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on Central Banking |
| By: | Guglielmo Maria Caporale; Hector Carcel; Luis A. Gil-Alana |
| Abstract: | This paper analyses the stochastic properties of and the bilateral linkages between the central bank policy rates of the US, the Eurozone, Australia, Canada, Japan and the UK using fractional integration and cointegration techniques respectively. The univariate analysis suggests a high degree of persistence in all cases: the fractional integration parameter d is estimated to be above 1, ranging from 1.26 (US) to 1.48 (UK), with the single exception of Japan, for which the unit root null cannot be rejected. Concerning the bivariate results, Australian interest rates are found to be cointegrated with the Eurozone and UK ones, Canadian rates with the UK and US ones, and Japanese rates with the UK ones. The increasing degree of integration of international financial markets and the coordinated monetary policy responses following the global financial crisis might both account for such linkages. |
| Keywords: | Interest Rates; Long memory; Fractional integration and cointegration |
| JEL: | C22 C32 E47 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1648&r=cba |
| By: | Jordi Galí |
| Abstract: | I develop an extension of the basic New Keynesian model with overlapping generations of finitely-lived agents. In contrast with the standard model, the proposed framework allows for the existence of rational expectations equilibria featuring asset price bubbles. I examine the conditions under which bubbly equilibria may emerge and the implications for the design of monetary policy. |
| Keywords: | monetary policy rules, stabilization policies, asset price volatility |
| JEL: | E44 E52 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:959&r=cba |
| By: | Kiyotaka NAKASHIMA (Faculty of Economics, Konan University, Japan); Masahiko SHIBAMOTO (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan); Koji TAKAHASHI (Department of Economics, University of California, San Diego, USA) |
| Abstract: | This paper proposes a novel method for identifying unconventional monetary policy shocks. Our identifying method incorporates the movement in two unconventional monetary policy indicators, namely the size and composition of the central bank’s balance sheet, after its policy decisions. Under some restrictions imposed in the vector autoregressive model, we identify two unconventional policy shocks, quantitative and qualitative shocks, as news shocks that best portend the current and future paths of the unconventional policy indicators in response to the policy shocks. The qualitative easing shocks have expansionary effects on real economy, while the quantitative easing shocks have contractionary effects. |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:kob:dpaper:dp2017-05&r=cba |
| By: | Lozej, Matija (Central Bank of Ireland); Rannenberg, Ansgar (Central Bank of Ireland) |
| Abstract: | We use the Central Bank of Ireland’s DSGE model to investigate the introduction of regulatory loan-to-value and loan-to-income ratios in the mortgage market in 2015, which form part of the Central Bank’s macroprudential measures. The main finding is that while the measures dampen economic activity in the short run, they bring benefits in the medium and long run. Household leverage declines, which lowers the default rate on bank loans. The economy as a whole deleverages and foreign debt decreases significantly. |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:ecolet:04/el/17&r=cba |
| By: | Ricardo Correa; Keshav Garud; Juan M. Londono; Nathan Mislang |
| Abstract: | Using the text of financial stability reports (FSRs) published by central banks, we analyze the relation between the financial cycle and the sentiment conveyed in these official communications. To do so, we construct a dictionary tailored specifically to a financial stability context, which assigns positive and negative connotations based on the sentiment conveyed by words in FSRs. With this dictionary, we construct a financial stability sentiment (FSS) index. Using a panel of 35 countries for the sample period between 2005 and 2015, we find that central banks' FSS indexes are mostly driven by developments in the banking sector and by the indicators that convey information about the health of this sector. We also find that the sentiment captured by the FSS index translates into changes in financial cycle indicators related to credit, asset prices, and systemic risk. Finally, our results show that central banks' sentiment deteriorates just prior to the start of banking crises. |
| Keywords: | Financial stability ; Central bank communications ; Text analysis ; Dictionary ; Sentiment index |
| JEL: | G15 G28 |
| Date: | 2017–03–21 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1203&r=cba |
| By: | Raphael A. Auer (Bank for International Settlements and CEPR); Andrei A. Levchenko (University of Michigan, NBER, and CEPR); Philip Saure (Swiss National Bank) |
| Abstract: | We document that observed international input-output linkages contribute substantially to synchronizing producer price inflation (PPI) across countries. Using a multi-country, industry-level dataset that combines information on PPI and exchange rates with international and domestic input-output linkages, we recover the underlying cost shocks that are propagated internationally via the global input-output network, thus generating the observed dynamics of PPI. We then compare the extent to which common global factors account for the variation in actual PPI and in the underlying cost shocks. Our main finding is that across a range of econometric tests, input-output linkages account for half of the global component of PPI inflation. We report three additional findings: (i) the results are similar when allowing for imperfect cost pass-through and demand complementarities; (ii) PPI synchronization across countries is driven primarily by common sectoral shocks and input-output linkages amplify co-movement primarily by propagating sectoral shocks; and (iii) the observed pattern of international input use preserves fat-tailed idiosyncratic shocks and thus leads to a fat-tailed distribution of inflation rates, i.e., periods of disinflation and high inflation. |
| Keywords: | international inflation synchronization, input linkages |
| JEL: | F33 F41 F42 |
| Date: | 2017–02–15 |
| URL: | http://d.repec.org/n?u=RePEc:mie:wpaper:655&r=cba |
| By: | HOHBERGER, Stefan; PRIFTIS, Romanos; VOGEL, Lukas |
| Abstract: | This paper analyses the macroeconomic effects of the ECB's quantitative easing programme using an open-economy DSGE model estimated with Bayesian techniques. Using data on government debt stocks and yields across maturities we identify the parameter governing portfolio adjustment in the private sector. Shock decompositions suggest a positive contribution of ECB QE to EA year-on-year output growth and inflation of up to 0.4 and 0.5 pp in the standard linearized version of the model. Allowing for an occasionally binding zero-bound constraint by using piecewise linear solution techniques raises the positive impact up to 1.0 and 0.7 pp, respectively. |
| Keywords: | Quantitative easing; Portfolio rebalancing; Bayesian estimation; Open-economy DSGE model; Real GDP |
| JEL: | E44 E52 E53 F41 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2017/04&r=cba |
| By: | João Silvestre |
| Abstract: | Sovereign default contagion in Eurozone has been under attention since the first problems in Greece at the end of 2009. Despite the improvements in the situation, in particular after several European Central Bank non- conventional monetary policy measures, the roots of the problem and policy prescriptions are still fiercely debated today. Using an agent-based model adapted from Tirole (2015), we simulate sovereign default contagion in a world where countries have random incomes, heterogeneous borrowing behaviors and risk aversion levels and where governments have the possibility to enter in ex-ante agreements to protect against default. We conclude that default contagion can be a very fast and ‘destructive’ process, higher spending countries tend to have lower disposable incomes and higher risk aversion levels are associated with lower default rates. |
| JEL: | C63 E62 G01 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:ise:isegwp:wp082017&r=cba |
| By: | Filippo Ippolito; Ali K. Ozdagli; Ander Perez |
| Abstract: | We describe and test a mechanism through which outstanding bank loans affect the firm balance sheet channel of monetary policy transmission. Unlike other debt, most bank loans have floating rates mechanically tied to monetary policy rates. Hence, monetary policy-induced changes to floating rates affect the liquidity, balance sheet strength, and investment of financially constrained firms that use bank debt. We show that firms---especially financially constrained firms---with more unhedged bank debt display stronger sensitivity of their stock price, cash holdings, sales, inventory, and fixed capital investment to monetary policy. This effect disappears when policy rates are at the zero lower bound, which further supports the floating rate mechanism and reveals a new limitation of unconventional monetary policy. We argue that the floating rate channel can have a significant macroeconomic effect due to the large size of the aggregate stock of unhedged floating-rate business debt, an effect at least as important as the bank lending channel through new loans. |
| Keywords: | Bank debt ; Financial constraints ; Firm balance sheet channel ; Floating interest rates ; Hedging ; Monetary policy transmission |
| JEL: | G21 G32 E52 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2017-26&r=cba |
| By: | Rama Cont (Imperial College London); Eric Schaanning (Norges Bank (Central Bank of Norway)) |
| Abstract: | We present a framework for quantifying the impact of re sales in a network of financial institutions with common asset holdings, subject to leverage or capital constraints. Asset losses triggered by macro-shocks may interact with one-sided portfolio constraints, such as leverage or capital constraints, resulting in liquidation of assets, which in turn affects market prices, leading to contagion of losses and possibly new rounds of fire sales when portfolios are marked to market. Price-mediated contagion occurs through common asset holdings, which we quantify through liquidity-weighted overlaps across portfolios. Exposure to price-mediated contagion leads to the concept of indirect exposure to an asset class, as a consequence of which the risk of a portfolio depends on the matrix of asset holdings of other large and leveraged portfolios with similar assets. Our model provides an operational stress testing method for quantifying the systemic risk arising from these effects. Using data from the European Banking Authority, we examine the exposure of the EU banking system to price-mediated contagion. Our results indicate that, even with optimistic estimates of market depth, moderately large macro-shocks may trigger fire sales which may then lead to substantial losses across bank portfolios, modifying the outcome of bank stress tests. Price-mediated contagion leads to a heterogeneous cross-sectional loss distribution across banks, which cannot be replicated simply by applying a macro-shock to bank portfolios in absence of fire sales. Unlike models based on `leverage targeting', which assume symmetric reactions to gains or losses, our approach is based on the asymmetric interaction of portfolio losses with one-sided constraints, distinguishes between insolvency and illiquidity and leads to substantially different loss estimates in stress scenarios. |
| Date: | 2017–03–17 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2017_02&r=cba |
| By: | de Ramon, Sebastian (Bank of England); Francis, William (Bank of England); Milonas, Kristoffer (Bank of England) |
| Abstract: | This paper provides an overview of the dramatic changes in the UK banking sector over the 1989–2013 period, seen through the lens of a newly assembled database built from banks’ regulatory reports. This database, which we refer to as the Historical Banking Regulatory Database (HBRD), covers financial statement and confidential regulatory information for all authorized UK banks and building societies at the consolidated (group) and standalone (bank) level. As a result, it permits both a more comprehensive picture of the UK banking sector as well as a more refined view of subsectors, such as small banks, than possible with other existing data sets (eg from external vendors or aggregate statistics). The overview focuses on developments in banks’ CAMEL characteristics (Capital adequacy, Asset quality, Management skills, Earnings performance and Liquidity), and relates these developments to concurrent regulatory changes, such as the Basel Market Risk Amendment. We also suggest ways in which the database can be used for evidence-based research and policy analysis. |
| Keywords: | Bank regulation; regulatory data; database; CAMEL; capital; capital requirements; asset quality; management; earnings performance; liquidity; funding |
| JEL: | G01 G21 G28 N20 |
| Date: | 2017–03–20 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0652&r=cba |
| By: | Andreas Hanl (Universität Kassel); Jochen Michaelis (Universität Kassel) |
| Abstract: | Cryptocurrencies such as Bitcoins may revolutionize the financial system by at least partially replacing intermediaries such as central banks and commercial banks. The blockchain technology enables users to transact on a peer-to-peer basis. This imposes a serious threat on the financial intermediaries as well as on monetary policy authorities. In this paper, we examine how well cryptocurrencies fulfill the functions of a fiat money and discuss the comparative advantages of cryptocurrencies. We proceed by exploring the implications of digital currencies for the concept and conduct of monetary policy. |
| Keywords: | Bitcoin, Kryptowährung, Geldpolitik |
| JEL: | E42 E52 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:201715&r=cba |
| By: | Frame, W. Scott (Federal Reserve Bank of Atlanta); Mihov, Atanas (Federal Reserve Bank of Richmond); Sanz, Leandro (Federal Reserve Bank of Richmond) |
| Abstract: | This study investigates the implications of cross-country differences in banking regulation and supervision for the international subsidiary locations and risk of U.S. bank holding companies (BHCs). We find that U.S. BHCs are more likely to operate subsidiaries in countries with weaker regulation and supervision and that such location decisions are associated with elevated BHC risk and higher contribution to systemic risk. The quality of BHCs’ internal controls and risk management play an important role in these location choices and risk outcomes. Overall, our study suggests that U.S. banking organizations engage in cross-country regulatory arbitrage with potentially adverse consequences. |
| Keywords: | regulation; supervision; bank holding companies; cross-border operations; subsidiary locations; risk; systemic risk |
| JEL: | G15 G21 G28 |
| Date: | 2017–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2017-02&r=cba |
| By: | Franck Martin (Université de Rennes 1, CREM CNRS, France); Jiangxingyun Zhang (Université de Rennes 1, CREM CNRS, France) |
| Abstract: | This paper tries to evaluate the impact of the ECB's QE programs on the equilibrium of European sovereign bond markets. For this purpose, we develop an original theoretical model to understand the formation of long-term sovereign rates in the euro area. Precisely, it's an international bond portfolio choice model with two countries which generalizes the traditional results of the term structure interest rates theory. Particularly, except for traditional properties, long-term equilibrium rates depend as well as on the anticipated variances and covariances, considered as a component of a volatility risk premium, of future bond yields. By using CDS as a variable to control default risks, the model is tested empirically over the period January 2006 to September 2016. We can conclude that the ECB's QE programs beginning from March 2015, have accelerated the "defragmentation process" of the European bond markets, already initiated since the OMT. However, according to the test à la Forbes and Rigobon, it seems difficult to affirm that QE programs have led to a significant increase in the conditional correlations between bond markets. In a supplementary empirical test, we show that QE has significantly reduced the sensitivities of bond yield spreads to the premiums paid on sovereign CDS. |
| Keywords: | QE impact, Term structure interest rates |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:tut:cremwp:2017-04&r=cba |
| By: | Chu, Angus C.; Cozzi, Guido; Furukawa, Yuichi; Liao, Chih-Hsing |
| Abstract: | This study develops a Schumpeterian growth model with endogenous entry of heterogeneous firms to analyze the effects of monetary policy on economic growth via a cash-in-advance constraint on R&D investment. Our results can be summarized as follows. In the special case of a zero entry cost, an increase in the nominal interest rate decreases R&D, the arrival rate of innovations and economic growth as in previous studies. However, in the general case of a positive entry cost, an increase in the nominal interest rate affects the distribution of innovations that are implemented and would have an inverted-U effect on economic growth if the entry cost is sufficiently large. We also calibrate the model to aggregate data of the US economy and find that the growth-maximizing inflation rate is about 3%, which is consistent with recent empirical estimates. |
| Keywords: | monetary policy, inflation, economic growth, heterogeneous firms |
| JEL: | E41 O3 O4 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:77543&r=cba |
| By: | António Afonso; Jorge Silva |
| Abstract: | We assess the determinants of the 10-year sovereign yield for the period 2000-2015, in Portugal and in Ireland. Results show that the long-term Portuguese sovereign yield increased with the rise of the 10-year Bund yield and during the Securities Markets Programme, but decreased due to financial integration. Additionally, during the period of the economic and financial adjustment programme, there was evidence of additional rises (decreases) due to increases (decreases) in the 3-month Euribor rate, and the level of public debt. EU/IMF funding reduced sovereign yield. Key Words : 10-year sovereign yield, economic and financial adjustment programme, Portugal, Ireland. |
| JEL: | C20 E44 E62 G01 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:ise:isegwp:wp062017&r=cba |