nep-cba New Economics Papers
on Central Banking
Issue of 2016‒10‒23
fifteen papers chosen by
Maria Semenova
Higher School of Economics

  1. Integrating stress tests within the Basel III capital framework: a macroprudentially coherent approach By Pierluigi Bologna; Anatoli Segura
  2. Interdependencies between Leverage and Capital Ratios in the Central and Eastern European Banks By Janda, Karel; Kravtsov, Oleg
  3. Money, Asset Prices and the Liquidity Premium By Lee, Seungduck
  4. Central Bank Sentiment and Policy Expectations By Paul Hubert; Fabien Labondance
  5. Necessity as the Mother of Invention: Monetary Policy after the Crisis By Alan S. Blinder; Michael Ehrmann; Jakob de Haan; David-Jan Jansen
  6. Liquidity Trap and Stability of Taylor Rules By Antoine Le Riche; Francesco Magris; Antoine Parent
  7. Observing and shaping the market: the dilemma of central banks By Romain Baeriswyl; Camille Cornand; Bruno Ziliotto
  8. Multinational banks: Supranational resolution regimes and the importance of capital regulation By Maier, Ulf
  9. Risk-Based Capital Requirements for Banks and International Trade By Michalski, Tomasz; Örs, Evren; Pakel, Banu Demir
  10. Leverage and Risk Weighted Capital Requirements By Gambacorta, Leonardo; Karmakar, Sudipto
  11. Achieving Price Stability by Manipulating the Central Bank's Payment on Reserves By Robert E. Hall; Ricardo Reis
  12. Government Support of Banks and Bank Lending By William Bassett; Selva Demiralp; Nathan Lloyd
  13. Inflation and Broadband Revisited. Evidence from an OECD Panel By Klaus S. Friesenbichler
  14. Relationship Between Inflation and Economic Activity and Its Variation Over Time in Latvia By Andrejs Bessonovs; Olegs Tkacevs
  15. The role of central banks in supporting economic growth and creation of productive employment : the case of Pakistan By Sayeed, Asad.; Abbasi, Zubair Faisal.

  1. By: Pierluigi Bologna (Bank of Italy); Anatoli Segura (Bank of Italy)
    Abstract: In the post-crisis era banks’ capital adequacy is established by the Basel III capital standards and, in many jurisdictions, also by supervisory stress tests. In this paper we first describe the ways in which supervisory stress tests can supplement the risk-based capital framework of Basel III and how this could be codified with a stress test buffer. We then argue that in order to ensure coherence with the macroprudential objectives of Basel III, the severity of supervisory stress tests should be procyclical. In addition, to increase the transparency and predictability of the overall capital framework, severity choices should follow a constrained discretion approach based on a simple rule. Finally, we analyze supervisory stress testing practices across some jurisdictions and find that while the United States and the UK frameworks are in line with some of the elements of our proposal, including most notably the need for procyclical severity, this is not the case in the euro area.
    Keywords: stress test, capital regulation, macroprudential policy
    JEL: G21 G28
    Date: 2016–10
  2. By: Janda, Karel; Kravtsov, Oleg
    Abstract: In this paper we discuss the implications of the Basel III requirements on the leverage ratio for the banking sector in the Central and Eastern Europe (CEE) and particularly in the Czech Republic. In the empirical study, we applied a data sample of 198 major banks operating in seven countries across the CEE region over the period 2007-2014. The data of the Czech banking sector confirms stronger capital ratios and an overall solid leverage level with only few historical observations being lower than the regulatory guidelines. By analyzing the components of ratios, we conclude that the Czech banks during the last seven years are focusing more on the optimization of risk weighted assets and structuring portfolios with lower risks. We propose an empirical model that allows to test how the leverage ratios and its variables respond to the changes in the cycle. Our analysis across financial institutions in the CEE region shows that the leverage in normal times is strongly related to capital ratio. The statistic evidences on the risk profile and strategy as measured by risk proxy in the model are pointing out on incentives of the banks to manage actively their balance sheet and reduce the riskiness of their portfolios in adverse economic conditions.
    Keywords: Leverage ratio, capital ratio, Basel III, Czech Republic, CEE
    JEL: G21 G32
    Date: 2016–10–13
  3. 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
  4. By: Paul Hubert (Observatoire français des conjonctures économiques); Fabien Labondance (Observatoire français des conjonctures économiques)
    Abstract: We explore empirically the theoretical prediction that waves of optimism or pessimism may have aggregate effects, in the context of monetary policy. We investigate whether the sentiment conveyed by ECB and FOMC policymakers in their statements affect the term structure of private short-term interest rate expectations. First, we quantify central bank tone using a computational linguistics approach. Second, we identify sentiment as exogenous shocks to these quantitative measures using an augmented narrative approach following the information friction literature. Third, we estimate the impact of sentiment on private agents’ expectations about future short-term interest rates using a high-frequency methodology and an ARCH model. We find that sentiment shocks increase private interest rate expectations around maturities of one and two years. We also find that this effect is non-linear and depends on the state of the economy and on the characteristics (precision, sign and size) of the sentiment signal.
    Keywords: Animal spirits; Optimism; Confidence; Central bank communication; Interest rate expectations
    JEL: E52 E58 E43
    Date: 2016–09
  5. By: Alan S. Blinder; 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 that tool positively. Finally, the relationship between central banks and their governments might well have changed, with central banks “crossing the line” more often than in the past.
    JEL: E52 E58
    Date: 2016–10
  6. By: Antoine Le Riche (AMSE - Aix-Marseille School of Economics - EHESS - École des hautes études en sciences sociales - Centre national de la recherche scientifique (CNRS) - Ecole Centrale Marseille (ECM) - AMU - Aix Marseille Université, Laboratoire GAINS - Université du Maine - UM - Université du Maine, CAC – IXXI - Complex Systems Institute - CAC – IXXI - Complex Systems Institute); Francesco Magris (LEO - Laboratoire d'économie d'Orleans - CNRS - Centre National de la Recherche Scientifique - UO - Université d'Orléans, CAC – IXXI - Complex Systems Institute - CAC – IXXI - Complex Systems Institute); Antoine Parent (LAET - Laboratoire Aménagement Économie Transports - UL2 - Université Lumière - Lyon 2 - École Nationale des Travaux Publics de l'État [ENTPE] - CNRS - Centre National de la Recherche Scientifique, IEP Lyon - Sciences Po Lyon - Institut d'études politiques de Lyon, CAC – IXXI - Complex Systems Institute - CAC – IXXI - Complex Systems Institute)
    Abstract: We study a productive economy with safe government bonds and fractional cash-in-advance constraint on consumption expenditures. Government issues bonds and levies taxes to finance public expenditures, while the Central Bank follows a feedback Taylor rules by pegging the nominal interest rate. We show that when the nominal interest rate is bound to be non-negative, under active policy rules a liquidity trap steady state does emerge besides the Leeper (1991) equilibrium. The stability of the two steady states depends, in turns, upon the amplitude of the liquidity constraint. When the share of consumption to be paid cash is set lower than one half, the liquidity trap equilibrium is unstable. The stability of Leeper equilibrium too depends dramatically upon the amplitude of the liquidity constraint. Policy and Taylor rules are thus theoretically rehabilitated since their targets, by contrast with a vast literature, may be now stable. We also show that a relaxation of the liquidity constraint is Pareto-improving and that the liquidity trap equilibrium Pareto-dominates the Leeper one, in view of the zero cost of money.
    Keywords: cash-in-advance,liquidity trap,monetary policy,multiple equilibria
    Date: 2016–05
  7. By: Romain Baeriswyl (Swiss National Bank - Swiss National Bank); Camille Cornand (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - CNRS - Centre National de la Recherche Scientifique - UCBL - Université Claude Bernard Lyon 1 - UL2 - Université Lumière - Lyon 2 - Université Jean Monnet - Saint-Etienne - PRES Université de Lyon - ENS Lyon - École normale supérieure - Lyon); Bruno Ziliotto (UP9 - Université Paris 9, Dauphine - Université Paris-Dauphine)
    Abstract: While the central bank observes the market activity to assess economic fundamentals, it shapes the market outcome through its policy interventions. The more the central bank influences the market, the more it spoils the informational content of economic aggregates. How should the central bank act and communicate when it derives its information from observing the market? This paper analyses the optimal central bank's action and disclosure under endogenous central bank's information for three operational frameworks: pure communication, action and communication, and signaling action. When the central bank takes an action, it would be optimal for the central bank to be fully opaque to prevent its disclosure from deteriorating the information quality of market outcomes. However, in the realistic case where central bank's action is observable, it may be optimal to refrain from implementing any action.
    Keywords: heterogeneous information, public information, endogenous information, overreaction, transparency, coordination.
    Date: 2016
  8. By: Maier, Ulf
    Abstract: The lack of coordination in the resolution of multinational banks has led to demands for the increased centralization of resolution regimes. However, as this paper argues, the anticipation of resolution procedures affects the incentives of host countries to impose capital standards on their resident banks. Critically, it is shown that overall welfare can even be decreased by introducing a centralized resolution regime without fully centralizing capital requirements. As, in the aftermath of the financial crisis, only countries that are not part of a supranational resolution regime unilaterally and significantly increased the capital requirements for their largest resident banks, this paper can help to understand and study the heterogeneity of the observed regulatory approaches.
    Keywords: regulatory competition; multinational banks; capital requirements; bank supervision
    JEL: G21 G18 G33 F36 H73
    Date: 2016–07
  9. By: Michalski, Tomasz; Örs, Evren; Pakel, Banu Demir
    Abstract: We find that changes in banks' risk-based capital requirements can affect firm-level exports. We exploit the mandatory Basel II adoption in its Standardized Approach by all banks in Turkey on July 1, 2012. This change affects risk-weights for letters of credit and generates two identification schemes with opposite predicted signs. Using data that cover 16,662 exporters shipping 2,888 different products to 158 countries, we find that the share of letter of credit-based exports decreases (increases) at the firm- country-product level when the associated counterparty risk-weights increase (decrease) after Basel II adoption. However, growth of firm-product-country level exports remains unaffected.
    Keywords: Basel II; international trade finance; letters of credit
    JEL: F14 G21 G28
    Date: 2016–10
  10. By: Gambacorta, Leonardo; Karmakar, Sudipto
    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 bank’s 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; leverage; regulation; Risk-Weighted Assets
    JEL: G21 G28 G32
    Date: 2016–10
  11. By: Robert E. Hall (Stanford University; National Bureau of Economic Research (NBER)); Ricardo Reis (Centre for Economic Policy Research (CEPR); Centre for Macroeconomics (CFM); Economics Department London School of Economics (LSE); National Bureau of Economic Research (NBER))
    Abstract: Today, all major central banks pay or collect interest on reserves, and stand ready to use the interest rate as an instrument of monetary policy. We show that by paying an appropriate rate on reserves, the central bank can pin the price level uniquely to a target. The essential idea is to index reserves to the market interest rate, the price level, and the target price level in a way that creates a contractionary financial force if the price level is above the target and an expansionary force if below. Our payment-on-reserves policy process does not require terminal conditions like Taylor rules, exogenous fiscal surpluses like the fiscal theory of the price level, liquidity preference as in quantity theories, or local approximations as in new Keynesian models. The process accommodates liquidity services from reserves, segmented financial markets where only some institutions can hold reserves, and nominal rigidities. We believe it would be easy to implement.
    Date: 2016–10
  12. By: William Bassett (Board of Governors of the Federal Reserve System); Selva Demiralp (Koc University); Nathan Lloyd (Board of Governors of the Federal Reserve System)
    Abstract: The extraordinary steps taken by governments during the 2007-2009 financial crisis to prevent the failure of large financial institutions and support credit availability have invited heated debate. This paper comprehensively reviews empirical assessments of the benefits of those programs—such as their effectiveness in reducing bank failures or supporting new lending—introduces a combined dataset of five key programs that provided term debt or equity to banks in the U.S., and assesses the effects of such support on lending by U.S. banks. The results, using an instrumental variable approach, suggest that bank loans did not increase at institutions receiving government support.
    Keywords: Bank Loans, TAF, TARP, Capital Purchase Program.
    JEL: G11 G21 E58
    Date: 2016–10
  13. By: Klaus S. Friesenbichler (WIFO)
    Abstract: This note revisits the conjecture that the use of broadband internet lowers transaction costs and thereby inflation. Using a macroeconomic panel of OECD countries, it roughly confirms previous findings reported by Yi and Choi (2005) by addressing conceptual and econometric issues.
    Keywords: Inflation, broadband
    Date: 2016–10–12
  14. By: Andrejs Bessonovs (Bank of Latvia); Olegs Tkacevs (Bank of Latvia)
    Abstract: This paper studies the relationship between inflation and economic slack in Latvia with a particular focus on its time variation. The results suggest that the Phillips curve for Latvia had been steepening before the crisis against the backdrop of rising inflation. In the more recent years, there has been tentative evidence of the Phillips curve flattening as Latvia's economy entered a period of very low inflation. If the current trend of an even weaker response of inflation to economic activity in Latvia persists and proves to be statistically significant, unconventional monetary policy instruments may be of limited effectiveness to control inflation in Latvia. This calls for structural reforms aimed at increasing competition and reducing price stickiness.
    Keywords: inflation, Phillips curve, business cycles, Bayesian estimation
    JEL: C32 C51 E31 E52
    Date: 2016–09–23
  15. By: Sayeed, Asad.; Abbasi, Zubair Faisal.
    Abstract: This study explores different facets of the evolving structure, functions and conduct of Pakistan’s central bank or the State Bank as it is usually called. The study commences by offering an overview of the country’s macroeconomic, labour market and social indicators and evaluates how they have evolved over time. It attempts to gauge the conduct of the State Bank through its response to moments of economic significance faced by the country in the last two and a half decades. Specific attention is paid to the conduct of monetary policy, the role of the State Bank in channelling investment resources to priority sectors and its coordination with fiscal policy.
    Keywords: bank, economic growth, employment creation, Pakistan, banque, croissance économique, création d'emploi, Pakistan, banco, crecimiento económico, creación de empleos, Pakistán
    Date: 2015

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