushion channel. {{p}} Results are robust to additional tests, including accounting for potential endogeneity and selection bias. Findings yield policy conclusions about the wisdom of bailouts, which banks might be the best targets for future bailouts, and the form these bailouts might take.
    Keywords: Bailouts; Banks; Financial crises; Systemic risk; Troubled Assets Relief Program (TARP)
    JEL: G18 G21 G28
    Date: 2016–10–04
  24. By: Daniele Petrone; Vito Latora
    Abstract: We propose a credit risk approach in which financial institutions, modelled as a portfolio of risky assets characterized by a probability of default and a correlation matrix, are the nodes of a network whose links are credit exposures that would be partially lost in case of neighbours' default. The systemic risk of the network is described in terms of the loss distribution over time obtained with a multi-period Montecarlo simulation process, during which the nodes can default, triggering a change in the probability of default in their neighbourhood as a contagion mechanism. In particular, we have considered the expected loss and introduced new measures of network stress called PDImpact and PDRank. They are expressed in monetary terms as the already known DebtRank and can be used to assess the importance of a node in the network. The model exhibits two regimes of 'weak' and 'strong' contagion, the latter characterized by the depletion of the loss distribution at intermediate losses in favour of fatter tails. Also, in systems with strong contagion, low average correlation between nodes corresponds to larger losses. This seems at odds with the diversification benefit obtained in standard credit risk models. Results suggest that the credit exposure network of the European global systemically important banks is in a weak contagion regime, but strong contagion could be approached in periods characterized by extreme volatility or in cases where the financial institutions are not adequately capitalized.
    Date: 2016–10
  25. By: Pesenti, Amos
    Abstract: The conventional approach to monetary stability is not so much different from that related to price stability. As such, it simply supposes that the aggregation of prices in the marketplace is necessary and sufficient for determining the presence of inflation (or deflation) in the economy. However, investigating monetary stability according to this microeconomic approach leads to confusion since the aggregation of price data, as suggested in this paper, does not explain the source of inflationary (or deflationary) pressure on overall prices. Consequently, price instability does not necessarily imply the existence of monetary instability, and vice versa. Hence, this paper, besides presenting a new macroeconomic approach to monetary stability, explains the true source of upward (or downward) pressure on overall prices and then provides policy recommendations to prevent monetary instability.
    Keywords: banking; consumer price index; deflation; inflation; monetary stability; money; payments; price stability
    JEL: E10 E20 E31 E42 E51 E52
    Date: 2016–10–03

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