nep-cba New Economics Papers
on Central Banking
Issue of 2017‒05‒14
25 papers chosen by
Maria Semenova
Higher School of Economics

  1. Macroprudential Policy, Central Banks and Financial Stability: Evidence from China By Klingelhöfer, Jan; Sun, Rongrong
  2. Evaluating the impact of macroprudential policies on credit growth in Colombia By Esteban Gómez; Angélica Lizarazo; Juan Carlos Mendoza; Andrés Murcia Pabón
  3. Are risk-based capital requirements detrimental to corporate lending? Evidence from Europe By Bruno, Brunella; Nocera, Giacomo; Resti, Andrea Cesare
  4. Capital Requirements, Risk-Taking and Welfare in a Growing Economy By Pierre-Richard Agénor; Luiz A. Pereira da Silva
  5. Liquidity risk and financial stability regulation By Paul Pichler; Flora Lutz
  6. Asymmetric Monetary and Exchange Rate Policies in Latin America By Libman, Emiliano
  7. Household Debt, Macroprudential Rules, and Monetary Policy By Nurlan Turdaliev; Yahong Zhang
  8. Rationalizing the Bias in Central Banks' Interest Rate Projections By Michael Frenkel; Jin-Kyu Jung; Jan-Christoph Rülke
  9. International financial integration, crises and monetary policy: evidence from the Euro area interbank crises By Puriya Abbassi; Falk Brauning; Falko Fecht; José-Luis Peydró
  10. Formation of inflation expectations in turbulent times. Recent evidence from the European Survey of Professional Forecasters By Tomasz Łyziak; Maritta Paloviita
  11. Uncertainty and monetary policy in good and bad times By Caggiano, Giovanni; Castelnuovo, Efrem; Nodari, Gabriela
  12. The impact of macroprudential policies and their interaction with monetary policy: an empirical analysis using credit registry data By Leonardo Gambacorta; Andrés Murcia Pabón
  13. Prudential policies and their impact on credit in the United States By Paul Calem; Ricardo Correa; Seung Jung Lee
  14. Do stress tests matter? Evidence from the 2014 and 2016 stress tests By Georgescu, Oana-Maria; Gross, Marco; Kapp, Daniel; Kok, Christoffer
  15. Monetary policy at work: Security and credit application registers evidence By José-Luis Peydró; Andrea Polo; Enrico Sette
  16. Whatever it takes: The Real Effects of Unconventional Monetary Policy By Acharya, Viral V; Eisert, Tim; Eufinger, Christian; Hirsch, Christian
  17. A CVAR scenario for a standard monetary model using theory-consistent expectations By Katarina Juselius
  18. Clustering and forecasting inflation expectations using the World Economic Survey: the case of the 2014 oil price shock on inflation targeting countries By Hector M. Zarate-Solano; Daniel R. Zapata-Sanabria
  19. A Central Bank Theory of Price Level Determination By Benigno, Pierpaolo
  20. Reforming the European Monetary Union By Chari, V. V.; Dovis, Alessandro; Kehoe, Patrick J.
  22. Exchange rate regime and external adjustment: an empirical investigation for the U.S. By Alberto Fuertes
  23. Controlling inflation with switching monetary and fiscal policies: expectations, fiscal guidance and timid regime changes By Ascari, Guido; Florio, Anna; Gobbi, Alessandro
  24. Flow effects of central bank asset purchases on euro area sovereign bond yields: evidence from a natural experiment By De Santis, Roberto A.; Holm-Hadulla, Fédéric
  25. Drivers of systemic risk: Do national and European perspectives differ? By Buch, Claudia M.; Krause, Thomas; Tonzer, Lena

  1. By: Klingelhöfer, Jan; Sun, Rongrong
    Abstract: This paper studies the Chinese case to show that a central bank can use macroprudential policies to play an active role in safeguarding financial stability. The narrative approach is used to disentangle macropudential policy actions from those monetary. We show that many monetary policy tools, such as the reserve requirement, window guidance, supervisory pressure and housing-market policies, can be used for macroprudential purposes. Time series are constructed to measure macroprudential tightness/ease. The VAR estimates suggest that macroprudential policy has immediate and persistent impact on the credit cycle, but no significant effect on output. Macroprudential policy can be used either alone to retain financial stability, without harming the real economy; or as a complement to monetary policy to offset the buildup of financial vulnerabilities resulted from a monetary easing. Our analysis suggests that it is the multi-instrument framework that enables a central bank to achieve both macroeconomic and financial stability objectives. This finding has implications for the current debates on the post-crisis central bank’s operating regime.
    Keywords: macroprudential policy, monetary policy, credit cycle, financial stability, China
    JEL: E44 E52 E58
    Date: 2017–02–15
  2. By: Esteban Gómez; Angélica Lizarazo; Juan Carlos Mendoza; Andrés Murcia Pabón
    Abstract: Macroprudential tools have been used around the world to counter potential risks and imbalances in the financial sector. Colombia is a good example of a country that has employed a variety of regulatory measures to manage systemic risks in the economy. The purpose of this paper is to evaluate the effectiveness of two such policies with a view to increasing systemic resilience and curbing excesses in the credit supply. The first measure, the countercyclical reserve requirement, was implemented in 2007 to control excessive credit growth. The second was the dynamic provisioning scheme for commercial loans, which was designed to establish a countercyclical buffer through loan loss provision requirements. To perform this analysis, a rich dataset based on loan-by-loan information for Colombian banks during the 2006-09 period is used. A fixed effects panel model is estimated using the characteristics of debtors, banks and the macroeconomy as control variables. In addition, a difference in differences estimation is performed to evaluate the policies' impact. The findings suggest that the dynamic provisions and the countercyclical reserve requirement had a negative effect on credit growth, and that this effect varies according to bank-specific characteristics. Results also suggest that the aggregate macroprudential policy stance in Colombia has worked effectively to stabilize credit cycles, with some preliminary evidence also pointing towards significant effects in reducing bank risk-taking. Moreover, evidence is found that macroprudential policies have worked as a complement to monetary policy, as both have a moderating effect on credit growth when tightened.
    Keywords: Macroprudential policies, reserve requirements, credit growth, dynamic provisioning, credit registry data
    Date: 2017–05
  3. By: Bruno, Brunella; Nocera, Giacomo; Resti, Andrea Cesare
    Abstract: In this paper, we first explore the main drivers of the differences in RWAs across European banks. We also assess the impact of RWA-based capital regulation on bank's asset allocation in 2008-2014. We find that risk weights are affected by bank size, business models, and asset mix. We also find that the adoption of internal ratings-based approaches is an important driver of bank risk-weighted assets and that national segmentations explain a significant (albeit decreasing) share of the variability in risk weights. As for the impact on internal rating on banks' asset allocation, we uncover that banks using IRB approaches more extensively have reduced more (or increased less) their corporate loan portfolio. Such effect is somehow stronger for banks located in Euro periphery countries during the 2010-12 sovereign crisis. We do not find evidence, however, of a reallocation from corporate loans to government exposures, pointing to the fact that other motives prevail in explaining the banks' shift towards government bonds during the Euro sovereign crisis, including the "financial repression" channel.
    Date: 2017–04
  4. By: Pierre-Richard Agénor; Luiz A. Pereira da Silva
    Abstract: The effects of capital requirements on risk-taking and welfare are studied in a stochastic overlapping generations model of endogenous growth with banking, limited liability, and government guarantees. Capital producers face a choice between a safe technology and a risky (but socially inefficient) technology, and bank risk-taking is endogenous. Setting the capital adequacy ratio above a structural threshold can eliminate the equilibrium with risky loans (and thus inefficient risk-taking), but numerical simulations show that this may entail a welfare loss. In addition, the optimal ratio may be too high in practice and may concomitantly require a broadening of the perimeter of regulation and a strengthening of financial supervision to prevent disintermediation and distortions in financial markets.
    Keywords: Capital Requirements, Bank risk-taking, Investment, Financial Stability, Economic Growth, Capital Goods, Financial Regulation, Financial Intermediaries, Financial Markets, risky investments, financial regulation, financial stability
    JEL: O41 G28 E44
    Date: 2017–03
  5. By: Paul Pichler; Flora Lutz
    Abstract: We study banks' borrowing and investment decisions in an economy with pecuniary externalities and both aggregate and idiosyncratic liquidity risk. We show that private decisions by pro t-maximizing banks always result in socially inecient outcomes, but the nature of ineciency depends critically on the structure of liquidity risk. Overborrowing and overinvestment in risky assets arises only if idiosyncratic risk is suciently small. By contrast, if idiosyncratic risk is large, unregulated banks underborrow, underinvest and hold insucient liquidity reserves. A macroprudential regulator can restore constrained eciency by imposing countercyclical reserve requirements. Pigouvian taxes or bank capital requirements cannot achieve this objective.
    JEL: E44 E58 G21 G28
    Date: 2017–04
  6. By: Libman, Emiliano
    Abstract: During the last decades, the number of countries that adopted more fexible exchange rate regimes, in particular Inflation Targeting, has been increasing steadily. Latin-America was no exception. Some authors have argued that there is a flaw in the way in which the system has been conducted in the region. When inflation falls, the Central Bank is reluctant to cut interest rates, but when inflation increases, the Central Bank is willing to raise interest rates very aggressively, adding an unnecessary bias to monetary and exchange rate policies. This paper analyzes the asymmetry of monetary and exchange rate policies in the five largest Latin-American Inflation Targeting countries, Brazil, Chile, Colombia, Mexico, and Peru. Using different econometric techniques, I find that the Central Banks, with the exception of Chile, suffer from "fear of floating". This is a more pronounced phenomenon for the case of Brazil and Mexico, as the literature has argued.
    Keywords: Exchange Rates, Exchange Rate Regimes, Inflation Targeting, Asymmetric Policy Rule, Markov-Switching Models, GMM, STAR Models.
    JEL: E58 F30 F41 F43
    Date: 2017–04–30
  7. By: Nurlan Turdaliev (Department of Economics, University of Windsor); Yahong Zhang (Department of Economics, University of Windsor)
    Abstract: Today's Canadian economy features a historic high of household debt and persistently low growth rate. The average debt-to-GDP ratio has reached the level experienced in the U.S. just prior to the recent financial crisis. Should monetary policy lean against the household indebtedness or are macroprudential policies better suited for the task? To provide a quantitative answer, this paper develops a small open economy dynamic stochastic general equilibrium model featuring a banking sector that channels funds between household savers and borrowers. We estimate the model using the Canadian data from 1991Q1 to 2015Q3 and conduct policy experiments. We find that using monetary policy that reacts to household indebtedness increases inflation volatility and lowers borrowers' welfare, while using macroprudential policies such as lowering the loan-to-value ratio limit increases borrowers' welfare.
    Keywords: household debt, macroprudential rules, monetary policy
    JEL: E32 E44 E52
    Date: 2017–05
  8. By: Michael Frenkel; Jin-Kyu Jung; Jan-Christoph Rülke
    Abstract: In this paper, we study the bias in interest rate projections for four central banks, namely for Czech Republic, New Zealand, Norway, and Sweden. We examine whether central bank projections are based on an asymmetric loss function and report evidence that central banks perceive an overprojection of their longer-term interest rate forecasts as twice as costly as an underprojection of the same size. We document that rationality is consistent with biased interest rate projections which contribute to explaining the central banks’ behavior.
    Keywords: Interest rate forecasts, Central bank communication, Asymmetric loss
    JEL: E43 E47 E58
    Date: 2017–04–26
  9. By: Puriya Abbassi; Falk Brauning; Falko Fecht; José-Luis Peydró
    Abstract: We analyze how financial crises affect international financial integration, exploiting euro-area proprietary interbank data, crisis and monetary shocks, and loan terms to the same borrower-day by domestic versus foreign lenders. Crisis shocks reduce the supply of cross-border liquidity, with stronger volume than pricing effects, thereby impairing international financial integration. On the extensive margin, there is flight to home—but independently of quality. On the intensive margin, however, GIPS-headquartered debtor banks suffer in the Lehman crisis, but effects are stronger in the sovereign-debt crisis, especially for riskier banks. Nonstandard monetary policy improves interbank liquidity, but without fostering strong cross-border financial re-integration.
    Keywords: financial integration, financial crises, cross-border lending, monetary policy, euro area sovereign crisis, liquidity
    JEL: E58 F30 G01 G21 G28
    Date: 2017–05
  10. By: Tomasz Łyziak (Narodowy Bank Polski); Maritta Paloviita (Bank of Finland)
    Abstract: This paper analyses formation of inflation expectations in the euro area. At the beginning we analyse forecast accuracy of ECB inflation projections relative to private sector forecasts. Then, using the ECB Survey of Professional Forecasters, we estimate a general model integrating two theoretical concepts, i.e. the hybrid model of expectations, including rational and static expectations, and the sticky-information (epidemiological) model. Among determinants of inflation expectations we consider – except backward-looking factors – rational expectations assumption and the effects of the ECB inflation projections. We examine whether ECB inflation projections are still important in expectations’ formation once the impact of forwardlookingness of economic agents has been taken into account. We also assess the consistency of implicit (perceived) inflation targets with the ECB inflation target. Our analysis indicates that recent turbulent times have contributed to changes in expectations’ formation in the euro area, as the importance of backward-looking mechanisms has decreased and the importance of the perceived inflation target has increased. We also find that the perceived inflation target has remained broadly consistent with the official ECB inflation target in the medium-term. However, the downward trend of the perceived target signals some risks of de-anchoring of inflation expectations. The importance of ECB inflation projections for mediumterm private sector inflation expectations has increased over time, but the magnitude of this effect is rather small. However, SPF inflation forecasts remain consistent with the ECB communication, being ether close to ECB projections or between ECB projections and the inflation target.
    Keywords: Formation of inflation expectations, survey data, euro area, financial crisis, low inflation
    JEL: D84 E52 E58
    Date: 2017
  11. By: Caggiano, Giovanni; Castelnuovo, Efrem; Nodari, Gabriela
    Abstract: We investigate the role played by systematic monetary policy in tackling the real effects of uncertainty shocks in U.S. recessions and expansions. We model key indicators of the business cycle with a nonlinear VAR that allows for different dynamics in busts and booms. Uncertainty shocks are identi ed by focusing on historical events that are associated to jumps in nancial volatility. Uncertainty shocks hitting in recessions are found to trigger a more abrupt drop and a faster recovery in real activity than in expansions. Counterfactual simulations suggest that the effectiveness of systematic monetary policy in stabilizing real activity is greater in expansions. Finally, we provide empirical and narrative evidence pointing to a risk management approach by the Federal Reserve.
    JEL: C32 E32
    Date: 2017–05–04
  12. By: Leonardo Gambacorta; Andrés Murcia Pabón
    Abstract: This paper summarises the results of a joint research project by eight central banks in the Americas region to evaluate the effectiveness of macroprudential tools and their interaction with monetary policy. In particular, using meta-analysis techniques, we summarise the results for five Latin American countries (Argentina, Brazil, Colombia, Mexico and Peru) that use confidential bank-loan data. The use of granular credit registry data helps us to disentangle loan demand from loan supply effects without making strong assumptions. Results from another three countries (Canada, Chile and the United States) corroborate the analysis using data for credit origination and borrower characteristics. The main conclusions are that (i) macroprudential policies have been quite effective in stabilising credit cycles. The propagation of the effects to credit growth is more rapid (they materialise after one quarter) for policies aimed at curbing the cycle than for policies aimed at fostering resilience (which take effect within a year); and (ii) macroprudential tools have a greater effect on credit growth when reinforced by the use of monetary policy to push in the same direction.
    Keywords: macroprudential policies, bank lending, credit registry data, meta-analysis
    Date: 2017–05
  13. By: Paul Calem; Ricardo Correa; Seung Jung Lee
    Abstract: We analyze how two types of recently used prudential policies affected the supply of credit in the United States. First, we test whether the U.S. bank stress tests had any impact on the supply of mortgage credit. We find that the first Comprehensive Capital Analysis and Review (CCAR) stress test in 2011 had a negative effect on the share of jumbo mortgage originations and approval rates at stress-tested banks-banks with worse capital positions were impacted more negatively. Second, we analyze the impact of the 2013 Supervisory Guidance on Leveraged Lending and subsequent 2014 FAQ notice, which clarified expectations on the Guidance. We find that the share of speculative-grade term-loan originations decreased notably at regulated banks after the FAQ notice.
    Keywords: bank stress tests, CCAR, Home Mortgage Disclosure Act (HMDA) data, jumbo mortgages, leveraged lending, macroprudential policy, Shared National Credit (SNC) data, Interagency Guidance on Leveraged Lending, syndicated loan market
    Date: 2017–05
  14. By: Georgescu, Oana-Maria; Gross, Marco; Kapp, Daniel; Kok, Christoffer
    Abstract: Stress tests have been increasingly used in recent years by regulators to foster confidence in the banking sector by not only increasing its resilience via mandatory capital increases but also by enhancing transparency to allow investors to better discriminate between banks. In this study, using an event study approach, we explore how market participants reacted to the 2014 Comprehensive Assessment and the 2016 EBA EU-wide stress test. The results show that stress test disclosures revealed new information that was priced by the markets. We also provide evidence that the publication of stress test results enhanced price discrimination as the impact on bank CDS spreads and equity prices tended to be stronger for the weaker performing banks in the stress test. Finally, we provide some evidence that also sovereign funding costs were affected in the aftermath of the stress test publications. The results provide insights into the effects and usefulness of stress test-related disclosures. JEL Classification: G14, G18, G21
    Keywords: bank stress tests, disclosure, event study
    Date: 2017–05
  15. By: José-Luis Peydró; Andrea Polo; Enrico Sette
    Abstract: The potency of the bank lending channel of monetary policy may be limited if banks rebalance their portfolios towards securities, e.g. to pursue risk-shifting or liquidity hoarding. To test for the bank lending and risk-taking (reach-for-yield) channels, we therefore analyze banks’ securities trading, in addition to credit supply, in turn allowing us to also study the empirical relevance of key financial frictions. For identification, since the creation of the euro, we exploit the security and credit application registers owned by the central bank of Italy. In crisis times, we find that, with softer monetary policy, less capitalized banks prefer buying securities rather than increasing credit supply (not due to lack of good loan applications), thereby impacting firm-level real outcomes. Moreover, more – not less – capitalized banks reach-for-yield, which is inconsistent with the risk-shifting hypothesis. Results suggest that the main drivers at work are access to liquidity and risk-bearing capacity, and not regulatory capital arbitrage. Finally, in pre-crisis times, when financial frictions are limited, less capitalized banks do not expand securities holdings over credit supply.
    Keywords: monetary policy, securities, loan applications, bank capital, reach-for-yield, held to maturity, available for sale, trading book, haircuts, regulatory arbitrage, sovereign debt
    JEL: E51 E52 E58 G01 G21
    Date: 2017–04
  16. By: Acharya, Viral V; Eisert, Tim; Eufinger, Christian; Hirsch, Christian
    Abstract: Launched in Summer 2012, the European Central Bank (ECB)'s Outright Monetary Transactions (OMT) program indirectly recapitalized European banks through its positive impact on periphery sovereign bonds. However, the stability reestablished in the banking sector did not fully translate into economic growth. We document zombie lending by banks that remained undercapitalized even post-OMT. In turn, firms receiving loans used these funds not to undertake real economic activity such as employment and investment but to build up cash reserves. Creditworthy firms in industries with a high zombie firm prevalence suffered significantly from this credit misallocation, which further slowed down the economic recovery.
    Date: 2017–04
  17. By: Katarina Juselius (Department of Economics, University of Copenhagen)
    Abstract: A theory-consistent CVAR scenario describes a set of testable regularities capturing basic assumptions of the theoretical model. Using this concept, the paper considers a standard model for exchange rate determination and shows that all assumptions about the model?s shock structure and steady-state behavior can be formulated as testable hypotheses on common stochastic trends and cointegration. While the scenario was rejected on essentially all counts, the results were informative about the cause of the empirical failure. It was the stationarity assumptions that were too restrictive to explain the long persistent swings in the real exchange rate and the interest rate differential.
    Keywords: Theory-Consistent CVAR, Expectations, International Puzzles, Long Swings, Persistence, Imperfect Knowledge
    JEL: F31 F41 G15 G17
    Date: 2017–04–10
  18. By: Hector M. Zarate-Solano (Banco de la República de Colombia); Daniel R. Zapata-Sanabria (Banco de la República de Colombia)
    Abstract: This paper examines inflation expectations of the World Economic Survey for ten inflation targeting countries. First, by a Self Organizing Maps methodology, we cluster the trajectory of agents inflation expectations using the beginning of the oil price shock occurred in June of 2014 as a benchmark in order to discriminate between those countries that anticipated the shock smoothly and those with brisk changes in expectations. Then, the expectations are modeled by artificial neural networks forecasting models. Second, for each country we investigate the information content of the quantitative survey forecast by comparing it to the average annual inflation based on national consumer price indices. The results indicate the presence of heterogeneity among countries to anticipate inflation under the oil shock and, also different patterns of accuracy to predict average annual inflation were found depending on the observed inflation trend. Classification JEL: C02, C222, C45, C63, E27
    Keywords: Inflation expectations, machine learning, self-organizing maps, nonlinear autoregressive neural network, expectation surveys
    Date: 2017–05
  19. By: Benigno, Pierpaolo
    Abstract: A theory in which the central bank controls the price level is put forward as an alternative to the fiscal theory of the price level. It is not necessary to have a fiscal stimulus to avoid liquidity traps nor a fiscal anchor to disallow inflationary spirals. A central bank appropriately capitalized can succeed to control the price level by setting the interest rate on reserves, holding risk-free assets and rebating its income to the treasury -- from which it has to maintain financial independence. If the central bank undertakes unconventional open-market operations, either it has to give up its financial independence or leaves the economy exposed to self-fulfilling inflationary spirals or chronic liquidity traps.
    Date: 2017–04
  20. By: Chari, V. V. (Federal Reserve Bank of Minneapolis); Dovis, Alessandro (University of Pennsylvania); Kehoe, Patrick J. (Federal Reserve Bank of Minneapolis)
    Abstract: We offer a theoretically based narrative that attempts to account both for the formation of the European Monetary Union (EMU) and for the challenges it has faced. Lack of commitment to policy plays a central role in this narrative and leads to four policy implications for EMU redesign.
    Date: 2017–05–08
  21. By: Rüdiger Bachmann; Sebastian Rüth (-)
    Abstract: What are the macroeconomic consequences of changing aggregate lending standards in residential mortgage markets, as measured by loan-to-value (LTV) ratios? In a structural VAR, GDP and business investment increase following an expansionary LTV shock. Residential investment, by contrast, falls, a result that depends on the systematic reaction of monetary policy. We show that, historically, the Fed tended to respond directly to expansionary LTV shocks by raising the monetary policy instrument, and, as a result, mortgage rates increase and residential investment declines. The monetary policy reaction function in the US appears to include lending standards in residential markets, a finding we confirm in Taylor rule estimations. Without the endogenous monetary policy reaction residential investment increases. House prices and household (mortgage) debt behave in a similar way. This suggests that an exogenous loosening of LTV ratios is unlikely to explain booms in residential investment and house prices, or run ups in household leverage, at least in times of conventional monetary policy.
    Keywords: loan-to-value ratios, monetary policy, residential investment, structural VAR, Cholesky identification, Taylor rules
    JEL: E30 E32 E44 E52
    Date: 2017–04
  22. By: Alberto Fuertes (Banco de España)
    Abstract: This paper analyses the relationship between the U.S. net external position and the exchange rate regime. I find a structural break in the U.S. net external position at the end of the Bretton Woods system of fixed exchange rates that changed both the mean and variance of the series. On average, the U.S. changed from a creditor to a debtor position and the variance of the external position increased during the floating period. This increase is to a large extent due to the valuation component of external adjustment, which accounts for 54% of the variance of the U.S. external position during the floating period but only 29% during the fixed exchange rate period. Further analysis shows that the exchange rate regime mainly affects the valuation channel of external adjustment. There is also evidence of another structural break in the U.S. external position around the time of the introduction of the euro. Finally, I document asset pricing implications from the relationship between the exchange rate regime and the external adjustment process, as external imbalances predict future exchange rate developments once the exchange rate regime is taken into account.
    Keywords: external adjustment, exchange rate regime, structural breaks, valuation adjustment
    JEL: F31 F33
    Date: 2017–05
  23. By: Ascari, Guido; Florio, Anna; Gobbi, Alessandro
    Abstract: Inflation depends on both monetary and fiscal policies and on how agents believe that these policies will evolve in the future. Can monetary policy control inflation, when both monetary and fiscal policies are allowed to change over time? To analyse this problem, we study a model in which both monetary and fiscal policies may switch according to a Markov process. Controlling inflation entails a unique and Ricardian solution. We propose a natural generalisation of the original Leeper (1991) taxonomy, introducing the concepts of globally active (or passive) and globally switching policies to define the conditions that allow monetary policy to control inflation under Markov switching. First, monetary and fiscal policies need to be globally balanced to guarantee a unique equilibrium: globally active monetary policies need to be coupled with globally passive fiscal policies, and switching monetary policies with switching fiscal policies. Second, this distinction characterises the nature of the solutions: a globally AM/PF regime is Ricardian, while a globally switching regime features expectation and wealth effects. Third, the strength of policy deviations across regimes is key, insofar a globally active (or passive) policy allows only timid deviations. Finally, our framework can rationalise the impulse responses from a Bayesian VAR on U.S. data for the recent zero lower bound period as being due to "timidity" in fiscal actions that have been unable to spur inflation.
    JEL: E58 E63
    Date: 2017–05–05
  24. By: De Santis, Roberto A.; Holm-Hadulla, Fédéric
    Abstract: We estimate the response of euro area sovereign bond yields to purchase operations under the ECBs Public Sector Purchase Programme (PSPP), using granular data on all PSPP-eligible securities at daily frequency. To avoid simultaneity bias in the estimated relationship between yields and purchase volumes, we exploit a PSPP design feature that renders certain securities temporarily ineligible for reasons unrelated to their yields. Using these temporary purchase restrictions as an instrument to identify exogenous variation in purchase volumes, we find that the “flow effect” of PSPP operations has, on average, led to a temporary 7 basis-point decline in sovereign bond yields on the day of purchase. This impact estimate is well above those found in similar studies for the US; at the same time, our results imply that flow effects have accounted for only a limited share of the downward pressure of PSPP on sovereign yields, most of which instead derived from anticipation and announcement effects at the onset of the programme. JEL Classification: E52, E58, E65, G12
    Keywords: monetary policy, natural experiment, quantitative easing, sovereign yields
    Date: 2017–05
  25. By: Buch, Claudia M.; Krause, Thomas; Tonzer, Lena
    Abstract: In Europe, the financial stability mandate generally rests at the national level. But there is an important exception. Since the establishment of the Banking Union in 2014, the European Central Bank (ECB) can impose stricter regulations than the national regulator. The precondition is that the ECB identifies systemic risks which are not adequately addressed by the macroprudential regulator at the national level. In this paper, we ask whether the drivers of systemic risk differ when applying a national versus a European perspective. We use market data for 80 listed euro-area banks to measure each bank's contribution to systemic risk (SRISK) at the national and the euro-area level. Our research delivers three main findings. First, on average, systemic risk increased during the financial crisis. The difference between systemic risk at the national and the euro-area level is not very large, but there is considerable heterogeneity across countries and banks. Second, an exploration of the drivers of systemic risk shows that a bank's contribution to systemic risk is positively related to its size and profitability. It decreases in a bank's share of loans to total assets. Third, the qualitative determinants of systemic risk are similar at the national and euro-area level, whereas the quantitative importance of some determinants differs.
    Keywords: systemic risk,bank regulation,Banking Union
    JEL: G01 G21 G28
    Date: 2017

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