nep-cba New Economics Papers
on Central Banking
Issue of 2017‒01‒08
27 papers chosen by
Maria Semenova
Higher School of Economics

  1. Central banking in the XXI century: never say never By Fabio Panetta
  2. The bank lending channel of conventional and unconventional monetary policy By Ugo Albertazzi; Andrea Nobili; Federico M. Signoretti
  3. Learning, robust monetray policy and the merit of precaution By Marine Charlotte André; Meixing Dai
  4. The Real Effects of Capital Requirements and Monetary Policy: Evidence from the United Kingdom By Filippo De Marco; Tomasz Wieladek
  5. Gender and Monetary Policymaking: Trends and Drivers By Donato Masciandaro; Paola Profeta; Davide Romelli
  6. Doves, Hawks and Pigeons: Behavioral Monetary Policy and Interest Rate Inertia By Federico Favaretto; Donato Masciandaro
  7. Mending the broken link: heterogeneous bank lending and monetary policy pass-through. By Carlo Altavilla; Fabio Canova; Matteo Ciccarelli
  8. Macroprudential Policy Transmission and Interaction with Fiscal and Monetary Policy in an Emerging Economy: a DSGE model for Brazil By Fabia A. de Carvalho; Marcos R. Castro
  9. Evaluating the Impact of Macroprudential Policies in Colombia's Credit Growth By Esteban Gómez; Angélica Lizarazo; Juan Carlos Mendoza; Andrés Murcia
  10. Identifying the Effects of Monetary Policy Shock on Output and Prices in Thailand By Jiranyakul, Komain
  11. Bank networks: contagion, systemic risk and prudential policy By Iñaki Aldasoro; Domenico Delli Gatti; Ester Faia
  12. The currency dimension of the bank lending channel in international monetary transmission By Elod Takats; Judit Temesvary
  13. Post-Crisis Regulatory and Supervisory Arrangements – The New ‘Old’ Central Banking By Aleksandra Maslowska-Jokinen; Anna MatysekJedrych
  14. From Monetary Policy to Macroprudentials: the Aftermath of the Great Recession By Bilin Neyapti
  15. Macroeconomics of bank capital and liquidity regulations By Frederic Boissay; Fabrice Collard
  16. A Historical Retrieval of the Methods and Functions of Monetary Policy By Hassan, Sherif Maher
  17. Banking industry dynamics and size-dependent capital regulation By Tirupam Goel
  18. Interconnectedness Among Banks, Financial Stability, and Bank Capital Regulation By Yehning Chen; Iftekhar Hasan
  19. Is Bank Supervision Effective? Evidence from the Allowance for Loan and Lease Losses By Yang, Ling
  20. Monetary Policy, Trend Inflation and Unemployment Volatility By Sergio A. Lago Alves
  21. The Volcker Rule and Market-Making in Times of Stress By Jack Bao; Maureen O'Hara; Xing Zhou
  22. Monetary Policy Committees, Voting Behavior and Ideal Points By Sylvester Eijffinger; Ronald Mahieu; Louis Raes
  23. A quantitative case for leaning against the wind By Andrew Filardo; Phurichai Rungcharoenkitkul
  24. More than the Human Appendix: Fed Capital and Central Bank Financial Independence By Donato Masciandaro
  25. Monetary Policy Credibility and the Comovement between Stock Returns and Inflation By Eurilton Araújo
  26. Regulatory arbitrage and the efficiency of banking regulation By Pierre C. Boyer; Hubert Kempf
  27. The Price of Being a Systemically Important Financial Institution (SIFI) By Dacorogna, Michel M; Busse, Marc

  1. By: Fabio Panetta
    Abstract: At first glance, today’s global economic outlook gives plenty of ammunition to the critics of central banks. Take the euro area – though its problems are by no means unique – where notwithstanding a strongly expansionary monetary stance, inflation is persistently low, growth is weak, and the recovery far more fragile than one would hope. It is unsurprising that in this environment we have got caught in a crossfire of questions on the nature of monetary policy. Is the ECB pursuing the right objectives? Is it doing so effectively? Zero or negative rates and intrusive asset purchase programmes could cause all sorts of distortions, including financial bubbles or inequalities? Is the ECB fully aware of this? And if so, does it care?
    Date: 2016
  2. By: Ugo Albertazzi (Bank of Italy); Andrea Nobili (Bank of Italy); Federico M. Signoretti (Bank of Italy)
    Abstract: Using a new monthly dataset on bank-level lending rates, we study the transmission of conventional and unconventional monetary policy in the euro area via shifts in the supply of credit. We find that a bank lending channel is operational for both types of measures, though its functioning differs: for standard operations the transmission is weaker for banks with more capital and a more solid funding structure, in line with an important role of asymmetric information. However, in response to non-standard measures lending supply expands by more at banks with stronger capital and funding positions, suggesting a crucial role for regulatory and economic constraints. We also find that the transmission of unconventional measures is attenuated by their negative effect on future bank’s capital position via the net interest income (reverse bank capital channel). Finally, we find that large sovereign exposures mute the response of lending rates to conventional policy, but amplify the transmission of unconventional measures.
    Keywords: unconventional monetary policy, lending rates, bank lending channel, bank capital channel, fragmentation
    JEL: E30 E32 E51
    Date: 2016–12
  3. By: Marine Charlotte André; Meixing Dai
    Abstract: We study in a New Keynesian framework the consequences of adaptative learning for the design of robust monetary policy. Compared to rational expectations, the fact that private follows adaptative learning gives the central bank an additional intertemporal trade-off between optimal behavior thanks to ability to manipulate future inflation expectations. We show that adaptative learning imposes a more restrictive constraint on monetary policy robustness to ensure the dynamic stability of the equilibrium than under rational expectations and weakens the argument in favor of a more aggressive monetary policy when the central bank takes account of model misspecifications.
    Keywords: robust control, model uncertainty, adaptative learning, optimal monetary policy.
    JEL: C62 D83 D84 E52 E58
    Date: 2016
  4. By: Filippo De Marco; Tomasz Wieladek
    Abstract: We study the effects of bank-specific capital requirements on Small and Medium Enterprises (SMEs) in the UK from 1998 to 2006. Following a 1% increase in capital requirements, SMEs’ asset growth contracts by 6.9% in the first year of a new bankfirm relationship, but the effect declines over time. We also compare the effects of capital requirements to those of monetary policy. Monetary policy only affects firms with higher credit risk and those borrowing from small banks, whereas capital requirements affect both. Capital requirement changes, instead, do not affect firms with alternative sources of finance, but monetary policy shocks do.
    Keywords: Capital requirements, SME real effects, relationship lending, microprudential and monetary policy
    JEL: G21 G28 E51
    Date: 2016
  5. By: Donato Masciandaro; Paola Profeta; Davide Romelli
    Abstract: This paper analyses the gender representation in monetary policy committees, offering three contributions. We propose the first index to evaluate the gender representation in monetary policymaking – i.e. the GMP Index – for a sample of 112 countries as of 2015. Second, we investigate the drivers of gender diversity in monetary policy committees. Our results show that, besides legal (Common Law), religious (Orthodox), historical (French colony) and socio-economic (female labour force) drivers, the gender representation is more likely to be relevant in countries characterized by a well-defined central bank governance, i.e. more independent central banks and less involved in supervision. Finally, we test whether gender diversity in central bank boards affects the conduct of monetary policy and hence macroeconomic outcomes. We find that gender diversity is inversely associated with inflation rates and money growth. The presence of women in central bank boards seems to be associated with a more hawkish approach to monetary policy making.
    Keywords: Inflation, Monetary Policy, Central Banks and their Policies, Gender Economics
    JEL: E31 E52 E58 J16
    Date: 2016
  6. By: Federico Favaretto; Donato Masciandaro
    Abstract: Behavioral bias – loss aversion – can explain monetary policy inertia in setting interest rates. Economic literature has tended to explain inertia in monetary policymaking in terms of frictions and delays, or has stressed the role of governance rules. We introduce a new driver of inertia, independent from frictions and central bank governance settings: a Monetary Policy Committee (MPC) that takes decisions on interest rates by voting according to a majority rule, in an economy with nominal price rigidities and rational expectations. Central bankers are senior officials, high-ranking bureaucrats who care about their careers and can be divided into three groups, depending on their level of inflation conservatism: doves, pigeons, and hawks. While a conservative stance doesn’t necessarily produce monetary inertia, we show that introducing loss aversion in individual behavior influences the stance of monetary policy under three different but convergent perspectives. First of all, a Moderation Effect can emerge, i.e. the number of pigeons increases. At the same time also a Hysteresis Effect can become relevant, whereby both doves and hawks soften their attitudes. Finally a Smoothing Effect tends to stabilize the number of pigeons. Together, the three effects consistently cause higher monetary policy inertia.
    Keywords: Monetary Policy, Behavioral Economics
    JEL: E5
    Date: 2016
  7. By: Carlo Altavilla; Fabio Canova; Matteo Ciccarelli
    Abstract: We analyze the pass-through of monetary policy measures to lending rates to Örms and households in the euro area using a novel bank-level dataset. Banksí characteristics such as the capital ratio, the exposure to sovereign debt, and the percentage of non-performing loans are responsible for the heterogeneity in pass-through of conventional monetary policy changes. The location of a bank is irrelevant. Non-standard measures normalized the capacity of banks to grant loans. Banks with high level of non-performing loans and low capital ratio were most a§ected. Banksílending margins fell considerably. Macroeconomic implications are discussed.
    Keywords: Monetary policy pass-through, european banks, heterogeneity, VARs.
    Date: 2016–10
  8. By: Fabia A. de Carvalho; Marcos R. Castro
    Abstract: We use a DSGE model with heterogeneous financial frictions and foreign capital flows estimated with Bayesian techniques for Brazil to investigate optimal combinations of simple macroprudential, fiscal and monetary policy rules that can react to the business and/or the financial cycle. We find that the gains from implementing a cyclical fiscal policy are only significant if macroprudential policy countercyclically reacts to the financial cycle. Optimal fiscal policy is countercyclical in the business cycle and slightly procyclical in the financial cycle
    Date: 2016–12
  9. By: Esteban Gómez (Banco de la República de Colombia); Angélica Lizarazo (Banco de la República de Colombia); Juan Carlos Mendoza (Banco de la República de Colombia); Andrés Murcia (Banco de la República de Colombia)
    Abstract: Macroprudential tools have been used around the world as a mechanism to control potential risks and imbalances in the financial sector. Colombia is a good example of a country that has employed different regulatory measures to manage systemic risks in the economy. The purpose of this paper is to evaluate the effectiveness of two policies employed in said country to increase the resilience of the system and to moderate exuberance in credit supply. The first measure, the countercyclical reserve requirement, was implemented in 2007 to control excessive credit growth. The second tool corresponds to the dynamic provisioning scheme for commercial loans, whose objective was to consolidate a countercyclical buffer through loan loss provision requirements. To perform this analysis a rich data set based on loan-by-loan information for Colombian banks during the period between 2006 and 2009 is used. A fixed effects panel model is estimated using debtors', banks' and macroeconomic characteristics as control variables. In addition, a difference in differences estimation is performed to evaluate the impact of the aforementioned policies. Findings suggest that dynamic provisions and the countercyclical reserve requirement had a negative effect on credit growth, and that said effect differs conditioned on bank-specific characteristics. Results also suggest that the aggregate macroprudential policy stance in Colombia has worked as an effective stabilizer of credit cycles, with some preliminary evidence also pointing towards significant effects in reducing bank risk-taking. Moreover, evidence is found that macroprudential policies have worked as a complement of monetary policy, accompanying the stabilizing effects of changes in interest rates on credit growth. Classification JEL: E58, G28, C23
    Keywords: Macroprudential policies, Reserve requirements, Credit growth, Dynamic provisioning, Credit registry data.
    Date: 2017–01
  10. By: Jiranyakul, Komain
    Abstract: This paper attempts to identify the effects of monetary policy shock on output and price level in Thailand during 2005Q1 and 2016Q2. Recently available policy rate is used as a monetary policy variable. The structural VAR methodology is employed to identify the monetary policy shock. To enhance the precision of the model specification, the short-run restrictions are imposed on the specified structural model of cointegrated variables to allow the levels of variables to interact simultaneously with each other. The results from the analysis of the structural model reveal that a shock to monetary policy drives cycles for both real GDP and the inflation rate.
    Keywords: Monetary policy shock, structural VAR, impulse response
    JEL: C32 E5 E52
    Date: 2016–12
  11. By: Iñaki Aldasoro; Domenico Delli Gatti; Ester Faia
    Abstract: We present a network model of the interbank market in which optimizing risk averse banks lend to each other and invest in non-liquid assets. Market clearing takes place through a tâtonnement process which yields the equilibrium price, while traded quantities are determined by means of an assortative matching process. Contagion occurs through liquidity hoarding, interbank interlinkages and fire sale externalities. The resulting network configuration exhibits a core-periphery structure, disassortative behavior and low density. Within this framework we analyse the effects of a stylized set of prudential policies on the stability/efficiency trade-off. Liquidity requirements unequivocally decrease systemic risk, but at the cost of lower efficiency (measured by aggregate investment in non-liquid assets). Equity requirements also tend to reduce risk (hence increase stability), though without reducing significantly overall investment. On this basis, our results provide general support for the Basel III approach based on complementary regulatory metrics.
    Keywords: Banking networks, systemic risk, contagion, fire sales, prudential regulation
    Date: 2016–12
  12. By: Elod Takats; Judit Temesvary
    Abstract: We investigate how the use of a currency transmits monetary policy shocks in the global banking system. We use newly available unique data on the bilateral crossborder lending flows of 27 BIS-reporting lending banking systems to over 50 borrowing countries, broken down by currency denomination (USD, EUR and JPY). We have three main findings. First, monetary shocks in a currency significantly affect cross-border lending flows in that currency, even when neither the lending banking system nor the borrowing country uses that currency as their own. Second, this transmission works mainly through lending to non-banks. Third, this currency dimension of the bank lending channel works similarly across the three currencies suggesting that the cross-border bank lending channel of liquidity shock transmission may not be unique to lending in USD.
    Keywords: Cross-border bank lending, bank lending channel, monetary transmission, currency denomination
    Date: 2016–12
  13. By: Aleksandra Maslowska-Jokinen; Anna MatysekJedrych
    Abstract: The Global Financial Crisis (GFC) exposed clear gaps in the pre-crisis regulatory and supervisory framework in most of financial systems worldwide, but not in all financial systems. Optimal design of supervisory and regulatory arrangements in the post-crisis perspective requires identifying elements that failed in helping predicting current slowdown, and those that directly or indirectly affected vulnerability of financial markets. Both tasks appear to be as challenging as twelve labors of Hercules: demanding, covering wide aspects of financial and macroeconomic environment, requiring cooperation of many key agents in all markets; hence truly virtually impossible. Instead of identifying ‘failed’ elements, we propose the positive approach to the post-crisis regulatory and supervisory framework, which is proving that some institutional arrangements and basic elements of financial safety net helped some countries avoid the crisis. There are many important questions, which should be treated as a starting point for discussing changes in supervisory and regulatory framework, especially in relation to the central banking. Should central banks become less powerful and be made more subject to political control, or be given more tools to achieve financial stability? Should the trend of removing central banks from direct supervisory responsibilities be reversed? Is the period of ‘central banks’ triumph’, a period in which their independence and autonomy was widely accepted, now over?
    Date: 2016
  14. By: Bilin Neyapti
    Abstract: Monetary policy is about the determination of money stock and interest rates to affect economic activity in the short-, medium- and the long-term. Besides helping to eliminate recessionary or inflationary business cycles, controlling interest rates and value of money have important impact on economic prospects by way of affecting domestic and international transaction costs. From a normative perspective, the ultimate goal of monetary policy is to increase allocative and distributional efficiency that are, in theory, consistent with the price stability focus of the modern central banking practice. Low level and variability of inflation rates is necessary for investment and sustainable growth; provided that the benefits of growth are distributed equitably, it also contributes economic development.
    Date: 2016
  15. By: Frederic Boissay; Fabrice Collard
    Abstract: We study the transmission mechanisms of liquidity and capital regulations as well as their effects on the economy and welfare. We propose a macro-economic model in which a regulator faces the following trade-off. On the one hand, banking regulations may reduce the aggregate supply of credit. On the other hand, they promote the allocation of credit to its best uses. Accordingly, in a regulated economy there is less, but more productive lending. Based on a version of the model calibrated on US data, we find that both liquidity and capital requirements are needed, and must be set relatively high. They also mutually reinforce each other, except when liquid assets are scarce. Our analysis thus provides broad support for Basel III's "multiple metrics" framework.
    Keywords: Financial frictions, externalities, banking regulation
    Date: 2016–12
  16. By: Hassan, Sherif Maher
    Abstract: There exists a broad implicit agreement that steering the monetary policy has important consequences for the whole economy (Friedman, 1968). This book uses topic classification to present a historical retrieval of the main theories and applications of the monetary policy within different schools of economic thinking and across history. From Humes’ automatic price-species flow in the 17th century, to the Keynesians, Monetarists and Austrians perspectives of the monetary dynamics in the beginning of the 19th century. The second chapter provides a general overview about how the monetary authority can fine tune monetary indicators in response to business cycle shocks. This part will discuss the monetary transmission mechanisms that represent the different means of interaction between monetary tools together and their impact on the real economy. In this context, the concept of inflation targeting will be elaborated in details while explaining its main institutional and economic prerequisites. The third and final chapter is devoted to giving an overview of the Egyptian monetary policy from 1990 to 2010 prior to the Egyptian revolution. The detailed analysis disaggregates this period into three eras: the first starts from 1991 till 1996 (ERSAP era), the second from 1996 till 2003 (Transitional era), and the third from 2003 till 2010 (towards Inflation Targeting era). This part of the book covers the broad changes occurred in the Egyptian monetary regimes and how well the successive governments used various monetary tools to achieve their policy goals and to mitigate real economic problems like unemployment and inflation.
    Keywords: Monetary policy, Egypt, inflation targeting
    JEL: B2 E4
    Date: 2016
  17. By: Tirupam Goel
    Abstract: This paper presents a general equilibrium model with a dynamic banking sector to characterize optimal size-dependent bank capital regulation (CR). Bank leverage choices are subject to the risk-return trade-off: high leverage increases expected return on capital, but also increases return variance and bank failure risk. Financial frictions imply that bank leverage choices are socially inefficient, providing scope for a welfare-enhancing CR that imposes a cap on bank leverage. The optimal CR is tighter relative to the pre-crisis benchmark. Optimal CR is also bank specific, and tighter for large banks than for small banks. This is for three reasons. First, allowing small banks to take more leverage enables them to potentially grow faster, leading to a growth effect. Second, although more leverage by small banks results in a higher exit rate, these exits are by the less efficient banks, leading to a cleansing effect. Third, failures are more costly among large banks, because these are more efficient in equilibrium and intermediate more capital. Therefore, tighter regulation for large banks renders them less prone to failure, leading to a stabilization effect. In terms of industry dynamics, tighter CR results in a smaller bank exit rate and a larger equilibrium mass of better capitalized banks, even though physical capital stock and wages are lower. The calibrated model rationalizes various steady state moments of the US banking industry, and provides general support for the Basel III GSIB framework.
    Keywords: Size distribution, entry & exit, heterogeneous agent models, size dependent policy
    Date: 2016–12
  18. By: Yehning Chen; Iftekhar Hasan
    Abstract: This paper proposes that whether interconnectedness among banks leads to financial instability depends on banks’ leverage decisions. It extends the network model in Allen et al. (2012) to study the relationship between interconnectedness and the banks’ failure probability. In the model, banks adopt the Value-at-Risk rule to make the capital structure decisions and the risk of contagion is neglected. The paper finds that interconnectedness may either increase or decrease the banks’ failure probability. It also shows that interconnection is more harmful when banks are more over-optimistic about their prospects, and that financial integration may hurt financial stability. In addition, the adverse impact of interconnectedness on the banks’ failure probability can be alleviated if bank capital regulation is properly designed. This paper supports the conclusion in Allen and Gale (2000) that a complete financial system in which each bank is connected to all the other banks is superior to incomplete ones in which banks are connected to only a part of other banks.
    Keywords: financial network, contagion, interconnectedness, diversification, bank capital regulation
    JEL: G01 G21
    Date: 2016
  19. By: Yang, Ling
    Abstract: I investigate whether bank supervision is effective in enforcing written rules on the estimations of the allowance for loan and lease losses (ALLL) consistently between public and private banks, which have different intensity of incentives to misreport the ALLL. Results suggest that bank supervision of the ALLL estimations was effective between 2002 and 2012, but has become lax recently. State-chartered public banks underestimated the ALLL by about 13% annually between 2013 and 2015. Bank regulators are willing to cater to banks’ private interests when the economic environment is good and the regulatory emphasis is weak, but not during the crisis.
    Keywords: commercial banks, bank regulation, bank supervision, bank accounting and disclosure, allowance for loan and lease losses (ALLL), reporting incentives
    JEL: G21 G28 M41 M48
    Date: 2016–12–22
  20. By: Sergio A. Lago Alves
    Abstract: The literature has long agreed that the canonical DMP model with search and matching frictions in the labor market can deliver large volatilities in labor market quantities, consistent with US data during the Great Moderation period (1985-2005), only if there is at least some wage stickiness. I show that the canonical model can deliver nontrivial volatility in unemployment without wage stickiness. By keeping average US inflation at a small but positive rate, monetary policy may be accountable for the standard deviations of labor market variables to have achieved those large empirical levels. Solving the Shimer (2005) puzzle, the role of long-run inflation holds even for an economy with flexible wages, as long as it has staggered price setting and search and matching frictions in the labor market
    Date: 2016–12
  21. By: Jack Bao; Maureen O'Hara; Xing Zhou
    Abstract: Focusing on downgrades as stress events that drive the selling of corporate bonds, we document that the illiquidity of stressed bonds has increased after the Volcker Rule. Dealers regulated by the Rule have decreased their market-making activities while non-Volcker-affected dealers have stepped in to provide some additional liquidity. Furthermore, even Volcker-affected dealers that are not constrained by Basel III and CCAR regulations change their behavior, inconsistent with the effects being driven by these other regulations. Since Volcker-affected dealers have been the main liquidity providers, the net effect is that bonds are less liquid during times of stress due to the Volcker Rule.
    Keywords: Volcker Rule ; Corporate Bond Illiquidity ; Regulation ; Capital Commitment ; Dealer Inventory ; Market-Making ; Financial Crisis
    JEL: G14 G21 G23 G24 G28
    Date: 2016–09
  22. By: Sylvester Eijffinger; Ronald Mahieu; Louis Raes
    Abstract: While not obvious at first sight, in many modern economies, the position of a monetary authority is similar to the position of the highest-level court (Goodhart (2002)). For example, both bodies are expected to operate independently even though there are crosscountry differences in what independence entails. In the United Kingdom, the highest court is the Appellate Committee of the House of Lords (in short: Law Lords). There is a consensus among legal scholars that the powers of Law Lords with respect to the legislature are less wide ranging in the United Kingdom than the United States’ counterpart, the supreme court (Goodhart and Meade (2004), p.11). In economic jargon one says that the Supreme Court has goal independence whereas the Law Lords have instrument independence.
    Date: 2016
  23. By: Andrew Filardo; Phurichai Rungcharoenkitkul
    Abstract: Should a monetary authority lean against the build-up of financial imbalances? We study this policy question in an environment in which there are recurring cycles of financial imbalances that develop over time and eventually collapse in a costly manner. The optimal policy reflects the trade-off between the short-run macroeconomic costs of leaning against the wind and the longer-run benefits of stabilising the financial cycle. We model the financial cycle as a nonlinear Markov regime-switching process, calibrate the model to US data and characterise the optimal monetary policy. Leaning systematically over the whole financial cycle is found to outperform policies of "benign neglect" and "late-in-the-cycle" discretionary interventions. This conclusion is robust to a wide range of alternative assumptions and supports an orientation shift in monetary policy frameworks away from narrow price stability to a joint consideration of price and financial stability.
    Keywords: monetary policy, financial stability, leaning against the wind, financial cycle, time-varying transition probability Markov regime-switching model
    Date: 2016–12
  24. By: Donato Masciandaro
    Abstract: In 2002 in reviewing the role of the Federal Reserve System (FED) the United States General Accounting Office declared that” We found no widely accepted, analytically based criteria to show whether a central bank needs capital as a cushion against losses or how the level of such an account should be determined”; the FED capital has become somewhat like the human appendix, an organ whose function is no longer understood (Stella 2009). Is it still true? These short notes address the issue, using a Q&A exposition and taking the occasion the fact that the U.S. Government Accountability Office (GAO), has been asked by members of the Congress to study the implications of a recent dividend rate change for Federal Reserve Bank stock and the implications of modifying or eliminating the existing requirement that all member banks purchase stock issued by their respective Federal Reserve Bank.
    Keywords: Federal Reserve System, Central Bank Independence, Central Bank Capital, Global Crisis
    JEL: E42 E58 E61
    Date: 2016
  25. By: Eurilton Araújo
    Abstract: Empirical evidence suggests that the magnitude of the negative comovement between real stock returns and inflation declined during the Great Moderation in the U.S. To understand the role of monetary policy credibility in this change, I study optimal monetary policy under loose commitment in a macroeconomic model in which stock price movements have direct implications for business cycles. In line with the data, a calibration of the model featuring a significant degree of credibility can replicate the weakening of the negative relationship between real stock returns and inflation in the Great Moderation era
    Date: 2016–12
  26. By: Pierre C. Boyer; Hubert Kempf
    Abstract: We study the effciency of banking regulation under ?nancial integration. Banks freely choose the jurisdiction where to locate their activities and have private information about their e?ciency level. Regulators non-cooperatively offer any regulatory contract that satis?es information and participation constraints of banks. We show that the unique Nash equilibrium of the regulatory game is a simple pooling contract: ?nancial integration is characterized by the inability for regulators to discriminate between banks with different efficiency levels. This result is driven by the endogenous restriction caused by regulatory arbitrage on the capacity of regulators to use several regulatory instruments.
    Keywords: Regulatory Arbitrage, Banking regulation, Regulatory competition, Financial integration, Asymmetric information
    JEL: C72 D82 G21 G28
    Date: 2016
  27. By: Dacorogna, Michel M; Busse, Marc
    Abstract: After reviewing the notion of Systemically Important Financial Institution (SIFI), we propose a first principles way to compute the price of the implicit put option that the State gives to such an institution. Our method is based on important results from Extreme Value Theory (EVT), one for the aggregation of heavy tailed distributions and the other one for the tail behavior of the Value-at-Risk (VaR) versus the Tail-Value-at-Risk (TVaR). We show how to value in practice is proportional to the VaR of the institution and thus would provide the wrong incentive to the banks even if not explicitly granted. We conclude with a proposal to make the institution pay the price of this option to a fund, whose task would be to guarantee the orderly bankruptcy of such an institution. This fund would function like an insurance selling a cover to clients.
    Keywords: Systemic Risk; "Too Big to Fail"; Risk Measure; Value-at-Risk and Tail Value-at- Risk; Option Price; Risk Neutral Distribution; Heavy tail; Pareto; Insurance
    JEL: C10 E58 E61
    Date: 2016–06–27

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