|
on Central Banking |
| By: | Murat Midiliç (Ghent University); Michael Frömmel (Ghent University) |
| Abstract: | This study considers international reserve management motivation of emerging market central banks in foreign exchange market interventions. Emerging market central banks use currency intervention as a policy tool against exchange rate movements and accumulate international reserves as an insurance against sudden-stops in capital flows. To account for both of these motivations, a model of infrequent interventions only with exchange rates is extended to include international reserves-to-gross domestic product (GDP) ratio at the daily frequency. Daily values of the ratio are forecast using the Mixed Data Sampling (MIDAS) model and exchange rate returns. The model is estimated by using the floating exchange rate regime period data of Turkey. Compared with the benchmark model, it is shown that the MIDAS model does a better job in the forecasting of the reserve-to-GDP ratio. In addition to that, there are breaks in the interventions policy in Turkey, and the extended intervention model performs better than the model only with exchange rates especially in predicting purchases of US Dollar. |
| Keywords: | currency intervention, international reserves, emerging markets, Turkey, mixed data sampling |
| JEL: | F31 E58 G15 |
| URL: | http://d.repec.org/n?u=RePEc:sek:iacpro:4106590&r=cba |
| By: | Alan Blindera; Michael Ehrmann; Jakob de Haan; David-Jan Jansen |
| Abstract: | We ask whether recent changes in monetary policy due to the financial crisis will be temporary or permanent. We present evidence from two surveys-one of central bank governors, the other of academic specialists. We find that central banks in crisis countries are more likely to have resorted to new policies, to have had discussions about mandates, and to have communicated more. But the thinking has changed more broadly-for instance, central banks in non-crisis countries also report having implemented macro-prudential measures. Overall, we expect central banks in the future to have broader mandates, use macro-prudential tools more widely, and communicate more actively than before the crisis. While there is no consensus yet about the usefulness of unconventional monetary policies, we expect most of them will remain in central banks' toolkits, as governors who gain experience with a particular tool are more likely to assess thattool positively. Finally, the relationship between central banks and their governments might well have changed, with central banks "crossing the line" nmore often than in the past. |
| Keywords: | monetary policy; central banks; surveys |
| JEL: | E52 E58 |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:525&r=cba |
| By: | Eufinger, Christian; Gill, Andrej |
| Abstract: | This paper proposes a new regulatory approach that implements capital requirements contingent on executive incentive schemes. We argue that excessive risk-taking in the financial sector originates from the shareholder moral hazard created by government guarantees rather than from corporate governance failures within banks. The idea behind the proposed regulatory approach is thus that the more the compensation structure decouples the interests of bank managers from those of shareholders by curbing risk-taking incentives, the higher the leverage the bank is permitted to take on. Consequently, the risk-shifting incentives caused by government guarantees and the risk-mitigating incentives created by the compensation structure offset each other such that the manager chooses the socially efficient investment policy. |
| Keywords: | Basel III,capital regulation,compensation,leverage,risk |
| JEL: | G21 G28 G30 G32 G38 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:9r&r=cba |
| By: | Saloua Nassima Chaouche (ENSSEA); Rachid Toumach (ENSSEA) |
| Abstract: | The Taylor rules represent a guideline for central bank while setting their monetary policy in the aim to ensure the macroeconomic stability. The estimated Taylor rule and McCallum rule can be considered as a benchmark explicit formula for the central bank to follow when making monetary policy decisions. The Taylor rules capture the essential of the monetary authority’s behavior, and determine the level of short term interest rates compatible with price stability, keeping the output at its potential level. The gap between the rule’s rate and the observed one is used as an indicator of the appropriatemonetary policy with respect to inflation targeting and output gap targeting. In this work, we tried to asses if the short term interest rates announced by the Algerian Central Bank, fit the different version of The Taylor rule. It is an attempt to assesses the operational performance of three version of the Taylor rules in Algeria over the period 1996–2011 using quarterly data, with a view to analytically informing the conduct of monetary policy. The different estimations showed that the Taylor rule can be somehow and in some version the appropriate predictor of interest rate behavior in Algeria. |
| Keywords: | Monetary policy, Taylor’s rule, Interest rate , Forward-looking , Smoothing Interest rate , Backward-looking |
| JEL: | A10 A00 |
| URL: | http://d.repec.org/n?u=RePEc:sek:iacpro:4106716&r=cba |
| By: | Altavilla, Carlo; Pagano, Marco; Simonelli, Saverio |
| Abstract: | Using novel monthly data for 226 euro-area banks from 2007 to 2015, we investigate the determinants of changes in banks' sovereign exposures and their effects during and after the crisis. First, public, bailed out and poorly capitalized banks responded to sovereign stress by purchasing domestic public debt more than other banks, with public banks' purchases growing especially in coincidence with the largest ECB liquidity injections. Second, bank exposures significantly amplified the transmission of risk from the sovereign and its impact on lending. This amplification of the impact on lending does not appear to arise from spurious correlation or reverse causality. |
| Keywords: | sovereign exposures,sovereign risk,bank lending,credit risk,euro,crisis |
| JEL: | E44 F3 G01 G21 H63 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:539&r=cba |
| By: | Dong-Yop Oh (Department of Information Systems, University of Texas Rio Grande Valley); Hyejin Lee (Department of Information Systems, University of Texas Rio Grande Valley); Karl David Boulware (Department of Economics, Wesleyan University) |
| Abstract: | We investigate the long-run pass through of the federal funds rate to the prime rate from February 1987 to February 2015. Unlike previous studies that rely on conventional cointegration tests, this study employs cointegration tests based on the “residual augmented least squares” (RALS). The RALS cointegration tests have been shown to gain power when using a linear model in the presence of non-normal errors. The results indicate a significant cointegrating relation between the federal funds rate and the prime rate with incomplete interest rate pass through. |
| Keywords: | ATT/WTO, Monetary policy, interest rate pass through, cointegration analysis, non-normal errors, RALS |
| JEL: | E52 E43 E58 C12 C22 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:wes:weswpa:2016-002&r=cba |
| By: | Rafi Melnick; Till Strohsal; |
| Abstract: | A Phillips Curve (PC) framework is utilized to study the challenging post-1985 disinflation process in Israel. The estimated PC is stable and has forecasting power. Based on endogenous structural break tests we find that actual and expected inflation are co-breaking. We argue that the step-like development of inflation is in line with shocks and monetary policy that changed inflationary expectations. The disinflation process was long, and a long-term commitment by both the Central Bank and the government was required. Credibility was achieved gradually and the transition from the last step of 10% to 2% inflation was accomplished by introducing an inflation targeting regime. |
| Keywords: | Phillips Curve, Expected Inflation, Opportunistic Disinflation, Multiple Breakpoint Tests, Inflation Targeting |
| JEL: | E31 E52 E58 C22 |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2016-039&r=cba |
| By: | Michael T. Belongia; Peter N. Ireland |
| Abstract: | A vector autoregression with time-varying parameters is used to characterize changes in Federal Reserve policy that occurred from 2000 through 2007 and describe how they affected the performance of the U.S. economy. Declining coefficients in the model’s estimated policy rule point to a shift in the Fed’s emphasis away from stabilizing inflation over this period. More importantly, however, the Fed held the federal funds rate persistently below the values prescribed by this rule. Under this more discretionary policy, inflation overshot its target and the funds rate followed a path reminiscent of the "stop-go" pattern that characterized Fed behavior prior to 1979. |
| JEL: | C32 E31 E32 E37 E52 E58 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22693&r=cba |
| By: | Jonathan Benchimol (BoI - Bank of Israel); André Fourçans (ESSEC - ESSEC Business School - Essec Business School - Economics Department - Essec Business School) |
| Abstract: | Since the beginning of the financial crisis, a lively debate has emerged regarding which monetary policy rule the Fed (and other central banks) should follow, if any. To clarify this debate, several questions must be answered. Which monetary policy rule best the historical data? Which monetary policy rule best minimizes economic uncertainty and the Feds loss function? Which rule is best in terms of household welfare? Among the different rules, are NGDP growth or level targeting rules a good option, and when? Do they perform better than Taylor-type rules? To answer these questions, we use Bayesian estimations to test the Smets and Wouters (2007) model under nine different monetary policy rules with US data from 1955 to 2015 and over three different sub-periods. We find that when considering only the central bank’s loss function, the estimates generally indicate the superiority of NGDP level targeting rules, whatever the period. However, if other criteria are considered, the central banks objectives are not consistently met by a single rule for all periods. |
| Keywords: | Monetary policy, NGDP targeting, Taylor rule, DSGE model |
| Date: | 2016–07–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01357870&r=cba |
| By: | Masazumi Hattori; Steven Kong; Frank Packer; Toshitaka Sekine |
| 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 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:585&r=cba |
| By: | Francesco Columba (Bank of Italy); Jaqian Chen (IMF) |
| Abstract: | We analyse the effects and the interactions of macroprudential and monetary policies with an estimated dynamic stochastic general equilibrium (DSGE) model tailored to Sweden. Households are constrained by a loan-to-value ratio and mortgages are amortized. Government grants mortgage interest payment deductions. Lending rates are affected by mortgage risk weights. We find that to curb the household debt-to-income ratio demand-side macroprudential measures are more effective and less costly in terms of foregone consumption than monetary policy. A tighter macroprudential stance is also welfare improving, by promoting lower consumption volatility in response to shock, especially when combining different instruments, whose sequence of implementation is key. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:913&r=cba |
| By: | Oguzhan Ozcelebi (Istanbul University); Metin Duyar (Nevsehir Hacı Bektas Veli University) |
| Abstract: | Central banks which are responsible for minting and monetary policy implementations are the institutions carry out sensitive policies for the healthy functioning of the economy. Policies implemented by central banks and its existing institutional structures cannot be dissociated from the political and social development of the country they live in, and the whole of economic policy. In recent years, with increasing pace of globalization, the mobility of international financial markets increased and this effect has extended the decisions of the central bank from national markets to international markets. In this study, we studied the possible impacts of changes in the share of gold in central banks’ reserves on gold prices proving empirical evidence from the USA, the Euro area, China and Russia. According to Causality and Forecast Error Variance Decomposition analysis deriving from VEC model, reserve polices of central banks of these countries has considerable effects on variations in gold price in the long-term. Empirical findings reveal the importance of the size of balance sheet of central banks, while it is also stressed that growth potential of economies and investment opportunities are crucial issues in terms storing reserves in terms of gold. |
| Keywords: | Dynamics of Gold Prices, Central Banks, the USA, the Euro area, China and Russia |
| JEL: | E44 E58 F30 |
| URL: | http://d.repec.org/n?u=RePEc:sek:iefpro:4206516&r=cba |
| By: | SK, Shanthi; Nangia, Vinay Kumar; Sircar, Sanjoy; Reddy, Kotapati Srinivasa |
| Abstract: | Purpose: The purpose of this special issue is to gain a deeper understanding of banking regulatory practices in emerging markets in the light of the financial crisis of 2007-08. The crisis necessitated countries to adopt macro-prudential policies in the current environment of globalized capital flows. The interconnectedness of financial institutions occurs not only across the world but also across a plethora of financial markets. Design/Methodology/Approach: The papers in this volume have a focused approach that addresses issues relating to the banking sector. The papers explore diverse issues such as the link between increased competition and the performance efficiency, application of macro prudential norms in credit growth and its relation thereof with the ownership pattern of banks, co-ordination between regulations and compensation in the event of bank failure and risk based regulation. All the papers are country specific and they take in India, Hong Kong and Nigeria.They will contribute to a better understanding of the various issues and will be of great use to academics for further research and for practitioners in new policy initiatives in the area of banking reform and regulation. |
| Keywords: | Emerging markets; Banking regulations; Financial markets laws; Global financial crisis; Policy development |
| JEL: | E5 E58 E6 G1 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:74289&r=cba |
| By: | Pao-Lin Tien (Bureau of Economic Analysis); Tara M. Sinclair (The George Washington University); Edward N. Gamber (Congressional Budget Office) |
| Abstract: | There is a large literature evaluating the forecasts of the Federal Reserve by testing their rationality and measuring the size of their forecast errors. There is also a substantial literature and debate on the impact of the Fed’s monetary policy on the economy. We know little, however about the impact of the Fed’s forecast errors on economic outcomes. This paper constructs a measure of a forecast error shock for the Federal Reserve based on the assumption that the Fed follows a forward-looking Taylor rule. Given the effort the Fed puts towards producing forecasts that do not have an endogenous error component, we treat the Fed’s forecast errors as a shock, analogous to a monetary policy shock. Our shock, however, is different in that it is completely unintended by the monetary authority rather than simply unanticipated by the public. We follow Romer and Romer (2004) and investigate the effect of the forecast error shock on output and price movements. Our results suggest that although the absolute magnitude of the forecast error shock is large, the impact of the shock on the macroeconomy is quite small. This finding is robust across a range of different specifications. The maximum impact suggests a decline of less than 0.3 percent of real GDP and less than 0.4 percent of GDP deflator in response to a 100 basis point contractionary forecast error shock. |
| Keywords: | Federal Reserve, Taylor rule, forecast evaluation, monetary policy shocks |
| JEL: | E32 E31 E52 E58 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:gwc:wpaper:2016-007&r=cba |
| By: | Emanuele Bacchiocchi (Department of Economics, Business and Quantitative Methods (DEMM), University of Milan); Efrem Castelnuovo (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne; Department of Economics, The University of Melbourne; and Department of Economics and Management, University of Padova); Luca Fanelli (Department of Statistical Sciences, School of Economics, Management and Statistics, University of Bologna) |
| Abstract: | We employ a non-recursive identification scheme to identify the effects of a monetary policy shock in a Structural Vector Autoregressive (SVARs) model for the U.S. post-WWII quarterly data. The identification of the shock is achieved via heteroskedasticity, and different on-impact macroeconomic responses are allowed for (but not imposed) in each volatility regime. We show that the impulse responses obtained with the suggested non-recursive identification scheme are quite similar to those conditional on a recursive VAR estimated with pre-1984 data. In contrast, recursive vs. non-recursive identification schemes return different short-run responses of output and investment during the Great Moderation. Robustness checks dealing with a different definition of investment, an alternative breakpoint, and federal funds futures rates as an indicator of the monetary policy stance are documented and discussed. |
| Keywords: | Structural break, recursive and non-recursive VARs, identification, monetary policy shocks, impulse responses |
| JEL: | C32 C50 E52 |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:iae:iaewps:wp2016n31&r=cba |
| By: | Charles W. Calomiris; Matthew S. Jaremski |
| Abstract: | Deposit insurance reduces liquidity risk but it also can increase insolvency risk by encouraging reckless behavior. A handful of U.S. states installed deposit insurance laws before the creation of the FDIC in 1933, and those laws only applied to some depository institutions within those states. These experiments present a unique testing ground for investigating the effect of deposit insurance. We show that deposit insurance increased risk by removing market discipline that had been constraining erstwhile uninsured banks. Taking advantages of the rising world agricultural prices during World War I, insured banks increased their insolvency risk, and competed aggressively for the deposits of uninsured banks operating nearby. When prices fell after the War, the insured systems collapsed and suffered especially high losses. |
| JEL: | G21 G28 N22 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22692&r=cba |
| By: | Pia Hüttl; Dirk Schoenmaker |
| Abstract: | During the global financial crisis and subsequent euro-debt crisis, the fiscal resources of some countries appeared to be insufficient to support their banking systems. These countries needed outside support to stabilise their banking systems and thereby their wider economies. This Policy Contribution assesses the potential fiscal costs of recapitalising large banks. Based on past financial crises, we estimate that the cost to recapitalise an individual bank amounts to 4.5 percent of its total assets. During a severe crisis, a country might have to recapitalise up to three of its large systemic banks. We assume that bail-in of private investors is not fully possible during a systemic crisis. Our empirical findings suggest that large countries, such as the United States, China and Japan, can still provide credible fiscal backstops to their large systemic banks. In the euro area, the potential fiscal costs are unevenly distributed and range from 4 to 12 percent of GDP. Differences in the strengths of the fiscal backstops in euro-area countries contribute to divergences in financing conditions across the banking union. To counter this fragmentation, we propose that the European Stability Mechanism (ESM) could be used as a fiscal backstop to recapitalise systemically important banks directly within the banking union, in the case of a severe systemic crisis. But this would be only a last resort, after other tools such as bail-in have been used to the maximum extent possible. The governance of the ESM should be reconsidered, to ensure swift and clear application in times of crisis. |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polcon:16765&r=cba |
| By: | Vladimir Asriyan; Luca Fornaro; Alberto Martin; Jaume Ventura |
| Abstract: | We propose a model of money, credit and bubbles, and use it to study the role of monetary policy in managing asset bubbles. In this model, bubbles pop up and burst, generating fluctuations in credit, investment and output. Two key insights emerge from the analysis. First, the growth rate of bubbles, which is driven by agents' expectations, can be set in real or in nominal terms. This gives rise to a novel channel of monetary policy, as changes in the in ation rate affect the real growth rate of bubbles and their effect on economic activity. Crucially, this channel does not rely on contract incompleteness or price rigidities. Second, there is a natural limit on monetary policy's ability to control bubbles: the zero-lower bound. When a bubble crashes, the economy may enter into a liquidity trap, a regime in which agents shift their portfolios away from bubbles - and the credit that they sustain - to money, reducing intermediation, investment and growth. We explore the implications of the model for the conduct of "conventional" and "unconventional" monetary policy, and we use the model to provide a broad interpretation of salient macroeconomic facts of the last two decades. |
| Keywords: | bubbles, monetary policy, liquidity traps, financial frictions. |
| JEL: | E32 E44 O40 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1533&r=cba |
| By: | Lenno Uusküla |
| Abstract: | An expansionary monetary policy shock increases the entry rate and the number of firms in the US. A pure sticky price model predicts that the number of firms in the economy should go down after a monetary expansion, but this prediction is at odds with the empirical findings. In marked contrast, the cost channel mechanism generates an increase in the number of firms that is consistent with the data. A key insight is that the greater price stickiness is, the stronger the cost channel needs to be to generate firm dynamics that are consistent with the data. |
| Keywords: | monetary transmission, cost channel, sticky prices, firm turnover |
| JEL: | E32 C32 |
| Date: | 2016–10–10 |
| URL: | http://d.repec.org/n?u=RePEc:eea:boewps:wp2016-7&r=cba |
| By: | Baptista, Rafa (Oxford Martin School, University of Oxford); Farmer, J. Doyne (Oxford Martin School, University of Oxford); Hinterschweiger, Marc (Bank of England); Low, Katie (Bank of England); Tang, Daniel (Oxford Martin School, University of Oxford); Uluc, Arzu (Bank of England) |
| Abstract: | This paper develops an agent-based model of the UK housing market to study the impact of macroprudential policies on key housing market indicators. This approach enables us to tackle the heterogeneity in this market by modelling the individual behaviour and interactions of first-time buyers, home owners, buy-to-let investors, and renters from the bottom up, and observe the resulting aggregate dynamics in the property and credit markets. The model is calibrated using a large selection of micro-data, mostly from household surveys and housing market data sources. We perform a series of comparative statics exercises to investigate the impact of the size of the rental/buy-to-let sector and different types of buy-to-let investors on housing booms and busts. The results suggest that an increase in the size of the buy-to-let sector may amplify house price cycles and increase house price volatility. Furthermore, in order to illustrate the effects of macroprudential policies on several housing market indicators, we implement a loan-to-income portfolio limit. We find that this policy attenuates the house price cycle. |
| Keywords: | Agent-based mode; housing market; macroprudential policy; buy-to-let sector |
| JEL: | D31 E58 R21 R31 |
| Date: | 2016–10–07 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0619&r=cba |
| By: | Issing, Otmar |
| Abstract: | "Institutional Overburdening" to a large extent was a consequence of the "Great Moderation". This term indicates that it was a period in which inflation had come down from rather high levels. Growth and employment were at least satisfying and variability of output had substantially declined. It was almost unavoidable that as a consequence expectations on future actions of central banks and their ability to control the economy reached an unprecedented peak which was hardly sustainable. Institutional overburdening has two dimensions. One is coming from exaggerated expectations on what central banks can achieve ("expectational overburdening"). The other dimension is "operational overburdening" i.e. overloading the central bank with more and more responsibilities and competences. |
| Keywords: | Central Banking,ECB,Monetary Policy |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewh:42&r=cba |
| By: | Brühl, Volker |
| Abstract: | The recent financial crisis has demonstrated that a failure of Systemically Important Financial Institutions (SIFIs) could seriously damage the stability of the financial system. A precise and consistent definition of a SIFI is pivotal to ensure efficient and effective regulation of the global financial sector. This paper proposes a threefold test logic that allows to classify Financial Institutions as systemically important across the various industry segments. |
| JEL: | G10 G20 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:538&r=cba |
| By: | Leonardo Gambacorta; Sudipto Karmakar |
| Abstract: | The global financial crisis has highlighted the limitations of risk-sensitive bank capital ratios. To tackle this problem, the Basel III regulatory framework has introduced a minimum leverage ratio, defined as a banks Tier 1 capital over an exposure measure, which is independent of risk assessment. Using a medium sized DSGE model that features a banking sector, financial frictions and various economic agents with differing degrees of creditworthiness, we seek to answer three questions: 1) How does the leverage ratio behave over the cycle compared with the risk-weighted asset ratio? 2) What are the costs and the benefits of introducing a leverage ratio, in terms of the levels and volatilities of some key macro variables of interest? 3) What can we learn about the interaction of the two regulatory ratios in the long run? The main answers are the following: 1) The leverage ratio acts as a backstop to the risk-sensitive capital requirement: it is a tight constraint during a boom and a soft constraint in a bust; 2) the net benefits of introducing the leverage ratio could be substantial; 3) the steady state value of the regulatory minima for the two ratios strongly depends on the riskiness and the composition of bank lending portfolios. |
| Keywords: | bank capital buffers, regulation, risk-weighted assets, leverage |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:586&r=cba |