nep-cba New Economics Papers
on Central Banking
Issue of 2017‒01‒22
sixteen papers chosen by
Maria Semenova
Higher School of Economics

  1. Money supply and inflation in Europe: Is there still a connection? By Diermeier, Matthias; Goecke, Henry
  2. The Inflation Targeting Debate By Malte Rieth
  3. The risk-adjusted monetary policy rule By Nakata, Taisuke; Schmidt, Sebastian
  4. Specialisation in mortgage risk under Basel II By Eckley, Peter; Benetton, Matteo; Latsi, Georgia; Garbarino, Nicola; Kirwin, Liam
  5. Loan production and monetary policy By LG Deidda; J.E. Galdon-Sanchez; M. Casares
  6. Macroeconomic stabilization, monetary-fiscal interactions, and Europe’s monetary union By Corsetti, Giancarlo; Dedola, Luca; Jarociński, Marek; Maćkowiak, Bartosz; Schmidt, Sebastian
  7. Policy conditionality, structural adjustment and the domestic policy system. Conceptual framework and research agenda By Calliope Spanou
  8. Monetary policy transmission mechanism in Poland.What do we know in 2015? By Mariusz Kapuściński; Andrzej Kocięcki; Halina Kowalczyk; Tomasz Łyziak; Jan Przystupa; Ewa Stanisławska; Anna Sznajderska; Ewa Wróbel
  9. Economic Crises and the Eligibility for the Lender of Last Resort: Evidence from 19th century France. By V. Bignon; C. Jobst
  10. Measuring the Distributions of Public Inflation Perceptions and Expectations in the UK By Murasawa, Yasutomo
  11. Impact of capital regulation on SMEs credit By Jose Felix Izquierdo; Santiago Muñoz; Ana Rubio; Camilo Ulloa
  12. Learning from financial crisis: the experience of Nordic banks By Berglund, Tom; Mäkinen, Mikko
  13. Management and Resolution of Banking Crises: Lessons from Recent European Experience By Patrick Honohan
  14. Quantitative Easing by the Fed and International Capital Flows By Sameer Khatiwada
  15. How effective quantitative easing is in relation to the Gold Standard? A historical approach based on the US experience By Economou, Emmanouel/Marios/Lazaros; Nickos, Kyriazis; Papadamou, Stephanos
  16. Why Insurance Regulation is Crucial for Long-term Investment and Economic Growth By Focarelli, Dario

  1. By: Diermeier, Matthias; Goecke, Henry
    Abstract: Since the outbreak of the European financial and economic crisis in 2008, the monetary policy of the European Central Bank (ECB) has been in crisis mode. The central bankers are attempting to get a grasp on the current low inflation rates and inflation expectations by, among other things, introducing a policy of extreme quantitative easing. The expansion of the Eurosystem's balance sheet was problem-free on this occasion, and the ECB also managed to eventually increase the money supply again. However, ensuring that the growth in the money supply transmutes into higher inflation or inflation expectations has been much more difficult. [...]
    JEL: E31 E52 E58
    Date: 2016
  2. By: Malte Rieth
    Abstract: Inflation targeting has become one of the most prominent monetary regimes around the globe. Proponents argue that it reduces the dynamic inconsistency problem of monetary policy and thereby stabilises prices, which in turn promotes growth. Opponents, on the other hand, say that by focusing on price stability inflation targeting neglects other important policy objectives, such as financial stability, and thereby contributed to the built up of the global financial crisis. This roundup summarises the arguments made in the debate. It concludes that no consensus has emerged in the empirical literature about whether inflation targeting improves macroeconomic performance.
    Date: 2017
  3. By: Nakata, Taisuke; Schmidt, Sebastian
    Abstract: Macroeconomists are increasingly using nonlinear models to account for the effects of risk in the analysis of business cycles. In the monetary business cycle models widely used at central banks, an explicit recognition of risk generates a wedge between the inflation-target parameter in the monetary policy rule and the risky steady state (RSS) of inflation - the rate to which inflation will eventually converge - which can be undesirable in some practical applications. We propose a simple modification to the standard monetary policy rule to eliminate the wedge. In the proposed risk-adjusted policy rule, the intercept of the rule is modified so that the RSS of inflation equals the inflation-target parameter in the policy rule. JEL Classification: E32, E52
    Keywords: effective lower bound, inflation targeting, monetary policy rule, risk, risky steady state
    Date: 2016–11
  4. By: Eckley, Peter (Bank of England); Benetton, Matteo (LSE); Latsi, Georgia (Independent); Garbarino, Nicola (Bank of England); Kirwin, Liam (Bank of England)
    Abstract: Since Basel II was introduced in 2008, two approaches to calculating bank capital requirements have co-existed: lenders’ internal models, and a less risk-sensitive standardised approach. Using a unique dataset covering 7 million UK mortgages for 2005–15, and novel identification, we provide empirical evidence that the differences between these approaches cause lenders to specialise. This leads to systemic concentration of high-risk mortgages in lenders with less sophisticated risk management. Our results have broad implications for the design of the international bank capital framework.
    Keywords: Capital regulation; banking; mortgages; specialisation; risk-taking; Basel II
    JEL: G01 G21 G28
    Date: 2017–01–13
  5. By: LG Deidda; J.E. Galdon-Sanchez; M. Casares
    Abstract: We examine optimal monetary policy in a New Keynesian model with unemployment and financial frictions where banks produce loans using equity as collateral. Firms and households demand loans to finance externally a fraction of their flows of expenditures. Our findings show amplifying business-cycle effects of a more rigid loan production technology. In the monetary policy analysis, the optimal rule clearly outperforms Taylor (1993) rule. The optimized interest-rate response to the external finance premium turns significantly negative when either banking rigidities are high or when financial shocks are the only source of business cycle fluctuations.
    Keywords: external finance,optimal monetary policy,business cycles
    Date: 2016
  6. By: Corsetti, Giancarlo; Dedola, Luca; Jarociński, Marek; Maćkowiak, Bartosz; Schmidt, Sebastian
    Abstract: The euro area has been experiencing a prolonged period of weak economic activity and very low inflation. This paper reviews models of business cycle stabilization with an eye to formulating lessons for policy in the euro area. According to standard models, after a large recessionary shock accommodative monetary and fiscal policy together may be necessary to stabilize economic activity and inflation. The paper describes practical ways for the euro area to be able to implement an effective monetary-fiscal policy mix. JEL Classification: E31, E62, E63
    Keywords: eurobond, government bonds, joint analysis of fiscal and monetary policy, lower bound on nominal interest rates, self-fulfilling sovereign default
    Date: 2016–12
  7. By: Calliope Spanou
    Abstract: Policy conditionality has been a frequently used tool in the context of the Euro zone crisis management. By linking the disbursement of loan instalments to specific policy requirements the macro-economic adjustment programmes used conditionality as leverage to promote structural reforms.How does conditionality induce policy change? This central question is examined by considering conditionality as a ‘mega’ policy instrument that seeks to guide the domestic policy system and define its reform trajectory. Policy conditionality thus determines the areas of reform and prescribes their direction while also defining the means and timeframe within which they have to be implemented. Conditionality impacts on domestic governance and transforms the policy making system into a compliance and implementation mechanism. The paper argues that the reform potential of conditionality relies on its interaction with the domestic political system and policy process. A public policy lens can help to better understand the dynamics inherent in this process as well as highlight the strengths and limitations of conditionality. Following the conventional stages of public policy, the contribution focuses on the political challenges involved and sketches out a prospective empirical research agenda.
    Keywords: Policy conditionality, structural reform, domestic governance, euro crisis management, Policy instrument
    Date: 2016–11
  8. By: Mariusz Kapuściński; Andrzej Kocięcki; Halina Kowalczyk; Tomasz Łyziak; Jan Przystupa; Ewa Stanisławska; Anna Sznajderska; Ewa Wróbel
    Abstract: In this study we present a complex analysis of the monetary policy transmission mechanism in Poland. We find that this mechanism is quite stable, although the relative strength of its channels has been changing. In particular, the decline in the role of the exchange channel over the recent years has been accompanied by the growing role of credit (and the credit channel) and the growing anticipation of economicagents. In connection with the latter, in the assessment of the economic impact of the monetary policy, not only decisions in the scope of short-term interest rates but also central bank communication should be taken into account.
    Keywords: Monetary transmission mechanism, Poland
    JEL: E43 E52
    Date: 2016
  9. By: V. Bignon; C. Jobst
    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 Bank of France would have implemented the strictest eligibility rule. This effect is identified independently of changes in policy interest rates and the fiscal deficit.
    Keywords: discount window, collateral, Bagehot rule, central bank, default rate
    JEL: E32 E44 E51 E58 N14 N54
    Date: 2017
  10. By: Murasawa, Yasutomo
    Abstract: The Bank of England/GfK NOP Inflation Attitudes Survey asks individuals about their inflation perceptions and expectations in eight ordered categories with known boundaries except for an indifference limen. With enough categories for identification, one can fit a mixture distribution to such data, which can be multi-modal. Thus Bayesian analysis of a normal mixture model for interval data with an indifference limen is of interest. This paper applies the No-U-Turn Sampler (NUTS) for Bayesian computation, and estimates the distributions of public inflation perceptions and expectations in the UK during 2001Q1--2015Q4. The estimated means are useful for measuring information rigidity.
    Keywords: Bayesian, Indifference limen, Information rigidity, Interval data, Normal mixture, No-U-turn sampler
    JEL: C11 C25 C46 C82 E31
    Date: 2017–01–16
  11. By: Jose Felix Izquierdo; Santiago Muñoz; Ana Rubio; Camilo Ulloa
    Abstract: The Supporting Factor was introduced in Basel III with the aim of avoiding a reduction in the flow of new credit to SMEs, and the CRR revision published in November 2016 even proposes enlarging its scope to exposures above €1.5bn (but with a lower parameter).
    Keywords: Financial regulation , Spain , Working Paper
    JEL: G20 G21
    Date: 2017–01
  12. By: Berglund, Tom; Mäkinen, Mikko
    Abstract: To study whether banks retain their lessons from the experience of a severe financial crisis, we examine the effects of the systemic banking crisis of the early 1990s in three Nordic countries (Finland, Norway, and Sweden). While this crisis largely bypassed the rest of Europe, we hypothesize that banks in the three affected Nordic countries took their crisis experiences to heart and as a result outperformed other European banks during the 2008 global financial crisis. Based on a large panel data set of Nordic and European banks for the period 1994–2010, our findings support our main hypothesis that the Nordic banks learned from the 1990s crisis and adjusted their business models accordingly. Our descriptive analysis of Nordic banks finds evidence of “lessons learned” in such precautions as robust capital cushions, improvements in management efficiency and higher credit quality demands relative to the rest of Europe.
    JEL: G01 G21 G34
    Date: 2016–12–09
  13. By: Patrick Honohan (Peterson Institute for International Economics)
    Abstract: Several European countries endured severe and costly banking collapses in the past decade. Central banks (both within the euro area and outside) provided extensive liquidity to keep the payments system running smoothly in most—but not all—of these countries. The policy approaches to resolve the banking crises across European countries were remarkably different, reflecting the lack of administrative and legislative preparation for bank resolution. As banking systems that had been allowed to enlarge suffered in the face of the global downturn, the scale of bank failures that swept Europe overwhelmed existing policy structures. Not all the policy choices made seem wise in retrospect; a new policy approach was clearly needed. Along with new institutional arrangements for early warning of systemic instability and a single bank supervisor in the euro area, the European Union has adopted a new policy framework for managing and resolving banking crises in euro area countries. Honohan examines the new regime, which has been in operation since the beginning of 2016, and concludes that despite improvements, more needs to be done to ensure the safety of European financial institutions and prevent future banking crises.
    Date: 2017–01
  14. By: Sameer Khatiwada (IHEID, Graduate Institute of International and Development Studies, Geneva and ILO Regional Office Bangkok)
    Abstract: By employing a novel dataset on international capital flows, this paper examines the impact of Fed’s quantitative easing (QE) policies on flows to emerging markets economies (EMEs) and the EU countries. Episodes of QE are examined separately, with the last episode divided between pre- and post-tapering. We find evidence that QE was associated with an increase in capital inflow, while tapering was associated with a period of retrenchment. The magnitude of the impact varied by different episodes of QE and the types of assets (bonds or equities). Our results show that the EU countries behaved differently than the EMEs. We also find support for the importance of “pull factors” and individual country characteristics for capital inflows. However, the paper shows that episodes of QE accounted for most of the variation in capital inflows during 2008-2014. G20 statements during the episodes of QE show that countries are increasingly cognizant of their inability to control flows and have thus called for better monetary policy coordination to avoid excessive volatility and negative spillovers.
    Keywords: Quantitative Easing (QE), spillovers, capital flows, emerging market economies (EMEs)
    JEL: E44 E52 E58 F32 F41 F42
    Date: 2017–01
  15. By: Economou, Emmanouel/Marios/Lazaros; Nickos, Kyriazis; Papadamou, Stephanos
    Abstract: The current paper contributes to the recent discussion in the US which has to do with the level of efficiency of the QE practices being implemented since 2008 and afterwards until today. It also analyses the basic argumentation of the academics and social and political groups who are in favour of the restoration of the Gold Standard. Thus, the analysis offers a critical approach concerning the US monetary practices linked to the implementation of the gold standard regimes as against to the quantitative easing policies. We conclude that although there are both arguments in favour of or against the abandonment of the QE policies in the US, the implementation (through restoration) of the Gold standard doctrines is very difficult to materialize, especially when an economy faces or has already faced the negative and detrimental side-effects of recession.
    Keywords: US monetary policy, Gold Standard, Quantitative Easing
    JEL: E62 F33 G18 N2
    Date: 2017–01–07
  16. By: Focarelli, Dario (LUISS School of European Political Economy)
    Abstract: This paper focuses on the role of insurers as providers of funds for long-term investment in the real economy, with an examination of the European market. The thesis is that financial regulation, and prudential insurance regulation in particular, crucially affects insurers’ investment behavior and therefore their contribution to financial stability and economic growth, which for many reasons will be increasing in the near future. Accordingly, careful assessment of the effects of Solvency II on the insurance industry is required, bearing in mind the regulatory review planned for 2018.
    Keywords: Insurance; Insurance Companies; Regulation
    JEL: G22 G32 L10
    Date: 2017–01–13

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