nep-cba New Economics Papers
on Central Banking
Issue of 2018‒04‒02
thirty-one papers chosen by
Maria Semenova
Higher School of Economics

  1. Monetary and macroprudential policies under rules and discretion By Laureys, Lien; Meeks, Roland
  2. Rules Verus Discretion: Assessing the Debate Over the Conduct of Monetary Policy By John B. Taylor
  3. Deconstructing Monetary Policy Surprises - The Role of Information Shocks By Jarocinski, Marek; Karadi, Peter
  4. Tight money - tight credit: coordination failure in the conduct of monetary and financial policies By Carrillo, Julio A.; Mendoza, Enrique G.; Nuguer, Victoria; Roldán-Peña, Jessica
  5. Strengthening the Global Financial Safety Net By IRC Taskforce on IMF Issues
  6. Monetary policy reaction function pre and post the global financial crisis By Raputsoane, Leroi
  7. Stabilising virtues of central banks: (re)matching bank liquidity By V. Legroux; I. Rahmouni-Rousseau; U. Szczerbowicz; N. Valla
  8. Overnight index swap market-based measures of monetary policy expectations By Lloyd, Simon
  9. Prices and Inflation when Government Bonds are Net Wealth By Hagedorn, Marcus
  10. Targeting financial stress as opposed to the exchange rate By Raputsoane, Leroi
  11. Oil price shocks, monetary policy and current account imbalances within a currency union By Baas, Timo; Belke, Ansgar
  12. Macroprudential Stress Tests: A Reduced-Form Approach to Quantifying Systemic Risk Losses By Zineddine Alla; Raphael A Espinoza; Qiaoluan H. Li; Miguel A. Segoviano Basurto
  13. Inflation Anchoring and Growth: Evidence from Sectoral Data By Sangyup Choi; Davide Furceri; Prakash Loungani
  14. The Relation between Monetary Policy and the Stock Market in Europe By Helmut Lütkepohl; Aleksei Netsunajev
  15. Regulatory Competition in Banking: A General Equilibrium Approach By Gersbach, Hans; Haller, Hans; Papageorgiou, Stylianos
  16. Implementing Macroprudential Policy in NiGEM By Oriol Carreras; E Philip Davis; Ian Hurst; Iana Liadze; Rebecca Piggott; James Warren
  17. Are the Risk Weights of Banks in the Czech Republic Procyclical? Evidence from Wavelet Analysis By Vaclav Broz; Lukas Pfeifer; Dominika Kolcunova
  18. Countercyclical Prudential Tools in an Estimated DSGE Model By Serafín Frache; Javier García-Cicco; Jorge Ponce
  19. Quantitative easing and preferred habitat investors in the euro area bond market By Martijn Boermans; Robert Vermeulen
  20. Is Credit Easing Viable in Emerging and Developing Economies? An Empirical Approach By Luis I. Jacome H.; Tahsin Saadi Sedik; Alexander Ziegenbein
  21. Macroprudential FX Regulations: Shifting the Snowbanks of FX Vulnerability? By Ahnert, Toni; Forbes, Kristin; Friedrich, Christian; Reinhardt, Dennis
  22. When your regulator becomes your new neighbor: Bank regulation and the relocation of EBA and EMA By Berninger, M.; Kiesel, F.; Schiereck, D.
  23. Governing cryptocurrencies through forward guidance? By Goldmann, Matthias; Pustovit, Grygoriy
  24. Paul van Zeeland and the first decade of the US Federal Reserve System : The analysis from a European central banker who was a student of Kemmerer By Ivo Maes; Rebeca Gomez Betancourt
  25. Rethinking financial stability By Aikman, David; Haldane, Andrew; Hinterschweiger, Marc; Kapadia, Sujit
  26. Financialising the state : recent developments in fiscal and monetary policy By Ewa Karwowski; Marcos Centurion-Vicencio
  27. Alternatives For Reserve Balances And The Fed's Balance Sheet In The Future By John B. Taylor
  28. Capital regulation and product market outcomes By Sen, Ishita; Humphry, David
  29. A European Monetary Fund: Why and how? By Gros, Daniel; Mayer, Thomas
  30. The Effect of Financial Market Integration on Monetary Policy and Long-term Interest Rate in Korea and Its Policy Implications By Kim, Kyunghun; Kim, Soyoung; Yang, Da Young; Kang, Eunjung
  31. The impact of the Bank of England’s Corporate Bond Purchase Scheme on yield spreads By Boneva, Lena; de Roure, Calebe; Morley, Ben

  1. By: Laureys, Lien (Bank of England); Meeks, Roland (Bank of England)
    Abstract: We study the policy design problem faced by central banks with both monetary and macroprudential objectives. We find that a time-consistent policy is often superior to a widely studied class of simple monetary and macroprudential rules. Better outcomes result when interest rates adjust to macroprudential policy in an augmented monetary policy rule.
    Keywords: Monetary policy; macroprudential policy; DSGE models
    JEL: E44 E52 G28
    Date: 2017–12–21
  2. By: John B. Taylor
    Abstract: This paper reviews the state of the debate over rules versus discretion in monetary policy, focusing on the role of economic research in this debate. It shows that proposals for policy rules are largely based on empirical research using economic models. The models demonstrate the advantages of a systematic approach to monetary policy, though proposed rules have changed and generally improved over time. Rules derived from research help central bankers formulate monetary policy as they operate in domestic financial markets and the global monetary system. However, the line of demarcation between rules and discretion is difficult to establish in practice which makes contrasting the two approaches difficult. History shows that research on policy rules has had an impact on the practice of central banking. Economic research also shows that while central bank independence is crucial for good monetary policy making, it has not been enough to prevent swings away from rules-based policy, implying that policy-makers might consider enhanced reporting about how rules are used in monetary policy. The paper also shows that during the past year there has been an increased focus on policy rules in implementing monetary policy in the United States.
    Keywords: Â
    JEL: E52 E58 F33
    Date: 2018–02
  3. By: Jarocinski, Marek; Karadi, Peter
    Abstract: Central bank announcements simultaneously convey information about monetary policy and the central bank's assessment of the economic outlook. This paper disentangles these two components and studies their effect on the economy using a structural vector autoregression estimated on both US and euro area data. It relies on the information inherent in high-frequency comovement of interest rates and stock prices around policy announcements: a surprise policy tightening raises interest rates and reduces stock prices, while the complementary positive central bank information shock raises both. These two shocks have intuitive and very different effects on the economy. Ignoring the central bank information shocks biases the inference on monetary policy non-neutrality. We make this point formally and offer an interpretation of the central bank information shock using a New Keynesian macroeconomic model with financial frictions.
    Keywords: Central Bank Private Information; High-Frequency Identification; Monetary Policy Shock; structural VAR
    JEL: E32 E52 E58
    Date: 2018–03
  4. By: Carrillo, Julio A.; Mendoza, Enrique G.; Nuguer, Victoria; Roldán-Peña, Jessica
    Abstract: Quantitative analysis of a New Keynesian model with the Bernanke-Gertler accelerator and risk shocks shows that violations of Tinbergen’s Rule and strategic interaction between policymaking authorities undermine significantly the effectiveness of monetary and financial policies. Separate monetary and financial policy rules, with the latter subsidizing lenders to encourage lending when credit spreads rise, produce higher welfare and smoother business cycles than a monetary rule augmented with credit spreads. The latter yields a tight money-tight credit regime in which the interest rate responds too much to inflation and not enough to adverse credit conditions. Reaction curves for the choice of policy-rule elasticity that minimizes each authority’s loss function given the other authority’s elasticity are nonlinear, reflecting shifts from strategic substitutes to complements in setting policy-rule parameters. The Nash equilibrium is significantly inferior to the Cooperative equilibrium, both are inferior to a first-best outcome that maximizes welfare, and both produce tight money-tight credit regimes. JEL Classification: E44, E52, E58
    Keywords: financial frictions, financial policy, monetary policy
    Date: 2018–02
  5. By: IRC Taskforce on IMF Issues
    Abstract: Since the global financial crisis, the Global Financial Safety Net (GFSN), traditionally consisting mainly of countries’ own foreign exchange reserves with the International Monetary Fund (IMF) acting as a backstop, has expanded significantly with the continued accumulation of reserves, the sharp increase of swap lines between central banks, and the further development and creation of new Regional Financing Arrangements (RFAs). RFAs have expanded, reaching an aggregate size comparable to that of the IMF and becoming an integral layer of the safety net. Enhancing the cooperation between the IMF and RFAs so that they play complementary roles in case of global distress, becomes critical in order to further strengthen the multi-layered GFSN, while paying attention to issues such as moral hazard, stigma or exit strategies in connection with IMF-RFA cooperation. This paper presents recent experience and lessons learned in IMF-RFA cooperation and proposes how to improve their future interaction. JEL Classification: F33, F34, F53, F55
    Keywords: exit strategies, Global Financial Safety Net, International Monetary Fund, moral hazard, Regional Financing Arrangements, stigma
    Date: 2018–03
  6. By: Raputsoane, Leroi
    Abstract: This paper analyses the monetary policy reaction function pre and post the recent global financial crisis in South Africa. This is achieved by comparing the reaction function of the the monetary policy interest rate to changes in the target variables that comprise the inflation rate, output gap and financial stress index pre and post the recent global financial crisis. The results show a negligible reaction of the monetary policy to changes in inflation in the pre and post the recent global financial crisis period. The results further show a relatively loose monetary policy stance during the financially stressful economic conditions in the pre and post the recent global financial crisis period. Most importantly, the results show that the reaction of monetary policy to changes in the target variables pre the recent global financial crisis period has not changed significantly compared to post the recent global financial crisis period. Therefore the paper concludes that there is no material difference in the conduct of monetary policy by the monetary authority in South Africa pre and post the recent global financial crisis.
    Keywords: Monetary policy, Financial stress, Foreign exchange rate
    JEL: C11 E43 E58 F31
    Date: 2018–02–28
  7. By: V. Legroux; I. Rahmouni-Rousseau; U. Szczerbowicz; N. Valla
    Abstract: The liquidity of financial system plays a central role in systemic crises. In this paper, we show that the ECB haircut policies provided an important liquidity support to distressed financial institutions during the euro area sovereign debt turmoil. Using novel, micro data on the pool of collateral eligible to ECB open market operations, we construct a “public” liquidity mismatch indicator (LMI) for the French aggregate banking sector based on the ECB haircuts. We then compare it to the “private” LMI based on the haircuts in private repo markets in a spirit of Bai et al. (2018). The difference between the two indicators represents a new measure of the ECB liquidity support. Our results suggest that the ECB haircut policies have indeed helped French banks to reduce the liquidity mismatch.
    Keywords: Bank liquidity, liquidity mismatch, monetary policy, central bank, haircuts, collateral framework.
    JEL: E58 G21 G28
    Date: 2018
  8. By: Lloyd, Simon (Bank of England)
    Abstract: I assess the use of overnight indexed swap (OIS) rates as measures of monetary policy expectations. I find that one to twelve-month US OIS rates provide measures of investors’ interest rate expectations that are comparable to those from corresponding-horizon federal funds futures rates, which have regularly been used as financial market-based measures of US interest rate expectations. More generally, I find that one to 24-month US, euro-zone and Japanese OIS rates and one to 18-month UK OIS rates tend to accurately measure expectations of future short-term interest rates. Motivated by these results, researchers can look to OIS rates as globally comparable measures of monetary policy expectations.
    Keywords: Federal funds futures; overnight indexed swaps; monetary policy expectations
    JEL: E43 E44 E52
    Date: 2018–03–01
  9. By: Hagedorn, Marcus
    Abstract: In this paper I show that models in which government bonds are net wealth - that is, their value exceeds that of tax liabilities (Barro, 1974) - offer a new perspective on several issues in monetary economics. First and foremost, prices and inflation are jointly and uniquely determined by fiscal and monetary policy. In contrast to the conventional view, the long-run inflation rate here is, in the absence of output growth, and even when monetary policy operates an interest rate rule with a different inflation target, equal to the growth rate of nominal fiscal variables, which are controlled by fiscal policy. This novel theory also offers a different perspective on the fiscal and monetary transmission mechanism, policies at the zero-lower bound, U.S. inflation history, recent attempts to stimulate inflation in the Euro area and several puzzles which arise in New Keyensian models during a liquidity trap. To derive my findings, I first use a reduced form approach in which households derive utility from holding bonds. I prove how and for which policy rules the price level is globally determinate, then showing that the reduced form results carry over to a Bewley-Imrohoroglu-Huggett-Aiyagari heterogenous agent incomplete market model.
    Keywords: Fiscal Multiplier; Fiscal policy; incomplete markets; inflation; monetary policy; Policy Coordination; Price Level Determinacy; Ricardian Equivalence; zero lower bound
    JEL: D52 E31 E43 E52 E62 E63
    Date: 2018–03
  10. By: Raputsoane, Leroi
    Abstract: This paper analyses the role of monetary policy in targeting financial stress as opposed to the exchange rate in South Africa. This is achieved by augmenting the central bank’s monetary policy reaction function with the composite indicator of financial stress and the nominal bilateral exchange rate between the US dollar and the South African rand. The results show that the monetary authority adopts an accommodative monetary policy stance in the face of financially stressful economic conditions. The paper further finds a statistical insignificant as well as negligible reaction of the nominal bilateral foreign exchange rate to the changes in the monetary policy interest rate. The paper concludes that, although evidence exists that the monetary policy interest rate in South Africa has reacted to both the indicator of financial stress and the nominal bilateral foreign exchange rate, the impact of such a reaction seems to be more significant on the indicator financial stress as opposed to the exchange rate.
    Keywords: Monetary policy, Financial stress, Foreign exchange rate
    JEL: C11 E43 E58 F31
    Date: 2018–02–28
  11. By: Baas, Timo; Belke, Ansgar
    Abstract: For more than two decades now, current-account imbalances are a crucial issue in the international policy debate as they threaten the stability of the world economy. More recently, the government debt crisis of the European Union shows that internal current account imbalances inside a currency union may also add to these risks. Oil price fluctuations and a contracting monetary policy that reacts on oil prices, previously discussed to affect the current account may also be a threat to the currency union by changing internal imbalances. Therefore, in this paper, we analyze the impact of oil price shocks on current account imbalances within a currency union. Differences in institutions, especially labor market institutions and trade result in an asymmetric reaction to an otherwise symmetric shock. In this context, we show that oil price shocks can have a long-lasting impact on internal balances, as the exchange rate adjustment mechanism is not available. The common monetary policy authority, however, can reduce such effects by specifying an optimum monetary policy target. Nevertheless, we also show that there is no single best solution. CPI, core CPI or an asymmetric CPI target all come at a cost either regarding an increase in unemployment or increasing imbalances.
    Keywords: Current account deficit, Oil price shocks, DSGE models, Search and matching labor market, Monetary policy JEL Classifications: E32, F32, F45, Q43
    Date: 2017–12
  12. By: Zineddine Alla; Raphael A Espinoza; Qiaoluan H. Li; Miguel A. Segoviano Basurto
    Abstract: We present a novel approach that incorporates individual entity stress testing and losses from systemic risk effects (SE losses) into macroprudential stress testing. SE losses are measured using a reduced-form model to value financial entity assets, conditional on macroeconomic stress and the distress of other entities in the system. This valuation is made possible by a multivariate density which characterizes the asset values of the financial entities making up the system. In this paper this density is estimated using CIMDO, a statistical approach, which infers densities that are consistent with entities’ probabilities of default, which in this case are estimated using market-based data. Hence, SE losses capture the effects of interconnectedness structures that are consistent with markets’ perceptions of risk. We then show how SE losses can be decomposed into the likelihood of distress and the magnitude of losses, thereby quantifying the contribution of specific entities to systemic contagion. To illustrate the approach, we quantify SE losses due to Lehman Brothers’ default.
    Date: 2018–03–09
  13. By: Sangyup Choi; Davide Furceri; Prakash Loungani
    Abstract: Central bankers often assert that low inflation and anchoring of inflation expectations are good for economic growth (Bernanke 2007, Plosser 2007). We test this claim using panel data on sectoral growth for 22 manufacturing industries for 36 advanced and emerging market economies over the period 1990-2014. Inflation anchoring in each country is measured as the response of inflation expectations to inflation surprises (Levin et al., 2004). We find that credit constrained industries—those characterized by high external financial dependence and R&D intensity and low asset tangibility—tend to grow faster in countries with well-anchored inflation expectations. The results are robust to controlling for the interaction between these characteristics and a broad set of macroeconomic variables over the sample period, such as financial development, inflation, the size of government, overall economic growth, monetary policy counter-cyclicality and the level of inflation. Importantly, the results suggest that it is inflation anchoring and not the level of inflation per se that has a significant effect on average industry growth. Finally, the results are robust to IV techniques, using as instruments indicators of monetary policy transparency and independence.
    Date: 2018–03–02
  14. By: Helmut Lütkepohl; Aleksei Netsunajev
    Abstract: We use a cointegrated structural vector autoregressive model to investigate the relation between euro area monetary policy and the stock market. Since there may be an instantaneous causal relation we consider long-run identifying restrictions for the structural shocks and also use (conditional) heteroskedasticity in the residuals for identification purposes. Heteroskedasticity is modelled by a Markov-switching mechanism. We find a plausible identification scheme for stock market and monetary policy shocks which is consistent with the second order moment structure of the variables. The model indicates that contractionary monetary policy shocks lead to a long-lasting down-turn of real stock prices.
    Keywords: Cointegrated vector autoregression, heteroskedasticity, Markov-switching model, monetary policy analysis
    JEL: C32
    Date: 2018
  15. By: Gersbach, Hans; Haller, Hans; Papageorgiou, Stylianos
    Abstract: We study competition between governments with regard to capital requirements, bank levies and resolution regimes in a general equilibrium setting. In a two-country model, households can invest both domestically and abroad, with banks acting as intermediaries between households and risky technologies. When competing governments set banking regulation, the mechanism at work is driven by the trade-off between accentuating benefits over costs stemming from banking activities, on the one hand, and enhancing banks' competitiveness, on the other hand. Whether or not regulatory competition yields the efficient allocation of resources and risks crucially depends on whether governments compete with one, two or three policy tools.
    Keywords: bank levy; bank resolution; Capital requirements; General Equilibrium; Regulatory competition
    Date: 2018–03
  16. By: Oriol Carreras; E Philip Davis; Ian Hurst; Iana Liadze; Rebecca Piggott; James Warren
    Abstract: In this paper we incorporate a macroprudential policy model within a semi-structural global macroeconomic model, NiGEM. The existing NiGEM model is expanded for the UK, Germany and Italy to include two macroprudential tools: loan-to-value ratios on mortgage lending and variable bank capital adequacy targets. The former has an effect on the economy via its impact on the housing market while the latter acts on the lending spreads of corporate and households. A systemic risk index that tracks the likelihood of the occurrence of a banking crisis is modelled to establish thresholds at which macroprudential policies should be activated by the authorities. We then show counterfactual scenarios, including a historic dynamic simulation of the subprime crisis and the endogenous response of policy thereto, based on the macroprudential block as well as performing a cost-benefit analysis of macroprudential policies. Conclusions are drawn relating to use of this tool for prediction and policy analysis, as well as some of the limitations and potential further research.
    Keywords: macroprudential policy, house prices, credit, systemic risk, macroeconomic modelling
    JEL: E58 G28
    Date: 2018–03
  17. By: Vaclav Broz; Lukas Pfeifer; Dominika Kolcunova
    Abstract: We analyze the cyclicality of risk weights of banks in the Czech Republic from 2008 to 2016. We differentiate between risk weights under the internal ratings-based and those under the standardized approach, consider both the business cycle and the financial cycle, and employ wavelet coherence as a means of dynamic correlation analysis. Our results indicate that the risk weights of exposures under the internal ratings-based approach, including risk weights related to exposures secured by real estate collateral, are procyclical with respect to the financial cycle. We also show that the effect of changing asset quality on risk weights is present for the internal ratings-based approach, in line with our expectations based on regulatory standards. Our results can be employed for the purposes of decision-making on the activation of supervisory and macroprudential instruments, including the countercyclical capital buffer.
    Keywords: Financial cycle, financial stability, internal ratings-based approach, risk weight
    JEL: C14 E32 G21 G28 K23
    Date: 2017–12
  18. By: Serafín Frache (Banco Central del Uruguay y Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República); Javier García-Cicco (Banco Central de Chile y Universidad Católica Argentina); Jorge Ponce (Banco Central del Uruguay y Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República)
    Abstract: We develop a DSGE model for a small, open economy with a banking sector and endogenous default. The model is used to perform a realistic assessment of two macroprudential tools: countercyclical capital buffers (CCB) and dynamic provisions (DP). The model is estimated with data for Uruguay, where dynamic provisioning is in place since early 2000s. In general, while both tools force banks to build buffers, we find that DP seems to outperform the CCB in terms of smoothing the cycle. We also find that the source of the shock affecting the financial system matters to discuss the relative performance of both tools. In particular, given a positive external shock the ratio of credit to GDP decreases, which discourages its use as an indicator variable to activate countercyclical regulation.
    Keywords: banking regulation, minimum capital requirement, countercyclical capital buffer, reserve requirement, (countercyclical or dynamic) loan loss provision, endogenous default, Basel III, DSGE, Uruguay
    JEL: G21 G28
    Date: 2017–08
  19. By: Martijn Boermans; Robert Vermeulen
    Abstract: Quantitative easing (QE) aims to lower long term interest rates and stimulate economic growth via the portfolio rebalancing channel. One of the assumptions for QE to work is that there are investors with strong preferences to hold long term bonds, i.e. so called preferred habitat investors. This paper investigates whether the ECB's Public Sector Purchase Programme (PSPP) affected euro area investors' demand for bonds using granular securities holdings data. The results show strong evidence that euro area investors acted as preferred habitat investors. These findings hold across all major euro area investors (banks, insurance companies, pension funds and investment funds). The results suggest that since the sellers of bonds in response to QE in the euro area are different from those that sold to the Fed, BoE and BoJ, policymakers need to pay particular attention to demand by non-euro area investors, especially if the ECB plans to reduce its balance sheet.
    Keywords: quantitative easing; sovereign bonds; European Central Bank; PSPP; securities holdings statistics
    JEL: E58 F42 G11 G15
    Date: 2018–02
  20. By: Luis I. Jacome H.; Tahsin Saadi Sedik; Alexander Ziegenbein
    Abstract: During the global financial crisis, many central banks in advanced economies engaged in credit easing. These policies have been perceived as largely successful in reducing stress in financial markets, thus avoiding larger output losses. In this paper, we study empirically whether credit easing is also a viable policy tool to cope with banking crises in emerging and developing economies. We find that credit easing leads to a sharp increase in domestic currency depreciation, high inflation, and a substantial reduction in economic growth in a large panel of emerging and developing economies. For advanced economies, we find the effects to be benign. Our results suggest that emerging and developing economies should be cautious when using credit easing as it may fuel adverse macroeconomic repercussions.
    Date: 2018–03–08
  21. By: Ahnert, Toni; Forbes, Kristin; Friedrich, Christian; Reinhardt, Dennis
    Abstract: Can macroprudential foreign exchange (FX) regulations on banks reduce the financial and macroeconomic vulnerabilities created by borrowing in foreign currency? To evaluate the effectiveness and unintended consequences of macroprudential FX regulation, we develop a parsimonious model of bank and market lending in domestic and foreign currency and derive four predictions. We confirm these predictions using a rich dataset of macroprudential FX regulations. These empirical tests show that FX regulations: (1) are effective in terms of reducing borrowing in foreign currency by banks; (2) have the unintended consequence of simultaneously causing firms to increase FX debt issuance; (3) reduce the sensitivity of banks to exchange rate movements, but (4) are less effective at reducing the sensitivity of corporates and the broader financial market to exchange rate movements. As a result, FX regulations on banks appear to be successful in mitigating the vulnerability of banks to exchange rate movements and the global financial cycle, but partially shift the snowbank of FX vulnerability to other sectors.
    Keywords: Banking flows; FX regulations; International debt issuance; macroprudential policies
    JEL: F32 F34 G15 G21 G28
    Date: 2018–03
  22. By: Berninger, M.; Kiesel, F.; Schiereck, D.
    Abstract: Financial services providers belong to the most intensively regulated institutions at all, and to be compliant with regulation is a challenging and expensive task for each bank. Recent research indicates that a high geographic proximity to a regulatory supervisor might increase the monitoring intensity and therefore harm the shareholder wealth of monitored institutions. The announced relocation of the European Banking Authority (EBA) from London to Paris offers a natural experiment to test the effect of geographically close regulation on the market value of financial institutions. Our results show that the EBA relocation indeed induced negative abnormal stock returns for French banks. Additionally, we document that this is a bank specific effect. The parallel relocation decision of the European Medicines Agency (EMA) to Amsterdam does not result in abnormal returns of Dutch pharmaceutical corporations. Obviously, a relationship between distance and intensified monitoring exists for banks but not for pharmaceuticals.
    Date: 2018–03–22
  23. By: Goldmann, Matthias; Pustovit, Grygoriy
    Abstract: While the debate about the needs and merits of cryptocurrency regulation is ongoing, the unprecedented price hikes of cryptocurrencies towards the end of 2017 triggered a somewhat unexpected sort of regulation in the form of public statements by governments and financial supervisors. It kicked in rather quickly and turned out to be much more effective than imagined. These interventions can be identified as one of the main factors that drove asset prices down, thereby preventing destabilizing bubbles. The experience of the supervisory response to the cryptocurrency bubble of the past months keeps important insights for any prospective regulation of cryptocurrencies. First, public statements are a highly effective regulatory tool in the short term as they manage market expectations, a fact which is well-known as forward guidance in monetary policy. So far, the legal framework in the EU takes insufficient account of the regulatory role of public statements. Second, regulation needs to keep up with the incredible speed of fintech innovations. Some regulators addressed the challenge by adopting a "sandbox" approach. However, the "sandbox" approach clearly calls for international cooperation. To achieve a balance between safety and innovation, international cooperation should emulate the experimental character of sandboxes. One could conceive of a "sandbox for regulators", an arrangement which would facilitate the exchange of information on regulatory initiatives among authorities but also the coordination of communication and forward guidance.
    Keywords: cryptocurrencies,blockchain,distributed ledger technology,regulation,forward guidance
    Date: 2018
  24. By: Ivo Maes (National Bank of Belgium and Robert Triffin Chair, Université catholique de Louvain and ICHEC Brussels Management School, Boulevard de Berlaimont 14, 1000 Brussels, Belgium); Rebeca Gomez Betancourt (University of Lyon 2. Triangle-ISH)
    Abstract: The establishment of a central bank occurred at very different moments in the process of economic integration in the United States and the European Union. In this paper, we go into the first years of the Federal Reserve System through the lens of Paul van Zeeland’s PhD dissertation. Paul van Zeeland (1893-1973) became the first Head of the Economics Service of the National Bank of Belgium in 1921, after his studies in Princeton with Edwin Walter Kemmerer. There are clear similarities in their analyses of the Federal Reserve System, for instance in their adherence to the gold standard and the real bills doctrine as well as in their emphasis on the elasticity of the money supply. Moreover, they shared a view - with hindsight a rather naïve view - that with the Fed in place, financial crises would be a distant memory. However, there were also important differences. So, van Zeeland, like several other economists as Warburg, accorded greater significance to the discount market (a key factor for the international role of the dollar) and to a stronger centralization of the Fed (which would be taken up in the 1935 Banking Act). Moreover, very specific for van Zeeland is the importance given to the Fed's independence from the State (an element related to his continental European background and Belgium's experience of monetary financing during the war).
    Keywords: van Zeeland, Kemmerer, Federal Reserve System, financial crisis, banking reform
    JEL: A11 B1 E58 F02 N23
    Date: 2018–03
  25. By: Aikman, David (Bank of England); Haldane, Andrew (Bank of England); Hinterschweiger, Marc (Bank of England); Kapadia, Sujit (European Central Bank)
    Abstract: The global financial crisis has been the prompt for a complete rethink of financial stability and policies for achieving it. Over the course of the better part of a decade, a deep and wide-ranging international regulatory reform effort has been under way, as great as any since the Great Depression. We provide an overview of the state of progress of these reforms, and assess whether they have achieved their objectives and where gaps remain. We find that additional insights gained since the start of the reforms paint an ambiguous picture on whether the current level of bank capital should be higher or lower. Additionally, we present new evidence that a combination of different regulatory metrics can achieve better outcomes in terms of financial stability than reliance on individual constraints in isolation. We discuss in depth several recurring themes of the regulatory framework, such as the appropriate degree of discretion versus rules, the setting of macroprudential objectives, and the choice of policy instruments. We conclude with suggestions for future research and policy, including on models of financial stability, market-based finance, the political economy of financial regulation, and the contribution of the financial system to the economy and to society.
    Keywords: Financial stability; macroprudential policy; Basel III; capital requirements; liquidity requirements
    JEL: G01 G18 G21 G28
    Date: 2018–02–23
  26. By: Ewa Karwowski (UH - University of Hertfordshire [Hatfield]); Marcos Centurion-Vicencio (CREG - Centre de recherche en économie de Grenoble - UPMF - Université Pierre Mendès France - Grenoble 2 - UGA - Université Grenoble Alpes)
    Abstract: Understanding the nature of state financialisation is crucial to ensure de-financialisation efforts are successful. This paper provides a structured overview of the emerging literature on financialisation and the state. We define financialisation of the state broadly as the changed relationship between the state, understood as sovereign with duties and accountable towards its citizens, and financial markets and practices, in ways that can diminish those duties and reduce accountability. We then argue that there are four ways in which financialisation works in and through public institutions and policies: adoption of financial motives, advancing financial innovation, embracing financial accumulation strategies, and directly financialising the lives of citizens. Organising our review around the two main policy fields of fiscal and monetary policy, four definitions of financialisation in the context of public policy and institutions emerge. When dealing with public expenditure on social provisions financialisation most often refers to the transformation of public services into the basis for actively traded financial assets. In the context of public revenue, financialisation describes the process of creating and deepening secondary markets for public debt, with the state turning into a financial market player. Finally, in the realm of monetary policy financial deregulation is perceived to have paved the way for financialisation, while inflation targeting and the encouragement, or outright pursuit, of market-based short-term liquidity management among financial institutions constitute financialised policies.
    Keywords: state,financialisation , monetary policy , fiscal policy , public policy , financialisation
    Date: 2018–03–02
  27. By: John B. Taylor
    Abstract: This paper traces the evolution of the Fed's balance sheet in the years since the global financial crisis and presents economic reasons why the eventual size of the balance sheet and level of reserve balances should be such that the interest rate is determined by the demand and supply of reserves—in other words, by market forces—rather than by an administered rate under interest on excess reserves (IOER). The Fed would thus be operating as it did in the years before the crisis. The paper also contrasts this size with a system where the supply of reserves remains above the demand, and the interest rate must be administered through IOER.
    Keywords: Â
    Date: 2018–03
  28. By: Sen, Ishita (London Business School); Humphry, David (Bank of England)
    Abstract: This paper examines the impact of the introduction of a risk-based capital regulation regime in 2002 on product market outcomes for the insurance industry in the United Kingdom. Using proprietary data on stress-test submissions from the Bank of England, we develop a measure of firm-level shocks to regulatory constraints that is plausibly exogenous to shifts in insurance demand. We find that constrained firms reduced underwriting relative to unconstrained firms, particularly for traditional insurance products which became more capital intensive in the new regulatory regime. The reduction in underwriting was not as pronounced for linked products, products that are mainly investment vehicles like mutual funds, implying a shift in the equilibrium product mix from traditional to linked. We also show that a higher proportion of constrained firms restructured their balance sheets by transferring assets and liabilities and went through reorganizations ie a change in legal owner of the firm.
    Keywords: Risk-based capital regulation; stress testing; life insurance; trends in asset management
    JEL: G22 G28 G32
    Date: 2018–03–02
  29. By: Gros, Daniel; Mayer, Thomas
    Abstract: As early as 2010, at the outset of the sovereign debt crisis, Daniel Gros and Thomas Mayer argued that Europe needed a European Monetary Fund (EMF). In the meantime, the European Stability Mechanism (ESM) has been created, which performs the function of an EMF. It was critical in containing the cost of the crisis and four of its five country programmes have been a success. But the case of Greece shows that one needs to be prepared for failure as well. They propose in this paper to keep the ESM essentially as it is, but would empower it to set conditions on countries receiving its financial support. Such support would have a limit, however, to prevent situations in which the ESM would ‘own’ a country. The authors conceive of the ESM/EMF literally as a financial stability mechanism, whose main function is to ensure that a bailout is no longer “alternativlos”, as Chancellor Angela Merkel used to say. In 2010, the rescue of Greece was presented as TINA (There Is No Alternative) because the stability of the financial system of the entire euro area appeared to be in danger. With financial stability guaranteed by the ESM/EMF in combination with the Banking Union, default becomes an alternative that should be considered dispassionately. Whether the debt of a country is sustainable is rarely known with certainty beforehand. Accordingly, they argue that it is proper that the Union, in the ‘spirit of solidarity’, initially gives a country the benefit of the doubt and provides financial support for an adjustment programme, but caution that the exposure should be limited. If the programme goes awry, the ESM/EMF could be of great help, as it could provide bridge financing to soften the cost of default.
    Keywords: European Monetary Fund; European Stability Mechanism; EMU reform; debt restructuring in EMU; EMU exit
    Date: 2017–12
  30. By: Kim, Kyunghun (Korea Institute for International Economic Policy); Kim, Soyoung (Seoul National University); Yang, Da Young (Korea Institute for International Economic Policy); Kang, Eunjung (Korea Institute for International Economic Policy)
    Abstract: Financial market integration mitigates production shocks that occur in a country by pooling the risk through portfolio diversification and this contributes to consumption smoothing for life-time utility maximization. Financial market integration also contributes to economic growth by supplying capital to developing countries via the integrated financial market. However, the integrated financial market also serves as a transition channel where the financial shock which originated from the center country spreads to its neighboring economies. In the event of a financial crisis, there is a potential risk of capital flight from neighboring countries to the financial center, meaning that many countries in the integrated financial market have an economic structure that is vulnerable to external shocks. As the uncertainties in the international financial market increased significantly during the financial crisis, financial variables such as asset prices, leverage, credit growth, and capital flows in many countries were heavily affected by global financial market sentiments rather than their own monetary policies. This is evidence supporting that many countries in the global financial market have constrained monetary policies. In this report, we try to understand how monetary policy is constrained in the context of the international financial market, from which we can derive relevant policy implications. To this end we analyze how monetary policies are restricted by introducing the concept of monetary policy independence.
    Keywords: Financial Market Integration; Monetary Policy
    Date: 2018–03–09
  31. By: Boneva, Lena (Bank of England); de Roure, Calebe (Bank of Australia); Morley, Ben (Bank of England)
    Abstract: As part of its August 2016 policy package, the Bank of England announced a scheme to purchase up to £10 billion of corporate bonds. Only sterling investment-grade bonds issued by firms making a ‘material’ contribution to the UK economy were eligible to be purchased. So eligible bonds constitute a natural treatment group to estimate the announcement effect of the policy in a difference-in-differences approach. Our results suggest that the scheme reduced spreads of eligible bonds by 13–14 basis points compared to foreign bonds issued by the same set of firms, and by 2–5 basis points compared to ineligible sterling corporate bonds. But because of spillover effects, these estimates should be interpreted as a lower bound.
    Keywords: Central bank asset purchases; corporate bond; announcement effect
    JEL: E43 E58 G12
    Date: 2018–03–26

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