nep-cba New Economics Papers
on Central Banking
Issue of 2017‒01‒15
twenty-six papers chosen by
Maria Semenova
Higher School of Economics

  1. Unconventional US Monetary Policy: New Tools, Same Channels? By Feldkircher, Martin; Huber, Florian
  2. Cost-Benefit Analysis of Leaning Against the Wind: Are Costs Larger Also with Less Effective Macroprudential Policy? By Svensson, Lars E O
  3. Reforms to the European Union Financial Supervisory and Regulatory Architecture and Their Implications for Asia By Darvas, Zsolt; Schoenmaker, Dirk; Véron, Nicolas
  4. Economic Crises and the Eligibility for the Lender of Last Resort: Evidence from Nineteenth Century France By Bignon, Vincent; Jobst, Clemens
  5. Why are policy real interest rates so high in Brazil? An analysis of the determinants of the Central Bank of Brazil's real interest rate By Balliester Reis, Thereza
  6. Monetary Policy Credibility and Exchange Rate Pass-Through By Yan Carriere-Swallow; Bertrand Gruss; Nicolas E Magud; Fabian Valencia
  7. Monetary Policy and Macroeconomic Stability Revisited By Hirose, Yasuo; Kurozumi, Takushi; Van Zandweghe, Willem
  8. Ups and Downs. Central Bank Independence from the Great Inflation to the Great Recession: Theory, Institutions and Empirics By Donato Masciandaro; Davide Romelli
  9. The Currency Dimension of the Bank Lending Channel in International Monetary Transmission By Elod Takats; Judit Temesvary
  10. Can the Central Bank Alleviate Fiscal Burdens? By Reis, Ricardo
  11. Rethinking Operational Risk Capital Requirements By Peter Sands; Gordon Liao; Yueran Ma
  12. US Monetary Policy in a Globalized World By Crespo Cuaresma, Jesus; Doppelhofer, Gernot; Feldkircher, Martin; Huber, Florian
  13. Estabilidad de Precios en América Latina:¿Ya LLegamos Allí? By Olivo, Victor
  14. Long Memory, Breaks, and Trends: On the Sources of Persistence in Inflation Rates By Rinke, Saskia; Busch, Marie; Leschinski, Christian
  15. The Effects of Monetary Policy Shocks on Inequality By Davide Furceri; Prakash Loungani; Aleksandra Zdzienicka
  16. Determinants and implications of low global inflation rates By Juan Carlos Berganza; Pedro del Río; Fructuoso Borrallo
  17. Spillover Effects of Japan’s Quantitative and Qualitative Easing on East Asian Economies By Fukuda, Shin-ichi
  19. Sovereign Risk Spillover Effects and the Role of Systemically Important Financial Institutions: Evidence from the European Debt Crisis By Haoshen Hu; Jörg Prokop; Hans‐Michael Trautwein
  20. Causes and timing of the European debt crisis: An econometric evaluation By Valerio Filoso; Carlo Panico; Erasmo Papagni; Francesco Purificato; Marta Vázquez Suarez
  21. Spillover Effects of Unconventional Monetary Policy in Asia and the Pacific By Punzi, Maria Teresa; Chantapacdepong, Pornpinun
  22. Break-Even-Inflation's Decomposition in Mexico By Aguilar-Argaez Ana María; Elizondo Rocío; Roldán-Peña Jessica
  23. Drivers of Inflation Compensation : Evidence from Inflation Swaps in Advanced Economies By Marius del Giudice Rodriguez; Emre Yoldas
  24. Harmonic distances and systemic stability in heterogeneous interbank networks By Gabor Fukker
  25. Ambiguous Policy Announcements By Michelacci, Claudio; Paciello, Luigi
  26. On the Political Economy of Financial Deregulation By Korkut Erturk

  1. By: Feldkircher, Martin; Huber, Florian
    Abstract: In this paper we compare the transmission of a conventional monetary policy shock with that of an unexpected decrease in the term spread, which mirrors quantitative easing. Employing a time-varying vector autoregression with stochastic volatility, our results are two-fold: First, the spread shock works mainly through a boost to consumer wealth growth, while a conventional monetary policy shock affects real output growth via a broad credit / bank lending channel. Second, both shocks exhibit a distinct pattern over our sample period. More specifically, we find small output effects of a conventional monetary policy shock during the period of the global financial crisis and stronger effects in its aftermath. This might imply that when the central bank has left the policy rate unaltered for an extended period of time, a policy surprise might boost output particularly strongly. By contrast, the spread shock has affected output growth most strongly during the period of the global financial crisis and less so thereafter. This might point to diminishing effects of large scale asset purchase programs. (authors' abstrct)
    Keywords: Unconventional monetary policy; transmission channel; Bayesian TVP-SV-VAR
    Date: 2016–03
  2. By: Svensson, Lars E O
    Abstract: "Leaning against the wind" (of asset prices and credit booms) (LAW), that is, a somewhat tighter monetary policy and a higher policy interest rate, has costs in terms of a weaker economy with higher unemployment and lower inflation. It has been justified by possible benefits in terms of a lower probability or magnitude of a future financial crisis. A worse macro outcome in the near future is then considered to be an acceptable cost to be traded off against a better expected macro outcome further into the future. But a crisis can come any time, and the cost of a crisis is higher if initially the economy is weaker due to previous LAW. LAW thus has an additional cost in the form of a higher cost of a crisis when a crisis occurs. With this additional cost, for existing empirical estimates, the costs of LAW exceed by a substantial margin the possible benefits from a lower probability of a crisis. Furthermore, empirically a lower probability of a crisis is associated with lower real debt growth. But if monetary policy is neutral in the long run, it cannot affect real debt in the long run. Then, if a higher policy rate would result in lower debt growth and a lower probability of a crisis for a few years, this is followed by higher debt growth and a higher probability of a crisis in the future. This implies that the cumulated benefits over time of LAW are close to zero. But even if monetary policy is assumed to be non-neutral and permanently affect real debt, empirically the benefits are still less than the costs. Finally, somewhat surprisingly, less effective macroprudential policy, and generally a credit boom, with resulting higher probability, magnitude, or duration of a crisis, increase costs of LAW more than benefits, thus making costs exceed benefits by an even larger margin.
    Keywords: financial stability; macroprudential policy; monetary policy
    JEL: E52 E58 G01
    Date: 2017–01
  3. By: Darvas, Zsolt (Asian Development Bank Institute); Schoenmaker, Dirk (Asian Development Bank Institute); Véron, Nicolas (Asian Development Bank Institute)
    Abstract: European Union (EU) countries offer a unique experience of financial regulatory and supervisory integration, complementing various other European integration efforts following the Second World War. Financial regulatory and supervisory integration was a very slow process before 2008, despite significant cross-border integration, especially of wholesale financial markets. However, the policy framework proved inadequate in the context of the major financial crisis in the EU starting in 2007, and especially in the euro area after 2010. That crisis triggered major changes to European financial regulation and to the financial supervisory architecture, most prominently with the creation of three new European supervisory authorities in 2011 and the gradual establishment of European banking union starting in 2012. The banking union is a major structural institutional change for the EU, arguably the most significant since the introduction of the euro. Even in its current highly incomplete form, and with no prospects for rapid completion, the banking union has improved financial supervision in the euro area and increased the euro area’s resilience. Asian financial integration lags well behind Europe, and there is no comparable political and legal integration. Nevertheless, Asia can draw useful lessons from European experiences in multiple areas that include the harmonization of the microprudential framework, proper macroprudential structures, and participation in global financial authorities.
    Keywords: Financial regulation; banking union; european union; banking crisis
    JEL: F36 F65 G21 G22 G28
    Date: 2016–12–31
  4. By: Bignon, Vincent; Jobst, Clemens
    Abstract: This paper shows that a central bank can more efficiently mitigate economic crises when it broadens eligibility for its discount facility to any safe asset or solvent agent. We use difference-in-differences panel regressions and emulate crises by studying how defaults of banks and non-agricultural firms were affected by the arrival of an agricultural disease. We exploit the specificities of the implementation of the discount window to deal with the endogeneity of the access to the central bank to the arrival of the crisis and local default rates. We find that broad eligibility reduced significantly the increase in the default rate when the shock hit the local economy. A counterfactual exercise shows that defaults would have been 10% to 15% higher if the central bank would have implemented the strictest eligibility rule. This effect is identified independently of changes in policy interest rates and the fiscal deficit.
    Keywords: Bagehot rule; Collateral; default rate; discount window
    JEL: E32 E44 E51 E58 N14
    Date: 2017–01
  5. By: Balliester Reis, Thereza
    Abstract: This paper discusses the reasons for Brazil.s high policy real interest rates by considering two opposing views, the orthodox and heterodox approaches. While orthodox authors defend the position that bad domestic policies are the cause of the high interest rate, heterodox economists claim that the international financial system and orthodox policies influence the level of the policy rate in Brazil. The aim of this study is to assess whether the proposed arguments can be supported when comparing Brazilian real interest rates with other developing countries under the same monetary regime. The conclusion is that, although the orthodox and heterodox arguments are both intuitively plausible, when comparing stylized facts and testing the hypotheses econometrically neither is sufficient to elucidate the Brazilian case. The paper concludes by suggesting that there might be political causes of the high real interest rates in Brazil such as a politically influential rentier class.
    Keywords: Brazil,Central Bank,interest rate,monetary policy,developing countries
    JEL: E43 E58
    Date: 2016
  6. By: Yan Carriere-Swallow; Bertrand Gruss; Nicolas E Magud; Fabian Valencia
    Abstract: A long-standing conjecture in macroeconomics is that recent declines in exchange rate pass-through are in part due to improved monetary policy performance. In a large sample of emerging and advanced economies, we find evidence of a strong link between exchange rate pass-through to consumer prices and the monetary policy regime’s performance in delivering price stability. Using input-output tables, we decompose exchange rate pass-through to consumer prices into a component that reflects the adjustment of imported goods at the border, and another that captures the response of all other prices. We find that price stability and central bank credibility have reduced the second component.
    Keywords: Monetary policy;Exchange rate pass-through;Consumer prices;Price stabilization;Developed countries;Emerging markets;Cross country analysis;Exchange rate pass-through, monetary policy credibility.
    Date: 2016–12–13
  7. By: Hirose, Yasuo; Kurozumi, Takushi; Van Zandweghe, Willem (Federal Reserve Bank of Kansas City)
    Abstract: This paper revisits the question of how the Federal Reserve achieved macroeconomic stability after the Great Inflation of the 1970s.
    Keywords: Monetary policy; Great inflation; Equilibrium indeterminacy; Generalized New Keynesian Phillips curve; Sequential Monte Carlo algorithm
    JEL: C11 C52 C62 E31 E52
    Date: 2017–01–04
  8. By: Donato Masciandaro; Davide Romelli
    Abstract: This paper analyzes the pillar of modern central bank governance, i.e. central bank independence, highlighting three contributions. First, we provide a systematic review of the economics of central bank independence. Second, using a principal agent model we design a political economy framework, which explains how politicians can shape central bank governance in addressing macroeconomic shocks, taking into account both the wishes of the citizens and their own personal interests. This framework is then used to interpret the evolution of central bank independence from the Great Inflation throughout the Great Moderation – i.e. from the seventies to the first decade of the twenty-first century – and to the Great Recession during which recent reforms have shaken the design of the central banks by increasing their involvement in banking and financial supervision. Finally, we provide empirical evidence supporting this evolution of central bank independence using recently developed indices of dynamic central bank independence.
    Keywords: Monetary Policy, Central Bank Independence, Banking Supervision, Global Financial Crisis
    JEL: E31 E52 E58 E62
    Date: 2015
  9. 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 cross-border 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: Bank lending channel ; Cross-border bank lending ; Currency denomination ; Monetary transmission
    JEL: E5 F42 G21
    Date: 2016–12
  10. By: Reis, Ricardo
    Abstract: Central banks affect the resources available to fiscal authorities through the impact of their policies on the public debt, as well as through their income, their mix of assets, their liabilities, and their own solvency. This paper inspects the ability of the central bank to alleviate the fiscal burden by influencing different terms in the government resource constraint. It discusses five channels: (i) how inflation can (and cannot) lower the real burden of the public debt, (ii) how seignorage is generated and subject to what constraints, (iii) whether central bank liabilities should count as public debt, (iv) how central bank assets create income risk, and whether or not this threatens its solvency, and (v) how the central bank balance sheet can be used for fiscal redistributions. Overall, it concludes that the scope for the central bank to lower the fiscal burden is limited.
    Keywords: interest rates; monetary policy; Quantitative easing; Reserves
    JEL: E52 E58 E63
    Date: 2017–01
  11. By: Peter Sands; Gordon Liao; Yueran Ma
    Abstract: Operational risk capital requirements represent a relative backwater of the Basel capital framework for banks. We examine both the existing Basel II framework and the latest Basel Committee proposals for reform and conclude that neither are effective in creating the incentives and loss absorbency to minimize negative externalities from operational risk events. We suggest an alternative approach that we believe would be much more effective in achieving the regulatory objectives. We do not offer a view on the amount of capital required, focusing instead on the methodology and structure of the capital requirement.
    Date: 2017–01
  12. By: Crespo Cuaresma, Jesus; Doppelhofer, Gernot; Feldkircher, Martin; Huber, Florian
    Abstract: We analyze the interaction between monetary policy in the US and the global economy proposing a new class of Bayesian global vector autoregressive models that accounts for time-varying parameters and stochastic volatility (TVP-SV-GVAR). Our results suggest that US monetary policy responds to shocks to the global economy, in particular to global aggregate demand and monetary policy shocks. On the other hand, US-based contractionary monetary policy shocks lead to persistent international output contractions and a drop in global inflation rates, coupled with rising interest rates in advanced economies and a real depreciation of currencies with respect to the US dollar. We find considerable evidence for heterogeneity in the spillovers across countries, as well for changes in the transmission of monetary policy shocks over time. (authors' abstract)
    Keywords: Global vector autoregression; time-varying parameters; stochastic volatility; monetary policy; international spillovers
    Date: 2015–11
  13. By: Olivo, Victor
    Abstract: This paper main purpose is to analyze whether Latin America economies as a whole and on an individual basis have achieved price stability, or are moving towards this objective. After a revision of the literature on the quantitative definition of price stability, I adopt the one that has prevailed in most central banks worldwide: an inflation rate of 2% within a range between 1-3%. Comparing observed inflation and a three-year moving average of the inflation rate of Latin American countries with this benchmark, I conclude that the region has attained a low inflation but not price stability. The paper goes on to examine several factors that decrease the benefits and increase the cost of lowering inflation once this has been reduced below 10%. It also evaluates how the monetary policy strategies adopted throughout the region have influenced the achievement of price stability. I conclude that the region should avoid complacency. In a globalized world in which nations compete intensively in international trade and to attract capital flows, the achievement of the price stability objective added to others institutional reforms, could be fundamental.
    Keywords: Keywords: price stability, inflation rate, central banks, monetary policy, interest rate, monetary base.
    JEL: E3 E31 E5 E52 E58
    Date: 2016–11–30
  14. By: Rinke, Saskia; Busch, Marie; Leschinski, Christian
    Abstract: The persistence of inflation rates is of major importance to central banks due to the fact that it determines the costs of monetary policy according to the Phillips curve. This article is motivated by newly available econometric methods which allow for a consistent estimation of the persistence parameter under low frequency contaminations and consistent break point estimation under long memory without a priori assumptions on the presence of breaks. In contrast to previous studies, we allow for smooth trends in addition to breaks as a source of spurious long memory. We support the fi nding of reduced memory parameters in monthly inflation rates of the G7 countries as well as spurious long memory, except for the US. Nevertheless, only a few breaks can be located. Instead, all countries exhibit signi cant trends at the 5 percent level with the exception of the US.
    Keywords: Spurious Long Memory; Breaks; Trends; Inflation; G7 countries
    JEL: C13 E58
    Date: 2017–01
  15. By: Davide Furceri; Prakash Loungani; Aleksandra Zdzienicka
    Abstract: This paper provides new evidence of the effect of monetary policy shocks on income inequality. Using a measure of unanticipated changes in policy rates for a panel of 32 advanced and emerging market countries over the period 1990-2013, the paper finds that contractionary (expansionary) monetary actions increase (reduce) income inequality. The effect, however, varies over time, depending on the type of the shocks (tightening versus expansionary monetary policy) and the state of the business cycle, and across countries depending on the share of labor income and redistribution policies. In particular, we find that the effect is larger for positive monetary policy shocks, especially during expansions. Looking across countries, we find that the effect is larger in countries with higher labor share of income and smaller redistribution policies. Finally, while an unexpected increase in policy rates increases inequality, changes in policy rates driven by an increase in growth are associated with lower inequality.
    Keywords: Monetary policy;Income inequality;Developed countries;Emerging markets;Panel analysis;Time series;monetary policy; monetary policy shocks; income inequality.
    Date: 2016–12–22
  16. By: Juan Carlos Berganza (Banco de España); Pedro del Río (Banco de España); Fructuoso Borrallo (European Central Bank)
    Abstract: In this paper we look at global inflation trends over the last decade and try to disentangle factors that could explain the ultra-low levels of inflation during the recovery from the Great Recession. We review the literature on the subject, which points at possible structural shifts in price and wage setting processes in recent decades, such as inflation’s reduced cyclical sensitivity to domestic economic slack, a bigger role being played by forward-looking inflation expectations, and the increased importance of global factors. We then test empirically whether changes in the coefficients of the Phillips curve in the wake of the global financial crisis can explain the behaviour of inflation over this period for a large group of advanced economies. Our results show a wide range of variation between countries, and in some cases the findings are insufficiently robust to offer a satisfactory explanation of the recent course of inflation. Nevertheless, the persistence of inflation and the increased importance of backward-looking inflation expectations in some countries may pose risks for inflation-expectation anchoring and central bank credibility. Finally, we review the adverse effects on the real economy of ultra-low inflation over an extended period and analyse the policy options for addressing this problem.
    Keywords: inflation, inflation expectations, Phillips curve, monetary policy.
    JEL: E31 E32 E50
    Date: 2016–12
  17. By: Fukuda, Shin-ichi (Asian Development Bank Institute)
    Abstract: This paper explores the spillover effects of Japan’s quantitative and qualitative easing (QQE) on East Asian economies. Under the new monetary policy regime, the Japanese yen depreciated substantially, raising concerns that it would have a regional beggar-thy-neighbor effect. It is thus important to see what effects the QQE had on neighboring economies. Our empirical investigation of East Asian stock markets finds that they first reacted to the yen’s depreciation negatively, yet came to respond positively as the QQE progressed, implying that the QQE had a much smaller beggar-thy-neighbor effect than was originally feared. We show that the QQE benefited East Asian economies because the positive spillover effect of Japan’s stock market recovery dominated the beggar-thy-neighbor effect in the region.
    Keywords: spillovers; quantitative and qualitative easing; qqe; beggar-thy-neighbor effect; East Asia; yen depreciation; stock market
    JEL: E52 F10 F32
    Date: 2017–01–11
  18. By: Malgorzata Olszak (Department of Banking and Money Markets, Faculty of Management, University of Warsaw, Poland); Iwona Kowalska (Department of Mathematics and Statistical Methods, Faculty of Management, University of Warsaw, Poland); Sylwia Roszkowska (Faculty of Economic and Social Sciences, University of £ódŸ, National Bank of Poland, Poland)
    Abstract: In this paper we ask about the capacity of macroprudential policies to reduce the positive association between loans growth and the capital ratio. We focus on aggregated macroprudential policy measures and on individual instruments and test whether their effect on the association between lending and capital depends on bank size, the economic development of a country as well as on the extent of capital account openness. Applying the GMM 2-step Blundell and Bond approach to a sample covering over 60 countries, we find that macroprudential policy instruments reduce the impact of capital on bank lending during both crisis and non-crisis times. This result is stronger in large banks than in other banks. Of individual macroprudential instruments, only borrower-targeted LTV caps and DTI ratio weaken the association between lending and capital. Our results also show that the effect of macroprudential policies on the association between lending and the capital ratio in non-crisis periods is stronger in advanced countries than in emerging countries. Additionally, differentiating by the level of capital account openness, we find that macroprudential policies are more effective in increasing the resilience of banks and thus weakening the association between loan supply and capital ratio for relatively closed economies but less effective for relatively open economies. Generally, with our study we are able to support the view that macroprudential policy has the potential to curb the procyclical impact of bank capital on lending and therefore, the introduction of more restrictive international capital standards included in Basel III and of macroprudential policies are fully justified.
    Keywords: loan supply, capital ratio, procyclicality, macroprudential policy
    JEL: E32 G21 G28 G32
    Date: 2016–08
  19. By: Haoshen Hu (University of Oldenburg); Jörg Prokop (University of Oldenburg - Finance and Banking; ZenTra - Center for Transnational Studies); Hans‐Michael Trautwein (Carl von Ossietzky Universität Oldenburg; ZenTra - Center for Transnational Studies)
    Abstract: We analyse two-way spillover effects between sovereign ratings and bank ratings across 17 Eurozone countries for the period 2002-2013. We show that sovereign rating actions including watchlist placements and outlooks have a significant impact on bank ratings. During the financial crisis, downgrade spillovers from sovereigns to systematically important financial institutions (SIFIs) are stronger than spillovers to non-SIFIs. Moreover, we provide evidence on the existence of a bank-to-sovereign rating transmission channel. Downgrades of SIFIs increase the probability of multiple-notch downgrades of sovereign ratings. Dividing the sample into PIIGS and non-PIIGS subsets, we find bank-to-sovereign spillovers to exist only in the PIIGS subsample.
    Keywords: bank rating, sovereign rating, two-way spillover effect, European sovereign debt crisis
    JEL: F36 G15 G24
    Date: 2016–11
  20. By: Valerio Filoso; Carlo Panico; Erasmo Papagni; Francesco Purificato; Marta Vázquez Suarez
    Abstract: According to the literature, two main factors sparked the European debt crisis: (1) macroeconomic imbalances originated by national governments and (2) institutional design flaws leading to feeble response by European authorities; still, economists disagree on the factors' strength. Using Bai and Perron's technique, we contribute to the debate by identifying break dates in Greece, Italy and Spain daily values of 10-year public bonds’ interest rates and link them to key political and institutional events. Also, employing GARCH and EGARCH models, we investigate how interest rates spreads' volatility reacted to crucial and long-lasting events. Our results uncover the following facts about the crisis: a) it began in May 2010, while the first aid programme for Greece was approved; b) worsened after summer 2011, as the European authorities hastened restructuring the Greek sovereign debt; c) improved only during summer 2012, when the ECB Governing Council approved a programme for the purchase of sovereign bonds. On the whole, our results point at institutional failures as the main cause of the European debt crisis.
    Keywords: European debt crisis, Interest rates, Public debt, Event study.
    JEL: G12 G14 H63
    Date: 2017–01–03
  21. By: Punzi, Maria Teresa (Asian Development Bank Institute); Chantapacdepong, Pornpinun (Asian Development Bank Institute)
    Abstract: We assess the evolution of spillover effects of unconventional monetary policies on Asia and the Pacific region, and evaluate the impact on and implications for the macroeconomy. We develop a Panel Vector Auto Regression model for the Asia and Pacific region for a period covering data from first quarter 2000 until first quarter 2015. We split the overall sample into two subsets: the Pre-Crisis (2000q1–2006q4) and Post-Crisis (2009q1–2015q1) samples. We identify unconventional monetary policy shocks with a shadow interest rate estimated by Krippner (2013). We find that Asia and the Pacific region has responded to the advanced economies’ actions with accommodative monetary policy. Such lower interest rates were coupled with currency appreciation, asset price inflation, and strong movements in capital flows. Foreign investors have shifted their preferences for bonds in Asia and the Pacific. If prior to the Global Financial Crisis, the “global saving glut” hypothesis (i.e., Asian savings flight to the US) was one of the major effects resulting in booming US house prices, it is clear that a reversal effect has dominated the economy after the Global Financial Crisis: funds flight to Asia and the Pacific region putting pressure on asset prices, leading to financial vulnerability.
    Keywords: spillover effects; unconventional monetary policy (UMP); Global Financial Crisis (GFC); funds flight; global savings glut
    JEL: E44 E52 F41
    Date: 2017–01–05
  22. By: Aguilar-Argaez Ana María; Elizondo Rocío; Roldán-Peña Jessica
    Abstract: This document studies the recent evolution of the break-even-inflation implicit in the yields of long-term financial instruments in Mexico. In particular, it analyzes the dynamics of its main components: the long-run inflation expectation and the inflationary risk premium, which are estimated by means of an affine term structure model of interest rates. The results show that the gradual reduction registered in such compensation in the last years is the result of the decrease showed by both components. This reflects, on the one hand, the progressive convergence of the estimated inflation expectation to Banco de México's inflation target as well as its anchoring and, on the other hand, that nominal-bond holders have required a lower hedging against future inflation, possibly, as a reflection of a lower risk perception associated to it.
    Keywords: Inflation;Break-even-inflation;Inflation expectation;Inflationary risk premium
    JEL: E31 E43 E52 G12
    Date: 2016–12
  23. By: Marius del Giudice Rodriguez; Emre Yoldas
    Abstract: In this note, we provide a comparative analysis of inflation swaps for three advanced economies: the United States, the euro area, and the United Kingdom. We consider empirical proxies for energy prices, economic activity, exchange rates, and risky asset prices as potential drivers of inflation expectations and risk premiums in a regression framework.
    Date: 2016–12–30
  24. By: Gabor Fukker (Magyar Nemzeti Bank)
    Abstract: This paper investigates the effects of contagion in interbank lending networks. I introduce a new measure based on the harmonic distance of Acemoglu et al. (2015) and, motivated by their theoretical results, compare it to well-known centrality measures already applied in the systemic risk literature which do not take into account the structure of a contagion mechanism. I derive an explicit formula of size-adjusted harmonic distances and extend it with the usage of liquid assets for a heterogeneous banking system. The simulation results on scale-free and complete networks do not confirm that this new distance would perform better than "off-the-shelf" measures but its performance becomes similar to the best known measures in case of averaged networks which are applied in central banking analysis. This new measure is capable of identifying systemically important institutions and its time variation is also presented in an interbank network. I also test for the scale-free property of the Hungarian interbank lending network and besides, network measures as systemic risk indicators are analyzed on Hungarian data.
    Keywords: systemic risk, financial networks, interbank contagion, macroprudential regulation.
    JEL: D85 E44 G01 G21 G28 L14
    Date: 2017
  25. By: Michelacci, Claudio; Paciello, Luigi
    Abstract: We study the effects of monetary policy announcements in a New Keynesian model, where ambiguity-averse households with heterogenous net financial wealth use a worst-case criterion to assess the credibility of announcements. The announcement of a future loosening of monetary policy leads to the rebalancing of financial asset positions, it can cause credit crunches, and it may prove to be contractionary in the interim before implementation. This is because the households with positive net financial wealth (creditors) are those that are most likely to believe the announcement, due to the potential loss of wealth from the prospective policy easing. And when creditors believe the announcement more than debtors, their expected wealth losses are larger than the wealth gains that debtors expect. So aggregate net wealth is perceived to fall, and the economy can contract owing to lack of aggregate demand, which is more likely when the inequality in wealth is more pronounced. We evaluate the importance of this mechanism, focusing on the start of the ECB's practice of offering forward guidance in July 2013. The inflation expectations of households have responded in accordance with the theory. After matching the entire distribution of European households' net financial wealth, we find that the ECB's announcement is contractionary in our model. In general, redistributing expected wealth may have perverse effects when agents are ambiguity-averse.
    Date: 2017–01
  26. By: Korkut Erturk
    Abstract: Drawing broadly on the literature on the political economy of the financial crisis, the paper looks at deregulation as a market driven process that culminated in a collective action failure. In the run up to the 2008 Financial Crisis strong competition and moral hazard went hand in hand and that raises a flag that needs explanation. The paper argues that opportunistic profit (rent) seeking was more the cause rather than the effect of moral hazard and regulation failure. Deregulation promised higher profitability partly because of better risk management made possible by advances in information technology and partly because financial institutions could take “tail-risks” the full cost of which they did not have to bear. The profits deregulation promised in turn incentivized financial firms to invest in tilting the political process to shape government policy. Because systemic risk cannot be fully privatized social insurance against it is inevitably a common pool (or open) resource, which means that there is an incentive for financial units to over-extract in the form of excessive risk taking in the absence of effective regulation. That explains why with deregulation market competition could culminate in excessive risk taking with mounting social costs. Using simple game theory the paper gives a stylized account of what sustained the deregulatory trend. In the course of deregulation, the regulator’s implicit threat of imposing discipline on financial institutions lost much of its credibility. That, combined with growing plutocracy go a long way in explaining why deregulation became a run-away market driven process that worsened the problem of moral hazard over time.
    Keywords: financial deregulation, collective action failure, excessive risk taking, moral hazard JEL Classification: D72, C70, G20, G18
    Date: 2016

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