nep-cba New Economics Papers
on Central Banking
Issue of 2017‒06‒18
seventeen papers chosen by
Maria Semenova
Higher School of Economics

  1. The Optimal Response of Bank Capital Requirements to Credit and Risk in a Model with Financial Spillovers By Occhino, Filippo
  2. Disinflation, External Vulnerability, and Fiscal Intransigence; Some Unpleasant Mundellian Arithmetic By Evan C Tanner
  3. Is Inflation Default? The Role of Information in Debt Crises By Bassetto, Marco; Galli, Carlo
  4. Does Inflation Cause Gold Prices? Evidence from G7 Countries By Mehmet Balcilar; Zeynel Abidin Ozdemir; Muhammad Shahbaz; Serkan Gunes
  5. Nominal exchange rate shocks and inflation in an open economy: towards a structuralist inflation targeting agenda By Eduardo F. Bastian; Mark Setterfield
  6. Association between inflation rates and inflation uncertainty in quantile regression By Alimi, R. Santos
  7. The international dimensions of macroprudential policies By Pierre-Richard Agénor; Enisse Kharroubi; Leonardo Gambacorta; Giovanni Lombardo; Luiz Awazu Pereira da Silva
  8. Monetary Policy Transmission in a Macroeconomic Agent-Based Model By Schasfoort, Joeri; Godin, Antoine; Bezemer, Dirk; Caiani, Alessandro; Kinsella, Stephen
  9. How Have the Fed's Three Rate Hikes Passed Through to Selected Short-term Interest Rates? By Alyssa G. Anderson; Jane E. Ihrig; Mary-Frances Styczynski; Gretchen C. Weinbach
  10. Rollover and Capital Adequacy Requirements By YASUDA, Yukihiro
  11. The collateral channel of unconventional monetary policy By Giuseppe Ferrero; Michele Loberto; Marcello Miccoli
  12. Monetary policy and wandering overinvestment cycles in East Asia and Europe By Schnabl, Gunther
  13. The Transmission Mechanism of Credit Support Policies in the Euro Area By Boeckx, Jef; De Sola Perea, Maite; Peersman, Gert
  14. The financial stability dark side of monetary policy By Piergiorgio Alessandri; Antonio Maria Conti; Fabrizio Venditti
  15. Monetary and Fiscal Policy in England during the French Wars (1793-1821) By P. Antipa; C. Chamley
  16. Macroprudential Policy Coordination in a Currency Union' By Pierre-Richard Agénor; Pengfei Jia
  17. Did quantitative easing boost bank lending? The Slovak experience. By Lojschova, Adriana

  1. By: Occhino, Filippo (Federal Reserve Bank of Cleveland)
    Abstract: This paper studies optimal bank capital requirements in an economy where bank losses have financial spillovers. The spillovers amplify the effects of shocks, making the banking system and the economy less stable. The spillovers increase with banks’ financial distortions, which in turn increase with banks’ credit risk. Higher capital requirements dampen the current supply of banks’ credit, but mitigate banks’ future financial distortions. Capital requirements should be raised in response to both an expansion of banks’ credit supply and an increase in the expected future credit risk of banks. They should be lowered close to one-to-one in response to bank losses.
    Keywords: Debt overhang; financial vulnerabilities; financial stability; macro prudential regulation;
    JEL: G20 G28
    Date: 2017–06–06
  2. By: Evan C Tanner
    Abstract: This paper examines the policy challenges a country faces when it wants to both reduce inflation and maintain a sustainable external position. Mundell’s (1962) policy assignment framework suggests that these two goals may be mutually incompatible unless monetary and fiscal policies are properly coordinated. Unfortunately, if the fiscal authority is unwilling to cooperate—a case of fiscal intransigence—central banks that pursue a disinflation on a ‘go it alone’ basis will cause the country’s external position to further deteriorate. A dynamic analysis shows that if the central bank itself lacks credibility in its inflation goal, it must rely even more on cooperation from the fiscal authority than otherwise. Echoing Sargent and Wallace’s (1981) ‘unpleasant monetarist arithmetic,’ in these circumstances, a ‘go it alone’ policy may successfully stabilize prices and output, but only on a short-term basis.
    Keywords: Risk premium;External Vulnerability, Assignment Problem, General, Open Economy Macroeconomics, International Policy Coordination and Transmission
    Date: 2017–05–22
  3. By: Bassetto, Marco (Federal Reserve Bank of Chicago); Galli, Carlo (University College London)
    Abstract: We consider a two-period Bayesian trading game where in each period informed agents decide whether to buy an asset ("government debt") after observing an idiosyncratic signal about the prospects of default. While second-period buyers only need to forecast default, first-period buyers pass the asset to the new agents in the secondary market, and thus need to form beliefs about the price that will prevail at that stage. We provide conditions such that coarser information in the hands of second-period agents makes the price of debt more resilient to bad shocks not only in the last period, but in the first one as well. We use this model to study the consequences of issuing debt denominated in domestic vs. foreign currency: we interpret the former as subject to inflation risk and the latter as subject to default risk, with inflation driven by the information of a less-sophisticated group of agents endowed with less precise information, and default by the information of sophisticated bond traders. Our results can be used to account for the behavior of debt prices across countries following the 2008 financial crisis, and also provide a theory of "original sin."
    Keywords: Government Debt; Currency Denomination; Debt; Inflation
    JEL: D84 F34 H63
    Date: 2017–03–17
  4. By: Mehmet Balcilar (Department of Economics, Eastern Mediterranean University); Zeynel Abidin Ozdemir (Gazi University, Ankara, Turkey); Muhammad Shahbaz (Montpellier Business School, Montpelier, France); Serkan Gunes (Gazi University, Ankara, Turkey)
    Abstract: This paper utilises the newly proposed nonparametric causality-in-quantiles test to examine the predictability of returns and the volatility of gold based on inflation for G7 countries. The causality-in-quantiles approach permits us to test for not only causality in mean but also causality in variance. We start our investigation by utilising tests for nonlinearity. These tests identify nonlinearity, as the linear Granger causality tests are subject to misspecification error. Unlike tests of misspecified linear models, our nonparametric causality-in-quantiles tests find causality in mean and variance from inflation to gold returns via quantiles 0.20 to 0.70, implying that very low- and high-return movements in gold markets are not related to inflation. These changes in low- and high-level gold returns should be related to other sources, such as financial shocks and exchange market shocks. We find support that gold serves as a hedge against inflation, but only in the mid-quantile ranges, i.e., quantiles 0.20 to 0.70. Our results show that gold does not serve as a hedge against inflation during periods when gold returns are very low or very high, which are respectively quiet and highly volatile periods.
    Keywords: Gold, Inflation, Spot and futures markets; Quantile causality
    JEL: C22 Q02 E31
    Date: 2017
  5. By: Eduardo F. Bastian (Institute of Economics, Federal University of Rio de Janeiro (IE-UFRJ)); Mark Setterfield
    Abstract: This paper develops a model of inflation in an open economy. The model permits analysis of the susceptibility of open economies to permanent inflationary consequences arising from transitory foreign exchange shocks. Sources of structural vulnerability to such events are identified, and means of addressing these structural vulnerabilities are discussed. Ultimately, the paper arrives at a “structuralist inflation targeting agenda”. Based on a proper conception of inflation dynamics, this involves “getting inflation targeting right” rather than either accepting mainstream inflation targeting prescriptions or simply neglecting inflation altogether.
    Keywords: Inflation, strato-inflation, nominal exchange rate shocks, conflicting claims, hysteresis, capital controls, industrial policy
    JEL: E12 E31 F31 F41
    Date: 2017–06
  6. By: Alimi, R. Santos
    Abstract: Inflation and its associated uncertainty impose costs on real economic output in every economy. In developing economies, this welfare cost is higher than those obtainable in developed countries because inflation rate is still higher than desired, mostly double-digit in Africa. In contrast to conventional conditional mean approaches, this study employed quantile regressions and cross-sectional data from 44 African countries for the period 1986 to 2015 to examine the relationship between the level of inflation and inflation uncertainty. This study considers two measures of inflation – Inflation rate and mean inflation, and three different measures of inflation uncertainty – standard deviation, relative variation and median deviation of the inflation rate. The study found evidence of positive and significant association between inflation and its uncertainty across quantiles. It also found that higher inflation brings about more inflation variability, thereby supporting the Friedman-Ball hypothesis and on the other hand high inflation uncertainty prompts rises in inflation, confirming the Cukierman-Meltzer hypothesis. The study therefore recommend that policy makers should target low average inflation rates in order to reduce the negative consequences of inflation uncertainty, which in turn can improve economic performance in Africa.
    Keywords: Inflation, inflation uncertainty, inflation taergeting, quantile regression
    JEL: E3 E31 P44
    Date: 2017–06–12
  7. By: Pierre-Richard Agénor; Enisse Kharroubi; Leonardo Gambacorta; Giovanni Lombardo; Luiz Awazu Pereira da Silva
    Abstract: The large economic costs associated with the Global Financial Crisis have generated renewed interest in macroprudential policies and their international coordination. Based on a core-periphery model that emphasizes the role of international financial centers, we study the effects of coordinated and non-coordinated macroprudential policies when financial intermediation is subject to frictions. We find that even when the only frictions in the economy consist of financial frictions and financial dependency of periphery banks, the policy prescriptions under international policy coordination can differ quite markedly from those emerging from self-oriented policy decisions. Optimal macroprudential policies must address both short run and long run inefficiencies. In the short run, the policy instruments need to be adjusted to mitigate the adverse consequences of the financial accelerator, and its cross-country spillovers. In the long run, policymakers need to take into account the effects of the higher cost of capital, due to the presence of financial frictions. The gains from cooperation appear to be sizable. Nevertheless, their magnitude could be asymmetric, pointing to potential political-economy obstacles to the implementation of cooperative measures.
    Keywords: Macroprudential policies, international spillovers, financial frictions, international cooperation
    JEL: E3 E5 F3 F5 G1
    Date: 2017–06
  8. By: Schasfoort, Joeri; Godin, Antoine; Bezemer, Dirk; Caiani, Alessandro; Kinsella, Stephen (Groningen University)
    Date: 2017
  9. By: Alyssa G. Anderson; Jane E. Ihrig; Mary-Frances Styczynski; Gretchen C. Weinbach
    Abstract: Since December 2015, the Federal Open Market Committee (FOMC) has increased the target range for the federal funds rate by 25 basis points three times, bringing the target range from 0 to 25 basis points in late 2015 to 75 to 100 basis points in March 2017. This Note examines how this cumulative 75 basis point increase in the target range for the Fed's policy rate has transmitted to other short-term interest rates.
    Date: 2017–06–02
  10. By: YASUDA, Yukihiro
    Abstract: This paper shows theoretically that if bank supervision is weak, capital adequacy requirements provide an incentive for troubled banks with their non-performing loans to refinance their client distressed firms, even those with poor prospects. We also argue that in some cases rollover is desirable because the bank can resolve the debt overhang problem of its clients. Therefore, results such as these indicate that loan rollovers need to be assessed more carefully.
    Keywords: Rollover, Capital adequacy requirements, Debt overhang
    JEL: G21 G28
    Date: 2016–05
  11. By: Giuseppe Ferrero (Bank of Italy); Michele Loberto (Bank of Italy); Marcello Miccoli (Bank of Italy)
    Abstract: We build a general equilibrium model - along the lines of Williamson (2012) - where financial assets can be used as collateral in secured interbank markets to obtain reserves (central bank money). In this framework, frictions in the exchange process give rise to a liquidity premium for assets. An open market operation that provides reserves in exchange for assets decreases the availability of collateral by increasing its liquidity premium (and decreasing its return). The magnitude of the effect depends on assets' pledgeability properties (haircuts). We explore the positive implications of the model shown in the data. Focusing on the period 2009-2014, we analyse the relationship between yields of euro-area government bonds and the relative amount of bonds and central bank reserves held by the euro-area banking sector. We find evidence consistent with our model: yields decrease when reserves increase relative to bonds, with the effect being stronger at lower levels of haircuts. The results are confirmed after several robustness checks.
    Keywords: unconventional monetary policy, secured interbank market, asset prices
    JEL: E43 E58 G12
    Date: 2017–06
  12. By: Schnabl, Gunther
    Abstract: The paper analyses the role of monetary policy for cyclical movements of investment and asset markets in East Asia and Europe based on a Mises-Hayek overinvestment framework. It is shown how the gradual global decline of interest rates has triggered wandering overinvestment cycles in Japan, Southeast Asia and China. Similarly, it is shown how a one-size monetary policy within the European Monetary Union has not preserved the European Monetary Union from idiosyncratic economic development and crisis because of uncoordinated fiscal policies. With monetary policy crisis management being argued to impede financial and economic restructuring, a timely exit from ultra-expansionary monetary policies is recommended for both East Asia and Europe to reconstitute economic stability and growth.
    Keywords: Hayek,Mises,East Asia,European Monetary Union,monetary overinvestment theory,fiscal policy,asymmetric shocks,secular stagnation
    JEL: E52 E58 F42 E63
    Date: 2017
  13. By: Boeckx, Jef; De Sola Perea, Maite; Peersman, Gert
    Abstract: Using a sample of 131 banks, we Önd that the Eurosystemís credit support policies have been successful in stimulating bank credit to the private sector: the impact was greater on the loan supply of smaller, less liquid, less capitalized banks and those more dependent on wholesale funding. The role of bank capital is, however, ambiguous. Besides the above favorable direct e§ect on loan supply, lower levels of bank capitalization at the same time mitigate the size, retail and liquidity e§ects of these policies. The low capital drag on the other channels has even been dominant during the sample period.
    Date: 2017–06
  14. By: Piergiorgio Alessandri (Bank of Italy); Antonio Maria Conti (Bank of Italy); Fabrizio Venditti (Bank of Italy)
    Abstract: Since monetary policy affects risk premiums, and these appear to have a stronger influence on economic activity when they rise than when they fall, temporary monetary expansions may both stimulate the economy and sow the seeds of damaging financial market corrections in the future. We investigate this possibility by using local projection methods to examine the propagation of monetary shocks through US corporate bond markets. We find that, while the transmission of monetary shocks is symmetric, the impact of macroeconomic data releases is asymmetric: spreads are more responsive to bad news. Crucially, these responses precede economic slowdowns rather than directly cause them.
    Keywords: monetary policy, financial stability, risk premia, macro news, local projections
    JEL: C32 E32 F34
    Date: 2017–06
  15. By: P. Antipa; C. Chamley
    Abstract: The French Wars (1793-1815) exerted unprecedented pressures on Britain's fiscal and monetary policy settings. Policy makers had to constantly adjust the policy mix as events unfolded. This meant implementing monetary and fiscal policy innovations, such as the suspension of the gold standard and the instauration of Britain's first income tax. These adjustments signalled the government's commitment to undertake the necessary to win the war, without jeopardizing fiscal sustainability. Drawing on new hand-collected data, we also show that the Bank of England played an essential role in two successive phases of the war. The Bank granted ample liquidity to the domestic payment system, by discounting large amounts of private bills. It also financed the decisive phase of the wars by purchasing large amounts of public debt. The successful winding down of the balance sheet and the resumption of the gold standard influenced the Bank's policies and shaped the political and financial landscape for the century to come.
    Keywords: Interactions between monetary and fiscal policies, central bank balance sheet, unconventional monetary policy, open market operations.
    JEL: N13 H63 E58 E62
    Date: 2017
  16. By: Pierre-Richard Agénor; Pengfei Jia
    Abstract: This paper evaluates, using a game-theoretic approach, the benefits of coordinating macroprudential policy (in the form of reserve requirements) in a two-country model of a currency union with credit market imperfections. Financial stability is first defined in terms of the volatility of the credit-to-output ratio. The gains from coordination are measured by comparing outcomes under a centralized regime, where a common regulator sets the required reserve ratio to minimize union-wide financial volatility, and a decentralized (Nash) regime, where each country regulator sets that ratio to minimize its own policy loss. Experiments show that, under asymmetric real and financial shocks, the gains from coordination are significant at the union level. Moreover, these gains are higher when the common and national regulators have asymmetric preferences with respect to output stability, when financial markets are more integrated, and when the degree of asymmetry in credit markets between members is larger. Implications of the analysis for macroprudential policy coordination in the euro area are also discussed.
    Date: 2017
  17. By: Lojschova, Adriana
    Abstract: We find evidence that households in Slovakia do benefit from the ECB asset purchase programme. On the individual bank-level data of 26 financial institutions (full representation of the banking sector) we establish and confirm a traditional relationship between bank lending and changes to deposit ratio. We find the long-run relationship to be twice as strong in the household sector as in the sector of non-financial corporations. Controlling for interest rate changes and other factors, we also introduce asset purchases into the model. We document some, although limited, evidence of the presence of the bank lending channel of asset purchases in the household sector.
    Keywords: Bank lending channel, quantitative easing, panel data
    JEL: E52 G21
    Date: 2017–05

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