nep-cba New Economics Papers
on Central Banking
Issue of 2017‒06‒04
fifteen papers chosen by
Maria Semenova
Higher School of Economics

  1. Communicating Monetary Policy Rules By Davig, Troy A.; Foerster, Andrew T.
  2. Is inflation targeting the proper monetary policy regime in a dual banking system? new evidence from ARDL bounds test By Ndiaye, Ndeye Djiba; Masih, Mansur
  3. Monetary Policy and the Redistribution Channel By Adrien Auclert
  4. Central banks preferences and banking sector vulnerability By Gregory Levieuge; Yannick Lucotte; Florian Pradines-Jobet
  5. Anticipatory Monetary Policy and the 'Price Puzzle' By James Bishop; Peter Tulip
  6. Monetary Policy Reaction Functions of the TICKs: A Quantile Regression Approach By Christina Christou; Ruthira Naraidoo; Rangan Gupta; Won Joong Kim
  7. The Impact of Warnings Published in a Financial Stability Report on the Loan to Value Ratio By Andrés Alegría,; Rodrigo Alfaro; Felipe Córdova
  8. The impact of ECBs conventional and unconventional monetary policies on European banking indexes returns. By Salvatore Perdichizzi
  9. Policy Effects in a Simple Fully Non-Linear New Keynesian Model of the Liquidity Trap By Volker Hahn
  10. An Early Experiment with "Permazero" By Quinn, Stephen F.; Roberds, William
  11. Evolución de la Normativa de Riesgo de Mercado de la Banca Chilena By José Miguel Matus
  12. Financial Globalisation, Monetary Policy Spillovers and Macro-modelling: Tales from 1001 Shocks By Georgiadis, Georgios; Jancokova, Martina
  13. Origins of Too-Big-to-Fail Policy By Prescott, Edward Simpson; Nurisso, George
  14. House prices and macroprudential policy in an estimated DSGE model of New Zealand By Funke, Michael; Kirkby, Robert; Mihaylovski, Petar
  15. Monetary policy implications on the investment decision: Do economies of scope in the banking sector matter? By Eleni Dalla

  1. By: Davig, Troy A. (Federal Reserve Bank of Kansas City); Foerster, Andrew T. (Federal Reserve Bank of Kansas City)
    Abstract: Sixty-two countries around the world use some form of inflation targeting as their monetary policy framework, though none of these countries express explicit policy rules. In contrast, models of monetary policy typically assume policy is set through a rule such as a Taylor rule or optimal monetary policy formulation. Central banks often connect theory with their practice by publishing inflation forecasts that can, in principle, implicitly convey their reaction function. We return to this central idea to show how a central bank can achieve the gains of a rule-based policy without publicly stating a specific rule. {{p}} The approach requires central banks to specify an inflation target, tolerance bands, and provide economic projections. Thus, when inflation moves outside the band, inflation forecasts provide a time frame over which inflation will return to within the band. We show how this approach replicates and provides the same information as a rule-based policy.
    JEL: E4 E43 E5 E61
    Date: 2017–04–01
  2. By: Ndiaye, Ndeye Djiba; Masih, Mansur
    Abstract: This paper explores the appropriateness and consequently the feasibility of inflation targeting in an economy with a dual financial system. We take the case of Malaysia, an example of a successful coexistence of the conventional and Islamic systems. The study employs ARDL bounds testing approach to investigate the long run relationship between inflation rate, real effective exchange rate, statutory reserve rate, narrow money, Islamic interbank rate and the overnight policy of Malaysia, considering the major transmission mechanism channels in the conduct of monetary policy stance. An Error Correction Model (ECM) is used to capture the short run dynamics, and variance decomposition of forecast errors is used to determine the causality direction of the variables. The periods considered was monthly data from the June 2007 to February 2017. Our results show that there is a long and short term relationship between inflation, narrow money, statutory reserve rate, real effective exchange rate and the Islamic interbank rate. However, we suggest that Inflation targeting may not be ideal in a dual banking system, especially the case of Malaysia. Alternatively, interest rate targeting is found to be most effective. Additionally, it will give the central bank more control over the Islamic segment of the financial system.
    Keywords: Dual Banking, Islamic Banking, Interest rate, Inflation Targeting, Islamic Profit rate, Monetary Policy, ARDL
    JEL: C58 E44 G15
    Date: 2017–05–12
  3. By: Adrien Auclert
    Abstract: This paper evaluates the role of redistribution in the transmission mechanism of monetary policy to consumption. Three channels affect aggregate spending when winners and losers have different marginal propensities to consume: an earnings heterogeneity channel from unequal income gains, a Fisher channel from unexpected inflation, and an interest rate exposure channel from real interest rate changes. Sufficient statistics from Italian and U.S. data suggest that all three channels are likely to amplify the effects of monetary policy. A standard incomplete markets model can deliver the empirical magnitudes if assets have plausibly high durations but a counterfactual degree of inflation indexation.
    JEL: D31 D52 E21 E52
    Date: 2017–05
  4. By: Gregory Levieuge; Yannick Lucotte; Florian Pradines-Jobet
    Abstract: According to "Schwartz’s conventional wisdom" and what has been called "divine coincidence", price stability should imply macroeconomic and financial stability. However, in light of the recent financial crisis, with monetary policy focused on price stability, scholars have held that banking and financial risks were largely unaddressed. According to this alternative view, the belief in divine coincidence turns out to be benign neglect. The objective of this paper is to test Schwartz’s hypothesis against the benign neglect hypothesis. The priority assigned to the inflation goal is proxied by the central banks’ conservatism (CBC) index proposed by Levieuge and Lucotte (2014b), here extended to a large sample of 73 countries from 1980 to 2012. Banking sector vulnerability is measured by six alternative indicators that are frequently employed in the literature on early warning systems. Our results indicate that differences in monetary policy preferences robustly explain cross-country differences in banking vulnerability and validate the benign neglect hypothesis, in that a higher level of CBC implies a more vulnerable banking sector
    Keywords: central banks preferences, inflation aversion, banking sector vulnerability, monetary policy
    JEL: E3 E44 E52 E58
    Date: 2017–05–25
  5. By: James Bishop (Reserve Bank of Australia); Peter Tulip (Reserve Bank of Australia)
    Abstract: Vector autoregression (VAR) models often find that inflation increases in response to a tightening in monetary policy, although standard macroeconomics predicts the opposite. This 'price puzzle' is commonly thought to reflect interest rates being tightened in anticipation of future inflation, reflecting information possessed by policymakers beyond that contained in the model. Romer and Romer (2004) and Cloyne and Hürtgen (2016) successfully remove the price puzzle from US and UK data, respectively, by purging the cash rate of systematic policy responses to central bank forecasts. We find that this approach does not work for Australia under a wide range of specifications. This suggests that VARs may not be the most reliable way to analyse monetary policy.
    Keywords: price puzzle; monetary policy; VARs
    JEL: E31 E52
    Date: 2017–05
  6. By: Christina Christou (Open University of Cyprus, School of Economics and Finance, Latsia, Cyprus); Ruthira Naraidoo (Department of Economics, University of Pretoria, Pretoria, South Africa); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa); Won Joong Kim (Department of Economics, Konkuk University, Seoul, Republic of Korea)
    Abstract: The purpose of this study is to investigate how the four nations of Taiwan, India, China and Korea (i.e., the TICKs member states) set interest rates in the context of policy reaction functions. It adds to the previous literature in that the empirical estimates are conducted not only at the central mean of interest rate but we also take into account the response of interest rate to inflation, output and exchange rate at various points on the conditional distribution of interest rates, hence offering the possibility to test predictions of greater or lesser aggression at different bounds of interest rate. Our results indicate the tendency of a milder response to inflation at low interest rates and greater response at higher quantiles of interest rates, where inflation is presumably higher than desired for China and South Korea and hence offers evidence for nonlinearity. While the response to inflation over the quantiles is significant for India, yet the Taylor principle is less likely to hold. For Taiwan, the results imply that another instrument is employed to deal with its official managed floating currency.
    Keywords: Monetary policy; Taylor rule; Quantile regression; Emerging markets
    JEL: C21 C26 E52 E58
    Date: 2017–05
  7. By: Andrés Alegría,; Rodrigo Alfaro; Felipe Córdova
    Abstract: This paper shows how central bank communications can play a role in macroprudential supervision. We document how specific warnings about real estate markets, published in the Central Bank of Chile’s Financial Stability Reports of 2012, affected bank lending policies. We provide empirical evidence of a rebalancing in the characteristics of mortgage loans granted, with a reduction in the number of mortgage loans with high loan-to-value ratios (LTV), along with an increase in loans with lower LTV ratios.
    Date: 2017–02
  8. By: Salvatore Perdichizzi (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore)
    Abstract: This paper investigates how conventional and unconventional monetary policies announcements a ect European banking indexes returns through an event-study analysis. We use data of 11 European banking indexes for the periods 1999-2015. We examine the state dependency of such e ects and focus on the surprise elements of policy changes derived from the Euribor futures market. Overall, we nd a positive relation between the unexpected changes in the ECBs reference rate and European banking indexes returns. We also discover that the e ect is stronger during the nancial crisis, especially during the sovereign debt crisis. Moreover, we identify a positive relation between the announcements of unconventional policies and the European banking indexes returns , particularly where the banking system was more risky such as Spain, France and Italy but with a low degree of magnitude than expected. Hence, the Euro banks reactions to monetary policies announcements seem to be more relevant through conventional measures with respect to non-conventional ones.
    Keywords: Banking,Conventional and Unconventional Monetary Policy, Interest rate, ECB.
    JEL: G01 E44 E52
    Date: 2017–05
  9. By: Volker Hahn (Department of Economics, University of Konstanz, Germany)
    Abstract: We analyze a simple yet fully non-linear New Keynesian model with a central bank that pursues an inflation targeting strategy. Our analysis shows that expected adverse productivity shocks may drive the economy into a liquidity trap. As our model entails positive or moderately negative inflation in such a situation, it has the potential to explain the so-called “missing disinflation” in the Great Recession. In contrast with some previous papers, we find that the effects of fiscal policy in a liquidity trap are moderate and that reductions in labor income taxes are expansionary. We do not find support for higher inflation targets. Finally, we provide additional support for the view that the common practice of log-linearizing equilibrium relations can be potentially misleading in models with a lower bound on nominal interest rates.
    Keywords: Zero lower bound, missing disinflation, fiscal multiplier, liquidity trap, new Keynesian model, multiple equilibria, inflation target
    JEL: E52 E58 E62
    Date: 2017–05–18
  10. By: Quinn, Stephen F. (Texas Christian University); Roberds, William (Federal Reserve Bank of Atlanta)
    Abstract: We investigate a monetary regime with persistent, near-zero policy interest rates ("permazero" in the terminology of Bullard 2015). This regime was implemented in 1683 by a prominent early central bank called the Bank of Amsterdam ("Bank"). The Bank fixed its policy rate at one-half percent and held it unchanged for more than a century. Maintaining the rate helped stabilize the value of Bank money. We employ archival data to reconstruct the Bank's activities during a portion of that interval (1736–91) for which data are most readily available. The data suggest that "permazero" worked well for long periods because the Bank counteracted market swings with quantitative operations. These same data show how fiscal exploitation denied the Bank sufficient resources to stabilize large shocks, with adverse results.
    Keywords: central banks; monetary policy; zero lower bound
    JEL: E58 E65 N13
    Date: 2017–05–01
  11. By: José Miguel Matus
    Abstract: This paper describes the main changes in regulation and the measurement of market risks of the banking industry. In that sense, this article focuses its analysis in the 1979-2015 period, especially the main recommendations of the Basel Committee on Banking Supervision (BCBS) and the challenges facing the banks in terms of existing gaps between the current regulation and the standards suggested by the BCBS.
    Date: 2017–02
  12. By: Georgiadis, Georgios (European Central Bank); Jancokova, Martina (European Central Bank)
    Abstract: Financial globalisation and spillovers have gained immense prominence over the last two decades. Yet, powerful cross-border financial spillover channels have not become a standard element of structural monetary models. Against this background, we hypothesise that New Keynesian DSGE models that do not feature powerful financial spillover channels confound the effects of domestic and foreign disturbances when confronted with the data. We derive predictions from this hypothesis and subject them to data on monetary policy shock estimates for 29 economies obtained from more than 280 monetary models in the literature. Consistent with the predictions from our hypothesis we find: Monetary policy shock estimates obtained from New Keynesian DSGE models that do not account for powerful financial spillover channels are contaminated by a common global component; the contamination is more severe for economies that are more susceptible to financial spillovers in the data; and the shock estimates imply implausibly similar estimates of the global output spillovers from monetary policy in the US and the euro area. None of these findings applies to monetary policy shock estimates obtained from VAR and other statistical models, financial market expectations and the narrative approach.
    JEL: C50 E52 F42
    Date: 2017–05–01
  13. By: Prescott, Edward Simpson (Federal Reserve Bank of Cleveland); Nurisso, George (Federal Reserve Bank of Cleveland)
    Abstract: This paper traces the origin of the too-big-to-fail problem in banking to the bailout of the $1.2 billion Bank of the Commonwealth in 1972. It describes this bailout and those of subsequent banks through that of Continental Illinois in 1984. Motivations behind the bailouts are described with a particular emphasis on those provided by Irvine Sprague in his book Bailout. During this period, market concentration due to interstate banking restrictions is a factor in most of the bailouts, and systemic risk concerns were raised to justify the bailouts of surprisingly small banks. Sprague’s descriptions are also used to describe the trade offs and the time-consistency problem faced by bank regulators. Finally, most of the bailouts in this period relied on the Federal Deposit Insurance Corporation’s use of the Essentiality Doctrine. A discussion of this doctrine is provided and used to illustrate how legal constraints on regulators may become less constraining over time.
    Keywords: Too big to fail; deposit insurance; banking; time consistency; TBTF;
    JEL: G21 G28 N22
    Date: 2017–05–24
  14. By: Funke, Michael; Kirkby, Robert; Mihaylovski, Petar
    Abstract: We analyse the effects of macroprudential and monetary policies and their interactions using an estimated dynamic stochastic general equilibrium (DSGE) model tailored to New Zealand. We find that the main historical drivers of house prices are shocks specific to the housing sector. While our estimates show that monetary policy has large spillover effects on house prices, it does not appear to have been a major driver of house prices in New Zealand. We consider macroprudential policies, including the loan-to-value restrictions that have been implemented in New Zealand. We find that loan-to-value restrictions reduce house prices with negligible effects on consumer prices, suggesting that they can be used without derailing monetary policy. We estimate that the loan-to-value restrictions imposed in New Zealand in 2013 reduced house prices by 3.8 per cent and that greater forward guidance on their duration would have made them more effective.
    Keywords: Macroprudential policies, Housing, DSGE, Bayesian estimation, New Zealand,
    Date: 2017
  15. By: Eleni Dalla (Department of Economics, University of Macedonia)
    Abstract: In this paper, we investigate the effectiveness of monetary policy, in the context of a theoretical model that captures both the banking and the firm behavior. Following the industrial organization approach to banking, the banking sector is described by a two-stage Cournot game with scope economies. On the other hand, the firm behavior concerns the investment decision which is explained using a second order accelerator model in discrete time. Considering the interbank rate and the reserve requirements as the instruments of monetary policy, it is demonstrated that its effectiveness depends on the type of scope economies in the oligopolistic banking sector..
    Keywords: interbank rate, investment decision, reserve requirements, scope economies.
    JEL: G21 L13 D92 E52
    Date: 2017–03

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