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on Central Banking |
| By: | Arias, Jonas E. (Federal Reserve Bank of Philadelphia); Ascari, Guido (University of Oxford, University of Pavia, and Bank of Finland); Branzoli, Nicola (Bank of Italy); Castelnuovo, Efrem (University of Melbourne and University of Padova) |
| Abstract: | This paper studies the challenge that increasing the inflation target poses to equilibrium determinacy in a medium-sized New Keynesian model without indexation fitted to the Great Moderation era. For moderate targets of the inflation rate, such as 2 or 4 percent, the probability of determinacy is near one conditional on the monetary policy rule of the estimated model. However, this probability drops significantly conditional on model-free estimates of the monetary policy rule based on real-time data. The difference is driven by the larger response of the federal funds rate to the output gap associated with the latter estimates. |
| Keywords: | trend inflation; determinacy; monetary policy |
| JEL: | C22 E3 E52 |
| Date: | 2017–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:17-16&r=cba |
| By: | Coenen, Günter; Ehrmann, Michael; Gaballoz, Gaetano; Hoffmann, Peter; Nakov, Anton; Nardelli, Stefano; Persson, Eric; Strasser, Georg |
| Abstract: | Monetary policy communication is particularly important during unconventional times because high uncertainty about the economy, the introduction of new policy tools and possible limits to the central bank’s toolkit could hamper the predictability of policy actions. We study how monetary policy communication should and has worked under such circumstances. Our main results relate to announcements of asset purchase programmes and the use of forward guidance. We show that announcements of asset purchase programmes have lowered market uncertainty, particularly when accompanied by a contextual release of implementation details such as the envisaged size of the programme. We also show that forward guidance reduces uncertainty more effectively when it is state‐contingent or when it provides guidance about a long horizon than when it is open‐ended or covers only a short horizon, and that the credibility of forward guidance is strengthened if the central bank also has embarked on an asset purchase programme. JEL Classification: E43, E52, E58 |
| Keywords: | asset purchase programme, central bank communication, forward guidance, unconventional monetary policy |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20172080&r=cba |
| By: | Fernando Garcia-Barragan; Guangling Liu |
| Abstract: | This paper presents a tractable framework with endogenous default and evaluates the welfare implication of bank capital requirements. We analyze the response of social welfare to a negative technology shock under different capital requirement regimes with and without default. We show that including default as an additional indicator of capital requirements is welfare improving. When implementing capital requirements, a more aggressive reaction to the default rate is more effective for weakening the negative effect of the shock on welfare. Compared with output gap, the credit-to-output gap is a better indicator for implementing the countercyclical capital buffer. |
| Keywords: | Bank capital requirement, Default, Welfare, DSGE |
| JEL: | E44 E47 E58 G28 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:688&r=cba |
| By: | Carrillo Julio A.; Mendoza Enrique G.; Nuguer Victoria; Roldán-Peña Jessica |
| Abstract: | In a New Keynesian model with the BGG accelerator and risk shocks, we show that violations of Tinbergen's Rule and strategic interaction between economic authorities undermine the effectiveness of monetary and financial policies. Separate monetary and financial policy rules produce higher welfare than a monetary rule augmented with credit spreads. The latter yields a tight money-tight credit regime in which the interest rate responds too much to inflation and not enough to credit. Reaction curves for the policy-rule elasticities are nonlinear, which reflects shifts in these elasticities from strategic substitutes to complements. The Nash equilibrium is inferior to the Cooperative equilibrium, both are inferior to a first-best outcome, and both might produce tight money-tight credit regimes. |
| Keywords: | Financial Frictions;Monetary Policy;Financial Policy |
| JEL: | E44 E52 E58 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdm:wpaper:2017-10&r=cba |
| By: | Yener Altunbas; Mahir Binici; Leonardo Gambacorta |
| Abstract: | This paper investigates the effects of macroprudential policies on bank risk through a large panel of banks operating in 61 advanced and emerging market economies. There are three main findings. First, there is evidence suggesting that macroprudential tools have a significant impact on bank risk. Second, the responses to changes in macroprudential tools differ among banks, depending on their specific balance sheet characteristics. In particular, banks that are small, weakly capitalised and with a higher share of wholesale funding react more strongly to changes in macroprudential tools. Third, controlling for bank-specific characteristics, macroprudential policies are more effective in a tightening than in an easing episode. |
| Keywords: | Macroprudential policies, effectiveness, bank risk |
| JEL: | E43 E58 G18 G28 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:646&r=cba |
| By: | Agénor, Pierre-Richard; Gambacorta, Leonardo; Kharroubi, Enisse; Lombardo, Giovanni; Pereira da Silva, Luiz A. |
| 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: | Financial Frictions; international cooperation; International spillovers; macroprudential policies |
| JEL: | E3 E5 F3 F5 G1 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12108&r=cba |
| By: | Wang, J. Christina (Federal Reserve Bank of Boston) |
| Abstract: | This paper examines whether the low interest rate environment that has prevailed since the Great Recession has compelled banks to reach for yield. It is important to recognize that banks can take on a variety of risks that offer higher yields today but incur different forms of future losses. Some losses, such as mark-to-market losses due to yield increases, can be avoided with accounting treatments whereas others, chiefly credit losses, cannot. A simple model shows that a bank’s incentive to take on risks for which potential future losses can be managed, such as interest rate risk, is countercyclical, especially if a bank is capital constrained. This study thus focuses on a bank’s exposure to interest rate risk through a maturity mismatch between its assets and liabilities. It finds evidence that the banks that faced less enhanced regulation after the financial crisis, especially those institutions used to having a higher net interest margin before the crisis, took on assets with longer maturities or prepayment risk, even while their source of funding shifted toward more transaction and saving deposits as a result of the near zero short-term interest rates. In contrast, those banks designated as systematically important and thus subjected to expanded post-crisis regulations have substantially shortened the average maturity of their assets since the crisis. There is some evidence that greater maturity mismatch is slightly more associated with a higher net interest margin during the post-crisis years. After the taper tantrum in 2013, these two groups of banks also adjusted their securities holdings in different ways, consistent with the differential regulatory accounting treatment. |
| Keywords: | banks; reaching for yield; maturity mismatch; regulation; zero lower bound |
| JEL: | E41 E52 G11 G18 G21 |
| Date: | 2017–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:17-3&r=cba |
| By: | Mendicino, Caterina; Nikolov, Kalin; Suarez, Javier |
| Abstract: | We examine the optimal size and composition of banks' total loss absorbing capacity (TLAC). Optimal size is driven by the trade-off between providing liquidity services through deposits and minimizing deadweight default costs. Optimal composition (equity vs. bail-in debt) is driven by the relative importance of two incentive problems: risk shifting (mitigated by equity) and private benefit taking (mitigated by debt). Our quantitative results suggest that TLAC size in line with current regulation is appropriate. However, an important fraction of it should consist of bail-in debt because such buffer size makes the costs of risk-shifting relatively less important at the margin. |
| Keywords: | agency problems; bail-in debt; Bank Regulation; loss absorbing capacity; risk shifting |
| JEL: | G21 G28 G32 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12104&r=cba |
| By: | Georgiadis, Georgios; Jančoková, Martina |
| 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 Classification: F42, E52, C50 |
| Keywords: | financial globalisation, monetary policy shocks, New Keynesian DSGE models, spillovers |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20172082&r=cba |
| By: | Toni Ahnertand; Co-Pierre Georg |
| Abstract: | We examine the effect of ex-post information contagion on the ex-ante optimal portfolio choices of banks and the welfare losses due to joint default. Because of counterparty risk and common exposures, bad news about one bank reveals valuable information about another bank, thereby triggering information contagion. Systemic risk is defined as the ex-ante probability of joint bank default ex post. We find that information contagion increases systemic risk when banks are subject to common exposures since portfolio adjustments are small. In contrast, when banks are subject to counterparty risk, information contagion induces a large shift toward more prudential portfolios and therefore reduces systemic risk. |
| Keywords: | information contagion, counterparty risk, common exposure, systemic risk |
| JEL: | G01 G21 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:686&r=cba |
| By: | Hugo Rodríguez Mendizábal |
| Abstract: | What would be the effect of imposing a 100 percent reserve require- ment to depository institutions? This paper contends that reserves do not compete with loans on the asset side of bank’s balance sheets. Thus, they only affect liquidity provision by banks indirectly through their impact on the cost of loan and deposit creation. This cost could be driven to zero if, as the Eurosystem does, central banks remunerated required reserves at the same rate of their refinancing operations. The paper argues that the crucial constraint imposed by a fully backed banking system is collateral availability by depository institutions. |
| Keywords: | narrow banking, endogenous money, interbank market, bank solvency, liquidity, monetary policy |
| JEL: | E4 E5 G21 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:955&r=cba |
| By: | Smith, Jonathan Acosta; Grill, Michael; Lang, Jan Hannes |
| Abstract: | This paper addresses the trade-off between additional loss-absorbing capacity and potentially higher bank risk-taking associated with the introduction of the Basel III Leverage Ratio. This is addressed in both a theoretical and empirical setting. Using a theoretical micro model, we show that a leverage ratio requirement can incentivise banks that are bound by it to increase their risk-taking. This increase in risk-taking however, should be more than outweighed by the benefits of higher capital and therefore increased loss-absorbing capacity, thereby leading to more stable banks. These theoretical predictions are tested and confirmed in an empirical analysis on a large sample of EU banks. Our baseline empirical model suggests that a leverage ratio requirement would lead to a significant decline in the distress probability of highly leveraged banks. JEL Classification: G01, G21, G28 |
| Keywords: | bank capital, Basel III, leverage ratio, risk-taking |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20172079&r=cba |
| By: | Elia Berdin; Matteo Sottocornola (EIOPA) |
| Abstract: | This paper investigates the systemic relevance of the insurance industry. We do it by analysing the systemic contribution of the insurance industry vis-á-vis other industries by applying three measures, namely the linear Granger causality test, conditional value at risk and marginal expected shortfall, to three groups, namely banks, insurers and non-financial companies listed in Europe over the last 14 years. Our evidence suggests that the insurance industry shows i) a persistent systemic relevance over time, ii) it plays a subordinate role in causing systemic risk compared to banks. In addition, iii) we do not find clear evidence on the higher systemic relevance of SIFI insurers compared to non-SIFIs. |
| Keywords: | Insurance, Systemic Risk, financial stability |
| JEL: | G22 G28 E27 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:eio:thafsr:6&r=cba |
| By: | Masazumi Hattori; James Yetman |
| Abstract: | We model inflation forecasts as monotonically diverging from an estimated long-run anchor point towards actual inflation as the forecast horizon shortens. Fitting the model with forecaster-level data for Japan, we find that the estimated anchors across forecasters have tended to rise in recent years, along with the dispersion in estimates across forecasters. Further, the degree to which these anchors pin down inflation expectations at longer horizons has increased, but remains considerably lower than found in a similar study of Canadian and US forecasters. Finally, the wide dispersion in estimated decay paths across forecasters points to a diverse set of views across forecasters about the inflation process in Japan. |
| Keywords: | Inflation expectations, decay function, inflation targeting, deflation |
| JEL: | E31 E58 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:647&r=cba |