nep-cba New Economics Papers
on Central Banking
Issue of 2018‒01‒01
nineteen papers chosen by
Maria Semenova
Higher School of Economics

  1. Combining Monetary Policy and Prudential Regulation: An Agent-Based Modeling Approach By Michel Alexandre; Gilberto Tadeu Lima
  2. A macro approach to international bank resolution By Dirk Schoenmaker
  3. Optimal Monetary Policy and Fiscal Policy Interaction in a non-Ricardian Economy By Massimiliano Rigon; Francesco Zanetti
  4. Central bank financial strength and inflation: an empirical reassessment considering the key role of the fiscal support By Julien Pinter
  5. Drivers of price inertia: survey evidence By Nataliya Karlova; Irina Bogacheva; Elena Puzanova
  6. Capital and liquidity buffers and the resilience of the banking system in the euro area By Budnik, Katarzyna; Bochmann, Paul
  7. Delay determinants of European Banking Union implementation By Koetter, Michael; Krause, Thomas; Tonzer, Lena
  8. Did the exchange rate interventions enhance inflation in Switzerland? By Žídek, Libor; Šuterová, Magdalena
  9. Why so low for so long? A long-term view of real interest rates By Claudio Borio; Piti Disyatat; Mikael Juselius; Phurichai Rungcharoenkitkul
  10. Capturing macroprudential regulation effectiveness: A DSGE approach with shadow intermediaries By Federico Lubello; Abdelaziz Rouabah
  11. Triffin: dilemma or myth? By Michael Bordo; Robert N McCauley
  12. Why are banks not recapitalized during crises? By Matteo Crosignani
  13. Averting defaults in turbulent times: controversies over the League of Nations preferred creditor status By Flores Zendejas, Juan
  14. Central Bank Optimism as a Policy Tool: Evidence from the Bank of England By Tola Adesina
  15. How do the EM Central Bank talk? A Big Data approach to the Central Bank of Turkey By Joaquin Iglesias; Alvaro Ortiz; Tomasa Rodrigo
  16. An Overview of Inflation-Targeting Frameworks: Institutional Arrangements, Decision-making, & the Communication of Monetary Policy By Alberto Naudon; Andrés Pérez
  17. Constraints on LTV as a macroprudential tool: a precautionary tale By José Garcia Montalvo; Josep M. Raya
  18. Will Bank Transparency really Help Financial Markets and Regulators? By Karima Bouaiss; Catherine Refait-Alexandre; Hervé Alexandre
  19. The Effectiveness of Monetary and Fiscal Policy Shocks on U.S. Inequality: The Role of Uncertainty By Goodness C. Aye; Matthew W. Clance; Rangan Gupta

  1. By: Michel Alexandre; Gilberto Tadeu Lima
    Abstract: This paper explores the interaction between monetary policy and prudential regulation in an agent-based modeling framework. Firms borrow funds from the banking system in an economy regulated by a central bank. The central bank carries out monetary policy, by setting the interest rate, and prudential regulation, by establishing the banking capital requirement. Different combinations of interest rate rule and capital requirement rule are evaluated with respect to both macroeconomic and financial stability. Several relevant policy implications were drawn. First, the efficacy of a given capital requirement rule or interest rate rule depends on the specification of the rule of the other type it is combined with. More precisely, less aggressive interest rate rules perform better when the range of variation of the capital requirement is narrower. Second, interest rate smoothing is more effective than the other interest rate rules assessed, as it outperforms those other rules with respect to financial stability and macroeconomic stability. Third, there is no tradeoff between financial and macroeconomic stability associated with a variation of either the capital requirement or the smoothing interest rate parameter. Finally, our results reinforce the cautionary finding of other studies regarding how output can be ravaged by a low inflation targeting.
    Keywords: Agent-based modeling; monetary policy; financial stability; prudential Regulation.
    JEL: E52 G18 C63
    Date: 2017–12–15
  2. 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 to reintroduce market discipline and reduce the reliance on taxpayer-funded bailouts, the effects on the wider banking system have not been properly considered. This paper proposes a macro approach to resolution, which should consider (i) the contagion effects of bail-in, and (ii) 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 latter approach in its Banking Union. Other countries have taken a stand-alone approach, which leads to multiple-point-of-entry resolution of international banks and contributes to fragmentation of the global banking system.Creation-Date: 2017-10 JEL Classification: G01, G21, G28
    Keywords: bank resolution, international banking, single point of entry, multiple point of trilemma, banking union
    Date: 2017–11
  3. By: Massimiliano Rigon (Bank of Italy); Francesco Zanetti (University of Oxford)
    Abstract: This paper studies optimal discretionary monetary policy and its interaction with fiscal policy in a New Keynesian model with fi?nitely-lived consumers and government debt. Optimal discretionary monetary policy involves debt stabilization to reduce consumption dispersion across cohorts of consumers. The welfare relevance of debt stabilization is proportional to the debt-to-output ratio and inversely related to the household?s probability of survival that affects the household?s propensity to consume out ?financial wealth. Debt stabilization bias implies that discretionary optimal policy is suboptimal compared with the infl?ation targeting rule that fully stabilizes the output gap and the in?flation rate while leaving debt to freely fl?uctuate in response to demand shocks.
    Keywords: Optimal monetary policy, ?fiscal and monetary policy interaction.
    JEL: E52 E63
    Date: 2017–12
  4. By: Julien Pinter (Centre d'Economie de la Sorbonne & Amsterdam University)
    Abstract: This paper re-examines whether weak central bank finances affect inflation by scrutinizing the key rationale for such a relationship: that the absence of Treasury support makes central bank finances relevant for price stability. Specifically, I ask whether central banks which are not likely to enjoy fiscal support when needed experience higher inflation as their inflation as their financial situation deteriorates. I find this to be true among a large sample of 82 countries between 1998 and 2008. De facto potential fiscal support appears relevant, while de jure fiscal support, which I survey analyzing 82 central bank laws, does not appear to matter. No link is found in a general context. The results bring forward an explanation for the conflicting results of the previous empirical studies, which neglected this key component
    Keywords: Central bank financial strength; Central bank capital; Central bank balance sheet; Inflation; Fiscal space; Central bank law
    JEL: E58 E52 E42 E63
    Date: 2017–10
  5. By: Nataliya Karlova (Bank of Russia, Russian Federation); Irina Bogacheva (Bank of Russia, Russian Federation); Elena Puzanova (Bank of Russia, Russian Federation)
    Abstract: Inflation inertia hinders the process of slowing down inflation to meet the target level and thus lowers the effectiveness of monetary policy. Widespread methods of assessing the observed inflation inertia using different models can’t clear up important aspects, such as between-industry analysis based on firm-specific characteristics and, consequently, the speed of response to external shocks in different sectors. The paper investigates the pricing behaviour of firms on the basis of a survey of companies’ conducted by the Bank of Russia. According to the results the main drivers of inflation (price) inertia (or delayed and prolonged response of inflation to shocks) in Russia are backwardlooking (or adaptive) expectations of economic agents, inflexible pricing policy, and wage indexation based on past inflation level. It is important for central banks to understand these processes in order to implement and maintain the effective monetary policy.
    Keywords: price inertia, price-setting behaviour of companies, inflation expectations, Inflexible pricing policy, survey of companies, Russia
    Date: 2017–11
  6. By: Budnik, Katarzyna; Bochmann, Paul
    Abstract: How do capital and liquidity buffers affect the evolution of bank loans in periods of financial and economic distress? To answer this question we study the responses of 219 individual banks to aggregate demand, standard and unconventional monetary policy shocks in the euro area between 2007 and 2015. Banks’ responses are derived from a factor-augmented VAR, which relates macroeconomic aggregates to individual bank balance sheet items and interest rates. We find that banks with high capital and liquidity buffers show a more muted response in their lending to adverse real economy shocks. Capital and liquidity buffers also affect bank responses to monetary policy shocks. High bank capitalisation reduces the degree to which banks increase the average duration of loans to the non-financial corporate sector, while high bank liquidity strengthens the positive response to policy easing of both longand short-term loans to the non-financial corporate sector. The latter findings substantiate the relevance of interactions between prudential controls and monetary policy. JEL Classification: E51, E52, G21
    Keywords: capital requirements, liquidity requirements, macroprudential policy, monetary policy
    Date: 2017–12
  7. By: Koetter, Michael; Krause, Thomas; Tonzer, Lena
    Abstract: To safeguard financial stability and harmonise regulation, the European Commission substantially reformed banking supervision, resolution, and deposit insurance via EU directives. But most countries delay the transposition of these directives. We ask if transposition delays result from strategic considerations of governments conditional on the state of their financial, regulatory, and political systems? Supervisors might try to protect national banking systems and local politicians maybe reluctant to surrender national sovereignty to deal with failed banks. Alternatively, intricate financial regulation might require more implementation time in large and complex financial and political systems. We therefore collect data on the transposition delays of the three Banking Union directives and investigate observed delay variation across member states. Our correlation analyses suggest that existing regulatory and institutional frameworks, rather than banking market structure or political factors, matter for transposition delays.
    Keywords: single rulebook,political economy,transposition delays
    JEL: C41 F30 F55 G15 G18
    Date: 2017
  8. By: Žídek, Libor; Šuterová, Magdalena
    Abstract: For nearly five years, the Swiss National Bank intervened against the Swiss franc to prevent increase of deflation pressures. An unexpected switch in monetary policy was made in January 2015, and the regime was abandoned. In this paper, the authors examine the exchange rate influence on the inflation in Switzerland, separately for the pre-crisis and the intervention period. Using autoregressive models, they quantify the extent of pass-through of an exchange rate shock to different price indices. The results suggest that the exchange rate interventions did indeed enhance the exchange rate pass-through into inflation. Despite the effect's moderate influence, the decline was not immediate. The authors additionally analysed long-term exchange rate pass-through. The examination reveals that the long-term behaviour arises rather from the intervention than from the precrisis period. The exchange rate effect on inflation was thus in a better accordance with theory during the intervention period. As such, currency depreciation did have a positive effect on inflation in Switzerland.
    Keywords: Swiss National Bank,exchange rate interventions,exchange rate passthrough,SVAR
    JEL: C32 E31 E52
    Date: 2017
  9. By: Claudio Borio; Piti Disyatat; Mikael Juselius; Phurichai Rungcharoenkitkul
    Abstract: Prevailing explanations of the decline in real interest rates since the early 1980s are premised on the notion that real interest rates are driven by variations in desired saving and investment. But based on data stretching back to 1870 for 19 countries, our systematic analysis casts doubt on this view. The link between real interest rates and saving-investment determinants appears tenuous. While it is possible to find some relationships consistent with the theory in some periods, particularly over the last 30 years, they do not survive over the extended sample. This holds both at the national and global level. By contrast, we find evidence that persistent shifts in real interest rates coincide with changes in monetary regimes. Moreover, external influences on countries' real interest rates appear to reflect idiosyncratic variations in interest rates of countries that dominate global monetary and financial conditions rather than common movements in global saving and investment. All this points to an underrated role of monetary policy in determining real interest rates over long horizons.
    Keywords: real interest rate, natural interest rate, saving, investment, inflation, monetary policy
    JEL: E32 E40 E44 E50 E52
    Date: 2017–12
  10. By: Federico Lubello; Abdelaziz Rouabah
    Abstract: Shadow intermediaries activities have registered a spectacular increase during the last decades. Recently, their market shares have rapidly been gaining momentum partially due to “regulatory arbitrage". Although their centrality to the credit boom in the early 2000s and to the collapse during the financial crisis of 2007-2009 is widely documented, the number of contributions studying the implications on the real economy and the underlying transmission mechanisms is surprisingly limited. We contribute to filling this gap and devise a new DSGE model whose productive sector captures key characteristics of the European economy by accounting for small and large firms vertically linked in a production chain. The adopted framework includes commercial banks and shadow financial intermediaries directly interconnected in the interbank market with specific and differentiated channels of financing to the real economy. The framework also incorporates moral hazard for commercial banks which, together with regulatory arbitrage, might bring further incentives for banks to securitize part of their assets. An attempt to incorporate macroprudential policy is considered through the implementation of capital requirements and caps to securitization in the traditional banking sector. The results show that the complementarity of such tools devised by a macroprudential authority can be effective in dampening aggregate volatility and safeguarding financial stability.
    Keywords: DSGE models, Macroprudential Policy, Shadow Banking, SMEs
    JEL: C32 E32 E44 E5 G21 G23
    Date: 2017–10
  11. By: Michael Bordo; Robert N McCauley
    Abstract: Triffin gained enormous influence by reviving the interwar story that gold scarcity threatened deflation. In particular, he held that central banks needed to accumulate claims on the United States to back money growth. But the claims would eventually surpass the US gold stock and then central banks would inevitably stage a run on it. He feared that the resulting high US interest rates would cause global deflation. However, we show that the US gold position after WWII was no worse than the UK position in 1900. Yet it took WWI to break sterling's gold link. And better and feasible US policies could have kept Bretton Woods going. This history serves as a backdrop to our critical review of two later extensions of Triffin. One holds that the dollar's reserve role required US current account deficits. This current account Triffin is popular, but anachronistic, and flawed in logic and fact. Nevertheless, it pops up in debates over the euro's and the renminbi's reserve roles. A fiscal Triffin holds that global demand for safe assets will either remain dangerously unsatisfied, or force excessive US fiscal debt. Less flawed, this story posits implausibly inflexible demand for and supply of safe assets. Thus, these stories do not convince in their own terms. Moreover, each lacks Triffin's clear cross-over point from a stable system to an unstable one. Triffin's seeming predictive success leads economists to wrap his brand around dissimilar stories. Yet Triffin's dilemma in its most general form correctly points to the conflicts and difficulties that arise when a national currency plays a role as an international public good.
    Keywords: Triffin dilemma, foreign exchange reserves, gold, US current account, safe assets, world's banker
    JEL: F32 F33 F34 F41 H63
    Date: 2017–12
  12. By: Matteo Crosignani
    Abstract: I develop a model where the sovereign debt capacity depends on the capitalization of domestic banks. Low-capital banks optimally tilt their government bond portfolio toward domestic securities, linking their destiny to that of the sovereign. If the sovereign risk is sufficiently high, low-capital banks reduce private lending to further increase their holdings of domestic government bonds, lowering sovereign yields and supporting the home sovereign debt capacity. The model rationalizes, in the context of the eurozone periphery, the increase in domestic government bond holdings, the reduction of bank credit supply, and the prolonged fragility of the financial sector. JEL Classification: E44, F33, G21, G28
    Keywords: Bank Capital, Sovereign Crises, Risk-Shifting, Government Bonds, Bank Credit
    Date: 2017–11
  13. By: Flores Zendejas, Juan
    Abstract: Loans by the IMF are considered to have “preferred creditor status”. However, given the potential distortions for the allocation of resources in IMF lending, the current debt crisis in Greece has raised new questions about the need for such treatment. This paper brings a historical dimension to the debate and analyzes the link between a multilateral’s preferred creditor status and its capacity to support countries in financial distress. During the early 1930s, the League of Nations attempted to secure a preferred status for the loans it promoted. At the onset of the Great Depression, while these loans were not legally senior, governments granted the League loans a de facto preferred status under the assumption that averting default would foster renewed support from the League. However, when support did not materialize, the loans’ exceptional treatment vanished, further weakening the position of the League to secure emergency lending.
    Keywords: sovereign defaults, preferred creditor status, IMF, sovereign debt markets
    JEL: N24 F34 F42 F55
    Date: 2017
  14. By: Tola Adesina (Birkbeck, University of London)
    Abstract: We evaluate the tone of optimism in the Bank of England’s Monetary Policy Committee (MPC) communication using computerised textual analysis and then explore the impacts of optimism shocks on key macroeconomic variables. We show that innovations in optimism impact key macroeconomic variables in the same way that a contractionary monetary policy would. We find that increasing optimism shocks in MPC communication leads to rising inflation, falling output, declining stock market returns and a rise in the Pound value. We further find evidence that optimism shocks reduce credit availability, the money supply, retail sales as well as earnings. Finally, government bond yields also tend to rise in response to optimism shocks.
    Keywords: Central Bank Communication, Monetary Policy, Optimism.
    JEL: E52 E58
    Date: 2017–11
  15. By: Joaquin Iglesias; Alvaro Ortiz; Tomasa Rodrigo
    Abstract: We apply the natural language processing or computational linguistics (NLP) to the analysis of the communication policy (i.e statements and minutes) of the Central Bank of Turkey (CBRT). While previous literature has focused on Developed countries, we extend the NLP analysis to the Central Banks of the Emerging Markets using the Dynamic Topic Modelling approach.
    Keywords: Working Paper , Central Banks , Digital economy , Economic Analysis , Emerging Economies , Turkey
    JEL: E52 E58
    Date: 2017–12
  16. By: Alberto Naudon; Andrés Pérez
    Abstract: The main objective of this study is to contribute to the public understanding of the inflationtargeting (IT) framework currently being implemented in several leading central banks. We do so by discussing differences in the institutional set up, the decision-making process, and the communication of monetary policy. We analyze these aspects from a conceptual perspective and review them in practice by referring to a set of eleven “small, open” OECD economies as well as four major central banks of the world (Bank of England, Bank of Japan, European Central Bank, & the Federal Reserve). We pay specific attention to recent changes along the multiple dimensions that have, on balance, aimed at further strengthening the IT framework.
    Date: 2017–12
  17. By: José Garcia Montalvo; Josep M. Raya
    Abstract: The introduction of limits or regulatory penalties on high LTV ratios for residential mortgages is one of the most frequently used tools of macroprudential policy. The available evidence seems to indicate that this instrument can reduce the feedback loop between credit and house prices. In this paper, we show that these constraints on LTV ratios, used by Spanish banking regulators before the onset of the housing crisis of 2008, did not prevent that feedback loop. In the Spanish case, the fact that appraisal companies were mostly owned by banks led to a situation in which the LTV limits were used to generate appraisal values adjusted to the needs of the clients, rather than trying to appropriately represent the value of the property. This tendency towards over-appraisals produced important externalities in terms of a higher than otherwise demand for housing, and intensification of the feedback loop between credit and house prices.
    JEL: E52 E58 Y G28
    Date: 2017–12
  18. By: Karima Bouaiss (Université de Tours - Université de Tours); Catherine Refait-Alexandre (CRESE - UFC - Université de Franche-Comté); Hervé Alexandre (DRM - Dauphine Recherches en Management - Université Paris-Dauphine - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The transparency of credit institutions is currently an issue of crucial importance not only with regard to the adaptation of regulatory tools (Basle II, IAS-IFRS international norms etc.)but also to the banking, financial and economic consequences. The current crisis places the importance of information about all banking activities centre stage in any debate. At a time when banks are controlled more than ever before, it is surprising to see them being swamped with criticism about their opaqueness and their reluctance to communicate, especially about the risks they are taking. This paper therefore, presents state of the art works on disclosure and bank transparency.It deals with questioning whether it is beneficial or not to increase disclosure levels in order to improve the discipline that the regulators and the markets exert on the banks.
    Keywords: Market discipline,Banking crises,Bank transparency
    Date: 2017–11–18
  19. By: Goodness C. Aye (Department of Economics, University of Pretoria, Pretoria, South Africa); Matthew W. Clance; Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa)
    Abstract: The study examines the effect of monetary and fiscal policy on inequality conditioned on low and high uncertainty. We use U.S. quarterly time series data on different measures of income, labour earnings, consumption and total expenditure inequality as well as economic uncertainty. Our analysis is based on the impulse responses from the local projection methods that enable us to recover a smoothed average of the underlying impulse response functions. The results show that both contractionary monetary and fiscal policies increase inequality, and in the presence of relatively higher levels of uncertainty, the effectiveness of both policies is weakened. Thus, pointing to the need for policy-makers to be aware of the level of uncertainty while conducting of economic policies in the U.S.
    Keywords: Inequality, Monetary and Fiscal Policies, Uncertainty
    JEL: C22 E24 E40 E62
    Date: 2017–12

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