nep-cba New Economics Papers
on Central Banking
Issue of 2017‒07‒16
twelve papers chosen by
Maria Semenova
Higher School of Economics

  1. Systemic Financial Sector and Sovereign Risks By Xisong Jin; Francisco Nadal De Simone
  2. How to reach all Basel requirements at the same time? By M. Birn; M. Dietsch; D. Durant
  3. A macro approach to international bank resolution By Dirk Schoenmaker
  4. Optimal Unconventional Monetary Policy in the Face of Shadow Banking By Philipp Kirchner; Benjamin Schwanebeck
  5. Transitions in Central Bank Leadership By Carlos Carvalho; Tiago Fl´orido; Eduardo Zilberman
  6. The Combination of Monetary and Fiscal Policy Shocks: A TVP-FAVAR Approach By MOLTENI, Francesco, PAPPA, Evi
  7. How Effective is Monetary Policy at the Zero Lower Bound? Identification Through Industry Heterogeneity By Arsenios Skaperdas
  8. Optimal Monetary Policy under Negative Interest Rate By Dong, Feng; Wen, Yi
  9. A Tale of Two Velocities By Steve Ambler
  10. Inflation persistence in BRICS countries: A quantile autoregressive (QAR) model By Phiri, Andrew
  11. The IMF and precautionary lending : An empirical evaluation of the selectivity and effectiveness of the flexible credit line By Dennis Essers; Stefaan Ide
  12. Optimal Regulation of Financial Intermediaries By Sebastian Di Tella

  1. By: Xisong Jin; Francisco Nadal De Simone
    Abstract: This study takes a comprehensive approach to systemic risk stemming from Luxembourg’s Other Systemically Important Institutions (OSIIs), from the Global Systemically Important Banks (G-SIBs) to which they belong, from the investment funds sponsored by the OSIIs, from the housing market, from the non-financial corporate sector and from the sovereign. All sectoral balance sheets are integrated and the resulting systemic contingent claims are linked into a stochastic version of the general government balance sheet to gauge their impact on sovereign risk. Explicitly modelling default dependence and capturing the time-varying non-linearities and feedback effects typical of financial markets, the approach evaluates systemic losses and potential public sector costs from contingent liabilities stemming directly or indirectly from the financial sector. Various vulnerability and risk indicators suggest the sovereign is robust to a variety of shocks. The analysis highlights the key role of a sustainable fiscal position for financial stability.
    Keywords: financial stability; sovereign risk; macro-prudential policy; banking sector; investment funds; default probability; non-linearities; generalized dynamic factor model; dynamic copulas
    JEL: C1 E5 F3 G1
    Date: 2017–06
  2. By: M. Birn; M. Dietsch; D. Durant
    Abstract: We use confidential bank-level data from the BCBS’s quantitative impact studies between 2011 and 2014 to document how banks have been adjusting to Basel III solvency and liquidity requirements. We first develop a non-linear optimization model to assess how banks’ balance sheets should have adjusted between 2011 and 2014, absent any external factor other than the new regulations. We find that the increase in capital observed during this period was far larger than that predicted by our model, thus suggesting that banks may have faced pressures from financial markets. In contrast, the observed increase in HQLA was lower than that predicted by the model. We then use the model to assess the adjustments that were still needed, at the end of 2014, for banks to fully comply with Basel III. Based on data at the end of 2014 (and assuming, beyond 2014, a change in deposits similar to the one observed in 2011-2014), we find that the required adjustment in HQLA still necessary to meet all Basel requirements, w as half of the one achieved in 2011-2014, and that the required adjustment in capital would come exclusively from TLAC. Finally, any required increase in capital helps to fulfil liquidity regulation but the reverse is not true.
    Keywords: banking regulation, Basel III, financing of the real economy, credit supply, solvency ratios, leverage ratio, liquidity ratios.
    JEL: G21 G28
    Date: 2017
  3. By: Dirk Schoenmaker
    Abstract: In the aftermath of the Great Financial Crisis, regulators have rushed to strengthen banking supervision and implement bank resolution regimes. While such resolution regimes are welcome as a means to reintroduce market discipline and reduce the reliance on taxpayer-funded bailouts, the effects on the wider banking system have not been properly considered. A macro approach to resolution is also needed, which should consider the contagion effects of bail-in and the continuing need for a fiscal backstop to the financial system. For bail-in to work, it is important that bail-inable bank bonds are largely held outside the banking sector, which is currently not the case. Stricter capital requirements could push them out of the banking system. The organisation of the fiscal backstop is crucial for the stability of the global banking system. Single-point-of-entry resolution of international banks is only possible for the very largest countries or for countries working together, including in terms of sharing the burden of a potential bank bailout. The euro area has adopted the burden-sharing approach in its banking union. This Policy Contribution recommends completing banking union. Other countries have taken a stand-alone approach, which leads to multiple-point-of-entry resolution of international banks headquartered in those countries and contributes to fragmentation of the global banking system.
    Date: 2017–07
  4. By: Philipp Kirchner (University of Kassel); Benjamin Schwanebeck (University of Kassel)
    Abstract: Using a DSGE framework, we discuss the optimal design of monetary policy for an economy where both retail banks and shadow banks serve as fi?nancial intermediaries. We get the following results. During crises times, a standard Taylor rule fails to reach sufficient stimulus. Direct asset purchases prove to be the most effective unconventional tool. When maximizing welfare, central banks should shy away from interventions in the funding process between retail and shadow banks. Liquidity facilities are the welfare-maximizing unconventional policy tool. The effectiveness of unconventional measures increases in the size of the shadow banking sector. However, the optimal response to shocks is sensitive to the resource costs of the implementation which may differ across central banks. Hence, optimal unconventional monetary policy is country-speci?c.
    Keywords: ?nancial intermediation; shadow banking; ?financial frictions; unconventional policy; optimal policy
    JEL: E44 E52 E58
    Date: 2017
  5. By: Carlos Carvalho (Central Bank of Brazil and PUC-Rio); Tiago Fl´orido (Harvard University); Eduardo Zilberman (PUC-Rio)
    Abstract: We assemble a novel dataset on transitions in central bank leadership in several countries, and study how monetary policy is conducted around those events. We find that policy is tighter both at the last meetings of departing governors and first meetings of incoming leaders. This finding cannot be fully explained by endogenous transitions, the effects of the zero lower bound, surges in inflation expectations, omitted variables such as fiscal policy and uncertainty nor electoral cycles. We conclude by offering two possible, perhaps complementary, explanations for these results. One based on a simple signalling story, another based on career and reputation concerns.Creation-Date: 2017-07
  6. By: MOLTENI, Francesco, PAPPA, Evi
    Abstract: This paper analyzes jointly the effects of monetary and fiscal policy shocks in the US economy using a factor augmented vector autoregressive model with drifting coefficients and stochastic volatility. The time varying structure of the model allows to assess the impact of monetary policy shocks in the same periods when fiscal policy shocks identified via the narrative approach are also at play. In this way we study how the monetary policy transmission changes conditional on expansionary or contractionary exogenous fiscal policies, which are determined by the discretionary intervention of the fiscal authority and are not the response of business cycle fluctuations or the reaction to monetary policy. We find that fiscal policy strongly affects the impulse responses to monetary policy shocks through the aggregate demand channel. These results are relevant to understand the implications of different policy mixes.
    Keywords: TVP FAVAR, monetary policy shocks, fiscal policy shocks
    JEL: E52 E62 E63 E65 C32
    Date: 2017
  7. By: Arsenios Skaperdas
    Abstract: US monetary policy was constrained from 2008 to 2015 by the zero lower bound, during which the Federal Reserve would likely have lowered the federal funds rate further if it were able to. This paper uses industry-level data to examine how growth was affected. Despite the zero bound constraint, industries historically more sensitive to interest rates, such as construction, performed relatively well in comparison to industries not typically affected by monetary policy. Further evidence suggests that unconventional policy lowered the effective stance of policy below zero.
    Keywords: Industry heterogeneity ; Unconventional monetary policy ; Zero lower bound
    JEL: E32 E43 E47 E52
    Date: 2017–07–07
  8. By: Dong, Feng (Shanghai Jiao Tong University); Wen, Yi (Federal Reserve Bank of St. Louis)
    Abstract: In responding to the extremely weak global economy after the financial crisis in 2008, many industrial nations have been considering or have already implemented negative nominal interest rate policy. This situation raises two important questions for monetary theories: (i) Given the widely held doctrine of the zero lower bound on nominal interest rate, how is a negative interest rate (NIR) policy possible? (ii) Will NIR be effective in stimulating aggregate demand? (iii) Are there any new theoretical issues emerging under NIR policies? This article builds a model to show that (i) money injections can remain effective even when the nominal bank lending rate has reached zero or become negative; (ii) it is a good policy to keep the nominal interest rate as low as possible by purchasing government bonds with money; and (iii) the conventional wisdom on the notion of the liquidity trap and the Fisherian decomposition between the nominal and real interest rate can be invalid.
    Keywords: Monetary Policy; Quantitative Easing; Liquidity Preference; Liquidity Trap; Banking; Money Demand
    JEL: E12 E13 E31 E32 E41 E43 E51
    Date: 2017–05–16
  9. By: Steve Ambler (Département des sciences économiques, ESG UQAM, Canada; C.D. Howe Institute, Canada; The Rimini Centre for Economic Analysis)
    Abstract: Quantitative easing in the US has meant a massive increase in the size of the Fed’s balance sheet and the monetary base without a commensurate increase in inflation. Instead, velocity has decreased dramatically. The only comparable episode in recent economic history was Japan’s experiment with quantitative easing in the early 2000s, where inflation remained low or negative and which ended in 2006 when the Bank of Japan reduced the size of its balance sheet to a level compatible with the growth path it was on before quantitative easing. We show that this is precisely what we would expect in a standard New Keynesian model in response to an increase in the money supply that is expected to be temporary.
    Date: 2017–07
  10. By: Phiri, Andrew
    Abstract: Using the recently-introduced quantile autoregression methodology (QAR), this study contributes to the ever-expanding empirical literature by investigating the persistence in inflation for BRICS countries using quarterly time series data collected between 1996 to 2016. Our empirical analysis reveals two crucial findings. Firstly, for all estimated regressions, persistence in moderate to high inflation rates in the QAR regression exhibits unit root tendencies. Secondly, we note that inflation persistence varies across different time horizons corresponding to periods priori and subsequent to the global financial crisis. These findings have important implications for Central Banks in BRICs countries.
    Keywords: BRICS; Emerging economies; Inflation persistence; Quantile regression.
    JEL: C31 E31
    Date: 2017–06–29
  11. By: Dennis Essers (Economics and Research Department, NBB and University of Antwerp, Institute of Development Policy and Management (IOB)); Stefaan Ide (Economics and Research Department, NBB and IMF, Resident Advisor Algeria)
    Abstract: This paper provides an empirical evaluation of the flexible Credit Line (FCL), the IMF's prime precautionary lending instrument since 2009 to which so far only three emerging market economies have subscribed: Mexico, Colombia and Poland. We consider both questions of selectivity and effectiveness: first, which factors explain the three FCL countries' participation in such arrangements? And second, to which extent have the FCL arrangements delivered on their promise of boosting market confidence in their respective users? Based on a probit analysis we show that FCL selectivity can be explained by both demand- and supply-side factors. The probability of participation in the FCL was greater in countries that experienced larger exchange market pressures prior to the creation of the instrument, that had lower bond spreads and inflation, that accounted for higher shares in US exports, and that exhibited a higher propensity of making political concessions to the US. Our estimation of the effects of the FCL employs the ‘synthetic control’ methodology, a novel counterfactual approach. We find evidence for some but not spectacular beneficial effects on sovereign bond spreads and gross capital inflows in FCL countries. Overall, our results suggest that any economic stigma eligible countries still attach to entry into an FCL arrangement is unwarranted. Conversely, the apparent link of FCL participation with US interests may not be conducive to overcoming political stigma..
    Keywords: Flexible Credit Line; IMF; global financial safety net; emerging markets; synthetic control.
    JEL: F33 F34 F55
    Date: 2017–06
  12. By: Sebastian Di Tella (Stanford GSB)
    Abstract: I characterize the optimal financial regulation policy in an economy where financial intermediaries trade capital assets on behalf of households, but must retain an equity stake for incentive reasons. Financial regulation is necessary because intermediaries cannot be excluded from privately trading in capital markets. They don’t internalize that high asset prices force everyone to bear more risk. The socially optimal allocation can be implemented with a tax on asset holdings, or equivalently, reserve requirements. I derive a simple formula for the externality/optimal policy in terms of observable variables, valid for heterogenous intermediaries and asset classes, and arbitrary aggregate shocks. I use market data on leverage and volatility of intermediaries’ equity to measure the externality, which co-moves with the business cycle.
    Date: 2017

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