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on Central Banking |
| By: | Steve Ambler (ESG, Université du Québec à Montréal, Canada; C.D. Howe Institute, Canada; The Rimini Centre for Economic Analysis, Italy); Fabio Rumler (Economic Analysis Division, Oesterreichische Nationalbank, Austria) |
| Abstract: | We use daily data on government bond yields and market-based inflation expectations (from inflation-linked swaps) to measure the effectiveness of unconventional monetary policy (UMP) in the euro area. We focus on the effects of policy announcements on ex-ante real interest rates, since the main transmission mechanism of monetary policy is through real interest rates and their effect on aggregate demand. We find evidence of significant impacts of UMP announcements of the ECB on real interest rates at maturities of five and ten years that operate mainly by raising inflation expectations. When distinguishing among UMP announcements that exceeded or disappointed market expectations, we find that the former significantly reduced nominal and real interest rates and increased inflation expectations while the latter had the opposite effect. |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:16-27&r=cba |
| By: | George J. Bratsiotis |
| Abstract: | In the aftermath of the Great Recession, when various policies for regulating credit liquidity were introduced, the US Fed and other central banks placed more emphasis on the interest on reserves than the more traditional required reserve ratio. This paper employs a model with endogenous credit risk, a balance sheet channel, a cost channel and bank equity requirements, to examine the macroprudential role of the interest on reserves and the required reserve ratio and compare their welfare implications. Two transmission channels are identified, the deposit rate and the balance sheet channels. The required reserve ratio is shown to have conflicting effects through these two channels mitigating its policy effectiveness as a credit regulation tool. Conversely, with the interest on reserves both these channels complement each other in reducing the output gap, the cost channel and inflation. The results show that as a credit regulation tool the interest on reserves requires lower policy rate intervention and yields superior welfare outcomes to both the required reserve ratio and credit-augmented Taylor rules. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:228&r=cba |
| By: | Rajmund Mirdala (Department of Economics at the Faculty of Economics, Technical University of Kosice, Slovak Republic) |
| Abstract: | Vulnerability of exchange rates to the external price shocks as well as their absorption capabilities represents one of the most discussed area in the fixed versus flexible exchange rate dilemma. Ability of exchange rates to serve as a traditional vehicle for a transmission of external shocks to domestic prices is affected by exchange rate arrangement adopted by monetary authorities. As a result, exchange rate volatility determines the overall dynamics of pass-through effects and associated absorption capability of exchange rate. Ability of exchange rates to transmit external (price) shocks to the national economy represents one of the most discussed areas relating to the current stage of the monetary integration in the European single market. The problem is even more crucial when examining crisis related redistributive effects. In the paper we analyze exchange rate pass-through to domestic prices in the European transition economies. We estimate VAR model to investigate (1) responsiveness of exchange rate to the exogenous price shock to examine the dynamics (volatility) in the exchange rate leading path followed by the unexpected oil price shock and (2) effect of the unexpected exchange rate shift to domestic price indexes to examine its distribution along the internal pricing chain. Our results indicate that there are different patterns of exchange rate passthrough to domestic prices according to the baseline period as well as the exchange rate regime diversity. |
| Keywords: | exchange rate pass-through, inflation, VAR, Cholesky decomposition, impulse-response function |
| JEL: | C32 E31 F41 |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:ost:wpaper:361&r=cba |
| By: | Akinci, Ozge (Federal Reserve Bank of New York); Queralto, Albert (Board of Governors of the Federal Reserve System) |
| Abstract: | Credit spreads display occasional spikes and are more strongly countercyclical in times of financial stress. Financial crises are extreme cases of this nonlinear behavior, featuring deep recessions and sharp losses in bank equity. We develop a macroeconomic model with a banking sector in which banks’ leverage constraints are occasionally binding and equity issuance is endogenous. The model captures the nonlinearities in the data and produces quantitatively realistic crises. Endogenous equity issuance makes crises infrequent but does not prevent them altogether. Macroprudential policy designed to enhance banks’ incentive to issue equity lowers the probability of a crisis and increases welfare. |
| Keywords: | financial intermediation; sudden stops; leverage constraints; occasionally binding constraints; financial stability policy |
| JEL: | E32 E44 F41 |
| Date: | 2016–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:802&r=cba |
| By: | Tobias Schuler; Luisa Corrado |
| Abstract: | This paper analyses the effects of several macro-prudential policy measures on the banking sector and its linkages to the macroeconomy. We employ a dynamic general equilibrium model with sticky prices, in which banks trade excess funds in the interbank lending market. We find that an increase in the liquidity requirement effectively reduces the impact of an interbank shock on output and employment, while an increased capital requirement propagates only through financial variables as inflation and interest rates. We conclude that stricter liquidity measures which limit inside money creation, dampen the severity of a breakdown in interbank lend- ing. Targeting interbank financing directly through liquidity measures along with a moderate capital requirement generates lower welfare losses. We thereby provide a comprehensive rationale in favor of the regulatory measures in Basel III. |
| JEL: | E40 E51 E58 G28 |
| Date: | 2016–12–05 |
| URL: | http://d.repec.org/n?u=RePEc:jmp:jm2016:psc747&r=cba |
| By: | Pierre-Richard Agénor; L. Pereira da Silva |
| Abstract: | The effects of capital requirements on risk taking and welfare are studied in a stochastic overlapping generations model of endogenous growth with banking, limited liability, and government guarantees. Capital producers face a choice between a safe technology and a risky (but socially inefficient) technology, and bank risk taking is endogenous. Setting the capital adequacy ratio above a structural threshold can eliminate the equilibrium with risky loans (and thus inefficient risk taking), but numerical simulations show that this may entail a welfare loss. In addition, the optimal ratio may be too high in practice and may require concomitantly a broadening of the perimeter of regulation and a strengthening of financial supervision to prevent disintermediation and distortions in financial markets. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:226&r=cba |
| By: | Garcés Díaz Daniel |
| Abstract: | Forecasts of inflation in the United States since the mid eighties have had smaller errors than in the past, but those conditional on commonly used variables cannot consistently beat the ones from univariate models. This paper shows through simple modifications to the classical monetary model that something similar occurred in those major Latin American economies that achieved their own "Great Moderation." For those countries that did not attain macroeconomic stability, inflation forecasting conditional on some variables has not changed. Allowing the parameters that determine Granger causality to change when the monetary regime does, makes possible the estimation of parsimonious inflation models for all available data (eight decades for one country and five for the others). The models so obtained ouperform others in pseudo out-of-sample forecasts for most of the period under study, except in the cases when an inflation targeting policy was successfully implemented. |
| Keywords: | Money;exchange rate;cointegration;inflation forecasting |
| JEL: | C32 E41 E42 E52 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:bdm:wpaper:2016-20&r=cba |
| By: | Raphael Auer; Steven Ongena |
| Abstract: | Do macroprudential regulations on residential lending influence commercial lending behavior too? To answer this question, we identify the compositional changes in banks' supply of credit using the variation in their holdings of residential mortgages on which extra capital requirements were uniformly imposed by the countercyclical capital buffer (CCB) introduced in Switzerland in 2012. We find that the CCB's introduction led to higher growth in commercial lending, in particular to small firms, although this was unrelated to conditions in regional housing markets. The interest rates and fees charged to these firms concurrently increased. We rationalize these findings in a model featuring both private and firm-specific collateral. The corresponding imperfect substitutability between private and commercial credit for the entrepreneur's relationship bank is then shown to give rise to the compositional patterns we empirically document. |
| Keywords: | macroprudential policy, spillovers, credit, bank capital, systemic risk |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:593&r=cba |
| By: | Arias, Jonas; Caldara, Dario; Rubio-Ramírez, Juan Francisco |
| Abstract: | This paper studies the effects of monetary policy shocks using structural VARs. We achieve identification by imposing sign and zero restrictions on the systematic component of monetary policy. We consistently find that an increase in the fed funds rate induces a contraction in output. We also show that the identification strategy in Uhlig (2005), which imposes sign restrictions on the impulse responses to a monetary shock, does not satisfy our restrictions on the systematic component of monetary policy with high posterior probability. This finding accounts for the difference in results with Uhlig (2005), who found that contractionary monetary policy shocks have no clear effect on output. When we reconcile the two approaches by combining both sets of restrictions, monetary policy shocks remain contractionary. |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11674&r=cba |
| By: | Qureshi, Irfan (Department of Economics, University of Warwick) |
| Abstract: | Is the classic Taylor rule misspecified? I show that the inability of the Taylor rule to explain the federal funds rate using real-time data stems from the omission of a money growth objective. I highlight the significant role played by money in the policy discourse during the Volcker-Greenspan era using new FOMC data, benchmarking a novel characterization of “good” policy. An application of this framework offers a unified policy-based explanation of the Great Moderation and Recession. Welfare analysis based on the New-Keynesian model endorses the rule with money. The evidence raises significant concerns about relying on the simple Taylor rule as a policy benchmark and suggests why money may serve as a useful indicator in guiding future monetary policy decisions. |
| Keywords: | Taylor rule ; policy objectives ; money aggregates ; macroeconomic stability |
| JEL: | E30 E31 E42 E52 E58 E61 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:1133&r=cba |
| By: | Claudia M. Buch; Linda Goldberg |
| Abstract: | The development of macroprudential policy tools has been one of the most significant changes in banking regulation in recent years. In this multi-study initiative of the International Banking Research Network, researchers from fifteen central banks and two international organizations use micro-banking data in conjunction with a novel dataset of prudential instruments to study international spillovers of prudential policy changes and their effects on bank lending growth. The collective analysis has three main findings. First, the effects of prudential instruments sometimes spill over borders through bank lending. Second, international spillovers vary across prudential instruments and are heterogeneous across banks. Bank-specific factors like balance sheet conditions and business models drive the amplitude and direction of spillovers to lending growth rates. Third, the effects of international spillovers of prudential policy on loan growth rates have not been large on average. However, our results tend to underestimate the full effect by focusing on adjustment along the intensive margin and by analyzing a period in which relatively few countries implemented country-specific macroprudential policies. |
| JEL: | F34 G01 G21 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22874&r=cba |
| By: | Armenter, Roc (Federal Reserve Bank of Philadelphia); Lester, Benjamin (Federal Reserve Bank of Philadelphia) |
| Abstract: | In response to the Great Recession, the Federal Reserve resorted to several unconventional policies that drastically altered the landscape of the federal funds market. The current environment, in which depository institutions are flush with excess reserves, has forced policymakers to design a new operational framework for monetary policy implementation. We provide a parsimonious model that captures the key features of the current federal funds market along with the instruments introduced by the Federal Reserve to implement its target for the federal funds rate. We use this model to analyze the factors that determine rates and volumes under the new implementation framework and to study the effects of changes in the policy rates and other shocks to the economic environment. We also calibrate the model and use it as a quantitative benchmark for applied analysis, with a particular emphasis on understanding the role of the overnight reverse repurchase agreement facility in supporting the federal funds rate. |
| Keywords: | excess reserves; federal funds market; federal funds rate |
| JEL: | E42 E43 E52 E58 |
| Date: | 2016–11–29 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:16-33&r=cba |