nep-cba New Economics Papers
on Central Banking
Issue of 2017‒05‒21
27 papers chosen by
Maria Semenova
Higher School of Economics

  1. Central bank communication: Managing expectations through the monetary dialogue By Belke, Ansgar
  2. Monetary Policy through Production Networks: Evidence from the Stock Market By Ali Ozdagli; Michael Weber
  3. Point sur la fourniture de liquidié publique By Anne-Marie Rieu-Foucault
  4. Unconventional monetary policy: interest rates and low inflation. A review of literature and methods By Mariarosaria Comunale; Jonas Striaukas
  5. Macroprudential Liquidity Stress Testing in FSAPs for Systemically Important Financial Systems By Andreas A. Jobst; Li Lian Ong; Christian Schmieder
  6. International Reserves, Credit Constraints, and Systemic Sudden Stops By Samer Shousha
  7. The Macroeconomic Effects of Quantitative Easing in the Euro Area: Evidence from an Estimated DSGE Model By Hohberger, Stefan; Priftis, Romanos; Vogel, Lukas
  8. Bagged artificial neural networks in forecasting inflation: An extensive comparison with current modelling frameworks By Karol Szafranek
  9. The Eurosystem collateral framework explained By Bindseil, Ulrich; Corsi, Marco; Sahel, Benjamin; Visser, Ad
  10. What Has Publishing Inflation Forecasts Accomplished? Central Banks And Their Competitors By Siklos, Pierre
  11. Interbank Market Frictions and Unconventional Policy in a Currency Union By Swarbrick, Jonathan Mark; Blattner, Tobias
  12. Exchange Rate Disconnect in General Equilibrium By Oleg Itskhoki; Dmitry Mukhin
  13. The Time-Varying Effect of Monetary Policy on Asset Prices By Paul, Pascal
  14. Effects of Monetary Policy Shocks on Inequality in Japan By Masayuki Inui; Nao Sudo; Tomoaki Yamada
  15. The Macroeconomic Effects of Japan's Unconventional Monetary Policies By MIYAO Ryuzo; OKIMOTO Tatsuyoshi
  16. The stability of short-term interest rates pass-through in the euro area during the financial market and sovereign debt crises By Sanvi Avouyi-Dovi; Guillaume Horny; Patrick Sevestre
  17. Evaluating regulation within an artificial financial system: A framework and its application to the liquidity coverage ratio regulation By Riedler, Jesper; Brueckbauer, Frank
  18. Systematic Monetary Policy and the Macroeconomic Effects of Shifts in Loan-to-Value Ratios By Bachmann, Rüdiger; Rueth, Sebastian
  19. Do conventional monetary policy instruments matter in unconventional times? By Buchholz, Manuel; Schmidt, Kirsten; Tonzer, Lena
  20. Spreading the word or reducing the term spread? Assessing spillovers from euro area monetary policy By Feldkircher, Martin; Gruber, Thomas; Huber, Florian
  21. The transmission channels of monetary, macro- and microprudential policies and their interrelations By Beyer, Andreas; Nicoletti, Giulio; Papadopoulou, Niki; Papsdorf, Patrick; Rünstler, Gerhard; Schwarz, Claudia; Sousa, João; Vergote, Olivier
  22. Financial Integration and Liquidity Crises By Fabio Castiglionesi; Fabio Feriozzi; Guido Lorenzoni
  23. The impact of macroprudential housing finance tools in Canada By Jason Allen; Timothy Grieder; Tom Roberts; Brian Peterson
  24. Capital requirements, risk shifting and the mortgage market By Uluc, Arzu; Wieladek, Tomasz
  25. Should bank capital requirements be less risk-sensitive because of credit constraints? By Ambrocio, Gene; Jokivuolle, Esa
  26. Central Bank Legal Frameworks in the Aftermath of the Global Financial Crisis By Ashraf Khan
  27. Milton Friedman and Data Adjustment By Neil R. Ericsson; David F. Hendry; Stedman B. Hood

  1. By: Belke, Ansgar
    Abstract: Successfully managing a course back to normality ("exit") will depend crucially on the central banks' ability to communicate effectively a credible strategy for an orderly exit from such kind of policies. In this context, clear, deliberate, coordinated messages that are anchored in the central banks' mandate are essential. We focus upon transparency and "forward guidance" as potential tools to stimulate the economy in the Euro Area. We then deliver details on whether and how the effectiveness of central bank's policies can be improved through more transparency and "forward guidance". We do so by highlighting marked differences in the Fed's and the ECB's interpretation of "forward guidance". In order to highlight the key issues of central bank communication and the management of expectations referring to a practical institutional example, we also comment on the role of the Monetary Dialogue, i.e. the regular appearances of the President of the European Central Bank (ECB) before the European Parliament (EP), in the context of an evolving monetary policy. Communication is finally described as a policy option in terms of minimising risk in the context of exit from unconventional monetary policies and of the signalling channel which refers to what the public learns from announcements of unconventional monetary policy operations such as Quantitative Easing.
    Keywords: central bank communication,European Central Bank,forward guidance,monetary dialogue,transparency
    JEL: E52 E58 G14
    Date: 2017
  2. By: Ali Ozdagli (Federal Reserve Bank of Boston); Michael Weber (University of Chicago Booth School of Business)
    Abstract: Monetary policy shocks have a large impact on aggregate stock market returns in narrow event windows around press releases by the Federal Open Market Committee. We use spatial autoregressions to decompose the overall effect of monetary policy shocks into a direct (demand) effect and an indirect (network) effect. We attribute 50%-85% of the overall effect to indirect effects. The decomposition is robust to different sample periods, event windows, and types of announcements. Direct effects are larger for industries selling most of the industry output to end-consumers compared to other industries. We find similar evidence of large indirect effects using ex-post realized cash-fundamentals. A simple model with intermediate inputs guides our empirical methodology. Our findings indicate that production networks might be an important propagation mechanism of monetary policy to the real economy.
    Keywords: Input-output linkages, Spillover effects, Asset prices, High frequency identification
    JEL: E12 E31 E44 E52 G12 G14
    Date: 2017
  3. By: Anne-Marie Rieu-Foucault
    Abstract: This paper link the theory and practice of providing public liquidity. Starting from the theory of insurance as a justification for the provision of public liquidity, it shows that in practice the response to the financial crisis has been made to curb contagion and amplification and that liquidity storage can intervene for strategic reasons. Central banks through liquidity allocations and macroprudential measures respond collectively to the phenomena of the crisis. The reactions are innovative in the form of a systemic lender of last resort and large-scale interventions but do not use the theory of systemic liquidity insurance.
    Keywords: Liquidity – financial crisis – Lender of last resort – Macroprudential.
    JEL: D78 E58 G01
    Date: 2017
  4. By: Mariarosaria Comunale (Bank of Lithuania and The Australian National University); Jonas Striaukas (Louvain School of Management)
    Abstract: In this paper, we review a range of approaches used to capture monetary policy in a period of Zero Lower Bound (ZLB). We concentrate here on methods closely linked to interest rates, which include: spreads, synthetic indices from principal component analysis, and different shadow rates. Next, we calculate these measures for the euro area, draw comparisons among different approaches, and look at the effects on main macroeconomic variables, with a special focus on inflation. By and large, the impact of unconventional monetary policy shocks on inflation is found to be significantly positive across studies and methods. Finally, we summarize the literature on the Natural Real Rate of Interest. This overview may help to assess how long low (real) interest rates in a ZLB stay in place, potentially leading to more accurate policy recommendations.
    Keywords: Unconventional monetary policy; zero lower bound; shadow rates; natural interest rate; inflation
    JEL: E43 E52 E58 F42
    Date: 2017–05–12
  5. By: Andreas A. Jobst; Li Lian Ong; Christian Schmieder
    Abstract: Bank liquidity stress testing, which has become de rigueur following the costly lessons of the global financial crisis, remains underdeveloped compared to solvency stress testing. The ability to adequately identify, model and assess the impact of liquidity shocks, which are infrequent but can have a severe impact on affected banks and financial systems, is complicated not only by data limitations but also by interactions among multiple factors. This paper provides a conceptual overview of liquidity stress testing approaches for banks and discusses their implementation by IMF staff in the Financial Sector Assessment Program (FSAP) for countries with systemically important financial sectors over the last six years.
    Date: 2017–05–01
  6. By: Samer Shousha
    Abstract: Why do emerging market economies simultaneously hold very high levels of international reserves and foreign liabilities? Moreover, why, even with such huge amounts of international reserves, did countries barely use them during the Global Financial Crisis? I argue that including international reserves as an implicit collateral for external borrowing in a small open economy model subject to exogenous financial shocks can explain both of these puzzling facts. I find that the model can obtain ratios of international reserves and net foreign liabilities to GDP similar to those of Latin American countries. Additionally, the optimal policy implies that the government accumulates international reserves before a sudden stop and that there is a small depletion during it. Finally, an alternative policy of keeping international reserves constant at the average level yields results very similar to those of the optimal policy during sudden stops, highlighting the stabilizing role of international reserves even if central banks do not use them.
    Keywords: International reserves ; Emerging market economies ; Sudden stops ; International crises
    JEL: F32 F34 F41
    Date: 2017–05–04
  7. 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 linearised 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: E44, E52, E53, F41
    JEL: E44 E52 F41
    Date: 2017–03–14
  8. By: Karol Szafranek (Narodowy Bank Polski, Warsaw School of Economics)
    Abstract: Accurate inflation forecasts lie at the heart of effective monetary policy. By utilizing a thick modelling approach, this paper investigates the out-of-sample quality of the short-term Polish headline inflation forecasts generated by a combination of thousands of bagged single hidden-layer feed-forward artificial neural networks in the period of systematically falling and persistently low inflation. Results indicate that the forecasts from this model outperform a battery of popular approaches, especially at longer horizons. During the excessive disinflation it has more accurately accounted for the slowly evolving local mean of inflation and remained only mildly biased. Moreover, combining several linear and nonlinear approaches with diverse underlying model assumptions delivers further statistically significant gains in the predictive accuracy and statistically outperforms a panel of examined benchmarks at multiple horizons. The robustness analysis shows that resigning from data preprocessing and bootstrap aggregating severely compromises the forecasting ability of the model.
    Keywords: inflation forecasting, artificial neural networks, principal components, bootstrap aggregating, forecast combination
    JEL: C22 C38 C45 C53 C55
    Date: 2017
  9. By: Bindseil, Ulrich; Corsi, Marco; Sahel, Benjamin; Visser, Ad
    Abstract: The Eurosystem collateral framework ESCF) has played a key role in the ECB monetary policy implementation since 1999. Moreover, the financial and sovereign debt crisis and with it the increased reliance of banks on central bank credit have underlined the importance of central bank collateral frameworks. Broad collateral frameworks have helped prevent large-scale liquidity-driven defaults of financial institutions in all major advanced economies. More recently, they have allowed central banks to provide a large amount of – at times targeted – longer-term credit. Nevertheless, a number of authors have argued that the ESCF is too forthcoming or broad and that it does not afford the central bank sufficient protection. This paper first explains and justifies the logic of collateral frameworks in general and that of the ESCF in particular. It then reviews the main critical comments. It concludes that the ESCF has been effective (i) in providing an adequate level of elasticity for Eurosystem credit, and (ii) in protecting the Eurosystem from financial losses despite the severity of the financial and sovereign debt crisis and the large amounts of longer-term credit provided by the Eurosystem. JEL Classification: E58
    Keywords: central banking, collateral, ECB, Eurosystem, lender of last resort, operations
    Date: 2017–05
  10. By: Siklos, Pierre (Wilfrid Laurier University)
    JEL: E42
    Date: 2017–04–01
  11. By: Swarbrick, Jonathan Mark; Blattner, Tobias
    Abstract: In this paper we show how interbank market frictions can play an important role in propagating and enhancing the effects of shocks in a currency union, and discuss the efficacy of two unconventional policy measures; multi-period central bank refinance operations and large scale asset purchases. To this end, a two-country structural model with idiosyncratic risk and country-specific transactional costs on interbank lending is proposed and used to show that (i) the effectiveness of monetary policy is enhanced when banks face an external finance premium in the interbank market; (ii) adverse shocks to the real economy can be the source of banking crisis, causing an increase in the interbank finance premia, aggravating the initial shock; and (iii) asset purchase policies and long-term refinancing operations can both be successful in supporting conventional monetary policy in mitigating the adverse effects of shocks.
    Keywords: Interbank market,monetary union,financial frictions,unconventional monetary policy
    JEL: E44 E52 F32 F36
    Date: 2017
  12. By: Oleg Itskhoki; Dmitry Mukhin
    Abstract: We propose a dynamic general equilibrium model of exchange rate determination, which simultaneously accounts for all major puzzles associated with nominal and real exchange rates. This includes the Meese-Rogoff disconnect puzzle, the PPP puzzle, the terms-of-trade puzzle, the Backus- Smith puzzle, and the UIP puzzle. The model has two main building blocks — the driving force (or the exogenous shock process) and the transmission mechanism — both crucial for the quantitative success of the model. The transmission mechanism — which relies on strategic complementarities in price setting, weak substitutability between domestic and foreign goods, and home bias in consumption — is tightly disciplined by the micro-level empirical estimates in the recent international macroeconomics literature. The driving force is an exogenous small but persistent shock to international asset demand, which we prove is the only type of shock that can generate the exchange rate disconnect properties. We then show that a model with this financial shock alone is quantitatively consistent with the moments describing the dynamic comovement between exchange rates and macro variables. Nominal rigidities improve on the margin the quantitative performance of the model, but are not necessary for exchange rate disconnect, as the driving force does not rely on the monetary shocks. We extend the analysis to multiple shocks and an explicit model of the financial sector to address the additional Mussa puzzle and Engel’s risk premium puzzle.
    JEL: E30 F30 F4
    Date: 2017–05
  13. By: Paul, Pascal (Federal Reserve Bank of San Francisco)
    Abstract: This paper estimates the time-varying responses of stock and house prices to changes in monetary policy in the United States. To this end, I augment a time-varying vector autoregressive model (VAR) with a series of monetary policy surprises obtained from federal funds futures, as a proxy for structural monetary policy shocks. The series of surprises enters the model as an exogenous variable and I show analytically that this approach gives identical relative impulse responses compared with an identification that uses the proxy as an external instrument within a constant parameter VAR. However, the exogenous variable approach allows for a convenient and tractable extension to a time-varying parameter VAR that is estimated with standard Bayesian methods. The results show that stock and house prices have been less responsive to monetary policy shocks during periods of high and rising asset prices. Moreover, I find that attempts by the Federal Reserve to lean against the house price boom before the Great Recession would have come with the risk of large deviations from its output target.
    Date: 2017–05–08
  14. By: Masayuki Inui (Bank of Japan); Nao Sudo (Bank of Japan); Tomoaki Yamada (Meiji University)
    Abstract: Impacts of monetary easing on inequality have recently attracted increasing attention. In this paper, we use the micro-level data of Japanese households to study the distributional effects of monetary policy. We construct quarterly series of income and consumption inequality measures from 1981 to 2008, and estimate their response to a monetary policy shock. We do find that monetary policy shocks do not have statistically significant impacts on inequalities across Japanese households in a stable manner. We find evidence, when considering inequality across households whose head is employed, an expansionary monetary policy shock increased income inequality through a rise in earnings inequality, in the period before the 2000s. Such procyclical responses are, however, scarcely observed when the current data is included in the sample period, or when earnings inequality across all households is considered. We also find that, transmission of income inequality to consumption inequality is minor even during the period when procyclicality of income inequality was pronounced. Using a two-sector dynamic general equilibrium model with attached labor inputs, we show that labor market flexibility is the central to the dynamics of income inequality after monetary policy shocks. We also use the micro-level data of households' balance sheet and show that distributions of households' financial assets and liabilities do not play a significant role in the distributional effects of monetary policy.
    Keywords: Monetary Policy; Income inequality; Consumption inequality
    JEL: E3 E4 E5
    Date: 2017–05–10
  15. By: MIYAO Ryuzo; OKIMOTO Tatsuyoshi
    Abstract: Japan is the country with the longest history of implementing unconventional monetary policies, which were first introduced 15 years ago and have since been expanded several times. A case in point is the quantitative and qualitative monetary easing (QQE) policy introduced by the Bank of Japan (BOJ) in early 2013 along with the commitment to continue with the program as long as necessary to achieve a 2% price stability target. This study attempts to assess the overall macroeconomic effects of Japan's unconventional monetary policies, with an emphasis on the recent QQE program. Using a stylized block-recursive vector autoregression (VAR) framework, the analysis suggests that expansionary unconventional monetary policy shocks have clear macroeconomic effects, leading to a persistent rise in real output and inflation in Japan. The evidence also suggests that these macroeconomic effects became larger and more persistent after the introduction of QQE. A formal analysis that allows for a regime shift based on a smooth-transition VAR model supports these findings.
    Date: 2017–05
  16. By: Sanvi Avouyi-Dovi (LEDa - Laboratoire d'Economie de Dauphine - Université Paris-Dauphine); Guillaume Horny (Banque de France); Patrick Sevestre (Autre - non renseigné)
    Abstract: We analyse the dynamics of the pass through of banks’ marginal cost to bank lending rates over the 2008 crisis and the euro area sovereign debt crisis in France, Germany, Greece, Italy, Portugal and Spain . We measure banks’ marginal cost by their rate on new deposits, contrary to the literature that focuses on money market rates. This allows us to account for banks’ risks. We focus on the interest rate on new short term loans granted to non financial corporations in these countries Our analysis is based on an error correction approach that we extend to handle the time varying long run relationship between banks’ lending rates and banks’ marginal cost, as well as stochastic volatility. Our empirical results are based on a harmonised monthly database from January 2003 to October 2014 . We estimate the model within a Bayesian framework, using Markov Chain Monte Carlo methods (MCMC). We reject the view that the transmission mechanism is time invariant. The long run relationship moved with the sovereign debt crises to a new one, with a slower pass through and higher bank lending rates. Its developments are heterogeneous from one country to the other. Impediments to the transmission of monetary rates depend on the heterogeneity in banks marginal costs and therefore, its risks. We also find that rates to small firms increase compared to large firms in a few countries. Using a VAR model, we show that overall, the effect of a shock on the rate of new deposits on the unexpected variances of new loans has been less important since 2010. These results confirm the slowdown in the transmission mechanism.
    Abstract: Nous étudions la dynamique de la transmission du coût marginal des banques aux taux à court terme des nouveaux crédits bancaires accordés aux sociétés non financières, en Allemagne, Espagne, France, Grèce, Italie et Portugal, au cours de la crise financière de 2008 et de celle des dettes souveraines. Nous mesurons le coût marginal des banques par les taux des nouveaux dépôts alors que l'accent est mis sur les taux du marché monétaire dans la littérature. Cela nous permet de différencier le risque auquel font face les banques dans les différents pays. Nous spécifions un modèle à correction d'erreur que nous généralisons, d’une part, pour permettre à la relation de long terme liant le taux des crédits bancaires au coût marginal des banques de changer dans le temps, et, d’autre part, pour introduire une volatilité stochastique. Le modèle est estimé avec des données, harmonisées entre les pays étudiés, et couvrant la période allant de Janvier 2003 à Octobre 2014. Nous utilisons une approche bayésienne, basée sur des méthodes de Monte Carlo par Chaînes de Markov (MCCM). Nos résultats rejettent l'hypothèse selon laquelle le coût marginal des banques se transmet aux taux des nouveaux crédits de manière constante dans le temps. La relation de long terme qui unit ces variables, s’est modifiée avec la crise de la dette souveraine ; elle est devenue une relation dans laquelle les variations de coût marginal se transmette nt plus lentement et où les taux des prêts bancaires sont plus élevés. Ces évolutions diffèrent d'un pays à l'autre. En effet, les freins à la transmission des taux monétaires dépendent de l'hétérogénéité des coûts marginaux des banques, et donc de leurs risques. Nous constatons également que dans certains pays, les taux accordés aux petites entreprises augmentent par rapport à ceux octroyés aux grandes entreprises durant la crise. Enfin, avec un modèle VAR, nous montrons que, globalement, un choc sur les taux des nouveaux dépôts à moins d’effet sur l’évolution des taux des nouveaux prêts depuis 2010. Ces résultats confirment le ralentissement dans la transmission.
    Keywords: Bank interest rates,error-correction model,structural breaks,stochastic volatility,Bayesian econometrics,ruptures structurelles,Taux bancaires,modèle à correction d’erreur,volatilité stochastique,économétrie bayésienne
    Date: 2017–04–21
  17. By: Riedler, Jesper; Brueckbauer, Frank
    Abstract: We develop a general model of the financial system that allows for the evaluation of bank regulation. Our framework comprises the agents and institutions that have proved crucial in the propagation of the subprime mortgage shock in the U.S. into a global financial crisis: Commercial banks and investment banks, which can also be interpreted as shadow banks, interact on wholesale debt markets. Beside a market for short term interbank loans and long term bank bonds, other funding sources include insured customer deposits, uninsured investor deposits and repos. While credit to the real sector is the principal asset of commercial banks, investment banks specialize in trading securities, which may differ according to risk, maturity and liquidity. As a first application of the model we implement the liquidity coverage ratio (LCR) regulation and analyze its impact on bank balance sheets, interest rates, the transmission of monetary policy and the stability of bank lending in the face of shocks. We find that the LCR regulation reduces the supply of loans to the real sector, increases the maturity and interest rate of long term wholesale debt, and strongly diminishes the role of the overnight interbank market as a funding source. Our simulations suggest that the transmission of changes to short term monetary policy rates is severely impaired when the LCR regulation is binding. Furthermore, we find that a strong confidence shock can lead to a protracted credit crunch under the liquidity regulation.
    Keywords: financial system,agent-based model,liquidity coverage ratio
    Date: 2017
  18. By: Bachmann, Rüdiger; Rueth, Sebastian
    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: Cholesky identification; loan-to-value ratios; monetary policy; residential investment; structural VAR; Taylor rules
    JEL: E30 E32 E44 E52
    Date: 2017–05
  19. By: Buchholz, Manuel; Schmidt, Kirsten; Tonzer, Lena
    Abstract: This paper investigates how declines in the deposit facility rate set by the European Central Bank (ECB) affect bank behavior. The ECB aims to reduce banks' incentives to hold reserves at the central bank and thus to encourage loan supply. However, given depressed margins in a low interest environment, banks might reallocate their liquidity toward more profitable liquid assets other than traditional loans. Our analysis is based on a sample of euro area banks for the period from 2009 to 2014. Three key findings arise. First, banks reduce their reserve holdings following declines in the deposit facility rate. Second, this effect is heterogeneous across banks depending on their business model. Banks with a more interest-sensitive business model are more responsive to changes in the deposit facility rate. Third, there is evidence of a reallocation of liquidity toward loans but not toward other liquid assets. This result is most pronounced for non-GIIPS countries of the euro area.
    Keywords: bank portfolio,central bank reserves,monetary policy
    JEL: E52 G11 G21
    Date: 2017
  20. By: Feldkircher, Martin; Gruber, Thomas; Huber, Florian
    Abstract: As a consequence of asset purchases by the European Central Bank (ECB), longer-term yields in the euro area decline, and spreads between euro area long-term yields narrow. To assess spillovers of these recent financial developments, we use a Bayesian variant of the global vector autoregressive (BGVAR) model with stochastic volatility and propose a novel mixture of zero impact and sign restrictions that we impose on the cross-section of the data. Both shocks generate positive and significant spillovers to industrial production in Central, Eastern and Southeastern Europe (CESEE) and other non-euro area EU member states. These effects are transmitted via the financial channel (mainly through interest rates and equity prices) and outweigh costs of appreciation pressure on local currencies vis-á-vis the euro (trade channel). While these results represent general trends, we also find evidence for both cross-country heterogeneity of effects within the euro area and region-specific spillovers thereof.
    Keywords: Euro area monetary policy, quantitative easing, spillovers
    Date: 2017–05
  21. By: Beyer, Andreas; Nicoletti, Giulio; Papadopoulou, Niki; Papsdorf, Patrick; Rünstler, Gerhard; Schwarz, Claudia; Sousa, João; Vergote, Olivier
    Abstract: This paper investigates the interrelations between monetary macro- and microprudential policies. It first provides an overview of the three policies, starting with their main instruments and objectives. Monetary policy aims at maintaining price stability and promoting balanced economic growth, macroprudential policies aim at safeguarding the stability of the overall financial system, while microprudential policies contribute to the safety and soundness of individual entities. Subsequently, the paper provides a simplified description of their respective transmission mechanisms and analyses the interactions between them. A conceptual framework is first presented on the basis of which the analysis of the interactions across the different policies can be demonstrated in a stylised manner. These stylised descriptions are then further complemented by model-based simulations illustrating the significant complementarities and interactions between them. Finally, the paper concludes that from a conceptual point of view there are numerous areas of interaction between the policies. These create scope for synergies, which can be reaped by sharing information and expertise across the various policy areas. JEL Classification: E58, G28
    Keywords: banking, central bank policies, DSGE models, financial regulation, non-standard measures
    Date: 2017–05
  22. By: Fabio Castiglionesi; Fabio Feriozzi; Guido Lorenzoni
    Abstract: The paper analyzes the effects of financial integration on the stability of the banking system. Financial integration allows banks in different regions to smooth local liquidity shocks by borrowing and lending on a world interbank market. We show under which conditions financial integration induces banks to reduce their liquidity holdings and to shift their portfolios towards more profitable but less liquid investments. Integration helps reallocate liquidity when different banks are hit by uncorrelated shocks. However, when a correlated (systemic) shock hits, the total liquid resources in the banking system are lower than in autarky. Therefore, financial integration leads to more stable interbank interest rates in normal times, but to larger interest rate spikes in crises. These results hold in a setup where financial integration is welfare improving from an ex ante point of view. We also look at the model's implications for financial regulation and show that, in a second-best world, financial integration can increase the welfare benefits of liquidity requirements.
    JEL: F36 G15 G21
    Date: 2017–04
  23. By: Jason Allen; Timothy Grieder; Tom Roberts; Brian Peterson
    Abstract: This paper combines loan-level administrative data with household-level survey data to analyze the impact of recent macroprudential policy changes in Canada using a microsimulation model of mortgage demand of first-time homebuyers. Policies targeting the loan-to-value ratio are found to have a larger impact on demand than policies targeting the debt-service ratio, such as amortization. In addition, we show that loan-to-value policies have a larger role to play in reducing default than income-based policies.
    Keywords: macroprudential policy, household finnance, microsimulation models
    Date: 2017–05
  24. By: Uluc, Arzu; Wieladek, Tomasz
    Abstract: We study the effect of changes to bank-specific capital requirements on mortgage loan supply with a new loan-level dataset containing all mortgages issued in the UK between 2005Q2 and 2007Q2. We find that a rise of a 100 basis points in capital requirements leads to a 5.4% decline in individual loan size by bank. Loans issued by competing banks rise by roughly the same amount, which is indicative of credit substitution. Borrowers with an impaired credit history (verified income) are not (most) affected. This is consistent with origination of riskier loans to grow capital by raising retained earnings. No evidence for credit substitution of non-bank finance companies is found. JEL Classification: G21, G28
    Keywords: capital requirements, credit substitution, loan-level data, mortgage market
    Date: 2017–05
  25. By: Ambrocio, Gene; Jokivuolle, Esa
    Abstract: We consider optimal capital requirements for banks' lending activities when the potential trade-off between financial stability and economic (productivity) growth is taken into account. Both sides of the trade-off are affected by banks' credit allocation, which in turn is affected by the risk weights used to set capital requirements on bank loans. We find that when firms are credit constrained, the optimal risk weights are flatter than those that are only set to safeguard against bank failures and their social costs. This provides an additional rationale for capital requirements to be less 'risk-sensitive'. Differences in company productivity have a further effect on the profile of optimal risk weights, and may amplify the ‘flattening’ effect.
    JEL: E44 G21 G28
    Date: 2017–05–15
  26. By: Ashraf Khan
    Abstract: Drawing on the 2016 update of the IMF’s Central Bank Legislation Database, this paper examines differences in central bank legal frameworks before and after the Global Financial Crisis. Examples from select countries show that many central bank laws have undergone changes in objectives, decision-making, accountability, and data collection. A wider cross-country survey illustrates the common occurrence of price stability in central bank objectives, and varying practices in defining financial stability, “independence†versus “autonomy,†and who within a central bank determines monetary policy. The highlighted facts illustrate the uses of the database and could be a starting point for further analyses.
    Date: 2017–05–01
  27. By: Neil R. Ericsson; David F. Hendry; Stedman B. Hood
    Abstract: When empirically modelling the U.S. demand for money, Milton Friedman more than doubled the observed initial stock of money to account for a "changing degree of financial sophistication" in the United States relative to the United Kingdom. This note discusses effects of this adjustment on Friedman's empirical models.
    Date: 2017–05–15

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