nep-cba New Economics Papers
on Central Banking
Issue of 2017‒11‒19
twelve papers chosen by
Maria Semenova
Higher School of Economics

  1. Central bank transparency and the volatility of exchange rates By Eichler, Stefan; Littke, Helge C. N.
  2. Financial Regulation in a Quantitative Model of the Modern Banking System By Begenau, Juliane; Landvoigt, Tim
  3. Leverage and Risk Weighted Capital Requirements By Sudipto Karmakar; Leonardo Gambacorta
  4. The Gold Pool (1961-1968) and the fall of the Bretton Woods system. Lessons for central bank cooperation. By Bordo, Michael D; Monnet, Eric; Naef, Alain
  5. The End of the Bretton Woods International Monetary System By Edwin M. Truman
  6. The Great Deception: The ‘Science’ of Monetary Policy and the Great Moderation Revisited By Gilberto Tadeu Lima; Mark Setterfield, Jaylson Jair da Silveira
  7. Macroprudential policy and intra-group dynamics: The effects of reserve requirements in Brazil By Becker, Christian; Ossandon Busch, Matias; Tonzer, Lena
  8. "Whatever it takes" to resolve the European sovereign debt crisis? Bond pricing regime switches and monetary policy effects By António Afonso; Michael G. Arghyrou; María Dolores Gadea; Alexandros Kontonikas
  9. The Role of Inflation Target Adjustment in Stabilization Policy By EO, Yunjong; LIE, Denny
  10. The recalibration of the European System of Financial Supervision in regard of the insurance sector: From dreary to dreamy or vice versa? By Gal, Jens; Gründl, Helmut
  11. A new IV approach for estimating the efficacy of macroprudential measures By Gadatsch, Niklas; Mann, Lukas; Schnabel, Isabel
  12. Financial Crises and Lending of Last Resort in Open Economies By Bocola, Luigi; Lorenzoni, Guido

  1. By: Eichler, Stefan; Littke, Helge C. N.
    Abstract: We analyze the effect of monetary policy transparency on bilateral exchange rate volatility. We test the theoretical predictions of a stylized model using panel data for 62 currencies from 1998 to 2010. We find strong empirical evidence that an increase in the availability of information about monetary policy objectives decreases exchange rate volatility. Using interaction models, we find that this effect is more pronounced for countries with a lower flexibility of goods prices, a lower level of central bank conservatism, and a higher interest rate sensitivity of money demand.
    Keywords: central bank transparency,exchange rate volatility,panel model
    JEL: E58 F31
    Date: 2017
  2. By: Begenau, Juliane (Harvard University); Landvoigt, Tim (University of TX)
    Abstract: How does the shadow banking system respond to changes in the capital regulation of commercial banks? We propose a tractable, quantitative general equilibrium model with regulated and unregulated banks to study the unintended consequences of regulatory policy. Tightening the capital requirement from the status quo creates a safer banking system despite more shadow banking activity. A reduction in aggregate liquidity provision decreases the funding costs of all banks, raising profits and reducing risk-taking incentives. Calibrating the model to data on financial institutions in the U.S., we find the optimal capital requirement is around 15%.
    Date: 2017–04
  3. By: Sudipto Karmakar; Leonardo Gambacorta
    Abstract: The global financial crisis has highlighted the limitations of risk-sensitive bank capital ratios. To tackle this problem, the Basel III regulatory framework has introduced a minimum leverage ratio, defined as a banks Tier 1 capital over an exposure measure, which is independent of risk assessment. Using a medium sized DSGE model that features a banking sector, financial frictions and various economic agents with differing degrees of creditworthiness, we seek to answer three questions: 1) How does the leverage ratio behave over the cycle compared with the risk-weighted asset ratio? 2) What are the costs and the benefits of introducing a leverage ratio, in terms of the levels and volatilities of some key macro variables of interest? 3) What can we learn about the interaction of the two regulatory ratios in the long run? The main answers are the following: 1) The leverage ratio acts as a backstop to the risk-sensitive capital requirement: it is a tight constraint during a boom and a soft constraint in a bust; 2) the net benefits of introducing the leverage ratio could be substantial; 3) the steady state value of the regulatory minima for the two ratios strongly depends on the riskiness and the composition of bank lending portfolios
    Keywords: Bank Capital Buffers, Regulation, Risk-Weighted Assets, Leverage
    JEL: G21 G28 G32
    Date: 2017–10
  4. By: Bordo, Michael D; Monnet, Eric; Naef, Alain
    Abstract: The Gold Pool (1961-1968) was one of the most ambitious cases of central bank cooperation in history. Major central banks pooled interventions - sharing profits and losses- to stabilize the dollar price of gold. Why did it collapse? From at least 1964, the fate of the Pool was in fact tied to sterling, the first line of defense for the dollar. Sterling's unsuccessful devaluation in November 1967 spurred speculation and massive losses for the Pool. Contagion occurred because US policies were inflationary and insufficiently credible as well. The demise of the Pool provides a striking example of contagion between reserve currencies.
    Keywords: Bretton Woods; central bank cooperation; Gold Pool; international monetary system; reserve currencies; sterling crisis
    JEL: E42 F31 F33 N14
    Date: 2017–11
  5. By: Edwin M. Truman (Peterson Institute for International Economics)
    Abstract: This paper examines two episodes of international economic policy coordination: the efforts to modify the Bretton Woods international monetary system in the 1960s and early 1970s and to reform the system after the closing of the US official gold window on August 15, 1971. The paper examines the diagnoses of the problem in each episode, the treatments applied, and the results in the short run and longer run. In the short run, both episodes were failures. The international monetary system that emerged in the mid-1970s, while less systemic than some would like, has nevertheless stood the test of time, although proposals for its reform continue to be discussed.
    Keywords: balance of payments, Bretton Woods, capital flows, Committee of Twenty, exchange rates, gold, International Monetary Fund, international monetary system, special drawing rights
    JEL: F30 F32 F33 F53
    Date: 2017–10
  6. By: Gilberto Tadeu Lima; Mark Setterfield, Jaylson Jair da Silveira
    Abstract: Conventional wisdom suggests that the Great Moderation was caused by either good policy, good luck (favourable shocks), more efficient private sector behaviour (such as better inventory management), or more effective financial innovations. We show that it may, instead, have originated from the complementarity of an erroneous reading of the economy by central bankers and evolutionarily time-varying heterogeneity in inflation expectations formation within the private sector. One general finding of our analysis is that seemingly inadequate stabilization policies may, in fact, work. We comment on the broader ramifications for stabilization policy of this finding.
    Keywords: Great Moderation; monetary policy; inflation targeting; macroeconomic Stability; heterogeneous inflation expectations; satisficing evolutionary dynamics.
    JEL: B52 E12 E31 E32 E52 E58
    Date: 2017–10–31
  7. By: Becker, Christian; Ossandon Busch, Matias; Tonzer, Lena
    Abstract: This paper examines whether intra-group dynamics matter for the transmission of macroprudential policy. Using novel bank-level data on the Brazilian banking system, we investigate the effect of reserve requirements targeting headquarter banks' deposit share on credit supply by their municipal bank branches. For identification purposes, we exploit that reserve requirements are adjusted following global economic cycles. Our results reveal a lending channel of reserve requirements for branches whose parent banks are more exposed to targeted deposits. Branch ownership and exposure to internal liquidity are central in explaining the results. Our findings reveal limitations in current macroprudential policy frameworks.
    Keywords: macroprudential regulation,financial intermediation,intra-group dynamics
    JEL: F30 G21 G28
    Date: 2017
  8. By: António Afonso; Michael G. Arghyrou; María Dolores Gadea; Alexandros Kontonikas
    Abstract: This paper investigates the role of unconventional monetary policy as a source of time-variation in the relationship between sovereign bond yield spreads and their fundamental determinants. We use a two-step empirical approach.First, we apply a time-varying parameter panel modelling framework to determine shifts in the pricing regime characterising sovereign bond markets in the euro area over the period January 1999 to July 2016.Second, we estimate the impact of ECB policy interventions on the time-varying risk fact or sensitivities of spreads. Our results provide evidence of a new bond-pricing regime following the announcement of the Outright Monetary Transactions (OMT) programmein August 2012.This regime is characterised by a weakened link between spreads and fundamentals, but with higher spreads relative to the pre-crisis period and residual redenomination risk. We also find that unconventional monetary policy measures affect the pricing of sovereign risk not only directly, but also indirectly through changes in banking risk.Overall, the actions of the ECB have operated as catalysts for reversing the dynamics of the European sovereign debt crisis.
    Keywords: euro area, spreads, crisis, time-varying relationship, unconventional monetary policy
    JEL: E43 E44 F30 G01 G12
    Date: 2017–09
  9. By: EO, Yunjong; LIE, Denny
    Abstract: How and under what circumstances can adjusting the inflation target serve as a stabilization-policy tool and contribute to welfare improvement? We answer these questions quantitatively with a standard New Keynesian model that includes cost-push type shocks which create a trade-o↵ between inflation and output gap stabilization. We show that this trade-o↵ leads to a non-trivial welfare cost under a standard Taylor rule, even with optimized policy coefficients. We then propose an additional policy tool of an inflation target rule and find that the optimal target needs to be adjusted in a persistent manner and in the opposite direction to the realization of a cost-push shock. The inflation target rule, combined with a Taylor rule, significantly reduces fluctuations in inflation originating from the cost-push shocks and mitigates the policy trade-o↵, resulting in a similar level of welfare to that associated with the Ramsey optimal policy. The welfare implications of the inflation target rule are more pronounced under a flatter Phillips curve.
    Keywords: Welfare analysis, Monetary policy, Cost-push shocks, Medium-run inflation, targeting, Flat Phillips curve
    JEL: E12 E32 E58 E61
    Date: 2017–10
  10. By: Gal, Jens; Gründl, Helmut
    Abstract: Coming (great) events cast their (long) shadow before. As the financial crisis gave birth to the creation of the European System of Financial Supervision (ESFS), the imminent Brexit now serves as an impulse to rather extensively reorganize it. Pursuant to the preferences of the Commission-as revealed in its draft for a regulation amending the regulations founding the European Supervisory Authorities (ESA)-the supervision (and regulation) of the financial sectors should be further centralized and integrated and additional powers should be given to the ESAs. To a large degree these alterations are intended to adjust the competences of the European Securities and Markets Authority (ESMA) to better meet its new objectives under the Capital Markets Union ('CMU'). In view that an equivalent to the CMU or the Banking Union-in the sense of a European Insurance Union-is not yet on the horizon for the insurance sector (or the occupational pensions sector), one could prima vista take the view that insurance supervision and regulation is once again taken captive by the necessity of regulatory reforms stemming from other financial sectors. However, even if that is partially the case, the outcome of the intended reforms might still be advantageous for the insurance sector and an important step in the right direction. Therefore, it needs to be intensively discussed. At this stage, some of the most prominent envisioned changes to the structure, tasks and powers of the European Insurance and Occupational Pensions Authority (EIOPA) and their necessity, usefulness or counter-productivity still have to be examined.
    Keywords: European Insurance Union,European Supervisory Authorities,EIOPA,European Insurance and Occupational Pensions Authority,Insurance Supervision
    Date: 2017
  11. By: Gadatsch, Niklas; Mann, Lukas; Schnabel, Isabel
    Abstract: We propose a new identification strategy to assess the efficacy of macroprudential measures. We propose a novel instrumental variable that is based on the idea that a politically sensitive macroprudential measure is more likely to be implemented if a politically independent institution, such as a central bank, is in charge. Our results show that borrower-based macroprudential measures have had a strong and statistically significant dampening effect on credit growth in the European Union.
    Date: 2017
  12. By: Bocola, Luigi (Federal Reserve Bank of Minneapolis); Lorenzoni, Guido (Northwestern University)
    Abstract: We study financial panics in a small open economy with floating exchange rates. In our model, bank runs trigger a decline in domestic wealth and a currency depreciation. Runs are more likely when banks have dollar debt. Dollar debt emerges endogenously in response to the precautionary motive of domestic savers: dollar savings provide insurance against crises; so when crises are possible it becomes relatively more expensive for banks to borrow in local currency, which gives them an incentive to issue dollar debt. This feedback between aggregate risk and savers’ behavior can generate multiple equilibria, with the bad equilibrium characterized by financial dollarization and the possibility of bank runs. A domestic lender of last resort can eliminate the bad equilibrium, but interventions need to be fiscally credible. Holding foreign currency reserves hedges the fiscal position of the government and enhances its credibility, thus improving financial stability.
    Keywords: Financial crises; Dollarization; Lending of last resort; Foreign reserves
    JEL: E44 F34 G11 G15
    Date: 2017–10–24

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