nep-cba New Economics Papers
on Central Banking
Issue of 2017‒02‒12
eighteen papers chosen by
Maria Semenova
Higher School of Economics

  1. Global impact of US and euro area unconventional monetary policies: a comparison By Qianying Chen; Marco Lombardi; Alex Ross; Feng Zhu
  2. Backtesting European Stress Tests By Camara, Boubacar; Pessarossi, Pierre; Philippon, Thomas
  3. Bank Response to Higher Capital Requirements: Evidence from a Quasi-Natural Experiment By Reint Gropp; Thomas C. Mosk; Steven Ongena; Carlo Wix
  4. Liquidity Traps and Monetary Policy: Managing a Credit Crunch By Buera, Francisco J.; Nicolini, Juan Pablo
  5. Liquidity Traps and Monetary Policy: Managing a Credit Crunch: Online Appendix By Buera, Francisco J.; Nicolini, Juan Pablo
  6. Optimal Fiscal and Monetary Policy, Debt Crisis and Management By Cristiano Cantore; Paul Levine; Giovanni Melina; Joseph Pearlman
  7. External Monetary Shocks to Central and Eastern European Countries By Pierre LESUISSE
  8. Monetary Policy and Inequality when Aggregate Demand depends on Liquidity By Bilbiie, Florin Ovidiu; Ragot, Xavier
  9. Systemic Risk in Europe By Robert F. Engle; Eric Jondeau; Michael Rockinger
  10. Managing Stigma during a Financial Crisis By Sriya Anbil
  11. Bank Capital Regulation with an Opportunistic Rating Agency By Matthias Efing
  12. Macroprudential policy instruments and procyclicality of loan-loss provisions – cross-country evidence By Malgorzata Olszak; Iwona Kowalska; Sylwia Roszkowska
  13. Intermediation Markups and Monetary Policy Passthrough By Semyon Malamud; Andreas Schrimpf
  14. The political economy of exchange rate stability during the gold standard. The case of Spain, 1874-1914 By Nogues-Marco, Pilar; Martínez-Ruiz, Elena
  15. Uncertainty and Monetary Policy in the US: A Journey into Non-Linear Territory By Giovanni Pellegrino
  16. Yields on sovereign debt, fragmentation and monetary policy transmission in the euro area: A GVAR approach By Victor Echevarria Icaza; Simón Sosvilla-Rivero
  17. Large and state-dependent effects of quasi-random monetary experiments By Jordà, Òscar; Schularick, Moritz; Taylor, Alan M.
  18. US Financial Deregulation: Repeal or Adjust? By Lopez, Claude; Saeidinezhad, Elham

  1. By: Qianying Chen; Marco Lombardi; Alex Ross; Feng Zhu
    Abstract: The paper analyses and compares the domestic and cross-border effects of US and euro area unconventional monetary policy measures on 24 major advanced and emerging economies, based on an estimated global vector error-correction model (GVECM). Unconventional monetary policies are measured using shadow interest rates developed by Lombardi and Zhu (2014). Monetary policy shocks are identified using sign restrictions. The GVECM impulse responses suggest that US unconventional monetary policy generally has stronger domestic and cross-border impacts than euro area non-standard measures. Its spillovers to other economies are estimated to be more sizeable and persistent, especially in terms of output growth and inflation. There is evidence of diverse responses in the emerging economies in terms of exchange rate pressures, credit growth as well as monetary policy. In addition, the strength of cross-border transmission channels to the emerging economies appears to differ for US and euro area policies.
    Keywords: unconventional monetary policy; quantitative easing; shadow interest rate; spillover; global vector error correction model (GVECM)
    Date: 2017–01
  2. By: Camara, Boubacar; Pessarossi, Pierre; Philippon, Thomas
    Abstract: We provide a first evaluation of the quality of banking stress tests in the European Union. We use stress tests scenarios and banks' estimated losses to recover bank level exposures to macroeconomic factors. Once macro outcomes are realized, we predict banks' losses and compare them to actual losses. We find that stress tests are informative and unbiased on average. Model-based losses are good predictors of realized losses and of banks' equity returns around announcements of macroeconomic news. When we perform our tests for the Union as a whole, we do not detect biases in the construction of the scenarios, or in the estimated losses across banks of different sizes and ownership structures. There is, however, some evidence that exposures are underestimated in countries with ex-ante weaker banking systems. Our results have implications for the modeling of credit losses, quality controls of supervision, and the political economy of financial regulation.
    JEL: E2 G2 N2
    Date: 2017–01
  3. By: Reint Gropp (Halle Institute for Economic Research); Thomas C. Mosk (Goethe University Frankfurt); Steven Ongena (University of Zurich and Swiss Finance Institute); Carlo Wix (Goethe University Frankfurt)
    Abstract: We study the impact of higher capital requirements on banks' balance sheets and its transmission to the real economy. The 2011 EBA capital exercise provides an almost ideal quasi-natural experiment, which allows us to identify the effect of higher capital requirements using a difference-in-differences matching estimator. We find that treated banks increase their capital ratios not by raising their levels of equity, but by reducing their credit supply. We also show that this reduction in credit supply results in lower firm-, investment-, and sales growth for firms which obtain a larger share of their bank credit from the treated banks.
    Keywords: bank capital requirements, bank lending, real economy
    JEL: E51 E58 G21 G28
  4. By: Buera, Francisco J. (Federal Reserve Bank of Chicago); Nicolini, Juan Pablo (Federal Reserve Bank of Minneapolis)
    Abstract: We study a model with heterogeneous producers that face collateral and cash-in-advance constraints. A tightening of the collateral constraint results in a credit-crunch-generated recession that reproduces several features of the financial crisis that unraveled in 2007 in the United States. The model can be used to study the effects of the credit-crunch on the main macroeconomic variables and the impact of alternative policies. The policy implications regarding forward guidance are in contrast with the prevalent view in most central banks, based on the New Keynesian explanation of the liquidity trap.
    Keywords: Liquidity trap; Credit crunch; Collateral constraints; Monetary policy; Ricardian equivalence
    JEL: E44 E52 E58 E63
    Date: 2017–02–02
  5. By: Buera, Francisco J. (Federal Reserve Bank of Chicago); Nicolini, Juan Pablo (Federal Reserve Bank of Minneapolis)
    Keywords: Liquidity trap; Credit crunch; Collateral constraints; Monetary policy; Ricardian equivalence
    JEL: E44 E52 E58 E63
    Date: 2017–02–02
  6. By: Cristiano Cantore (University of Surrey); Paul Levine (University of Surrey); Giovanni Melina (City Univeristy and IMF); Joseph Pearlman (City University)
    Abstract: The initial government debt-to-GDP ratio and the government’s commitment play a pivotal role in determining the welfare-optimal speed of fiscal consolidation in the management of a debt crisis. Under commitment, for low or moderate initial government debt-to-GPD ratios, the optimal consolidation is very slow. A faster pace is optimal when the economy starts from a high level of public debt implying high sovereign risk premia, unless these are suppressed via a bailout by official creditors. Under discretion, the cost of not being able to commit is reflected into a quick consolidation of government debt. Simple monetary-fiscal rules with passive fiscal policy, designed for an environment with “normal shocks”, perform reasonably well in mimicking the Ramsey-optimal response to one-off government debt shocks. When the government can issue also long-term bonds – under commitment – the optimal debt consolidation pace is slower than in the case of short-term bonds only, and entails an increase in the ratio between long and short-term bonds.
    JEL: E52 E62 H12 H63
    Date: 2017–02
  7. By: Pierre LESUISSE
    Abstract: Few countries are part of the European Union but on the verge of the Euro-zone. This study aims at identifying the amplitude of the direct ECB monetary policy impact, i.e. the so-called international monetary spillovers, in Central and Eastern European countries (CEECs). The use of a panel-VAR method allows to deal with the small time span and endogeneity. We found that CEECs tend to significantly converge in monetary terms to the ECB standards. The direct impact on real variables remains relatively weak but contrary to the literature, is significant and in line with expectations. A persistent negative adjustment of GDP gives a quick glimpse of a robust reaction against monetary shock when the focus is made on the post-economic crisis period. The exchange rate regime plays a small but significant role in terms of magnitude. This increased interdependence is the result of macroeconomic reforms implemented during the last 25 years.
    Keywords: Monetary integration, External shocks, Panel VAR.
    JEL: F42 E52 C23
    Date: 2017–02
  8. By: Bilbiie, Florin Ovidiu; Ragot, Xavier
    Abstract: Monetary policy design changes a great deal when inequality matters. In our New Keynesian model, aggregate demand depends on liquidity as heterogeneous consumers hold money in face of uninsurable risk and participate infrequently in financial markets. Endogenous fluctuations in precautionary liquidity challenge central bank's aggregate demand management: the Taylor coefficients required for determinacy are in the double digits, for moderate market incompleteness. Responding to inequality or liquidity can restore conventional wisdom. A novel tradeoff for Ramsey-optimal monetary policy arises between inequality and standard---inflation and output---stabilization objectives. Price stability has significant welfare costs that are inequality-related: inflation volatility hinders volatility of constrained agents' consumption.
    Keywords: determinacy; heterogenous agents; incomplete markets; inequality; interest rate rules; limited participation; liquidity constraints; money; optimal (Ramsey) monetary policy; Taylor principle
    JEL: D14 D31 E21 E3 E4 E5
    Date: 2017–01
  9. By: Robert F. Engle (New York University, New York University (NYU), and National Bureau of Economic Research (NBER)); Eric Jondeau (University of Lausanne and Swiss Finance Institute); Michael Rockinger (University of Lausanne, Centre for Economic Policy Research (CEPR), and Swiss Finance Institute)
    Abstract: Systemic risk may be defined as the propensity of a financial institution to be undercapitalized when the financial system as a whole is undercapitalized. In this paper, we investigate the case of non-U.S. institutions, with several factors explaining the dynamics of financial firms returns and with asynchronicity of time zones. We apply this methodology to the 196 largest European financial firms and estimate their systemic risk over the 2000-2012 period. We find that, for certain countries, the cost for the taxpayer to rescue the riskiest domestic banks is so high that some banks might be considered too big to be saved.
    Keywords: Systemic Risk, Marginal Expected Shortfall, Multi-factor Model
    JEL: C32 G01 G20 G28 G32
  10. By: Sriya Anbil
    Abstract: How should regulators design effective emergency lending facilities to mitigate stigma during a financial crisis? I explore this question using data from an unexpected disclosure of partial lists of banks that secretly borrowed from the lender of last resort during the Great Depression. I find evidence of stigma in that depositors withdrew more deposits from banks included on the lists in comparison with banks left off the lists. However, stigma dissipated for banks that were revealed earlier after subsequent banks were revealed. Overall, the results suggest that an emergency lending facility that never reveals bank identities would mitigate stigma.
    Keywords: Great Depression ; Central bank ; Financial crisis ; Stigma
    JEL: G01 G21 G28
    Date: 2017–02
  11. By: Matthias Efing (Ecole Polytechnique Fédérale de Lausanne, Swiss Finance Institute, University of Geneva, and CESifo (Center for Economic Studies and Ifo Institute for Economic Research))
    Abstract: This paper models the strategic interaction between a rating agency, a bank and a bank regulator who lacks information about bank asset risk. The regulator can either (1) make bank capital requirements contingent on credit ratings; or (2) set rating independent capital requirements. Truthful ratings provide efficiency gains because they allow the regulator to constrain high risk bank investment without simultaneously reducing overall investment volume. However, if collusion between the rating agency and the bank corrupts rating quality, rating independent regulation enhances welfare. The welfare benefits are largest if regulators maintain rating contingent capital requirements and discipline rating agencies.
    Keywords: Bank Regulation, Lucas Critique, Collusion, Ratings Inflation, Risk-shifting
    JEL: D82 G21 G24 G28
  12. 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: We analyze the effectiveness of various macroprudential policy instruments in reducing the procyclicality of loan-loss provisions (LLPs) using individual bank information from over 65 countries and applying the two-step GMM Blundell-Bond (1998) approach with robust standard errors. Our research identifies several new facts. Firstly, borrower restrictions are definitely more effective in reducing the procyclicality of loan-loss provisions than other macroprudential policy instruments. This effect is supported in both unconsolidated and consolidated data and is robust to several robustness checks. Secondly, dynamic provisions, large exposure concentration limits and taxes on specific assets are effective in reducing the procyclicality of loan-loss provisions. And finally, we find that both loan-to-value caps and debt-to-income ratios, are especially effective in reducing the procyclicality of LLP of large banks. Off-balance-sheet restrictions, concentration limits and taxes are also effective in reducing the procyclicality of LLP of large banks. Dynamic provisions reduce the procyclicality of LLP independently of bank size.
    Keywords: macroprudential policy, loan-loss provisions, business cycle, procyclicality
    JEL: E32 G21 G28 G32
    Date: 2016–12
  13. By: Semyon Malamud (Ecole Polytechnique Fédérale de Lausanne, Swiss Finance Institute, and Centre for Economic Policy Research (CEPR)); Andreas Schrimpf (Bank for International Settlements (BIS))
    Abstract: We introduce intermediation frictions into the classical monetary model with fully flexible prices. Trade in financial assets happens through intermediaries who bargain over a full set of state contingent claims with their customers. Monetary policy is redistributive and affects intermediaries' ability to extract rents; this opens up a new channel for transmission of monetary shocks into rates in the wider economy, which may be labelled the markup channel of monetary policy. Passthrough efficiency depends crucially on the anticipated sensitivity of future monetary policy to future stock market returns (the "Central Bank Put"). The strength of this put determines the room for maneuver of monetary policy: when it is strong, monetary policy is destabilizing and may lead to market tantrums where deteriorating risk premia, illiquidity and markups mutually reinforce each other; when the put is too strong, passthrough becomes fully inefficient and a surprise easing even begets a rise in real rates.
    Keywords: Monetary Policy, Stock Returns, Intermediation, Market Frictions
    JEL: G12 E52 E40 E44
  14. By: Nogues-Marco, Pilar; Martínez-Ruiz, Elena
    Abstract: This article contributes to the literature on the commitment to gold during the classical period of the gold standard. We use the case of Spain to analyse how national institutional design determined adherence to gold in peripheral countries, and argue that institutional design was the result of negotiation between the government and the central bank. We construct indicators of the relative bargaining power of the two actors to assess their respective influence in determining adherence to gold. Our results show that a powerful government facilitated adherence to the gold standard, but an independent central bank hindered it, especially if confronted by an unstable political authority. Central banks were private institutions whose objective was profit maximization, not monetary stability. Strongly independent private central banks operating in politically very weak countries avoided the responsibility of defending the national currency, even in a stable macroeconomic situation. In peripheral countries, therefore, adherence (or not) to gold was determined by the institutional design in which the monetary system operated.
    Keywords: Gold Standard, Political Economy, Central Bank Independence, Institutional Design, Monetary Stability, Spain
    JEL: E02 E42 E58 F33 N13
    Date: 2017
  15. By: Giovanni Pellegrino (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne; and Department of Economics, University of Verona)
    Abstract: This paper estimates a non-linear Interacted VAR model to assess whether the real effects of monetary policy shocks are milder during times of high uncertainty. In a novel way, uncertainty, i.e., the conditioning indicator discriminating “high†and “low†uncertainty states, is modeled endogenously in the VAR and is found to reduce after an expansionary shock. Generalized Impulse Response Functions à la Koop, Pesaran and Potter (1996) suggest that monetary policy shocks are significantly less powerful during uncertain times, with the peak reactions of a battery of real variables being about two-thirds milder than those during tranquil times. Among the theoretical explanations proposed by the literature, real option effects and precautionary savings appear the ones supported by our results.
    Keywords: Monetary policy shocks, Non-Linear Structural Vector Auto-Regressions, Interacted VAR, Generalized Impulse Response Functions, uncertainty
    JEL: C32 E32 E52
    Date: 2017–02
  16. By: Victor Echevarria Icaza (Universidad Complutense de Madrid Departamento de Fundamentos del Análisis Económico II (Economía Cuantitativa)); Simón Sosvilla-Rivero (Department of Quantitative Economics, Universidad Complutense de Madrid)
    Abstract: The divergence in sovereign yields has been presented as a reason for the lack of traction of monetary policy. We use a GVAR framework to assess the transmission of monetary policy in the period 2005-2016. We identify sovereign yield divergence as a key mechanism by which the leverage channel of monetary policy worked. Unconventional monetary policy was successful in mitigating this effect. When exploring the channels through which yields may affect the heterogeneous transmission of monetary policy, we find that the reaction of bank leverage depended substantially on where the sovereign yield originated, thus providing a mechanism that explains this heterogeneity. Second, large spillover effects meant that yield divergence decreased the traction of monetary policy even in anchor countries. Third, the heterogeneity in the transmission mechanism can be in part attributed to contagion from euro area wide sovereign stress. Fiscal credibility, therefore, may be an appropriate tool to enhance the output effect of monetary policy. Given the importance of spillovers, this credibility may be achieved by changes in the institutional make-up and policies in the euro area
    Keywords: monetary policy, spillovers, euro area crisis
    JEL: E52 E63 F45 H63
    Date: 2017–01
  17. By: Jordà, Òscar; Schularick, Moritz; Taylor, Alan M.
    Abstract: Fixing the exchange rate constrains monetary policy. Along with unfettered cross-border capital flows, the trilemma implies that arbitrage, not the central bank, determines how interest rates fluctuate. The annals of international finance thus provide quasi-natural experiments with which to measure how macroeconomic outcomes respond to policy rates. Based on historical data since 1870, we estimate the local average treatment effect (LATE) of monetary policy interventions and examine its implications for the population ATE with a trilemma instrument. Using a novel control function approach we evaluate the robustness of our findings to possible spillovers via alternative channels. Our results prove to be robust. We find that the effects of monetary policy are much larger than previously estimated, and that these effects are state-dependent.
    Keywords: fixed exchange rates; instru- mental variables; interest rates; local average treatment effect; local projections; monetary experiments; trilemma
    JEL: E01 E30 E32 E44 E47 E51 F33 F42 F44
    Date: 2017–01
  18. By: Lopez, Claude; Saeidinezhad, Elham
    Abstract: While a major overhaul of U.S. financial regulation may be unlikely during the early months of the Trump administration, changes should be expected as his nominees to lead the Treasury Department and financial regulatory agencies are confirmed. This will be the biggest turnover in regulatory leadership since the passage in 2010 of the Dodd-Frank Act, and it may prove to be a test for Basel III, the macroprudential policy framework created by the G20 countries in response to the 2007-2008 financial crisis. This short paper describes what can be expected in the near future due to the changes in leadership in many of the regulatory agency.
    Keywords: Dodd-Frank, US deregulation
    JEL: E6 G1 G2
    Date: 2017

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