nep-cba New Economics Papers
on Central Banking
Issue of 2018‒03‒05
twenty-six papers chosen by
Maria Semenova
Higher School of Economics

  1. Has Monetary Policy Changed? How the Crisis Shifted the Ground Under Central Banks By Pierre L. Siklos
  2. Empirical Evidence on the Effectiveness of Capital Buffer Release By Sivec, Vasja; Volk, Matjaz; Chen, Yi-An
  3. Optimal Monetary Policy Under Bounded Rationality By Benchimol, Jonathan; Bounader, Lachen
  4. Bank Capital Regulation in a Zero Interest Environment By Robin Döttling
  5. Role of Expectation in a Liquidity Trap By Kohei Hasui; Yoshiyuki Nakazono; Yuki Teranishi
  6. A new theory of seigniorage and optimal inflation By Reich, Jens
  7. Disagreement about Future Inflation: Understanding the Benefits of Inflation Targeting and Transparency By Steve Brito; Yan Carriere-Swallow; Bertrand Gruss
  8. Intermediation markups and monetary policy pass-through By Malamud, Semyon; Schrimpf, Andreas
  9. Household Credit, Global Financial Cycle, and Macroprudential Policies; Credit Register Evidence from an Emerging Country By Mircea Epure; Irina Mihai; Camelia Minoiu; José-Luis Peydró
  10. From window guidance to interbank rates : Tracing the transition of monetary policy in Japan and China By Angrick, Stefan; Naoyuki, Yoshino
  11. Are Eastern European Taylor Reaction Functions Asymmetric in Inflation or Output: Empirical Evidence for four Countries By Jens Klose
  12. One Money, Many Markets - A Factor Model Approach to Monetary Policy in the Euro Area with High-Frequency Identification By Corsetti, G.; Duarte, J. B.; Mann, S.
  13. A Global Lending Channel Unplugged? Does U.S. Monetary Policy Affect Cross-border and Affiliate Lending by Global U.S. Banks? By Temesvary, Judit; Ongena, Steven; Owen, Ann L.
  14. Friend or Foe? Cross-Border Linkages, Contagious Banking Crises, and “Coordinated” Macroprudential Policies By Seung M Choi; Laura E. Kodres; Jing Lu
  15. Mortgage Debt and Time-Varying Monetary Policy Transmission By David Finck; Joerg Schmidt; Peter Tillmann
  16. Financial Crisis, Monetary Base Expansion and Risk By Stylianos Tsiaras
  17. Asset Price Spillovers From Unconventional Monetary Policy: A Global Empirical Perspective By Domenico Lombardi, Pierre Siklos, Samantha St. Amand
  18. Forward Guidance and the Exchange Rate By Jordi Galí
  19. Why Are Inflation and Real Interest Rates So Low? A Mechanism of Low and Floating Real Interest and Inflation Rates By Harashima, Taiji
  20. Understanding HANK: insights from a PRANK By Acharya, Sushant; Dogra, Keshav
  21. Financial repression and high public debt in Europe By van Riet, Ad
  22. Central bank forward guidance and the signal value of market prices By Stephen Morris; Hyun Song Shin
  23. Regulatory Cycles: Revisiting the Political Economy of Financial Crises By Jihad Dagher
  24. Beyond Common Equity - The Influence of Secondary Capital on Bank Insolvency Risk By Thomas Conlon; John Cotter; Philip Molyneux
  25. A New Wave of ECB’s Unconventional Monetary Policies: Domestic Impact and Spillovers By Richard Varghese; Yuanyan Sophia Zhang
  26. Monetary theory reversed: Virtual currency issuance and miners’ remuneration By Luca Marchiori

  1. By: Pierre L. Siklos (Department of Economics, Wilfrid Laurier University, Canada; Balsillie School of International Affairs, Canada; Rimini Centre for Economic Analysis)
    Abstract: Central bank communication is more important than only a decade ago. This paper examines the results of a Survey begun in 2013, in cooperation with the BIS, to assess how and why central bank communication strategies have changed in light of the financial crisis of 2008-10. Existing metrics of central bank transparency are found to be relatively less informative about the role of financial stability in transparency. Inflation targeting central banks are more likely to incorporate market reactions to their policies and place greater weight on the modelling exercise used to generate macroeconomic forecasts. Central banks also believe that forward guidance is beneficial. Inflation targeting central banks are also more vocal in publicly explaining the role and function of macroprudential tools. Few differences in views about communicating in normal versus crisis times are observed. Therefore, communicating in normal versus crisis times are not seen as being very different.
    Keywords: central bank communication, transparency, forward guidance, quantitative easing, macroprudential tools
    JEL: E58 E3 E61 E63
    Date: 2018–02
  2. By: Sivec, Vasja; Volk, Matjaz; Chen, Yi-An
    Abstract: With the new regulatory framework, known as Basel III, policymakers introduced a countercyclical capital buffer. It subjects banks to higher capital requirements in times of credit excess and is released in a financial crisis. This incentivizes banks to extend credit and to buffer losses. Due to its recent introduction empirical research on its effects are limited. We analyse a unique policy experiment to evaluate the effects of buffer release. In 2006, the Slovenian central bank introduced a temporary deduction item in capital calculation, creating an average capital buffer of 0.8% of risk weighted assets. It was released at the start of the financial crisis in 2008 and is akin to a release of a countercyclical capital buffer. We estimate its impact on bank behaviour. After its release, firms borrowing from banks holding 1 p.p. higher capital-buffer received 11 p.p. more in credit. Also we find the impact was greater for healthy firms, and it increased loan-loss provisioning for firms in default.
    Keywords: countercyclical capital buffer, macroprudential policy, credit, loan loss provisions
    JEL: G01 G21 G28
    Date: 2018–01–02
  3. By: Benchimol, Jonathan (Bank of Israel); Bounader, Lachen (Mohammed V University)
    Abstract: Optimal monetary policy under discretion, commitment, and optimal simple rules regimes is analyzed through a behavioral New Keynesian model. Flexible price level targeting dominates under discretion; flexible inflation targeting dominates under commitment; and strict price level targeting dominates when using optimal simple rules. Stabilizing properties and bounded rationality-independence generally affect the regime's optimality. The policymaker's knowledge of an agent's myopia is decisive, whereas bounded rationality is not necessarily associated with decreased welfare. Several forms of economic inattention can be welfare increasing.
    JEL: C53 D01 D11 E37 E52
    Date: 2018–01–01
  4. By: Robin Döttling (University of Amsterdam)
    Abstract: How do near-zero interest rates affect bank competition, risk taking and regulation? I study these questions in a tractable dynamic general equilibrium model, in which forward-looking banks compete imperfectly for deposit funding, and deposit insurance may induce excessive risk taking. The zero lower bound on deposit rates (ZLB) distorts bank competition and boosts risk shifting incentives, particularly if rates are expected to remain near-zero for long. At the ZLB, capital regulation becomes a less effective tool to curb risk shifting incentives. When banks cannot pass on the cost of capital to depositors, tight capital requirements erode franchise value, countervailing the usual "skin in the game" effect. Optimal capital requirements vary with the interest rate cycle, highlighting a novel interaction between monetary and macro-prudential policies. Complementing existing regulation with policy tools that subsidize the funding cost of banks may improve welfare at the ZLB.
    Keywords: Zero lower bound; search for yield; capital regulation; bank competition; risk shifting; franchise value
    JEL: G21 G28 E43
    Date: 2018–02–28
  5. By: Kohei Hasui (Matsuyama University); Yoshiyuki Nakazono (Yokohama City University); Yuki Teranishi (Keio University)
    Abstract: This paper investigates how expectation formation affects monetary policy ef- fectiveness in a liquidity trap. We examine two expectation formations: (i) different degrees in anchoring expectation and (ii) different degrees in forward-lookingness to form expectation. We reveal several points as follows. First, under optimal commitment policy, expectation formation for an inflation rate does not markedly change the effects of monetary policy. Second, contrary to optimal commitment policy, the effects of monetary policy significantly change according to different inflation expectation formations under the Taylor rule. The reductions to an infla- tion rate and the output gap are mitigated if the expectation is well anchored. This rule, however, can not avoid large drops when the degree of forward-lookingness to form expectation decreases. Third, a simple rule with price-level targeting shows some similar outcomes according to different expectation formations as the Taylor rule does. However, in a simple rule with price-level targeting, an inflation rate and the output gap drop less severe due to a history dependent easing and are less sensitive to expectation formations than in the Taylor rule. Even for the Japanese economy, the effects of monetary policy on economic dynamics significantly change according to expectation formations for rules except optimal commitment policy. Furthermore, when the same expectation formations for the output gap are as- sumed, we observe similar outcomes.
    Keywords: Expectation; Liquidity Trap; Monetary Policy
    JEL: E31 E52 E58 E61
    Date: 2018–02
  6. By: Reich, Jens
    Abstract: Central banks like the Bank of England or the Bundesbank have highlighted recently that the supply of currency is achieved not by means of printing and spending but by means of credit. This clarification raises further issues. This article addresses the issue of seigniorage and optimal inflation. So far approaches to seigniorage and optimal inflation are still based on the assumption of a currency which is printed and spend by a central authority. From this perspective central banks’ inflation targets and optimal inflation targets are at odds with those suggested by economic theory. The so-called Friedman-rule, the common core of optimal inflation theory, determines optimal inflation via the (opportunity) cost of producing currency. This basic approach is amended by “external effects”, e.g. the impact of monetary non-neutrality or wage rigidities and so on. However, even under consideration of external effects there remains a significant gap between actual inflation targets and optimal rates as suggested by theory. The supply by means of credit, however, involves “costs of production” which do not appear in Friedman’s case: losses from borrower defaults. Incorporating expected losses into economic theory contributes significantly in aligning central banks’ optima with economic theory and provides a new theory of seigniorage for a credit currency.
    Keywords: Optimal inflation, seigniorage, monetary policy, central banking.
    JEL: E31 E51 E52 E58
    Date: 2017–11–01
  7. By: Steve Brito; Yan Carriere-Swallow; Bertrand Gruss
    Abstract: We estimate the determinants of disagreement about future inflation in a large and diverse sample of countries, focusing on the role of monetary policy frameworks. We offer novel insights that allow us to reconcile mixed findings in the literature on the benefits of inflation targeting regimes and central bank transparency. The reduction in disagreement that follows the adoption of inflation targeting is entirely due to increased central bank transparency. Since the benefits of increased transparency are non-linear, the gains from inflation targeting adoption have accrued mainly to countries that started from a low level of transparency. These have tended to be developing countries.
    Date: 2018–01–25
  8. By: Malamud, Semyon; Schrimpf, Andreas
    Abstract: We introduce intermediation frictions into the classical monetary model with fully flexible prices. In our model, monetary policy is redistributive because it affects intermediaries' ability to extract rents. The pass-through efficiency of quantitative easing (QE) and tightening (QT) policies depends crucially on the anticipated relationship between future monetary policy and future stock market returns (the "Central Bank Put"). When the Central Bank Put is too weak, balance sheet policies become inefficient. When the Central Bank Put is very strong, however, monetary policy may be destabilizing and lead to greater frequency of market tantrums.
    JEL: E40 E44 E52 G12
    Date: 2018–01
  9. By: Mircea Epure; Irina Mihai; Camelia Minoiu; José-Luis Peydró
    Abstract: We analyze the effects of macroprudential policies on local bank credit cycles and interactions with international financial conditions. For identification, we exploit the comprehensive credit register containing all bank loans to individuals in Romania, a small open economy subject to external shocks, and the period 2004-2012, which covers a full boom-bust credit cycle when a wide range of macroprudential measures were deployed. Although household leverage is known to be a key driver of financial crises, to our knowledge this is the first paper that employs a household credit register to study leverage and macroprudential policies over a full economic cycle. Our results show that tighter macroprudential conditions are associated with a significant decline in household credit, with substantially stronger effects for foreign currency (FX) loans than for local currency loans. The effects on FX loans are higher for: (i) ex-ante riskier borrowers proxied by higher debt-service-toincome ratios and (ii) banks with greater exposure to foreign funding. Moreover, tighter macroprudential policy has stronger dampening effects on FX lending when global risk appetite is high and foreign monetary policy is expansionary. Finally, quantitative effects are in general larger for borrower rather than lender macroprudential policies.
    Keywords: Household credit;Romania;Europe;Central banks and their policies;macroprudential policies, global financial cycle, cross-border spillovers, General
    Date: 2018–01–24
  10. By: Angrick, Stefan; Naoyuki, Yoshino
    Abstract: Monetary policy in most major economies has traditionally focused on control of the interbank interest rate to achieve an inflation target. Monetary policy in transition economies, in contrast, relied on a mixed system of price-based and quantity based instruments and targets. Japanese monetary policy up to the 1990s was based on such a mix, and echoes of this system are today found in China’s monetary policy set-up. We explore the transition of these two monetary policy regimes historically and quantitatively with institutional comparison and Structural Vector Autoregressive (SVAR) models. Specifically, we examine the role of the interbank rate and “window guidance,” a policy by which authorities use “moral suasion” to communicate target quotas for lending growth directly to commercial banks. In Japan’s case, we compile historical statistics on window guidance from newspapers and industry sources. For China, we apply Romer–Romer text analysis and computational linguistic techniques to policy reports to quantify information on window guidance.We empirically demonstrate the declining effectiveness of quantity measures and the increasing importance of price measures. We end with a policy assessment of managing the transition of monetary policy from a quantity-based system to a price-based system.
    JEL: E5 E52 E58
    Date: 2018–02–21
  11. By: Jens Klose (THM Business School)
    Abstract: Do central banks in Eastern European countries react asymmetrically and in a non-linear fashion to changes in inflation and output? We tackle this question by expanding the standard Taylor reaction function for the four inflation targeting countries Czech Republic, Hungary, Poland and Romania. We do so taking explicitly inflation rates below or above target and output below or above potential, the so-called state of the economy, into account. The results reveal that there are indeed substantial asymmetries in the reaction function of the Czech, Polish and Romanian central bank, which are only evident when the combination of inflation and output thresholds is explicitly modelled in one estimation equation. For these three central banks also non-linearities in the inflation and output response could be verified.
    Keywords: Taylor reaction function, Asymmetries, Eastern European countries
    JEL: E52 E58
    Date: 2018
  12. By: Corsetti, G.; Duarte, J. B.; Mann, S.
    Abstract: We reconsider the effects of common monetary policy shocks across countries in the euro area, using a data-rich factor model and identifying shocks with high-frequency surprises around policy announcements. We show that the degree of heterogeneity in the response to shocks, while being low in financial variables and output, is significant in consumption, consumer prices and macro variables related to the labour and housing markets. Mirroring country-specific institutional and market differences, we find that home ownership rates are significantly correlated with the strength of the housing channel in monetary policy transmission. We document a high dispersion in the response to shocks of house prices and rents and show that, similar to responses in the US, these variables tend to move in different directions.
    Keywords: Monetary Policy, High-Frequency Identification, Monetary Union, Labour Market, Housing Market.
    JEL: E21 E31 E44 E52 F44
    Date: 2018–02–22
  13. By: Temesvary, Judit; Ongena, Steven; Owen, Ann L.
    Abstract: We examine how U.S. monetary policy affects the international activities of U.S. Banks. We access a rarely studied U.S. bank-level regulatory dataset to assess at a quarterly frequency how changes in the U.S. Federal funds rate (before the crisis) and quantitative easing (after the onset of the crisis) affects changes in cross-border claims by U.S. banks across countries, maturities and sectors, and also affects changes in claims by their foreign affiliates. We find robust evidence consistent with the existence of a potent global bank lending channel. In response to changes in U.S. monetary conditions, U.S. banks strongly adjust their cross-border claims in both the pre and post-crisis period. However, we also find that U.S. bank affiliate claims respond mainly to host country monetary conditions.
    Keywords: Bank lending channel; Cross-country analysis; Global banking; Monetary transmission
    JEL: E44 E52 F42 G15 G21
    Date: 2018–02–02
  14. By: Seung M Choi; Laura E. Kodres; Jing Lu
    Abstract: This paper examines whether the coordinated use of macroprudential policies can help lessen the incidence of banking crises. It is well-known that rapid domestic credit growth and house price growth positively influence the chances of a banking crisis. As well, a crisis in other countries with high trade and financial linkages raises the crisis probability. However, whether such “contagion effects” can operate to reduce crisis probabilities when highly linked countries execute macroprudential policies together has not been fully explored. A dataset documenting countries’ use of macroprudential tools suggests that a “coordinated” implementation of macroprudential policies across highly-linked countries can help to stem the risks of widespread banking crises, although this positive effect may take some time to materialize.
    Keywords: Banking crisis;Financial crisis;Trade Linkages, Financial Linkages, Macroprudential Policies, Financial Aspects of Economic Integration, International Policy Coordination and Transmission
    Date: 2018–01–23
  15. By: David Finck (University of Giessen); Joerg Schmidt (University of Giessen); Peter Tillmann (University of Giessen)
    Abstract: We study the role of monetary policy for the dynamics of U.S. mortgage debt, which is the largest component of household indebtedness. A time-varying parameter VAR model allows us to study the variation in the mortgage debt sensitivity to monetary policy. We find that an identically-sized policy shock became less effective over time. We use a DSGE model to show that a fall in the share of adjustable-rate mortgages (ARMs) could replicate this finding. Calibrating the model to the drop in the ARM share since the 1980s yields a drop in the sensitivity of housing debt to monetary policy which is quantitatively similar to the VAR results. A sacrifice ratio for mortgage debt reveals that a policy tightening directed towards reducing household debt became more expensive in terms of a loss in employment. Counterfactuals show that this result cannot be attributed to changes in monetary policy itself. The results are consistent with the "mortgage rate conundrum" found by Justiniano et al. (2017) and have strong implications for policy.
    Keywords: mortgage debt, monetary policy, deleveraging, time-varying VAR, DSGE
    JEL: E3 E5 G2
    Date: 2018
  16. By: Stylianos Tsiaras (University of Surrey)
    Abstract: This paper examines the post-2008 European Central Bank's liquidity enhancing policies, namely 'Long Term Refinancing Operations', and the increase of banks' excess reserves that followed. To evaluate this in a quantitative environment, I build a dynamic, general equilibrium model that incorporates financial frictions in both the supply and demand for credit and allows banks to receive liquidity and hold reserves. Results suggest the existence of a risk-shifting channel of monetary policy in the recent ECB operations. Specifically, I show that when the central bank supplies liquidity during turbulent times, banks grant loans to riskier _rms. This increases the firms' default on new credit and worsens the performance of the economy although the banks' health is improved. Additionally, I find that an increase in the riskiness of the non-financial corporations can explain the recent reserve accumulation by the banking system. Lastly, I evaluate the effects of negative interest rates on credit and assess the welfare implications of the recent policies.
    JEL: E44 E58
    Date: 2018–01
  17. By: Domenico Lombardi, Pierre Siklos, Samantha St. Amand (Wilfrid Laurier University)
    Abstract: This paper sheds new light on spillovers from US monetary policies before, during and after the 2008-09 global financial crisis by examining the behavior of select financial asset returns and incorporating indicators of the content of US Federal Open Market Committee announcements. The impact of US monetary policies is examined for systematically-important and small-open advanced economies. US monetary policy surprise easings are found to have decreased yields in advanced economies post-crisis. The impact of the content of US Federal Open Market Committee statements, coded using text analysis software, is also found to be significant but sensitive to the state of the economy.
    Keywords: central bank communication, financial asset prices, monetary policy spillovers, unconventional monetary policy
    JEL: G12 G28 E52 E58
    Date: 2018–01–30
  18. By: Jordi Galí
    Abstract: I analyze the effectiveness of forward guidance policies in open economies, focusing on the role played by the exchange rate in their transmission. An open economy version of the "forward guidance puzzle" is shown to emerge. In partial equilibrium, the effect on the current exchange rate of an anticipated change in the interest rate does not decline with the horizon of implementation. In general equilibrium, the size of the effect is larger the longer is that horizon. Empirical evidence using U.S. and euro area data euro-dollar points to the presence of a forward guidance exchange rate puzzle: expectations of interest rate differentials in the near (distant) future have much larger (smaller) effects on the euro-dollar exchange rate than is implied by the theory.
    Keywords: forward guidance puzzle, uncovered interest rate parity, unconventional monetary policies, open economy New Keynesian model
    JEL: E43 E58 F41
    Date: 2018–02
  19. By: Harashima, Taiji
    Abstract: Real interest and inflation rates have been very low in many industrialized countries since the Great Recession. In this paper, a mechanism of low and floating real interest and inflation rates is examined based on the concept a “Nash equilibrium of a Pareto inefficient path” and the law of motion for trend inflation. I show that, because the link between the marginal product of capital and the real interest rate is severed on this path, the real interest rate loses its anchor and therefore floats. In addition, the inflation rate floats together with the real interest rate. There are, however, upper and lower bounds of the floating rates. It is also likely that the real interest rate floats below the marginal product of capital on this path and the inflation rate floats below the target rate of inflation.
    Keywords: Real interest rate; Inflation; Deflation; Marginal product of capital; Pareto inefficiency; Monetary policy; Fiscal policy; Bank behavior
    JEL: E21 E22 E31 E32 E43 E52 E62 G21
    Date: 2018–04–02
  20. By: Acharya, Sushant (Federal Reserve Bank of New York); Dogra, Keshav (Federal Reserve Bank of New York)
    Abstract: Does market incompleteness radically transform the properties of monetary economies? Using an analytically tractable heterogeneous agent New Keynesian (HANK) model, we show that whether incomplete markets resolve “policy paradoxes” in the representative agent New Keynesian model (RANK) depends primarily on the cyclicality of income risk, rather than incomplete markets per se. Incomplete markets reduce the effectiveness of forward guidance and multipliers in a liquidity trap only if risk is procyclical. Acyclical or countercyclical risk amplifies these puzzles relative to RANK. Cyclicality of risk also affects determinacy: procyclical risk permits determinacy even under an interest rate peg, while countercyclical income risk generates indeterminacy even if the Taylor principle holds. Finally, we uncover a new dimension of monetary-fiscal interaction. Since fiscal policy affects the cyclicality of income risk, it influences the effects of monetary policy even when “passive.”
    Keywords: New Keynesian; incomplete markets; monetary and fiscal policy; determinacy; forward guidance; fiscal multipliers
    JEL: E21 E30 E52 E62 E63
    Date: 2018–02–01
  21. By: van Riet, Ad (Tilburg University, School of Economics and Management)
    Abstract: The sharp rise in public debt-to-GDP ratios in the aftermath of the global financial crisis of 2008 posed serious challenges for fiscal policy in euro area countries. This thesis examines whether and to what extent modern financial repression has been applied in Europe to address these challenges. Financial repression is defined as the government’s strategy – supported by monetary and financial policies – to gain privileged access to capital markets at preferential credit conditions and divert resources to the state with the aim to secure and, if necessary, enforce public debt sustainability. This study shows that national public debt management, EU financial regulation, EMU crisis management as well as ECB monetary policy have significantly supported euro area governments in dealing with their fiscal predicament. Taken on their own, these public policies were targeted at supporting fiscal, financial and monetary stability in the wake of the euro area crisis. This study argues that the respective authorities have in fact applied the tools of financial repression and thereby contributed to relieving sovereign liquidity and solvency stress.
    Date: 2018
  22. By: Stephen Morris; Hyun Song Shin
    Abstract: The analysis suggests that relying less on market signals increases the effectiveness of central bank communication. In their eagerness to correctly anticipate policy moves, market participants risk giving too much weight to central bankers' utterances and not enough to assessing economic data. If central bankers, in turn, trust markets to guide their actions, they may end up creating a feedback loop that cancels out the value of the very market signals they rely on. In this circular relationship, market outcomes reflect central bank actions, which in turn reflect market outcomes.
    Keywords: central bank communication, market expectations, crowding out
    JEL: D82 E43 E58
    Date: 2018–01
  23. By: Jihad Dagher
    Abstract: Financial crises are traditionally analyzed as purely economic phenomena. The political economy of financial booms and busts remains both under-emphasized and limited to isolated episodes. This paper examines the political economy of financial policy during ten of the most infamous financial booms and busts since the 18th century, and presents consistent evidence of pro-cyclical regulatory policies by governments. Financial booms, and risk-taking during these episodes, were often amplified by political regulatory stimuli, credit subsidies, and an increasing light-touch approach to financial supervision. The regulatory backlash that ensues from financial crises can only be understood in the context of the deep political ramifications of these crises. Post-crisis regulations do not always survive the following boom. The interplay between politics and financial policy over these cycles deserves further attention. History suggests that politics can be the undoing of macro-prudential regulations.
    Date: 2018–01–15
  24. By: Thomas Conlon (University College Dublin); John Cotter (University College Dublin); Philip Molyneux (University of Sharjah)
    Abstract: Banks adhere to strict rules regarding the quantity of regulatory capital held, but have some flexibility as to its composition. In this paper, we examine bank insolvency risk (distance to default) for listed North American and European banks over the period 2002-2014, focusing on sensitivity to capital other than common equity. Decomposing tier 1 capital into equity and non-core components reveals a heretofore unidentified variation in risk reduction capacity. Greater non-core tier 1 capital is associated with increased insolvency risk for larger and more diversified banks, impairing the risk reducing capacity of aggregate tier 1 capital. Overall tier 2 capital is not linked with insolvency risk, although a conflicting relationship is isolated conditional on the level of total regulatory capital held. Finally, the association between risk and capital is weakened when the latter is defined relative to risk-weighted assets.
    Keywords: Regulatory Capital, Bank Risk, Regulatory Capital Arbitrage, Tier 1, Tier 2
    JEL: G21 G28 G32
    Date: 2018–02–19
  25. By: Richard Varghese; Yuanyan Sophia Zhang
    Abstract: ECB President Draghi’s Jackson Hole speech in August 2014 arguably marked a new phase of unconventional monetary policies (UMPs) in the euro area. This paper examines the market impact and tranmission channels of this new wave of UMPs using a modified event study framework. They are found to have a more prominent impact on inflation expectations and exchange rates compared to the earlier UMP announcements. The impact on bank equity, however, is less significant in part due to narrowing profit margin in a low interest rate environment; and the marginal effect on sovereign spread compression has diminished. By extracting components of monetary policy shocks from the yield curve, we find that the traditional signaling channel of the monetary policy transmission continued to play an important role, but the portfolio rebalancing channel became more important in the new phase. Spillovers to non-euro area EU countries (the Czech Republic, Denmark, Poland, and Sweden) are transmitted mainly through the portfolio rebalancing channel, largely affecting sovereign yields and exchange rates.
    Date: 2018–01–24
  26. By: Luca Marchiori
    Abstract: This study analyzes the macroeconomic implications of virtual currency issuance. It builds on a standard cash-in-advance model extended with (i) ‘virtual’ goods, sold against virtual currency, and (ii) miners, the agents providing payment services. The main finding is that virtual currency growthmay have effects opposite to those predicted by monetary theory when miners are rewarded with newly created coins. Declining currency issuance, as in Bitcoin, raises the price of virtual goods, which counteracts the traditional impact of a reduced inflation tax. The paper also shows how fiat money growth affects the welfare effects of virtual currency creation.
    Keywords: Cash-in-advance, virtual currency, fiat money, money supply
    JEL: E41 E42 E51
    Date: 2018–02

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