nep-cba New Economics Papers
on Central Banking
Issue of 2017‒12‒11
twenty papers chosen by
Maria Semenova
Higher School of Economics

  1. Hierarchical Bank Supervision By Repullo, Rafael
  2. Monetary Policy, Target Inflation and the Great Moderation: An Empirical Investigation By Qazi Haque
  3. The Continuing Validity of Monetary Policy Autonomy Under Floating Exchange Rates By Edward Nelson
  4. Banks' Capital Surplus and the Impact of Additional Capital Requirements By Simona Malovana
  5. Motivating the Use of Different Macro-prudential Instruments: the Countercyclical Capital Buffer vs. Borrower-Based Measures By O'Brien, Eoin; Ryan, Ellen
  6. Capital requirements for government bonds: Implications for bank behaviour and financial stability By Neyer, Ulrike; Sterzel, André
  7. Bank Failures, Capital Buffers, and Exposure to the Housing Market Bubble By Gazi Kara; Cindy M. Vojtech
  8. Monetary policy communication: Evidence from Survey Data By Neda Popovska – Kamnar
  11. Non-core liabilities and monetary policy transmission in Indonesia during the post-2007 global financial crisis By Victor Pontines; Reza Y. Siregar
  12. CoCo issuance and bank fragility By Stefan Avdjiev; Bilyana Bogdanova; Patrick Bolton; Wei Jiang; Anastasia Kartasheva
  13. Central Bank Digital Currency: Motivations and Implications By Walter Engert; Ben Fung
  14. Optimal Interbank Regulation By Thomas J. Carter
  15. Central bank swap lines and CIP deviations By Richhild Moessner; William A. Allen; Gabriele Galati; William Nelson
  16. Why are inflation forecasts sticky? Theory and application to France and Germany By F. Bec; R. Boucekkine; C. Jardet
  17. Identification of Monetary Policy Shocks with External Instrument SVAR By Kyungmin Kim
  18. Trend Inflation and Evolving Inflation Dynamics: A Bayesian GMM Analysis of the Generalized New Keynesian Phillips Curve By Yasufumi Gemma; Takushi Kurozumi; Mototsugu Shintani
  19. The introduction of the joint-stock company in English banking and monetary policy By Victoria Barnes; Lucy Newton;
  20. Systemic risk in insurance: Towards a new approach By Berdin, Elia; Sottocornola, Matteo

  1. By: Repullo, Rafael
    Abstract: This paper presents a model in which a central and a local supervisor contribute their efforts to obtain information on the solvency of a local bank, which is then used by the central supervisor to decide on its early liquidation. This hierarchical model is contrasted with the alternatives of decentralized and centralized supervision, where only the local or the central supervisor collects information and decides on liquidation. The local supervisor has a higher bias against liquidation (supervisory capture) and a lower cost of getting local information (proximity). Hierarchical supervision is the optimal institutional design when the bias of the local supervisor is high but not too high and the costs of getting local information from the center are low but not too low. With low (high) bias and high (low) cost it is better to concentrate all responsibilities in the local (central) supervisor.
    Keywords: bank liquidation; bank solvency; Centralized vs decentralized supervision; optimal institutional design.; strategic information acquisition; supervisory capture
    JEL: D02 G21 G23
    Date: 2017–12
  2. By: Qazi Haque (School of Economics, University of Adelaide)
    Abstract: This paper compares the empirical fit of a Taylor rule featuring constant versus time-varying inflation target by estimating a Generalized New Keynesian model under positive trend inflation while allowing for indeterminacy. The estimation is conducted over two different periods covering the Great Inflation and the Great Moderation. We find that the rule embedding time variation in target inflation turns out to be empirically superior and determinacy prevails in both sample periods. Counterfactual simulations point toward both `good policy' and `good luck' as drivers of the Great Moderation. We find that better monetary policy, both in terms of a more active response to inflation gap and a more anchored inflation target, has resulted in the decline in inflation gap volatility and predictability. In contrast, the reduction in output growth variability is mainly explained by reduced volatility of technology shocks.
    Keywords: Monetary policy; Great Inflation; Great Moderation; Equilibrium Indeterminacy; Generalized New Keynesian Phillips curve; Taylor rules; Time-varying inflation target; Good policy; Good luck; Sequential Monte Carlo
    JEL: C11 C52 C62 E31 E32 E52 E58
    Date: 2017–11
  3. By: Edward Nelson
    Abstract: Economic research in recent years has given considerable prominence to the issue of whether a floating exchange rate provides autonomy with regard to monetary policy to a central bank whose economy is highly open. In particular, Rey (2016) has argued that inflation-targeting advanced economies lack monetary policy autonomy by pointing to results suggesting that U.S. monetary policy shocks matter for the behavior of key financial variables in these economies. In contrast, it is argued in this paper that monetary autonomy does prevail in inflation-targeting advanced economies, notwithstanding the reaction of these economies’ asset prices to U.S. monetary policy developments. The reason is that the monetary-autonomy argument, as advanced by Milton Friedman and as embedded in new open-economy models, rests on the fact that the monetary base is insulated from foreign influences under floating rates. This fact allows the home monetary authority to pursue a stabilization policy in which it has a decisive influence on nominal variables in the long run, as well as a short-run influence on real variables. The result that rest-of-world monetary policy is among the other factors affecting the short-run behavior of real variables (including real asset prices) in a small, floating-rate open economy turns out to be consistent with the traditional and appropriate concept of monetary policy autonomy under floating exchange rates. It follows that such effects of rest-of-world monetary policy on the home economy are consistent with the celebrated open-economy trilemma.
    Keywords: Monetary policy autonomy ; Trilemma ; Floating exchange rates ; Inflation targeting
    JEL: E51 E52 F41
    Date: 2017–11–27
  4. By: Simona Malovana
    Abstract: Banks in the Czech Republic maintain their regulatory capital ratios well above the level required by their regulator. This paper discusses the main reasons for this capital surplus and analyses the impact of additional capital requirements stemming from capital buffers and Pillar 2 add-ons on the capital ratios of banks holding such extra capital. The results provide evidence that banks shrink their capital surplus in response to higher capital requirements. A substantial portion of this adjustment seems to be delivered through changes in average risk weights. For this and other reasons, it is desirable to regularly assess whether the evolution and current level of risk weights give rise to any risk of underestimating the necessary level of capital.
    Keywords: Banks, capital requirements, capital surplus, panel data, partial adjustment model
    JEL: G21 G28 G32
    Date: 2017–11
  5. By: O'Brien, Eoin (Central Bank of Ireland); Ryan, Ellen (Central Bank of Ireland)
    Abstract: In the implementation of macro-prudential policy, macro-prudential authorities such as the Central Bank of Ireland face policy choices as to how best to mitigate systemic risk(s). This Letter focuses on one such policy choice. The Letter conceptually assesses a capital-based tool (the countercyclical capital buffer) compared with borrower-based instruments (e.g. loan-to-value and loan-to-income restrictions). The Letter also briefly reviews the implementation of these tools across Europe. It is found that at a high level the countercyclical capital buffer tends to be viewed as best suited, although not limited, to enhancing the resilience of the banking system. Borrower-based measures, then, provide a tool that can be used to target the resilience of households or impact directly on the flow of mortgage lending. These instruments are flexible however and policymakers can tailor their implementation, either individually or in combination, to ensure an appropriate macro-prudential policy stance with respect to the prevailing systemic risk environment.
    Date: 2017–11
  6. By: Neyer, Ulrike; Sterzel, André
    Abstract: This paper analyses whether the introduction of capital requirements for bank government bond holdings increases financial stability by making the banking sector more resilient to sovereign debt crises. Using a theoretical model, we show that a sudden increase in sovereign default risk may lead to liquidity issues in the banking sector. Our model reveals that in combination with a central bank acting as a lender of last resort, capital requirements for government bonds increase the shock-absorbing capacity of the banking sector and thus the financial stability. The driving force is a regulation-induced change in bank investment behaviour.
    Keywords: bank capital regulation,government bonds,sovereign risk,financial contagion,lender of last resort.
    JEL: G28 G21 G01
    Date: 2017
  7. By: Gazi Kara; Cindy M. Vojtech
    Abstract: We empirically document that banks with greater exposure to high home price-to-income ratio regions in 2005 and 2006 have higher mortgage delinquency and charge-off rates and significantly higher probabilities of failure during the last financial crisis even after controlling for capital, liquidity, and other standard bank performance measures. While high price-to-income ratios present a greater likelihood of house price correction, we find no evidence that banks managed this risk by building stronger capital buffers. Our results suggest that there is scope for improved measures of mortgage loan risk that could be considered for regulatory and risk management applications.
    Keywords: Bank failure ; Credit risk ; Mortgage risk ; Residential real estate
    JEL: G01 G21 G28 R31
    Date: 2017–11–29
  8. By: Neda Popovska – Kamnar (National Bank of the Republic of Macedonia)
    Abstract: This paper summarizes the results of a Survey on Monetary policy Communication conducted among central banks in Central Eastern and South-Eastern Europe and the euro area. The main objective of this Survey was to draw evidence on the level of transparency and communication strategies of the central banks. The results of the Survey reveal that today the central banks pay much attention to the proper transparency and provide significant information about their decisions and policy making process. The overall conclusion of the Monetary policy communication Survey is that the communication and the transparency of the 15 central banks included in the Survey is on satisfactory level. Still, there is always a room for improvement, especially in the area of introducing forward guidance by the central banks and more “proactive ways” of communication with the public.
    Keywords: survey data, central banks, monetary policy, communication, transparency
    JEL: E52 E58 E66
    Date: 2017
  9. By: Eda Gülşen (Central Bank of the Republic of Turkey, Research Department, Ankara, Turkey); Erdal Özmen (Middle East Technical University, Department of Economics, Ankara, Turkey)
    Abstract: We empirically investigate the validity of the monetary policy trilemma postulation for emerging market (EME) and advanced (AE) economies under different exchange rate and monetary policy regimes before and after the recent global financial crisis (GFC). Consistent with the dilemma proposition, domestic interest rates are determined by global financial conditions and the FED rate even under floating exchange rate regimes (ERR) in the long-run. The impact of the FED rates is higher in EME than AE and EME are much more sensitive to global financial cycle under managed than floating ERR. The spillover from the FED rate substantially increases after the GFC in EME with floating ERR and AE. The results from the monetary policy reaction functions based on equilibrium correction mechanism specifications suggest that domestic interest rates respond to inflation and output gaps especially under inflation targeting (IT) in the short-run. The response to inflation gap tends to be smaller in IT AE after the GFC.
    Keywords: Exchange rate regimes, Global financial crisis, Inflation targeting, Monetary policy, Policy trilemma
    JEL: E50 E52 F30 F33 F42
    Date: 2017–11
  10. By: Boris Hofmann; Gert Peersman (-)
    Abstract: This study shows that, in the United States, the effects of monetary policy on credit and housing markets have become considerably stronger relative to the impact on GDP since the mid-1980s, while the effects on inflation have become weaker. Macroeconomic stabilization through monetary policy may therefore have become associated with greater fluctuations in credit and housing markets, whereas stabilizing credit and house prices may have become less costly in terms of macroeconomic volatility. These changes in the aggregate impact of monetary policy can be explained by several important changes in the monetary transmission mechanism and in the composition of macroeconomic and credit aggregates. In particular, the stronger impact of monetary policy on credit is driven by a much higher responsiveness of mortgage credit and a larger share of mortgages in total credit since the 1980s.
    Keywords: monetary policy trade-offs, monetary transmission mechanism, inflation, credit, house prices.
    JEL: E52
    Date: 2017–10
  11. By: Victor Pontines; Reza Y. Siregar
    Abstract: The policy importance of non-core liabilities has risen to prominence in recent years with the studies of Shin and Shin (2010), Hahm, et al., (2010) and Hahm, et al., (2013) highlighting it as a useful indicator of financial procyclicality and vulnerability. In this paper, we look at non-core liabilities in relation to its role in the transmission of monetary policy, particularly by examining how the interest rate channel of monetary policy is affected by non-deposit liabilities. We analyse this issue in the context of an emerging economy experience of Indonesia, which in recent years, has seen an increased reliance of its banking sector on non-core funding. Our investigation employs available bank-level data on non-core liabilities and lending rates in Indonesia over the period October 2011 to July 2016. We find that including non-core liabilities in the estimation has an effect, relative to the baseline, of stronger overall and immediate pass-through, albeit with a more sluggish adjustment towards correction of disequilibrium in the next period. The overall effect is that non-core liabilities make the duration lengthier for the monetary policy rate to transmit to bank lending rates in Indonesia.
    Keywords: non-core liabilities, lending rates, policy rates, interest rate channel, monetary policy transmission, dynamic panel
    JEL: C33 E43 E52 G21
    Date: 2017–12
  12. By: Stefan Avdjiev; Bilyana Bogdanova; Patrick Bolton; Wei Jiang; Anastasia Kartasheva
    Abstract: The promise of contingent convertible capital securities (CoCos) as a 'bail-in' solution has been the subject of considerable theoretical analysis and debate, but little is known about their effects in practice. In this paper, we undertake the first comprehensive empirical analysis of bank CoCo issues, a market segment that comprises over 730 instruments totaling $521 billion. Four main findings emerge: 1) The propensity to issue a CoCo is higher for larger and better-capitalized banks; 2) CoCo issues result in statistically significant declines in issuers' CDS spreads, indicating that they generate risk-reduction benefits and lower costs of debt. This is especially true for CoCos that: i) convert into equity, ii) have mechanical triggers, iii) are classified as Additional Tier 1 instruments; 3) CoCos with only discretionary triggers do not have a significant impact on CDS spreads; 4) CoCo issues have no statistically significant impact on stock prices, except for principal write-down CoCos with a high trigger level, which have a positive effect.
    Keywords: CoCos, Contingent Convertible Capital, Bank Capital Regulation, Basel III
    JEL: G01 G21 G28 G32
    Date: 2017–11
  13. By: Walter Engert; Ben Fung
    Abstract: The emergence of digital currencies such as Bitcoin and the underlying blockchain and distribution ledger technology have attracted significant attention. These developments have raised the possibility of considerable impacts on the financial system and perhaps the wider economy. This paper addresses the question of whether a central bank should issue digital currency that could be used by the general public. It begins by discussing the possible motivations for a central bank to issue a digital currency. The paper then sets out a benchmark central bank digital currency (CBDC) with features that are similar to cash. The implications of such a digital currency are explored, focusing on central bank seigniorage, monetary policy, the banking system and financial stability, and payments. Finally, a CBDC that differs from the benchmark digital currency in a significant way is considered.
    Keywords: Bank notes, Digital Currencies, Financial services, Payment clearing and settlement systems
    JEL: E E4 E41 E42 E5
    Date: 2017
  14. By: Thomas J. Carter
    Abstract: Recent years have seen renewed interest in the regulation of interbank markets. A review of the literature in this area identifies two gaps: first, the literature has tended to make ad hoc assumptions about the interbank contract space, which makes it difficult to generate convincing policy prescriptions; second, the literature has tended to focus on ex-post interventions that kick in only after an interbank disruption has come underway (e.g., open-market operations, lender-of-last-resort interventions, bail-outs), rather than ex-ante prudential policies. In this paper, I take steps toward addressing both these gaps, namely by building a simple model for the interbank market in which banks optimally choose the form of their interbank contracts. I show that the model delivers episodes that qualitatively resemble the interbank disruptions witnessed during the financial crisis. Some important implications for policy then emerge. In particular, I show that optimal policy requires careful coordination between ex-post and ex-ante interventions, with the ex-ante component surprisingly doing most of the heavy lifting. This suggests that previous literature has underemphasized the role that ex-ante interventions have to play in optimal interbank regulation.
    Keywords: Financial stability, Financial system regulation and policies
    JEL: G01 G20
    Date: 2017
  15. By: Richhild Moessner; William A. Allen; Gabriele Galati; William Nelson
    Abstract: We study the use of US dollar central bank swap lines as a tool for addressing dislocations in the foreign currency swap market against the USD since the global financial crisis. We find that the use of the Federal Reserve’s USD central bank swap lines was mainly related to tensions in US money markets during times of financial crisis, and less to tensions which were confined to foreign exchange swap markets. In particular, we find that the use of USD central bank swap lines did not react significantly to the recent period of persistent deviations of covered interest parity (CIP) since 2014. These results are consistent with the view that the Federal Reserve was guided by enlightened self-interest when providing swap lines to foreign central banks, in order to reduce dislocations in US financial markets and support financial stability. In recent years foreign exchange swap markets have not functioned properly, but it appears that now that the crisis is over, the Federal Reserve and other central banks have decided against trying permanently to fill the gap left by the dysfunction in the commercial foreign exchange swap market.
    Date: 2017–08
  16. By: F. Bec; R. Boucekkine; C. Jardet
    Abstract: This paper proposes a theoretical model of forecasts formation which implies that in presence of information observation and forecasts communication costs, rational professional forecasters might find it optimal not to revise their forecasts continuously, or at any time. The threshold timeand state-dependence of the observation reviews and forecasts revisions implied by this model are then tested using inflation forecast updates of professional forecasters from recent Consensus Economics panel data for France and Germany. Our empirical results support the presence of both kinds of dependence, as well as their threshold-type shape. They also imply an upper bound of the optimal time between two information observations of about six months and the coexistence of both types of costs, the observation cost being about 1.5 times larger than the communication cost.
    Keywords: Forecast revision, binary choice models, information and communication costs.
    JEL: C23 D8 E31
    Date: 2017
  17. By: Kyungmin Kim
    Abstract: We explore the use of external instrument SVAR to identify monetary policy shocks. We identify a forward guidance shock as the monetary shock component having zero instant impact on the policy rate. A contractionary forward guidance shock raises both future output and price level, stressing the relative importance of revealing policymakers' view on future output and price level over committing to a policy stance. We also decompose non-monetary structural shocks, and find that positive shocks to output and price level lead to monetary contraction. Since information on output and price level is revealed through both monetary and non-monetary channels, some monetary and non-monetary shocks can look alike, leading to linear dependence and violating usual instrument SVAR assumptions. We show that some of the main findings are robust to such dependence.
    Keywords: Forward guidance ; Instrument VAR ; Monetary policy
    JEL: E52 E44
    Date: 2017–11–28
  18. By: Yasufumi Gemma (Deputy Director and Economist, Institute for Monetary and Economic Studies (currently Research and Statistics Department), Bank of Japan (E-mail:; Takushi Kurozumi (Director and Senior Economist, Institute for Monetary and Economic Studies (currently Monetary Affairs Department), Bank of Japan (E-mail:; Mototsugu Shintani (Professor, RCAST, University of Tokyo and Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: Inflation dynamics in the U.S. and Japan are investigated by estimating a “generalized” version of the Galí and Gertler (1999) New Keynesian Phillips curve (NKPC) with Bayesian GMM. This generalized NKPC (GNKPC) differs from the original only in that, in line with the micro evidence, each period some prices remain unchanged even under non-zero trend inflation. Yet the GNKPC has features that are significantly distinct from those of the NKPC. Model selection using quasi-marginal likelihood shows that the GNKPC empirically outperforms the NKPC in both the U.S. and Japan. Moreover, it explains U.S. inflation dynamics better than a constant-trend-inflation variant of the Cogley and Sbordone (2008) GNKPC. According to our selected GNKPC, when trend inflation fell after the Great Inflation of the 1970s in the U.S., the probability of no price change rose. Consequently, the GNKPC’s slope flattened and its inflation- inertia coefficient decreased. As for Japan, when trend inflation turned slightly negative after the late 1990s (until the early 2010s), the fraction of backward-looking price setters increased; therefore, the GNKPC’s inflation-inertia coefficient increased and its slope flattened.
    Keywords: Inflation Dynamics, Trend Inflation, Generalized New Keynesian Phillips Curve, Bayesian GMM Estimation, Quasi-marginal Likelihood
    JEL: C11 C26 E31
    Date: 2017–11
  19. By: Victoria Barnes (Georgetown University Law Center); Lucy Newton (Henley Business School, University of Reading);
    Abstract: Following the passage of the 1826 Act, the joint-stock bank entered the English banking system and its dominance over the private bank is often thought to be a result of laissez-faire political ideology. This article shows that banking and monetary policy in the nineteenth century was far from liberal or permissive as regulators legislated with a clear idea of the intended outcomes of their actions. Yet, as policy-makers were often unsuccessful in their attempts to introduce change in the banking system, they became interventionist in an effort to rectify their mistakes. By placing regulation in its political context, we show that the emergence of a set of banks with shareholders, sleeping partners and investors as owners was both unexpected and unintentional. It reveals their subsequent attempt to repeal the 1826 Act and dissolve the offending companies through more legislation.
    Keywords: Banks, nineteenth century, policy-making, legislation
    Date: 2016–09
  20. By: Berdin, Elia; Sottocornola, Matteo
    Abstract: Financial stability can be intended as the state whereby the build-up of systemic risk is prevented along with consequent major disruptions in financial markets that could have potential negative effects on the real economy. It follows that financial stability is considered a prerequisite for a sustainable economic growth (Dudley, 2011) and the empirical evidence suggests that an instable financial system can have indeed a negative impact on economic growth (Creel et al., 2015). A growing body of literature provides evidence that among financial institutions, insurers do pose systemic risk although less than banks. Thus, it follows that insurers can also be a source of financial instability that in turn can create significant dislocation on the economic activity. Against this background, it is important to have in place a set of regulatory and supervisory tools that aim to enhance and preserve financial stability across the entire financial system. Such regulatory and supervisory tools might be adopted following a twofold approach: on the one hand, the completion of existing microprudential frameworks with tools that embed macroprudential features, i.e. the current Solvency II regime as an example (Christophersen and Zschiesche, 2015); on the other hand, the adoption of a macroprudential framework designed to take into account the characteristics of the insurance business, complemented by a set of additional measures designed to take into account the specific characteristics of other financial institutions, primarily banks. In this short letter, we mainly focus on the latter aspect, although the design of a macroprudential framework inevitably foresees macroprudential features into microprudential frameworks, thereby blurring the separating line between the two approaches.
    Keywords: systemic risk,macroprudential franework,insurance,financial stability
    Date: 2017

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