nep-cba New Economics Papers
on Central Banking
Issue of 2018‒05‒14
sixteen papers chosen by
Maria Semenova
Higher School of Economics

  1. Devaluation with Exchange rate Floor in a Small Open Economy By David Svacina
  2. Optimal inflation target: insights from an agent-based model By Jean-Philippe Bouchaud; Stanislao Gualdi; Marco Tarzia; Francesco Zamponi
  3. Sovereign Money Reforms and Welfare By Philippe Bacchetta; Elena Perazzi
  4. The Paradox of Global Thrift By Fornaro, Luca; Romei, Federica
  5. Helicopter Ben, monetarism, the New Keynesian credit view and loanable funds By Brett Fiebinger; Marc Lavoie
  6. Does Monetary Policy Influence Banks' Perception of Risks? By Simona Malovana; Dominika Kolcunova; Vaclav Broz
  7. Monetary policy spillovers, global commodity prices and cooperation By Filardo, Andrew; Lombardi, Marco; Montoro, Carlos; Ferrari, Massimo
  8. Banks' Disclosure of Information and Financial Stability Regulations By Okahara, Naoto
  9. Financial Crises, Macroeconomic Shocks, and the Government Balance Sheet: A Panel Analysis By Matteo Ruzzante
  10. The OFR Financial System Vulnerabilities Monitor By Joe McLaughlin; Nathan Palmer; Adam Minson; Eric Parolin
  11. The Effect of News Shocks and Monetary Policy By Luca Gambetti; Dimitris Korobilis; John D. Tsoukalas; Francesco Zanetti
  12. Private and public risk sharing in the euro area By Cimadomo, Jacopo; Furtuna, Oana; Giuliodori, Massimo
  13. Capital (and Earnings) Incentives for Loan Loss Provisions in Brazil: evidence from a crisis-buffering regulatory intervention By Ricardo Schechtman; Tony Takeda
  14. Eurozone: original flaws, present problems and challenges for the future By Marcello Minenna
  15. On the empirics of reserve requirements and economic growth By Crespo-Cuaresma, Jesus; Schweinitz, Gregor von; Wendt, Katharina
  16. The OFR Financial Stress Index By Phillip Monin

  1. By: David Svacina (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic)
    Abstract: In recent years, central banks in the Czech Republic and Switzerland used exchange rate floor commitment to use unlimited FX interventions to keep the exchange rate above the declared floor rate to persistently devalue their currency and stimulate inflation. Central banks in other small open economies, such as Sweden and Israel, faced similar challenges and could have chosen this instrument as well. In this paper, I develop an extension to dynamic stochastic general equilibrium (DSGE) models that could be used to esimate impact of such devaluations with exchange rate floor. As an illustration, I apply the extension to models estimated for Sweden and the Czech Republic. In particular, I simulate impact of a 5 percent devaluation with the exchange rate floor used as an unconventional monetary policy instrument with interest rates at the zero lower bound. In the first year after the devaluation, the annual consumer price in inflation increases by 0.8 percent in Sweden and 1.8 percent in the Czech Republic. The long-term exchange rate pass-through to consumer prices is 40 percent and 65 percent, respectively. The increase in inflation is highly dependent on the persistent nature of the devaluation.
    Keywords: Exchange Rate Floor, Devaluation of Currency, Unconventional Monetary Policy Instrument, Dynamic Stochastic General Equilibrium Models, Exchange Rate Pass-Through
    JEL: E31 E37 E58 F41
    Date: 2018–02
  2. By: Jean-Philippe Bouchaud (CFM - Capital Fund Management - Capital Fund Management); Stanislao Gualdi (CFM - Capital Fund Management - Capital Fund Management); Marco Tarzia (LPTMC - Laboratoire de Physique Théorique de la Matière Condensée - UPMC - Université Pierre et Marie Curie - Paris 6 - CNRS - Centre National de la Recherche Scientifique); Francesco Zamponi (LPTENS - Laboratoire de Physique Théorique de l'ENS - ENS Paris - École normale supérieure - Paris - UPMC - Université Pierre et Marie Curie - Paris 6 - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Which level of inflation should Central Banks be targeting? The authors investigate this issue in the context of a simplified Agent Based Model of the economy. Depending on the value of the parameters that describe the behaviour of agents (in particular inflation anticipations), they find a rich variety of behaviour at the macro-level. Without any active monetary policy, our ABM economy can be in a high inflation/high output state, or in a low inflation/low output state. Hyper-inflation, deflation and " business cycles " between coexisting states are also found. The authors then introduce a Central Bank with a Taylor rule-based inflation target, and study the resulting aggregate variables. The main result is that too-low inflation targets are in general detrimental to a CB-monitored economy. One symptom is a persistent under-realization of inflation, perhaps similar to the current macroeconomic situation. Higher inflation targets are found to improve both unemployment and negative interest rate episodes. The results are compared with the predictions of the standard DSGE model.
    Keywords: Taylor rule,Agent based models,monetary policy,inflation target
    Date: 2018
  3. By: Philippe Bacchetta; Elena Perazzi
    Abstract: A monetary reform is submitted for vote to the Swiss people in 2018. The Sovereign Money Initiative proposes that all sight deposits should be controlled by the Swiss National Bank (SNB) and that the SNB could distribute its additional resources. While a sovereign money reform would clearly a ect the structure of the banking sector, it would also have macroeconomic implications, in particular because it transfers resources from banks to the central bank. The objective of this paper is to analyze these macroeconomic implications using a simple infinite-horizon open-economy model calibrated to the Swiss economy. While we consider several policy experiments, we find that there is a key trade-o between a reduction in distortionary labor taxes and an increase in the opportunity cost of holding money. However, in the proposed Swiss reform it is this latter cost that dominates and we find that the reform unambiguously lowers welfare.
    Date: 2018–04
  4. By: Fornaro, Luca; Romei, Federica
    Abstract: This paper describes a paradox of global thrift. Consider a world in which interest rates are low and monetary policy cannot stabilize the economy because it is frequently constrained by the zero lower bound. Now imagine that governments complement monetary policy with prudential financial and fiscal policies, because they perceive that limiting private and public borrowing during booms will help stabilize the economy by reducing the risk of financial crises and by creating space for fiscal interventions during busts. We show that these policies, while effective from the perspective of individual countries, might backfire if applied on a global scale. In a financially integrated world, in fact, prudential policies generate a rise in the global supply of savings, or equivalently a drop in global aggregate demand. In turn, weaker global aggregate demand depresses output in countries whose monetary policy is constrained by the zero lower bound. Due to this effect, the world might paradoxically experience a fall in output and welfare following the implementation of well-intended prudential policies.
    Keywords: aggregate demand externalities; Capital Flows; current account policies; fiscal policies; international cooperation; Liquidity traps; macroprudential policies; zero lower bound
    JEL: E32 E44 E52 F41 F42
    Date: 2018–04
  5. By: Brett Fiebinger; Marc Lavoie
    Abstract: The purpose of this paper is to examine the intellectual roots of monetary dominance; specifically, the view that fiscal policy is largely irrelevant to counter-cyclical macro stabilisation and long-run output growth. A first step towards monetary dominance was the monetarist reinterpretation of the Great Depression. In the 1990s orthodoxy replaced money supply targeting with inflation targeting while preserving monetarist results. In this monetarism without money, fiscal policy was not needed in the short-run for macro stabilisation, and in the long-run could only lead to higher inflation rates and to higher real interest rates that lowered potential output by crowding-out private investment. Expansionary fiscal policy was mostly overlooked in the early 2000s New Keynesian literature on the zero lower bound; instead, the optimism on unconventional monetary policies failed to prepare policymakers for the Global Financial Crisis. The crisis demands far-reaching changes to macro theory not least of which is a recognition that the theory of loanable funds is incapable of providing any insight into how the financial system works in practice or the long-term effects of fiscal policy.
    Keywords: quantitative easing, monetarism, bank lending channel, loanable funds
    JEL: B31 E51 E52 E58
    Date: 2018
  6. By: Simona Malovana (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; Czech National Bank, Na Prikope 28, 115 03 Prague 1, Czech Republic); Dominika Kolcunova (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; Czech National Bank, Na Prikope 28, 115 03 Prague 1, Czech Republic); Vaclav Broz (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; Czech National Bank, Na Prikope 28, 115 03 Prague 1, Czech Republic)
    Abstract: This paper studies the extent to which monetary policy may affect banks' perception of credit risk and the way banks measure risk under the internal ratings-based approach. Specifically, we analyze the effect of different monetary policy indicators on banks' risk weights for credit risk. We present robust evidence of the existence of the risk-taking channel in the Czech Republic. Further, we show that the recent prolonged period of accommodative monetary policy has been instrumental in establishing this relationship. Finally, we obtain comparable results by extending the analysis to cover all the Visegrad Four countries. The presented findings have important implications for the prudential authority, which should be aware of the possible side-effects of monetary policy on how banks measure risk.
    Keywords: Banks, financial stability, internal ratings-based approach, risk-taking channel
    JEL: E52 E58 G21 G28
    Date: 2018–01
  7. By: Filardo, Andrew (Bank for International Settlements); Lombardi, Marco (Bank for International Settlements); Montoro, Carlos (Banco Central de Reserva del Perú; Ministerio de Economia y Finanzas); Ferrari, Massimo (Università Cattolica del Sacro Cuore)
    Abstract: How do monetary policy spillovers complicate the trade-offs faced by central banks face when responding to commodity prices? This question takes on particular relevance when monetary authorities find it difficult to accurately diagnose the drivers of commodity prices. If monetary authorities misdiagnose commodity price swings as being driven primarily by external supply shocks when they are in fact driven by global demand shocks, this conventional wisdom – to look through the first-round effects of commodity price fluctuations – may no longer be sound policy advice.
    Keywords: commodity prices, monetary policy, spillovers, global economy
    JEL: E52 E61
    Date: 2018–02
  8. By: Okahara, Naoto
    Abstract: This study proposes a model that analyzes the interaction between a bank and its creditors. The bank uses short-term wholesale funding and the creditors decide whether to roll over their loan by using information about the bank. The model shows that, when the creditors become more reluctant to roll over their loans since the bank heavily depends on such a debt, the bank does not issue the short-term debt excessively and its privately optimal amount of the debt in this situation corresponds to the socially desirable one. This implies that a regulation requiring banks to disclose information about their capital structures can by itself contribute to stabilizing the financial system. However, the model also shows that in order to ensure the result we need an additional regulation that bridges the information gap between banks and creditors
    Keywords: Short-term debt, Rollover risk, Macroprudential, Fire sales
    JEL: D80 E50
    Date: 2018–04
  9. By: Matteo Ruzzante
    Abstract: Government financial assets are increasingly recognized as playing an important role in assessing fiscal sustainability. However, very little research has been done on the dynamics of government financial assets compared to liabilities. In this paper, we investigate the impact of recent financial crises and macroeconomic shocks on government balance sheets, decomposing the separate effects on financial assets and liabilities. Using quarterly Government Finance Statistics (GFS) data, we analyze a panel of 27 countries over the period 1999Q1-2017Q1 through fixed effects and panel VAR techniques. Financial crises are shown to deteriorate the net financial worth of governments, but no significant impact is found on assets suggesting that they are not being used as fiscal buffers in bad times. On the contrary, countries that suffered both financial and banking crises experienced an “artificial” increase of their asset position through bank bailouts. Macroeconomic shock analyses reveal that government balance sheet items are countercyclical, but important asymmetries are found in their dynamics.
    Date: 2018–04–24
  10. By: Joe McLaughlin (Office of Financial Research); Nathan Palmer (Office of Financial Research); Adam Minson (Office of Financial Research); Eric Parolin (Office of Financial Research)
    Abstract: The Office of Financial Research (OFR) has a mandate to measure and monitor risks to U.S. financial stability. To help fulfill that mandate, the OFR launched the Financial System Vulnerabilities Monitor (FSVM) in 2017. The monitor is a starting point for assessing vulnerabilities in the U.S. financial system. It is constructed as a heat map of 58 quantitative indicators. It is designed to provide early warning signals of potential financial system vulnerabilities that merit investigation. This paper details the monitor’s purpose, construction, interpretation, and use.
    Keywords: financial stability, financial vulnerability, monitor, office of financial research, quantitative indicators, heat map
    Date: 2018–03–28
  11. By: Luca Gambetti (Departament d’Economia i d’Historia Economica, UAB and Barcelona GSE, Spain); Dimitris Korobilis (Essex Business School, University of Essex, UK; Rimini Centre for Economic Analysis); John D. Tsoukalas (Adam Smith Business School, University of Glasgow, UK); Francesco Zanetti (Department of Economics, University of Oxford, UK)
    Abstract: A VAR model estimated on U.S. data before and after 1980 documents systematic differences in the response of short- and long-term interest rates, corporate bond spreads and durable spending to news TFP shocks. Interest rates across the maturity spectrum broadly increase in the pre-1980s and broadly decline in the post-1980s. Corporate bond spreads decline significantly, and durable spending rises significantly in the post-1980 period while the opposite short-run response is observed in the pre-1980 period. Measuring expectations of future monetary policy rates conditional on a news shock suggests that the Federal Reserve has adopted a restrictive stance before the 1980s with the goal of retaining control over inflation while adopting a neutral/accommodative stance in the post-1980 period.
    Keywords: News shocks, Business cycles, VAR models, DSGE models
    JEL: E20 E32 E43 E52
    Date: 2018–05
  12. By: Cimadomo, Jacopo; Furtuna, Oana; Giuliodori, Massimo
    Abstract: This paper investigates the contribution of private and public channels for consumption risk sharing in the EMU over the period 1999-2015. In particular, we explore the role of financial integration versus international financial assistance for private consumption smoothing in this set of countries. In addition, we present a time-varying test which allows estimating how risk sharing has evolved since the start of the EMU, and in particular during the recent crisis. Our results suggest that, whereas in the early years of the EMU only about 40% of country-specific output shocks were smoothed, in the aftermath of the euro zone’s sovereign debt crisis about 65% of these shocks were absorbed, therefore reducing consumption growth differentials across countries. This progressive improvement of the shock-absorption capacity is due to a higher financial integration, but also to the activation of the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) channelling official loans to distressed euro zone economies. We also show that cross-border holdings of equities and debt seem to be more effective than cross-border bank loans in isolating households from country-specific shocks, therefore contributing to consumption smoothing. JEL Classification: C23, E62, G11, G15
    Keywords: financial integration, international financial assistance, risk sharing, time-variation
    Date: 2018–05
  13. By: Ricardo Schechtman; Tony Takeda
    Abstract: In order to provide higher incentives for loan loss provisions (LLP) of Brazilian banks when bad times were looming ahead, the discretionary excess in loan loss reserves was recognized temporarily as regulatory capital, in a sort of countercyclical policy. This study explores this regulatory change to investigate the capital management incentives of LLP of Brazilian banks. Results show that banks with less regulatory capital increased relatively more discretionary LLP during the regulatory change but not outside it, suggesting that capital management through discretionary LLP was relevant only during that period. On the other hand, banks with less earnings made less discretionary LLP throughout the sample period, suggesting earnings smoothing was relevant during the whole period. Results are robust to different realized and forward loan loss controls, different measures of capital before endogenous items, time-varying capital targets, and to the recognition of possible heterogeneous effects of the global financial crisis across Brazilian banks
    Date: 2018–05
  14. By: Marcello Minenna
    Abstract: The European monetary union was born as a result of a negotiation process among the founding countries profoundly influenced by the economic and political dynamics of the '90s: the experience of the EMS, the German unification process, the desire of France to prevent the reaffirmation of German supremacy in the European continent, the need for countries like Italy to reduce the cost of servicing public debt. Despite the strong differences between the countries involved, the conviction prevailed that the German fiscal recipe could be successfully exported to neighboring States and that the centralization of monetary policy at the European Central Bank while keeping fiscal sovereignty at a national level could be achieved without trauma. The experience of the last decade shows, however, that the a monetary union with a derisory federal budget and whose central bank has exclusively an inflation target and cannot act as a lender of last resort in the Member States is endogenously predisposed to the formation of large economic-financial imbalances between the various countries and is particularly vulnerable to exogenous shocks. The reversal of the diverging dynamics still in progress -- captured by the unprecedented size of the Target 2 balances of countries such as Germany and Italy-- requires a profound rethinking of the European project in accordance with the principles of subsidiarity and of sustainable and shared development enshrined in the Treaties.
    Date: 2018–05–11
  15. By: Crespo-Cuaresma, Jesus; Schweinitz, Gregor von; Wendt, Katharina
    Abstract: Reserve requirements, as a tool of macroprudential policy, have been increasingly employed since the outbreak of the great financial crisis. We conduct an analysis of the effect of reserve requirements in tranquil and crisis times on credit and GDP growth making use of Bayesian model averaging methods. In terms of credit growth, we can show that initial negative effects of higher reserve requirements (which are often reported in the literature) tend to be short-lived and turn positive in the longer run. In terms of GDP per capita growth, we find on average a negative but not robust effect of regulation in tranquil times, which is only partly offset by a positive but also not robust effect in crisis times.
    Keywords: reserve requirements,macroprudential policy,credit growth,economic growth,Bayesian model averaging
    JEL: C11 E44 F43 G28
    Date: 2018
  16. By: Phillip Monin (Office of Financial Research)
    Abstract: We introduce a financial stress index developed by the Office of Financial Research (OFR FSI) and detail its purpose, construction, interpretation, and use in financial market monitoring. Using a logistic regression framework and dates of government intervention in the financial system as a proxy for stress events, we find that the OFR FSI performs well in identifying systemic financial stress. In addition, we find that the OFR FSI leads the Chicago Fed National Activity Index in a Granger causality analysis, suggesting that increases in financial stress help predict decreases in economic activity.
    Keywords: Financial Stress Index (FSI), Office of Financial Research (OFR), Systemic Stress
    Date: 2017–10–25

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