nep-cba New Economics Papers
on Central Banking
Issue of 2018‒02‒05
fourteen papers chosen by
Maria Semenova
Higher School of Economics

  1. Measuring monetary policy deviations from the Taylor rule By Madeira, João; Palma, Nuno Pedro G.
  2. Credit controls as an escape from the trilemma. The Bretton Woods experience. By Monnet, Eric
  3. What has publishing inflation forecasts accomplished? Central banks and their competitors By Pierre L. Siklos
  4. Triffin: dilemma or myth? By Michael D. Bordo; Robert N. McCauley
  5. ECB Interventions in Distressed Sovereign Debt Markets: The Case of Greek Bonds By Jeromin Zettelmeyer; Christoph Trebesch
  6. Banking structure and the bank lending channel of monetary policy transmission: evidence from panel data methods By Chileshe, Patrick Mumbi
  7. The Combination of Monetary and Fiscal Policy Shocks: A TVP-FAVAR Approach By Molteni, Francesco; Pappa, Evi
  8. Credit Cycles and Capital Flows : Effectiveness of the Macroprudential Policy Framework in Emerging Market Economies By Salih Fendoglu
  9. A Model of the Fed's View on Inflation By Hasenzagl, Thomas; Pellegrino, Filippo; Reichlin, Lucrezia; Ricco, Giovanni
  10. The Efficiency Wage Hypothesis and monetary policy channels of transmission: developments and progress of Basel III leverage ratios By DiGabriele, Jim; Ojo, Marianne
  11. Are Macroprudential Policies Effective Tools to Reduce Credit Growth in Emerging Markets? By Fatma Pinar Erdem; Etkin Özen; Ibrahim Unalmis
  12. Bank Globalization and Monetary Policy Transmission in Small Open Economies By Inhwan So
  13. Basel III long-term liquidity standard in the context of the profitability of banks and volatility of their stock prices – quantitative analysis for the euro area By Marcin Flotyński
  14. Global spillovers and coordination of monetary and macroprudential policies in the Pacific Alliance economies By Quispe, Zenon; Rodriguez, Donita; Toma, Hiroshi; Vasquez, Cesar

  1. By: Madeira, João; Palma, Nuno Pedro G.
    Abstract: We estimate deviations of the federal funds rate from the Taylor rule by taking into account the endogeneity of output and inflation to changes in interest rates. We do this by simulating the paths of these variables through a DSGE model using the estimated time series for the exogenous processes except for monetary shocks. We then show that taking the endogeneity of output and inflation into account can make a significant quantitative difference (which can exceed 40 basis points) when calculating the appropriate value of interest rates according to the Taylor rule.
    Keywords: Bayesian estimation; Business Cycles; DSGE; interest rates; New Keynesian models; sticky prices
    JEL: E32 E37 E50
    Date: 2018–01
  2. By: Monnet, Eric
    Abstract: The macroeconomic policy "trilemma" is widely used as a framework to discuss the rationale for capital controls and monetary policy autonomy under the Bretton Woods system (1944-1971). Without denying its usefulness, I highlight two facts at odds with assumptions underlying the "trilemma" argument. First, conflicts between internal and external objectives were uncommon. Second, using quantitative credit controls allowed central banks to disconnect their interest rate from the domestic monetary policy stance. They assigned the interest rate to the external side while managing domestic credit expansion with direct quantitative controls. This paper documents that such mechanism was explicitly considered by contemporary economists and central bankers as a way to escape international financial constraints. In such an environment, capital controls were used to complement credit controls. Interest rate spreads were neither a good measure of capital controls nor of central bank autonomy.
    Keywords: Bretton Woods; capital controls; central banking; credit controls; macroprudential policies; reserve requirements; trilemma
    JEL: E58 F32 N20
    Date: 2017–12
  3. By: Pierre L. Siklos
    Abstract: This paper has examined the evolution of disagreement over the short-term inflation outlook in nine advanced economies during the decade and half beginning in the 2000s. The paper focuses on how disagreement is largely shaped by the benchmark against which this concept is evaluated and the role of potential shocks to the inflation process such as the global financial crisis.
    Date: 2018–01
  4. By: Michael D. 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.
    JEL: F32 F33 F34 F41 H63
    Date: 2018–01
  5. By: Jeromin Zettelmeyer (Peterson Institute for International Economics); Christoph Trebesch (Kiel University)
    Abstract: We study central bank interventions in times of severe distress (mid-2010), using a unique bond-level dataset of ECB purchases of Greek sovereign debt. ECB bond buying had a large impact on the price of short and medium maturity bonds, resulting in a remarkable "twist" of the Greek yield curve. However, the effects were limited to those sovereign bonds actually bought. We find little evidence for positive effects on market quality, or spillovers to close substitute bonds, CDS markets, or corporate bonds. Hence, our findings attest to the power of central bank intervention in times of crisis but also suggest that in highly distressed situations, this power may not extend beyond those assets actually purchased.
    Keywords: Central Bank Asset Purchases, Securities Markets Programme, Eurozone Crisis, Sovereign Risk, Market Segmentation
    JEL: E43 E58 F34 G12
    Date: 2018–01
  6. By: Chileshe, Patrick Mumbi
    Abstract: This study examines comprehensively the bank-lending channel of monetary policy for Zambia using a bank-level panel data covering the period Q1 2005 to Q4 2016. Specifically, the study investigates the effects of monetary policy changes on loan supply by commercial as well as the effect of bank-specific factors on response of loan supply to monetary policy shocks. In addition, the study investigates whether the level of bank competition does affect the bank-lending channel. Using a dynamic panel data approaches developed by Arellano-Bond (1991), the results indicate that a bank-lending channel exists in Zambia. In particular, the results show that is loan supply is negatively correlated with policy rate implying that following monetary policy tightening loan supply shrinks. Further, the results indicate that size, liquidity and bank-competiveness have effects on credit supply while capitalization has no effect. Specifically, the results show that bank size has negative effect on credit supply while liquidity and market power are found to enhance credit supply. Most importantly, the results showed that bank-specific factors and bank-competiveness is responsible for the asymmetrical response of banks to monetary policy. Specifically, the results showed that larger banks, banks with more market power, well-capitalized banks and liquid banks respond less to monetary policy tightening and vice-versa.
    Keywords: Monetary Policy Transmission, Bank Lending Channel, Panel Data, Generalized Method of Moments, Zambia
    JEL: E44 E52 G3
    Date: 2017–09
  7. By: Molteni, Francesco; Pappa, Evi
    Abstract: We analyze the joint effects of monetary and fiscal policy shocks in the U.S. economy using a factor augmented vector autoregressive model with drifting coefficients and stochastic volatility. The time varying structure of the model allows us to assess whether the transmission of monetary policy shocks differ when combined with exogenous expansionary and contractionary fiscal shocks, identified with the narrative approach. Government spending and temporary fiscal transfers weaken the effects of monetary policy shocks; permanent transfers are less effective to counteract the demand effects of monetary policy changes; while tax shocks do not alter the propagation of monetary policy shocks.
    Keywords: fiscal policy shocks; monetary policy shocks; narrative evidence; TVP-FAVAR
    JEL: C32 E52 E62 E63 E65
    Date: 2017–12
  8. By: Salih Fendoglu
    Abstract: I assess the effectiveness of macroprudential policy tools in containing credit cycles per se or the impact of portfolio inflows on the cycles in major emerging market economies. The results show that borrower-based tools, measures with a domestic focus, and domestic reserve requirements are particularly effective. The findings are, in most cases, stronger for the recent period during which most of the macroprudential actions are undertaken, and generally hold for alternative definitions of credit cycle, the monetary policy stance, and portfolio inflows. Moreover, the analyses focusing on the recent period and the regional analyses suggest that foreign-currency based measures are effective. Still, these measures being implemented in a few countries or only recently makes it harder to draw general conclusions. Lastly, financial-institutions-based measures are found to be effective for the Emerging Europe which has resorted to these policies relatively frequently. This result hints at the importance of building up experience in implementing macroprudential measures.
    Keywords: Credit cycles, Capital flows, Macroprudential policies, Reserve requirements, Emerging market economies
    JEL: E58 F32 G18 G28
    Date: 2017
  9. By: Hasenzagl, Thomas; Pellegrino, Filippo; Reichlin, Lucrezia; Ricco, Giovanni
    Abstract: A view often expressed by the Fed is that three components matter in inflation dynamics: a trend anchored by long run inflation expectations; a cycle connecting nominal and real variables; and oil prices. This paper proposes an econometric structural model of inflation formalising this view. Our findings point to a stable expectational trend, a sizeable and well identified Phillips curve and an oil cycle which, contrary to the standard rational expectation model, affects inflation via expectations without being reflected in the output gap. The latter often overpowers the Phillips curve. In fact, the joint dynamics of the Phillips curve cycle and the oil cycles explain the inflation puzzles of the last ten years.
    Keywords: Expectations; inflation; oil prices; Phillips curve
    Date: 2018–01
  10. By: DiGabriele, Jim; Ojo, Marianne
    Abstract: It is argued that “ the ascendency of the emerging economies changed the relative returns to labor and capital – and that because these economies’ global integration has made labor more abundant, workers in developed countries have lost some of their bargaining power – thus putting downward pressure on real wages.” Central bankers’ misunderstanding of certain monetary implications have also been highlighted in that by keeping interest rates too low, they allowed a build up of excess liquidity which flowed into the prices of assets such as homes – contributing to the build up leading to the 2007-2009 global Financial Crisis. The introduction of the 2010 Basel III leverage ratios was intended not only to address shortcomings of the previous Basel capital framework, but also intended to serve as a complement to the risk based capital adequacy framework. However, as with many implementation challenges, other issues which involve calibration between the risk based and leverage based frameworks continue to constitute areas of concern for regulators – and supervisors. So also matters relating to disclosures – as evidenced by ongoing initiatives in respect of Pillar 3. This paper aims to highlight progress and developments being made since 2010 – as well as accentuate challenges still being encountered by the leverage based framework. Herein lies the importance of continued collaborative efforts aimed at facilitating comparability, consistency, understanding and communication between national and federal regulators and supervisors from different jurisdictions – in efforts aimed at realizing Basel III initiatives and objectives.
    Keywords: monetary policy; leverage ratios; risk based capital adequacy measures; disclosures; Efficiency wage Hypothesis
    JEL: E3 E5 E58 G3 G38 K2 M4
    Date: 2017–11
  11. By: Fatma Pinar Erdem; Etkin Özen; Ibrahim Unalmis
    Abstract: Macroprudential policies (MPPs) have become a part of the policy toolkit, especially in the aftermath of the 2008 global financial crisis both in advanced and emerging market economies. Hence, there is a growing body of literature investigating effectiveness of such policies. In this paper, using a data set of 30 countries and panel VAR approach, we contribute to this literature by testing whether MPPs are effective in controlling domestic credit growth in emerging markets and developing countries in the wake of a positive global liquidity shock. Results indicate that MPPs are effective to limit domestic credit growth especially during the expansion phase of the credit cycle. Second, the number of MPP tools matter to better manage the domestic credit growth, since insufficient number of measures are unable to prevent leakages and reduce the effectiveness of MPPs under a global liquidity shock.
    Keywords: Macroprudential policies, Credit growth, Global liquidity, Credit cycle, Panel VAR
    JEL: E43 E58 G18 G28
    Date: 2017
  12. By: Inhwan So (International Department, The Bank of Korea)
    Abstract: This paper investigates how the openness of banking sector influences the transmission channels of home and foreign monetary policy shocks in small open economies. For the analysis, I construct a small open economy DSGE model enriched with a banking sector. I consider two forms of bank globalization: international bank capital finance and foreign loan account import. From the analysis, I find that bank globalization leads to a significant attenuation of domestic monetary policy transmission. On the other hand, opening of the banking sector intensifies the impact of foreign interest rate shocks on the local bank activities.
    Keywords: Bank globalization, Monetary policy, Dynamic stochastic general equilibrium model, Small open economies
    JEL: E32 E44 E52 E58 F36
    Date: 2017–11–20
  13. By: Marcin Flotyński (Poznan University of Economics and Business)
    Abstract: The paper is devoted to the Net Stable Funding Ratio (NSFR) - the liquidity regulation included in the Basel III recommendations. The aim of the article is to verify the impact of stable funding structure measured by estimated NSFR on the profitability of banks and the volatility of their stock prices. It embraces the data of the 100 biggest banks in the euro area which are listed on stock exchanges. The research area of this article is divided into two parts. The first one is devoted to the relation between the NSFR and bank profitability. In the second one, the relation between the NSFR and a bank’s valuation (stock prices) and the volatility of stock prices on the capital market is presented. Models with financial and macroeconomic variables were used. The research results showed that there is a positive and statistically significant relation between the level of the NSFR in banks and their profitability measured by the return on average assets (ROAA), the return on average equity (ROAE) and the net interest margin (NIM). Furthermore, a growing NSFR has a positive influence on changes of stock prices and a negative influence on the level of their volatility.
    Keywords: banking sector, regulation, funding structure, liquidity, Basel III, Net Stable Funding Ratio (NSFR), volatility of stock prices
    JEL: C33 G10 G15 G17 G21
    Date: 2017
  14. By: Quispe, Zenon (Banco Central de Reserva del Perú); Rodriguez, Donita (Apoyo Consultoría); Toma, Hiroshi (Banco Central de Reserva del Perú); Vasquez, Cesar (Banco Central de Reserva del Perú)
    Abstract: In recent times the Pacific Alliance member economies (Chile, Colombia, Mexico and Peru) have managed to achieve trade integration, have made an important progress in their financial integration and have withstood the spillovers from the global shocks that had risen from abroad. But, would the Pacific Alliance members be better off if they coordinated their monetary and macro prudential policy responses when facing the spillovers from these external global shocks? To test this we propose a framework based on the Global Projection Model (GPM) of the International Monetary Fund (IMF), which features real and financial linkages between countries. We introduce additional equations for terms of trade, commodities, portfolio inflows, foreign direct investment inflows, lending, lending interest rates and macro prudential policy with the objective of having a more comprehensive model. In the no-coordination case, we consider six countries: the four member economies of the Pacific Alliance acting separately, China and USA. The coordination case involves three parties: the Pacific Alliance acting as one country, China and USA. In this case of full coordination among Pacific Alliance countries, the members act as if they followed the same monetary and macroprudential policies. We find that upon global shocks spillovers coming from China and the United States, the Pacific Alliance member economies are mostly better off when coordinating monetary and macro prudential policy responses than when not.
    Date: 2017–12

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