nep-cba New Economics Papers
on Central Banking
Issue of 2017‒01‒29
ten papers chosen by
Maria Semenova
Higher School of Economics

  1. To QE or not to QE? New perspectives of an unconventional way of Eurozone revival after Brexit By Economou, Emmanouel/Marios/Lazaros; Kyriazis, Nikolaos
  2. The impact of the Basel III liquidity coverage ratio on macroeconomic stability: An agent-based approach By Li, Boyao
  3. Surviving the perfect storm: the role of the lender of last resort By Nuno Alves; Diana Bonfim; Carla Soares
  4. Israel's Triumph over Inflation: The Long and Winding Road By Razin, Assaf
  5. Interventions in Markets with Adverse Selection: Implications for Discount Window Stigma By Ennis, Huberto M.
  6. The Federal Reserve’s Evolving Monetary Policy Implementation Framework: 1914-1923 By Chabot, Benjamin
  7. The Household Cash Flow Channel of Monetary Policy By Gianni La Cava; Helen Hughson; Greg Kaplan
  8. Foreign Banks and International Transmission of Monetary Policy: Evidence from the Syndicated Loan Market By Demirguc-Kunt, Asli; Horvath, Balint; Huizinga, Harry
  9. The Missing Bretton Woods Debate over Flexible Exchange Rates By Douglas A. Irwin
  10. Finland: Financial sector Assessment Program; Technical Note-Macroprudential Policy Framework By International Monetary Fund.

  1. By: Economou, Emmanouel/Marios/Lazaros; Kyriazis, Nikolaos
    Abstract: In the aftermath of the UK referendum on 23 June, 2016 that resulted in a sonorous negative decision regarding the willingness of the British people to remain in the EU, a significant number of alarming questions have emerged. Although Europe should have forged in crises, nowadays, many compromises have to be made in order to maintain the European construction as intact as possible. The question we attempt to answer is whether a new phase of unconventional monetary policy in the form of QE would be appropriate to lessen the threat of an upcoming crisis. This is why we examine Eurozone QE perspectives through the prism of the new without the UK era of the EU in order to highlight the pros and cons of the historical Brexit decision. As new rounds of unconventional monetary policy are believed to be essential for supporting the weaker countries in the European south, perspectives of non-conventional success could alter and optimal policies be substantially reformulated subject to the newly-arising constraints.
    Keywords: Brexit, European Union, Quantitative Easing, Eurozone
    JEL: E02 E51 E52 E58 G2 H1
    Date: 2016–09–21
  2. By: Li, Boyao
    Abstract: Commercial banks across the world have been implementing the Basel III accord, which is the most important international response to the 2007-2008 financial crisis. Particularly, the liquidity coverage ratio (LCR) introduced by the Basel III accord is the first global standard for banking liquidity management. Does this requirement work? And what macroeconomic effects does it produce? In order to address such crucial issues, the author develops a stock-flow consistent (SFC)/agent-based computational economic (ACE) model. As he knows, there is a real danger that the requirement restricts the availability of bank credit and hence reducing economic activity. However, in comparison to the prior works, the author finds that the externality is presented as a positive self-reinforcing feedback process, which causes the macroeconomic conditions to spiral downwards. This dynamic feedback process that hardly can be revealed by the current macroeconomic models based on equilibrium analyses. The results also shed some light on the fact that credit creation substantially affects economic activity and macroeconomic stability, as the fundamental reason leading to the results. Therefore, the bank as the driver of credit creation is crucial in an economy, and meanwhile bank regulations have great potential impacts on entire economy rather than only in the bank sector itself.
    Keywords: credit creation,liquidity coverage ratio,bank regulation,economic stability,agentbased macroeconomics,stock-flow consistency,business cycle,crisis
    JEL: E27 E44 E51 E32 G01 G28
    Date: 2017
  3. By: Nuno Alves; Diana Bonfim; Carla Soares
    Abstract: When banks are hit by a severe liquidity shock, central banks have a key role as lenders of last resort. Despite the well-established importance of this mechanism, there is scarce empirical evidence that allows analyzing this key role of central banks. We are able to explore a unique setting in which banks suddenly lose access to market funding due to contagion fears at the onset of the euro area sovereign debt crisis. Using monthly data at the loan, bank, and firm level, we are able to test the role of the central bank in a scenario of imminent collapse. We find that the liquidity obtained from the central bank played a critical role in avoiding the materialization of such a scenario.
    JEL: E44 E5 G21
    Date: 2016
  4. By: Razin, Assaf
    Abstract: The paper gives an economic-history perspective of the long struggle with Inflation. It covers the early acceleration to three-digit levels, lasting 8 years; The stabilization program, based on political backing triggered sharp fall in inflationary expectation, and consequently to sharp inflation reduction to two- digit levels; The convergence to the advanced countries' levels during the "great Moderation", And Israel's resistance to the deflation-depression forces that the 2008 crisis created. The emphasis is on the forces of globalization and the building of institutions, political, regulatory, financial, budget design, and monetary, which helped stabilize prices and output.
    Keywords: Deflation-Depression forces; Hyperinflation; Stabilization
    JEL: E00 E6 F3 F38
    Date: 2017–01
  5. By: Ennis, Huberto M. (Federal Reserve Bank of Richmond)
    Abstract: I study the implications for central bank discount window stigma of the model by Philippon and Skreta (2012). I take an equilibrium perspective for a given discount window program instead of following the program-design approach of the original paper. This allows me to narrow the focus on the model's positive predictions. In the model, firms (banks) need to borrow to finance a productive project. There is limited liability and firms have private information about their ability to repay their debts. This creates an adverse selection problem. The central bank can ameliorate the impact of adverse selection by lending to firms. Discount window borrowing is observable and it may be taken as a signal of firms' credit worthiness. Under some conditions, firms borrowing from the discount window may pay higher interest rates to borrow in the market, a phenomenon often associated with the presence of stigma. I discuss these conditions in detail and what they suggest about the relevance of stigma as an empirical phenomenon.
    Keywords: Banking; Federal Reserve; Central Bank; Policy; Lender of last resort
    JEL: E51 E58 G21 G28
    Date: 2017–01–09
  6. By: Chabot, Benjamin (Federal Reserve Bank of Chicago)
    Abstract: The Federal Reserve has relied upon a number of different monetary policy implementation frameworks throughout its history. This paper describes the original implementation framework that evolved between 1914 and 1923 in response to new policy objectives and changing market conditions.
    Keywords: Monetary policy implementation; standing facilities; open market operations
    JEL: E52 E58 E59
    Date: 2017–01–18
  7. By: Gianni La Cava (Reserve Bank of Australia); Helen Hughson (Reserve Bank of Australia); Greg Kaplan (Reserve Bank of Australia)
    Abstract: We explore whether changes in interest rates affect household consumption by changing the amount of cash that households have to spend – the household cash flow channel of monetary policy. Based on a panel of Australian households, we find that, when interest rates decline, the cash flows and durable goods spending of households with variable-rate mortgage debt increases relative to comparable fixed-rate borrowers. This is consistent with a 'borrower' cash flow channel. We also find that lower interest rates reduce the cash flows available to households that receive interest on bank deposits and that this, in turn, is associated with lower spending by these households. This is consistent with a 'lender' cash flow channel. Overall, the borrower channel is a stronger channel of monetary transmission than the lender channel, such that lower interest rates will typically increase household cash flows and lead to higher spending in aggregate. The central estimates imply that lowering interest rates by 100 basis points would be associated with an increase in aggregate household expenditure of about 0.1 to 0.2 per cent per annum. Overall, the household cash flow channel appears to be an important channel of monetary transmission in Australia.
    Keywords: cash flow; consumption; liquidity constraints; monetary policy; mortgage debt
    JEL: D31 E21 E52
    Date: 2016–12
  8. By: Demirguc-Kunt, Asli; Horvath, Balint; Huizinga, Harry
    Abstract: This paper uses loan-level data from 124 countries over 1995–2015 to examine the transmission of monetary policy through the cross-border syndicated loan market. The results show that the expansion of monetary policy increases cross-border credit supply especially to weaker firms. However, greater foreign bank presence in the borrower country appears to reduce the potentially destabilizing impact of lower policy interest rates on cross-border lending, as it attenuates increases in loan volume and maturity while magnifying increases in collateralization and covenant use. The mitigating effect of foreign banking presence in the borrowing country on the transmission of monetary policy is robust to controlling for borrower-country economic and financial development, and a range of borrower and lender country policies and institutions, including the strength of bank regulation and supervision, exchange rate flexibility, and restrictions on capital flows. The findings qualify the characterization of international banks as sources of credit instability, and suggest that foreign bank entry can improve the stability of cross-border credit in the face of international monetary policy shocks.
    Keywords: Bank Regulation; Banking FDI; capital controls; Cross-border lending; Monetary Transmission
    JEL: E44 E52 F34 F38 F42 G15 G20
    Date: 2017–01
  9. By: Douglas A. Irwin
    Abstract: The collapse of the gold standard in the 1930s sparked a debate about the merits of fixed versus floating exchange rates. Yet the debate quickly vanished: there was almost no discussion about the exchange rate regime at the Bretton Woods conference in 1944 because John Maynard Keynes and Harry Dexter White agreed that exchange rate stability through fixed but adjustable pegs was the right approach. In light of the difficult macroeconomic tradeoffs experienced under the gold standard a decade earlier, the outright rejection of floating exchange rates seems surprising. This paper explores the views of leading economists about the exchange rate provisions in the Bretton Woods agreement and examines why arguments for floating exchange rates were so quickly dismissed.
    JEL: B22 F31 F33
    Date: 2017–01
  10. By: International Monetary Fund.
    Abstract: The macroprudential policy framework in Finland has experienced major changes recently and the mandate has become shared with the ECB. First, a domestic framework was formalized in 2014. The Board of the Financial Supervisory Authority (FIN-FSA) was designated as the authority to implement a set of macroprudential instruments in Finland, and a coordination mechanism among domestic authorities for macroprudential policy, including the Bank of Finland (BoF), was established. Second, with the start of the European Single Supervisory Mechanism (SSM) in 2014, the European Central Bank (ECB) was designated as a macroprudential authority for the euro area, with the European Systemic Risk Board (ESRB) continuing to play an advisory role for all European Union (EU) countries. As a result, macroprudential policy has become a shared responsibility among the national authorities, and the European Union and euro-area level authorities.
    Keywords: Financial Sector Assessment Program;Macroprudential Policy;Housing;Housing prices;Financial sector;Banks;Credit expansion;Financial risk;Financial stability;Finland;
    Date: 2017–01–11

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