nep-cba New Economics Papers
on Central Banking
Issue of 2017‒08‒06
fourteen papers chosen by
Maria Semenova
Higher School of Economics

  1. Financial Vulnerability and Monetary Policy By Fernando Duarte; Tobias Adrian
  2. Back to the Future: Backtesting Systemic Risk Measures during Historical Bank Runs and the Great Depression By Brownlees, Christian; Chabot, Ben; Ghysels, Eric; Kurz, Christopher
  3. Revisiting the Exchange Rate Pass-through in Emerging Markets By beldi, lamia; djelassi, mouldi; kadria, mohamed
  4. Forecasting Inflation in Latin America with Core Measures By Pincheira, Pablo; Selaive, Jorge; Nolazco, Jose Luis
  5. A top-down stress testing framework for the Dutch banking sector By Tijmen Daniëls; Patty Duijm; Franka Liedorp; Dimitris Mokas
  6. Implications for banking stability and welfare under capital shocks and countercyclical requirements By BEKIROS, Stelios; NILAVONGSE, Rachatar; UDDIN, Gazi Salah
  7. Foreign Financial Deregulation under Flexible and Fixed Exchange Rates By Paul J.J. Welfens
  8. Cross-border Flows and Monetary Policy By Teodora Paligorova; Horacio Sapriza; Andrei Zlate; Ricardo Correa
  9. Effects of euro area monetary policy on institutional sectors: the case of Portugal By António Afonso,; Jorge Silva
  10. Monetary Policy and the Stock Market: Time Series Evidence By Michael Weber; Andreas Neuhierl
  11. When to Lean Against the Wind By Richter, Björn; Schularick, Moritz; Wachtel, Paul
  12. Capital Controls, Macroprudential Regulation, and the Bank Balance Sheet Channel By Shigeto Kitano; Kenya Takaku
  13. The interplay between quantitative easing and risk: the case of the Japanese banking By Emmanuel C. Mamatzakis; Anh N. Vu
  14. Une perspective macroprudentielle pour la stabilité financière By Pinshi Paula, Christian

  1. By: Fernando Duarte (Federal Reserve Bank of New York); Tobias Adrian (Federal Reserve Bank of New York)
    Abstract: We present a parsimonious New Keynesian model that features financial vulnerabilities. The vulnerabilities generate time varying downside risk of GDP growth by driving the dynamics of risk premia. Monetary policy impacts the output gap directly via the IS curve, and indirectly via its impact on financial vulnerabilities. The optimal monetary policy rule always depends on financial vulnerabilities in addition to output, inflation, and the real rate. We show that a classic Taylor rule exacerbates downside risk of GDP growth relative to an optimal Taylor rule, thus generating welfare losses associated with negative skewness of GDP growth.
    Date: 2017
  2. By: Brownlees, Christian; Chabot, Ben; Ghysels, Eric; Kurz, Christopher
    Abstract: We evaluate the performance of two popular systemic risk measures, CoVaR and SRISK, during eight financial panics in the era before FDIC insurance. Bank stock price and balance sheet data were not readily available for this time period. We rectify this shortcoming by constructing a novel dataset for the New York banking system before 1933. Our evaluation exercise focuses on assessing whether systemic risk measures were able to detect systemically important financial institutions and to provide early warning signals of aggregate financial sector turbulence. The predictive ability of CoVaR and SRISK is measured controlling for a set of commonly employed market risk measures and bank ratios. We find that CoVaR and SRISK help identifying systemic institutions in periods of distress beyond what is explained by standard risk measures up to six months prior to the panic events. Increases in aggregate CoVaR and SRISK precede worsening conditions in the financial system; however, the evidence of predictability is weaker.
    Keywords: Financial crises; Risk Measures; systemic risk
    JEL: G01 G21 G28 N21
    Date: 2017–07
  3. By: beldi, lamia; djelassi, mouldi; kadria, mohamed
    Abstract: This paper aims to investigate the links between exchange rate pass-through (ERPT) and monetary policy. We examine the degree of ERPT to consumer prices for 11 emerging markets (6 inflation targeters and 5 non-inflation targeters) using both multivariate cointegrated VAR (CVAR) and impulse responses derived from the vector error correction model (VECM). Results of cointegration analyses suggest that the degree of ERPT is lower in ITers than in non-ITers. Besides, the impulse response estimates at 48 months are extremely close to the cointegration estimates in IT countries compared to those non-IT countries. The adjustment process is fully completed during the considered time horizon in the impulse response analysis. This finding confirms the literature review on the importance of the inflation environment and the monetary policy credibility in determining ERPT. The level of ERPT tend to decline in the countries where monetary policy moved strongly towards stabilizing inflation.
    Keywords: Exchange Rate pass-through; Domestic prices; Cointegration; Emerging Markets.
    JEL: E31 F31
    Date: 2017
  4. By: Pincheira, Pablo; Selaive, Jorge; Nolazco, Jose Luis
    Abstract: We explore the ability of core inflation to predict headline CPI annual inflation for a sample of 8 developing economies in Latin America during the period January 1995-May 2017. Our in-sample and out-of-sample results are roughly consistent in providing evidence of predictability in the great majority of our countries, although, as usual, a slightly stronger evidence of predictability comes from the in-sample analysis. The bulk of the out-of-sample evidence of predictability concentrates at the short horizons of 1 and 6 months. In contrast, at longer horizons of 12 and 24 months, we only find evidence of predictability for two countries: Chile and Colombia. This is both important and challenging, given that monetary authorities in our sample of developing countries are currently implementing or given steps toward the future implementation of inflation targeting regimes, which are heavily based on long run inflation forecasts.
    Keywords: Inflation, Forecasting, Time Series, Monetary Policy, Core Inflation, Developing Countries.
    JEL: E31 E37 E4 E47 E50 E52 E58 F4 F41 F47 O11 O23 O54
    Date: 2017–07–17
  5. By: Tijmen Daniëls; Patty Duijm; Franka Liedorp; Dimitris Mokas
    Abstract: Stress tests have become an increasingly important tool for macroprudential policy makers and micro-prudential supervisors. DNB has developed an extensive top-down stress test framework to support its macro- and micro-prudential responsibilities. It is used to quantify financial stability assessments, to challenge calculations that banks provide in supervisory stress tests and to reinforce the link between macro risk assessment and micro-prudential actions. This paper explains DNB's topdown stress test framework with a focus on the characteristics of the Dutch banking sector.
    Date: 2017–07
  6. By: BEKIROS, Stelios; NILAVONGSE, Rachatar; UDDIN, Gazi Salah
    Abstract: This paper incorporates anticipated and unexpected shocks to bank capital into a DSGE model with a banking sector. We apply this model to study Basel III countercyclical capital requirements and their implications for banking stability and household welfare. We introduce three different countercyclical capital rules. The first countercyclical capital rule responds to credit to output ratio. The second countercyclical rule reacts to deviations of credit to its steady state, and the third rule reacts to credit growth. The second rule proves to be the most effective tool in dampening credit supply, housing demand, household debt and output fluctuations as well as in enhancing the banking stability by ensuring that banks have higher bank capital and capital to asset ratio. After conducting a welfare analysis we find that the second rule outranks the other ones followed by the first rule, the baseline and the third rule respectively in terms of welfare accumulation.
    Keywords: Banking stability, Basel III, Capital requirements, News shocks, Welfare analysis
    JEL: E32 E44 E52
    Date: 2017
  7. By: Paul J.J. Welfens (Europäisches Institut für Internationale Wirtschaftsbeziehungen (EIIW))
    Abstract: An enhanced Mundell-Fleming model with domestic and foreign banking deregulation is considered for a small open economy. Deregulation is assumed to influence net capital outflows. It can be shown that under fixed exchange rates, foreign deregulation reduces output and employment and therefore there will be an international resistance to strong deregulation abroad - typically in the US or the UK whose big banking sectors could give an inherent incentive to deregulate. Under flexible exchange rates, banking deregulation abroad raises output and employment so that banking deregulation in the US – or the UK - will face less resistance than under a system of fixed exchange rates; excessive deregulation pressure could emerge in a system of flexible rates. There is a new trilemma. While banking deregulation might bring a national and global output increase in the medium term, the long-run effects could be higher government restructurings cost related to ailing banks in OECD countries. The debate of fixed exchange rates versus flexible exchange rates thus has a new additional aspect, namely the probability of banking deregulation. A key policy implication derived is thus that in a system of flexible exchange rates national and international as well as IMF monitoring of banking regulation quality is important for economic stability and welfare – the IMF’s FSAP and the work of the BIS are quite crucial. BREXIT allows one to expect a wave of deregulation in the UK (plus US); with negative external effects worldwide. New long-run effects are also considered in an enhanced Solow growth model with risk, trade and FDI.
    Keywords: Banking, Deregulation, Macroeconomics, OECD, Employment
    JEL: E52 F00 F41 F43
    Date: 2017–06
  8. By: Teodora Paligorova (Bank of Canada); Horacio Sapriza (Federal Reserve Board); Andrei Zlate (Federal Reserve Bank of Boston); Ricardo Correa (Board of Governors of the Federal Reserve System)
    Abstract: We analyze the impact of monetary policy on cross-border bank flows using BIS Locational Banking Statistics data from 1995 to 2014. We find that monetary policy in the source countries is an important determinant of cross-border bank flows. In addition, we find evidence in favor of a cross-border portfolio reallocation channel that works in parallel with the traditional bank lending channel. As tighter monetary conditions in source countries erode the net worth and collateral values of domestic borrowers, banks reallocate credit away from relatively risky domestic borrowers toward safer foreign counterparties. The cross-border reallocation of credit is more pronounced for banks in source countries with higher prevalence of household credit and weaker financial sectors. Also, the reallocation is directed especially toward foreign non-bank borrowers in advanced economies, or those in economies with investment grade sovereign rating. Thus, our study highlights the spillovers from domestic monetary policy on the dynamics of domestic and foreign credit, enhancing the understanding of the domestic and international monetary transmission mechanisms in the presence of global banks.
    Date: 2017
  9. By: António Afonso,; Jorge Silva
    Abstract: We study the effects of the euro area monetary policy on the institutional sectors in Portugal during the period 2000:4-2015:4. Our results show that the single monetary policy affected some variables that are proxies for the funding of each institutional sector of the economy: general government, other monetary financial institutions, non-financial corporations, households and the external sector. The period of the economic and financial adjustment programme influenced all institutional sectors, and financial integration in the euro area had an effect on the funding for the economy: there was a reduction of long term-to-GDP ratio, external funding to the Portuguese other MFIs, and new loans to households Key Words: monetary policy, euro area, Portugal, non-conventional instruments, institutional sectors, financial integration
    JEL: C20 E44 E52 E62 G01
    Date: 2017–07
  10. By: Michael Weber (University of Chicago); Andreas Neuhierl (University of Notre Dame)
    Abstract: We construct a slope factor from changes in federal funds futures of different horizons. Slope predicts stock returns at the weekly frequency: faster monetary policy easing positively predicts excess returns. Investors can achieve increases in weekly Sharpe ratios of 20% conditioning on the slope factor. The tone of speeches by the FOMC chair correlates with the slope factor. Slope predicts changes in future interest rates and forecast revisions of professional forecasters. Our findings show that the path of future interest rates matters for asset prices, and monetary policy affects asset prices throughout the year and not only at FOMC meetings.
    Date: 2017
  11. By: Richter, Björn; Schularick, Moritz; Wachtel, Paul
    Abstract: This paper shows that policy-makers can distinguish between good and bad credit booms with high accuracy and they can do so in real time. Evidence from 17 countries over nearly 150 years of modern financial history shows that credit booms that are accompanied by house price booms and a rising loan-to-deposit-ratio are much more likely to end in a systemic banking crisis. We evaluate the predictive accuracy for different classification models and show that the characteristics of the credit boom contain valuable information for sorting the data into good and bad booms. Importantly, we demonstrate that policy-makers have the ability to spot dangerous credit booms on the basis of data available in real time. We also show that these results are robust across alternative specifications and time-periods.
    Keywords: Banking Crisis; Credit Booms; crisis prediction; macroprudential policy
    JEL: E32 E52 G01
    Date: 2017–07
  12. By: Shigeto Kitano (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan); Kenya Takaku (Faculty of International Studies, Hiroshima City University, Japan)
    Abstract: We develop a sticky price, small open economy model with financial frictions à la Gertler and Karadi (2011), in combination with liability dollarization. An agency problem between domestic financial intermediaries and foreign investors of emerging economies introduces financial frictions in the form of time-varying endogenous balance sheet constraints on the domestic financial intermediaries. We consider a shock that tightens the balance sheet constraint and show that capital controls, the effects of which are rigorously examined as a policy tool for the emerging economies, can be a credit policy tool to mitigate the negative shock.
    Keywords: Capital control; Macroprudential regulation; Financial frictions; Financial intermediaries; Balance sheets; Small open economy; Liability dollarization; DSGE; Welfare
    JEL: E69 F32 F41
    Date: 2017–07
  13. By: Emmanuel C. Mamatzakis (University of Sussex); Anh N. Vu (University of Sussex)
    Abstract: The Japanese banking industry is an interesting one, given chronic problems related to notorious non-performing loans, originated back in the 1990s, but also due to an unprecedented monetary expansion. In this paper, we focus on the impact of quantitative easing on bank level risk, while controlling for bank competition. We opt for a measure of bank specific risk-taking based on a new data set of bankrupt and restructured loans. Given issues related to endogeneity among the main variables, we adopt dynamic panel threshold and panel vector autoregression analyses that address such criticism. Results demonstrate that quantitative easing reduces bankrupt and restructured loan ratios, though we do not observe a similar impact on bank stability. Given the adoption of negative rates in January 2016 by the Bank of Japan, our study comes is timely and provides insightful implications for future research.
    Keywords: Quantitative easing; bank risk-taking; Japan
    JEL: G21 C23 E52
    Date: 2017–05
  14. By: Pinshi Paula, Christian
    Abstract: The need to strengthen the macroprudential orientation of financial regulatory and supervisory frameworks stays a priority for financial and real healthy. Stability financial threatened with endogenous and exogenous risks translating crises, hence it has to a healthy regulation for the reduction risks. Macroprudential policy proves to be a best regulation for limiting systemic risk. We wonder about adoption a framework macroprudential for stability financial in Democratic Republic of the Congo (DRC). The correlation between countercyclical capital buffer and stability financial justify to make use of framework macroprudential. The causality analysis put in light the effect of policy macroprudential on financial stability. The coefficient of reserve requirements, used like an indicator par excellence, and countercyclical capital buffer cause financial stability. That’s justify an adoption of framework macroprudential in DRC. Finally, we suggest a best Framework governance for a macroprudential policy in DRC. The game have to be cooperative but flexible with monetary policy, it means, we must create a general management or autonomous institution macroprudential. However monetary policy must have a low of veto on this financial stability general management.
    Keywords: Monetary Policy, financial stability, macroprudential policy
    JEL: E37 E51 E58 G13 G18
    Date: 2017–06

This nep-cba issue is ©2017 by Maria Semenova. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.