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on Central Banking |
| By: | Aikman, David (Bank of England); Giese, Julia (Bank of England); Kapadia, Sujit (European Central Bank); McLeay, Michael (Bank of England) |
| Abstract: | This paper explores monetary-macroprudential policy interactions in a simple, calibrated New Keynesian model incorporating the possibility of a credit boom precipitating a financial crisis and a loss function reflecting financial stability considerations. Deploying the countercyclical capital buffer (CCyB) improves outcomes significantly relative to when interest rates are the only instrument. The instruments are typically substitutes, with monetary policy loosening when the CCyB tightens. We also examine when the instruments are complements and assess how different shocks, the effective lower bound for monetary policy, market-based finance and a risk-taking channel of monetary policy affect our results. |
| Keywords: | Macroprudential; monetary policy; financial stability; capital buffer; financial crises; credit boom |
| JEL: | E52 E58 G01 G28 |
| Date: | 2018–06–08 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0734&r=cba |
| By: | McLeay, Michael; Tenreyro, Silvana |
| Abstract: | This paper explains why inflation follows a seemingly exogenous statistical process, unrelated to the output gap. In other words, it explains why it is difficult to empirically identify a Phillips curve. We show why this result need not imply that the Phillips curve does not hold – on the contrary, our conceptual framework is built under the assumption that the Phillips curve always holds. The reason is simple: if monetary policy is set with the goal of minimising welfare losses (measured as the sum of deviations of inflation from its target and output from its potential), subject to a Phillips curve, a central bank will seek to increase inflation when output is below potential. This targeting rule will impart a negative correlation between inflation and the output gap, blurring the identification of the (positively sloped) Phillips curve. |
| Keywords: | identification; Inflation targeting; Phillips curve |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12981&r=cba |
| By: | Michael Bleaney; Atsuyoshi Morozumi; Zakari Mumuni |
| Abstract: | Previous research on inflation targeting (IT) has focused on high-income countries (HICs) and emerging market economies (EMEs). Only recently has enough data accumulated for the performance of IT in low-income countries (LICs) to be assessed. We show that IT has not so far been effective in reducing in inflation in LICs, unlike in EMEs. Weak institutions, a typical feature in LICs, help explain this result, particularly under fl oating exchange rate regimes. Our interpretation is that poor institutions, leaving fiscal policy unconstrained, impair central banks' ability to conduct monetary policy in a way consistent with IT. |
| Keywords: | infl ation targeting, low-income countries, institutions |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:not:notcfc:18/08&r=cba |
| By: | de Ferra, Sergio; Romei, Federica |
| Abstract: | In the aftermath of the global fi nancial crisis, sovereign default risk and the zero lower bound have limited the ability of policy-makers in the European monetary union to achieve their stabilization objective. This paper investigates the interaction between sovereign default risk and the conduct of monetary policy, when borrowers can act strategically and they share with their lenders a single currency in a monetary union. We address this question in an endogenous sovereign default model of heterogeneous countries in a monetary union, where the monetary authority may be constrained by the zero lower bound. We uncover three main results. First, in normal times, debtors have a stronger incentive to default to induce more expansionary monetary policy. Second, the zero lower bound, or constraints on monetary policy, may act as a disciplining device to enforce repayment of sovereign debt. Third, sovereign default risk induces countries with a preference for tight monetary policy to accept a laxer policy stance. These results help to shed light on the recent European experience of high default risk, expansionary monetary policy and low nominal interest rates. |
| Keywords: | Heterogeneous Countries; monetary union; sovereign default; zero lower bound |
| JEL: | F34 F42 H63 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12976&r=cba |
| By: | Ralph Luetticke (Centre for Macroeconomics (CFM); University College London (UCL)) |
| Abstract: | Monetary policy affects both intertemporal consumption choices and portfolio choices between liquid and illiquid assets. The monetary transmission, in turn, depends on the distribution of marginal propensities to consume and invest. This paper assesses the importance of heterogeneity in these propensities for the transmission of monetary policy in a New Keynesian business cycle model with uninsurable income risk and assets with different degrees of liquidity. Liquidity-constrained households have high propensities to consume but low propensities to invest, which makes consumption more and investment less responsive to monetary shocks compared to complete markets. Redistribution through earnings heterogeneity and the Fisher channel from unexpected inflation further amplifies the consumption response but dampens the investment response. |
| Keywords: | Monetary policy, Heterogeneous agents, General equilibrium |
| JEL: | E21 E32 E52 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1819&r=cba |
| By: | Pierre-Richard Agénor; Luiz A. Pereira da Silva |
| Abstract: | The effects of capital requirements on risk-taking and welfare are studied in a stochastic overlapping generations model of endogenous growth with banking, limited liability, and government guarantees. Capital producers face a choice between a safe technology and a risky (but socially inefficient) technology, and bank risk-taking is endogenous. Setting the capital adequacy ratio above a structural threshold can eliminate the equilibrium with risky loans (and thus inefficient risk-taking), but numerical simulations show that this may entail a welfare loss. In addition, the optimal ratio may be too high in practice and may concomitantly require a broadening of the perimeter of regulation and a strengthening of financial supervision to prevent disintermediation and distortions in financial markets. |
| Keywords: | Capital Requirements, Bank risk-taking, Investment, Financial Stability, Economic Growth, Capital Goods, Financial Regulation, Financial Intermediaries, Financial Markets, risky investments, financial stability, financial regulation |
| JEL: | O41 G28 E44 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:idb:brikps:8206&r=cba |
| By: | Isabel Argimon; Clemens Bonner; Ricardo Correa; Patty Duijm; Jon Frost; Jakob de Haan; Leo de Haan; Viktors Stebunovs |
| Abstract: | Global financial institutions play an important role in channeling funds across countries and, therefore, transmitting monetary policy from one country to another. In this paper, we study whether such international transmission depends on financial institutions' business models. In particular, we use Dutch, Spanish, and U.S. confidential supervisory data to test whether the transmission operates differently through banks, insurance companies, and pension funds. We find marked heterogeneity in the transmission of monetary policy across the three types of institutions, across the three banking systems, and across banks within each banking system. While insurance companies and pension funds do not transmit home-country monetary policy internationally, banks do, with the direction and strength of the transmission determined by their business models and balance sheet characteristics. |
| Keywords: | Monetary policy transmission ; Global financial institutions ; Bank lending channel ; Portfolio channel ; Business models |
| JEL: | E5 F3 F4 G2 |
| Date: | 2018–05–29 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1228&r=cba |
| By: | Jan Pablo Burgard; Matthias Neuenkirch; Matthias Nöckel |
| Abstract: | In this paper, we estimate a logit mixture vector autoregressive (Logit-MVAR) model describing monetary policy transmission in the euro area over the period 1999-2015. MVARs allow us to differentiate between different states of the economy. In our model, the time-varying state weights are determined by an underlying logit model. In contrast to other classes of non-linear VARs, the regime affiliation is neither strictly binary, nor binary with a transition period, and based on multiple variables. We show that monetary policy transmission in the euro area can indeed be described as a mixture of two states. The first (second) state with an overall share of 84% (16%) can be interpreted as a “normal state” (“crisis state”). In both states, output and prices are found to decrease after monetary policy shocks. During “crisis times” the contraction is much stronger, as the peak effect is roughly one-and-a-half times as large when compared to “normal times.” In contrast, the effect of monetary policy shocks is less enduring in crisis times. Both findings provide a strong indication that the transmission mechanism is indeed different for the euro area during times of economic and financial distress. |
| Keywords: | economic and financial crisis, euro area, mixture VAR, monetary policy transmission, state-dependency |
| JEL: | C32 E52 E58 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7074&r=cba |
| By: | Leombroni, Matteo; Vedolin, Andrea; Venter, Gyuri; Whelan, Paul |
| Abstract: | Using the institutional features of ECB monetary policy announcements, we provide direct evidence for the risk premium channel of central bank communication. We show that on days when the ECB announces its monetary policy almost all of the variation of bond yields is driven by communication. Moreover, while the effect of monetary policy is homogeneous across countries before the European debt crisis, we document dramatic differences post crisis and show that communication shocks drive a wedge between peripheral and core yields. We empirically link the periphery-core wedge to break-up and credit risk premia, and study this channel theoretically through the lens of an equilibrium model in which central bank communication reveals information about the state of the economy. |
| Keywords: | central bank communication; Eurozone; interest rates; monetary policy; risk premia |
| JEL: | E42 E58 G12 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12970&r=cba |
| By: | Qazi Haque (School of Economics, University of Adelaide); Nicolas Groshenny (School of Economics, University of Adelaide); Mark Weder (School of Economics, University of Adelaide) |
| Abstract: | In this paper we examine whether or not monetary policy was a source of instability during the Great Inflation. We focus on a number of attributes that we see relevant for any analysis of the 1970s: cost-push or oil price shocks, positive trend inflation as well as real wage rigidity. We turn our artificial sticky-price economy into a Bayesian model and find that the U.S. economy during the 1970s is best characterized by a high degree of real wage rigidity. Oil price shocks thus created a trade-off between inflation and output-gap stabilization. Faced with this dilemma, the Federal Reserve reacted aggressively to inflation but hardly at all to the output gap, thereby inducing stability, i.e. determinacy. |
| Keywords: | Monetary policy; Great Inflation; Cost-push shocks; Trend inflation; Sequential Monte Carlo algorithm |
| JEL: | E32 E52 E58 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:adl:wpaper:2018-03&r=cba |
| By: | Buch, Claudia (Deutsche Bundesbank); Bussiere, Matthieu (Banque de France); Goldberg, Linda (Federal Reserve Bank of New York); Hills, Robert (Bank of England) |
| Abstract: | This paper presents the novel results from an internationally coordinated project by the International Banking Research Network (IBRN) on the cross-border transmission of conventional and unconventional monetary policy through banks. Teams from 17 countries use confidential micro-banking data for the years 2000 through 2015 to explore the international transmission of monetary policies of the US, euro area, Japan, and United Kingdom. Two other studies use international data with different degrees of granularity. International spillovers into lending to the private sector do occur, especially for US policies, and bank-specific heterogeneity influences the magnitudes of transmission. The effects are supportive of the international bank lending channel and the portfolio channel of monetary policy transmission. They also show that the frictions that banks face matter; in particular, foreign currency funding and hedging considerations can be a key source of heterogeneity. The forms of bank balance sheet heterogeneity that differentiate spillovers across banks are not uniform across countries. International spillovers into lending can be large for some banks, even while the average international spillovers of policies into non-bank lending generally are not large. |
| Keywords: | Monetary policy; international spillovers; cross-border transmission; global bank; global financial cycle |
| JEL: | E52 G15 G21 |
| Date: | 2018–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0731&r=cba |
| By: | Benjamín García |
| Abstract: | The effective lower bound (ELB) on interest rates introduces an explicit non-linearity for feasible monetary policy paths: interest rates cannot go below a certain rate. In a forward looking environment, the ELB can affect the monetary policy decisions not only when the bound is reached, but also when there is a possibility that the bound may be reached in the future. In this context, as a recommendation for monetary policy in a low-inflation environment, Reifschneider and Williams (2002 FOMC) propose an asymmetric Taylor Rule with a threshold level that automatically drives the interest rate to zero whenever they fall below one percent. I test the hypothesis that the Federal Reserve has behaved in a manner consistent with Reifschneider and Williams’ advice, finding evidence of a negative correlation between the level of the interest rate and the strength of the monetary policy response. Using an estimated nonlinear DSGE model, I show that a monetary policy which act symmetrically and asymmetrically can have significantly different consequences. In particular, I study the relevance of this behavior for the analysis of a permanent rise of the inflation target. |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:819&r=cba |
| By: | Grégory Claeys; Maria Demertzis; Konstantinos Efstathiou |
| Abstract: | This policy contribution was prepared for the Committee on Economic and Monetary Affairs of the European Parliament (ECON) as an input for the Monetary Dialogue of 9 July 2018 between ECON and the President of the ECB. The original paper is available on the European Parliament’s webpage (here). Copyright remains with the European Parliament at all times. This Policy Contribution tries to answer two main questions - can cryptocurrencies acquire the role of money? And what are the implications for central banks and monetary policy? Money is a social institution that serves as a unit of account, a medium of exchange and a store of value. With the emergence of decentralised ledger technology (DLT), cryptocurrencies represent a new form of money - privately issued, digital and enabling peer-to-peer transactions. Historically, currencies fulfil their main functions successfully when their value is stable and their user network sufficiently large. So far, cryptocurrencies are arguably falling short against these criteria. They resemble speculative assets rather than money. Primarily this is because of their inherent volatility, which is the by-product of their inelastic supply, and which limits their widespread use as a medium of exchange. Cryptocurrency protocols could theoretically evolve to limit their volatility and correct their current deficiencies. If successful, this could lead to an increase in their popularity as an alternative to official currencies. A successful alternative to official currencies could put pressure on those who manage official currencies to provide better policies. But the widespread substitution of central bank currency for cryptocurrencies would effectively create parallel currencies. This by itself could create risks to the effectiveness of monetary policy, to financial stability and ultimately to growth. Nevertheless, the risks of cryptocurrencies becoming serious contenders remain small as long as fiat currencies issued by the world’s major central banks continue to deliver effectively the three traditional functions of money. It would take a deep crisis of trust in official currencies for their widespread substitution by cryptocurrencies to materialise. For cryptocurrencies to replace official currencies they would have to overcome a triple challenge. First, the supply of cryptocurrency would need to act as an instrument (or identify a different instrument) that affects the economy. Second, in the presence of fractional reserve banking, the supply would need to respond to liquidity crises and act as a lender of last resort in order to safeguard financial stability. Third, there would need to be a system of checks and balances to keep the agent, ie the cryptocurrency issuer, accountable to the principal, ie society, which is not possible because cryptocurrencies are automatically and privately-issued. For these reasons, official currencies controlled by inflation-targeting independent central banks still appear to be a far superior technology than cryptocurrencies to provide the money functions. |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polcon:26557&r=cba |
| By: | Taghizadeh-Hesary, Farhad (Asian Development Bank Institute); Yoshino, Naoyuki (Asian Development Bank Institute); Shimizu, Sayoko (Asian Development Bank Institute) |
| Abstract: | We assess the effects of the most recent monetary policy behavior of the Bank of Japan (BOJ), in particular, zero interest rate policy and negative interest rate policy, and the Japanese tax policy on income inequality during the first quarter (Q1) of 2002 to Q3 2017. The vector error correction model developed in this research shows that increase in money stock through quantitative easing and the quantitative and qualitative easing policies of the BOJ significantly increases income inequality. On the contrary, Japanese tax policy was effective in reducing income inequality. Variance decomposition results show that after 10 periods almost 87.15% of the forecast error variance of the inequality is accounted for by its own innovations and 3.76% of the forecast error variance can be explained by exogenous shocks to monetary policy shock—the money stock. The short-term interest rate also accounts for the increase in inequality by 0.47%. On the other hand, the total tax and real gross domestic product contributed in reducing the inequality measure, respectively, by 6.65% and 1.96% after 10 periods. |
| Keywords: | income inequality; monetary policy; tax policy; Japanese economy |
| JEL: | D63 E52 H24 |
| Date: | 2018–04–27 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0837&r=cba |
| By: | Hans-Werner Sinn |
| Abstract: | While the ECB helped mitigate the euro crisis in the aftermath of Lehman, it has stretched its monetary mandate and moved into fiscal territory. This text describes and summarizes the crucial role played by the ECB in the intervention spiral resulting from its bid to manage the crisis. It also outlines ongoing competitiveness problems in southern Europe, discusses the so-called austerity policy of the Troika, comments on QE and presents two alternative paths for the future development of Europe. |
| JEL: | E50 E58 G01 H63 H81 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24613&r=cba |
| By: | Lindner, Peter; Loeffler, Axel; Segalla, Esther; Valitova, Guzel; Vogel, Ursula |
| Abstract: | In this paper, we examine the international transmission of monetary policies of major advanced economies (US, UK, euro area) through banks in Austria and Germany. In particular, we compare the role of banks' funding structure, broken down by country of origin as well as by currency denomination, in the international transmission of monetary policy changes to bank lending. We find weak evidence for inward spillovers. The more a bank is funded in US dollars, the more its domestic real sector lending is affected by monetary policy changes in the US. This effect is more pronounced in Germany than in Austria. We do not find evidence for outward spillovers of euro area monetary policy through a bank funding channel. |
| Keywords: | monetary policy spillover,global banks,bank funding channel |
| JEL: | E52 F33 G21 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:132018&r=cba |
| By: | Akinci, Ozge (Federal Reserve Bank of New York); Queralto, Albert (Federal Reserve Board) |
| Abstract: | We use a two-country New Keynesian model with balance sheet constraints to investigate the magnitude of international spillovers of U.S. monetary policy. Home borrowers obtain funds from domestic households in domestic currency, as well as from residents of the foreign economy (the United States) in dollars. We assume agency frictions are more severe for foreign debt than for domestic deposits. As a consequence, a deterioration in domestic borrowers’ balance sheets induces a rise in the home currency’s premium and an exchange rate depreciation. We use the model to investigate how international monetary spillovers are affected by the degree of currency mismatches in balance sheets, and whether the latter make it desirable for domestic policy to target the nominal exchange rate. We find that the magnitude of spillovers is significantly enhanced by the degree of currency mismatches. Our findings also suggest that using monetary policy to stabilize the exchange rate is not necessarily more desirable with greater balance sheet mismatches and may actually exacerbate short-run exchange rate volatility. |
| Keywords: | financial intermediation; U.S. monetary policy spillovers; currency premium; uncovered interest rate parity condition |
| JEL: | E32 E44 F41 |
| Date: | 2018–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:849&r=cba |
| By: | Gerke, Rafael; Giesen, Sebastian; Kienzler, Daniel |
| Abstract: | After hitting the lower bound on interest rates, the Eurosystem engaged in a public sector purchase programme (PSPP) and forward guidance (FG). We use prior and posterior predictive analysis to evaluate the importance of parameter uncertainty in an analysis of these policies. We model FG as an anticipated temporary interest rate peg. The degree of parameter uncertainty is considerable and increasing in the length of FG. The probability of being able to reset prices and wages is the most important factor driving uncertainty about inflation. In contrast, variations in financial intermediaries' net worth adjustment costs have little impact on in ation outcomes. |
| Keywords: | prior/posterior predictive analysis,anticipated interest rate peg,parameter uncertainty,euro area,QE,PSPP,forward guidance puzzle |
| JEL: | C53 E32 E52 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:122018&r=cba |
| By: | Ashima Goyal (Indira Gandhi Institute of Development Research) |
| Abstract: | The worldwide move to constrain monetary and fiscal policy using rules is creating a switch from fiscal towards monetary dominance. India also implemented flexible inflation targeting and fiscal responsibility legislation. The theoretical arguments, openness to capital flows, and historical experience with the adverse effects of fiscal dominance that led to these changes are discussed. When output is demand determined, with a relatively greater impact of monetary policy on demand, while fiscal policy affects supply-side costs and therefore inflation, as in India, monetary dominance also has adverse effects. Since each policy acts more effectively on the other's objective, co-ordination is essential to achieve optimal outcomes. Under adverse movements in revenues and high interest rates public investment is the first to be cut. Growth can fall below potential while supply-side inflation persists. The paper examines one way of achieving better outcomes. Rules alone could be interpreted too strictly. Delegation to a more conservative fiscal and less conservative monetary authority, by removing the fears of non-cooperation, makes coordination with higher payoffs for both self-enforcing. Such constrained discretion gives the required long-term perspective, yet retains flexibility. |
| Keywords: | Monetary and fiscal rules; Monetary versus fiscal dominance; delegation; Coordination |
| JEL: | E63 E65 C72 |
| Date: | 2018–03 |
| URL: | http://d.repec.org/n?u=RePEc:ind:igiwpp:2018-010&r=cba |
| By: | Michael D. Bordo; Klodiana Istrefi |
| Abstract: | Narrative records in US newspapers reveal that about 70 percent of Federal Open Market Committee (FOMC) members who served during the last 55 years are perceived to have had persistent policy preferences over time, as either inflation-fighting hawks or growth-promoting doves. The rest are perceived as swingers, switching between types, or remained an unknown quantity to markets. What makes a member a hawk or a dove? What moulds those who change their tune? We highlight ideology by education and early life economic experiences of members of the FOMC from 1960s to 2015. This research is based on an original dataset. |
| JEL: | E50 E61 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24650&r=cba |
| By: | Jean-Luc Gaffard (Observatoire français des conjonctures économiques); Mauro Napoletano (Observatoire français des conjonctures économiques) |
| Abstract: | We revisit the main building blocks of the theoretical models underlying the monetary policy consensus before the Great Recession. We highlight how the failure of these models to prevent the crisis and to provide guidance during the recession were due to the excessive confidence in the ability of markets to coordinate demand and supply, and to the neglect of the role of finance. Furthermore, we outline the main elements of an alternative approach to monetary policy that put emphasis on the processes driving coordination in markets, and on the externalities transmitted by financial inter-linkages. Many elements of this new approach are captured by new classes of models, namely, agent-based and financial network models. We discuss some insights from these models for the conduct of monetary policy, and for its interactions with fiscal and macroprudential policies. |
| Keywords: | Output-inflation dynamics; New keynesian models; Disequilibrium analysis; Agent based models; Fiscal monetary policy interactions; Quantitative easing policies |
| JEL: | E31 E32 E5 E61 E62 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/3tl6t49e929fla0aa2ukppot8n&r=cba |
| By: | Efrem Castelnuovo (University of Padova); Giovanni Pellegrino (University of Melbourne) |
| Abstract: | We estimate a nonlinear VAR model to study the real effects of monetary policy shocks in regimes characterized by high vs. low macroeconomic uncertainty. We Â…find unexpected monetary policy moves to exert a substantially milder impact in presence of high uncertainty. We then exploit the set of impulse responses coming from the nonlinear VAR framework to estimate a medium-scale new-Keynesian DSGE model with a minimum-distance approach. The DSGE model is shown to be able to replicate the VAR evidence in both regimes thanks to different estimates of some crucial structural parameters. In particular, we identify a steeper new-Keynesian Phillips curve as the key factor behind the DSGE modelÂ’s ability to replicate the milder macroeconomic responses to a monetary policy shock estimated with our VAR in presence of high uncertainty. A version of the model featuring fiÂ…rm-speciÂ…c capital is shown to be associated to estimates of the price frequency which are in line with some recent evidence based on micro data. |
| Keywords: | Monetary policy shocks, uncertainty, Threshold VAR, medium scale DSGE framework, minimum-distance estimation |
| JEL: | C22 E32 E52 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:pad:wpaper:0219&r=cba |
| By: | Iman van Lelyveld; Sinziana Kroon |
| Abstract: | We investigate how counterparty credit risk influences the prices of over-the-counter CDS contracts using confidential transaction level data for practically all Dutch trades. We confirm our prior of a significant negative relationship between the credit worthiness of the CDS seller and the price of the CDS contract. We find that an increase of 100 basis points in the credit spread of the seller, decreases the price of the CDS contract by 7.2 basis points. Also, the larger the size of the CDS contract the lower the price of the CDS contract. Finally, we find that regulatory exemptions have a statistically significant but economically negligible impact on CDS pricing: Transactions exempted from banking capital requirements for Credit Valuation Adjustment risk - mostly banks transacting with non-financial institutions, sovereigns and pension funds - trade 0.14 basis points lower, all else equal. |
| Keywords: | OTC market; counterparty credit risk; credit default swap |
| JEL: | G10 G12 G14 G20 G23 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:599&r=cba |
| By: | Chris Kirrane |
| Abstract: | This paper describes the opportunities and also the difficulties of EMU with regard to international monetary cooperation. Even though the institutional and intellectual assistance to the coordination of monetary policy in the EU will probably be strengthened with the EMU, among the shortcomings of the Maastricht Treaty concerns the relationship between the founder members and those countries who wish to remain outside monetary union. |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1807.00419&r=cba |
| By: | Andrew Watt; Sebastian Watzka |
| Abstract: | Some important progress has been made since the crisis, belatedly and often imperfectly, in reforming the institutional framework of the Euro Area. However, the existential weaknesses - redenomination risk given doubts about the effectiveness of the Lender-of-Last-Resort function and the inadequacy of measures to address inherent divergence trends between member countries - have not been resolved. For as long as that is so, the euro area will remain on shaky ground. This report reviews proposals to strengthen the institutional setup of the euro area. A package is proposed that would rectify the over-reliance on the ECB as a firefighter, and put euro area institutions and member states - with the involvement of governments, parliaments and social partners - in charge of dealing with intra-euro area imbalances and keeping growth close to potential. The more a preventive approach can be reinforced, the less recourse is needed to euro-level emergency measures, the greater will be the confidence that such measures can be introduced without risking "moral hazard". |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:imk:report:139-2018&r=cba |