|
on Central Banking |
| By: | Tobias Adrian |
| Abstract: | The evolution of risk management has resulted from the interplay of financial crises, risk management practices, and regulatory actions. In the 1970s, research lay the intellectual foundations for the risk management practices that were systematically implemented in the 1980s as bond trading revolutionized Wall Street. Quants developed dynamic hedging, Value-at-Risk, and credit risk models based on the insights of financial economics. In parallel, the Basel I framework created a level playing field among banks across countries. Following the 1987 stock market crash, the near failure of Salomon Brothers, and the failure of Drexel Burnham Lambert, in 1996 the Basel Committee on Banking Supervision published the Market Risk Amendment to the Basel I Capital Accord; the amendment went into effect in 1998. It led to a migration of bank risk management practices toward market risk regulations. The framework was further developed in the Basel II Accord, which, however, from the very beginning, was labeled as being procyclical due to the reliance of capital requirements on contemporaneous volatility estimates. Indeed, the failure to measure and manage risk adequately can be viewed as a key contributor to the 2008 global financial crisis. Subsequent innovations in risk management practices have been dominated by regulatory innovations, including capital and liquidity stress testing, macroprudential surcharges, resolution regimes, and countercyclical capital requirements. |
| Keywords: | Stock exchanges;Capital movements;Financial risk;Risk management; |
| Date: | 2018–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfdep:18/13&r=cba |
| By: | Cristina Arellano (Federal Reserve Bank of Minneapolis); Gabriel Mihalache (Stony Brook University); Yan Bai (University of Rochester) |
| Abstract: | During the 1980s and 1990s emerging markets experienced recurrent episodes of high inflation and debt crises with high sovereign default premia, and many default events. Since the 2000s, inflation has come down in many of these emerging markets and debt crises have been limited. These developments have occurred as central banks in emerging markets have become more independent and have adopted a monetary policy of setting interest rates to target inflation. In this paper we study the interplay of monetary policy and sovereign default risk and show that inflation target induce not only lower inflation rates but also lower default risk of sovereign debt. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:851&r=cba |
| By: | Dmitry Orlov (University of Rochester); Andy Skrzypacz (Stanford Graduate School of Business); Pavel Zryumov (University of Rochester) |
| Abstract: | We study the design of macro-prudential stress tests and capital requirements. The tests provide information about correlation in banks portfolios. The regulator chooses contingent capital requirements that create a liquidity buffer in case of a fire sale. The optimal stress test discloses information partially: when systemic risk is low, capital requirements reflect full information; when systemic risk is high, the regulator pools information and requires all banks to hold precautionary liquidity. With heterogeneous banks, weak banks determine the level of transparency and strong banks are often required to hold excess capital when systemic risk is high. Moreover, dynamic disclosure and capital adjustments can improve welfare. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:913&r=cba |
| By: | Francesco Chiacchio; Grégory Claeys; Francesco Papadia |
| Abstract: | Central banks are not profit-maximising institutions; their objectives are rather of macroeconomic nature. The European Central Bank’s overriding objective is price stability. Nevertheless, there are three good reasons to conclude that it is preferable for central banks to achieve profits rather than to record losses. First, taxpayers endow central banks with large amounts of resources and one should be worried if this amount of resources did not produce any income. In a way, the efficient use by the central bank of the financial resources with which it is endowed is as relevant as the efficient use of the human resources at its disposal. Second, financial strength could affect the ability of monetary authorities to fulfil their mandates. In particular there is the fear that a central bank incurring systematic losses and ending up with negative capital would find it difficult to effectively pursue its macroeconomic objective. Third, profitable operations might be an indication that central banks are implementing the right policies - to achieve profits the central bank must purchase assets when they are undervalued and sell when they are overvalued, thus stabilising their prices. Overall, the Eurosystem has so far respected the principle of it being better to realise profits than losses. The accounts of the ECB, indeed of the entire Eurosystem, show that it generates a fairly stable profit flow. Monetary operations, ie refinancing operations, and securities purchases contribute substantially to these profits. This conclusion is confirmed by measuring the financial results of past purchases of foreign exchange and more recent purchases of securities from a mark-to-market perspective, instead of an accounting perspective. In the specific case of the Public Sector Purchase Programme (PSPP) this was because the coupons on the securities more than offset the capital losses - overall the Eurosystem has bought securities under the PSPP programme at prices higher than current ones. The considerations that might justify purchase operations, like the PSPP or other similar interventions, are very complex and require careful judgement. Once their macroeconomic desirability is established, however, the ECB has the necessary financial strength to implement them safely. |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polcon:27096&r=cba |
| By: | Athanasios Orphanides (Professor of the Practice of Global Economics and Management at the MIT Sloan School of Management (E-mail: athanasios.orphanides@mit.edu).) |
| Abstract: | What institutional arrangements for an independent central bank with a price stability mandate promote good policy outcomes when unconventional policies become necessary? Unconventional monetary policy poses challenges. The large scale asset purchases needed to counteract the zero lower bound on nominal interest rates have uncomfortable fiscal and distributional consequences and require central banks to assume greater risks on their balance sheets. Lack of clarity on the precise definition of price stability, coupled with concerns about the legitimacy of large balance sheet expansions, hinders policy: It encourages the central bank to eschew the decisive quantitative easing needed to reflate the economy and instead to accommodate too-low inflation. The experience of the Bank of Japan fs encounter with the zero lower bound suggests important benefits from a clear definition of price stability as a symmetric 2% goal for inflation, which the Bank of Japan adopted in 2013. |
| Keywords: | Bank of Japan, Zero lower bound, Quantitative easing, Central bank independence, Price stability, Inflation target, Balance sheet risk |
| JEL: | E52 E58 E61 N15 |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:18-e-10&r=cba |
| By: | Filippo Ferroni (Chicago FED) |
| Abstract: | We use euro intraday data to identify monetary policy surprises in the euro area. We find that communication right after the Governing Council meetings convey information that moves the yield curve far out. Moreover, the nature of information revealed via this communication changed over time. Until 2013, unexpected variations in future interest rates were positively correlated with changes in market-based measure of inflation expectations consistent with news on future macroeconomic conditions. That negative correlation disappeared roughly when forward guidance on future rates started to be given by the Governing Council. We use sign restrictions on the joint reaction of expected interest rates and inflation rates to the announcements to disentangle two types of monetary policy surprises: one about the future state of the economy (Delphic); the other about the future stance of the monetary authority (Odyssean). We find that a surprise that lowers future interest rates does not engineer a boom. By contrast, a surprise that lowers future interest rates because it signals future accommodation does. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:60&r=cba |
| By: | Qureshi, Irfan |
| Abstract: | Why does low central bank independence generate high macroeconomic instability? A government may periodically appoint a subservient central bank chairman to exploit the inflation-output trade-off, which may generate instability. In a New Keynesian framework, time-varying monetary policy is connected with a “chairman effect.” To identify departures from full independence, I classify chairmen based on tenure (premature exits), and the type of successor (whether the replacement is a government ally). Bayesian estimation using cross-country data confirms the relationship between policy shifts and central bank independence, explaining approximately 25 (15) percent of inflation volatility in developing (advanced) economies. Theoretical analyses reveal a novel propagation mechanism of the policy shock. |
| Keywords: | Financial Economics |
| Date: | 2017–09–09 |
| URL: | http://d.repec.org/n?u=RePEc:ags:uwarer:269096&r=cba |
| By: | Enrique Mendoza (Department of Economics, University of Pennsylvania) |
| Abstract: | Macroprudential policy holds the promise of becoming a powerful tool for preventing financial crises. Financial amplification in response to domestic shocks or global spillovers and pecuniary externalities caused by Fisherian collateral constraints provide a sound theoretical foundation for this policy. Quantitative studies show that models with these constraints replicate key stylized facts of financial crises, and that the optimal financial policy of an ideal constrained-efficient social planner reduces sharply the magnitude and frequency of crises. Research also shows, however, that implementing effective macroprudential policy still faces serious hurdles. This paper highlights three of them: (i) complexity, because the optimal policy responds widely and non-linearly to movements in both domestic factors and global spillovers due to regime shifts in global liquidity, news about global fundamentals, and recurrent innovation and regulatory changes in world markets, (ii) lack of credibility, because of time-inconsistency of the optimal policy under commitment, and (iii) coordination failure, because a careful balance with monetary policy is needed to avoid quantitatively large inefficiencies resulting from violations of Tinbergen’s rule or strategic interaction between monetary and financial authorities. |
| JEL: | E0 F0 G0 |
| Date: | 2016–10–24 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:16-020&r=cba |
| By: | Keiichi Goshima (Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: keiichi.goshima@boj.or.jp)); Yusuke Kumano (Deputy Director and Economist, Institute for Monetary and Economic Studies (currently, Research and Statistics Department), Bank of Japan (E-mail: yuusuke.kumano@boj.or.jp)) |
| Abstract: | We analyze the effects of algorithmic news trading (ANT) in the foreign exchange market around the time that the Bank of Japan makes public announcements of its policy decisions. To observe the activity level of ANT, we propose a novel measure based on a web access record to a central bank fs webpage. We find that our proposed measure appropriately captures the activity level of ANT. Employing an event study analysis and a VAR analysis, we find that ANT increases market volatility immediately after the monetary policy announcements, and that ANT activity indirectly decreases market liquidity through increasing volatility. In addition, we suggest that ANT trades based on changes of texts on monetary policy announcements. |
| Keywords: | Algorithmic trading, Monetary policy, High frequency data, Foreign exchange market, News trading, Market microstructure, Web access record |
| JEL: | E58 F31 G14 |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:18-e-13&r=cba |
| By: | Sanjay Singh (University of California, Davis) |
| Abstract: | We analyze the implications for monetary policy when deficient aggregate demand can cause a permanent loss in potential output, a phenomenon termed as output hysteresis. We incorporate Schumpeterian endogenous growth into a business cycle model with nominal rigidities. In the model, incomplete stabilization of a temporary shortfall in demand reduces the return to innovation, thus reducing R&D and producing a permanent loss in output. Output hysteresis arises under a standard Taylor rule, but not under a strict inflation targeting rule when the nominal interest rate is away from the zero lower bound (ZLB). At the ZLB, a central bank unable to commit to future policy actions suffers from hysteresis bias: it does not offset past losses in potential output. A new policy rule that targets zero output hysteresis approximates the optimal policy by keeping output at the first-best level. Estimated structural impulse response functions for key variables align with predictions of the model. A quantitative model provides evidence of significant output hysteresis resulting from endogenous growth over the Great Recession. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:554&r=cba |
| By: | Giovanni Caggiano; Efrem Castelnuovo; Gabriela Nodari |
| Abstract: | We employ real-time data available to the US monetary policy makers to estimate a Taylor rule augmented with a measure of financial uncertainty over the period 1969-2008. We find evidence in favor of a systematic response to financial uncertainty over and above that to expected inflation, output gap, and output growth. However, this evidence regards the Greenspan-Bernanke period only. Focusing on this period, the “risk-management” approach is found to be responsible for monetary policy easings for up to 75 basis points of the federal funds rate. |
| Keywords: | risk management-driven policy rate gap, uncertainty, monetary policy, Taylor rules, real-time data |
| JEL: | C20 E40 E50 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7177&r=cba |
| By: | OIKAWA Koki; UEDA Kozo |
| Abstract: | Central banks across the globe are paying increasing attention to the distributional aspects of monetary policy. In this study, we focus on reallocation among heterogeneous firms triggered by nominal growth. Japanese firm-level data show that large firms tend to grow faster than small firms under higher inflation. We then construct a model that introduces nominal rigidity into endogenous growth with heterogeneous firms. The model shows that, under a high nominal growth rate, firms of inferior quality bear a heavier burden of menu cost payments than do firms of superior quality. This outcome increases the market share of superior firms, while some inferior firms exit the market. This reallocation effect, if strong, yields a positive effect of monetary expansion on both real growth and welfare. The optimal nominal growth can be strictly positive even under nominal rigidity, whereas standard New Keynesian models often conclude that zero nominal growth is optimal. Moreover, the presence of menu costs can improve welfare. |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:18056&r=cba |
| By: | MacDonald, Margaux |
| Abstract: | This paper analyzes the impact of large-scale, unconventional asset purchases by advanced country central banks on emerging market economies (EMEs) from 2008 to 2014. I show that there was substantial heterogeneity in the way these purchases affected EME currency, equity, and long-term sovereign bond markets. Drawing on the gravity-in-international-finance literature, I show that the degree of capital market frictions between EMEs and advanced countries is significant in explaining the observed heterogeneity in how these asset prices were affected. This result is robust to considerations of domestic monetary policy, exchange rate regime, and capital control policies in EMEs. Furthermore, I show that the size and direction of asset price movements in EMEs depended both on the type of assets purchased and on whether it was the U.S. Federal Reserve or other advanced country central banks engaging in the purchases. |
| Keywords: | Financial Economics |
| Date: | 2018–03 |
| URL: | http://d.repec.org/n?u=RePEc:ags:quedwp:274672&r=cba |
| By: | Acharya, Viral V; Plantin, Guillaume |
| Abstract: | This paper studies a model in which a low monetary policy rate lowers the cost of capital for firms, thereby spurring productive investment. Low interest rates however also induce firms to lever up so as to increase payouts to shareholders. Such leveraged share buybacks and productive investment compete for funds, so much so that the former may crowd out the latter. Below an endogenous lower bound, monetary easing generates only limited capital expenditures that come at the cost of large and destabilizing financial risk-taking. |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13072&r=cba |
| By: | Simeon Nanovsky (Nazarbayev University) |
| Abstract: | This paper attempts to investigate the degree of macroeconomic autonomy among the 12 original members of the eurozone. We develop a new measure of macroeconomic independence based on the concept of the desired policy interest rate each country would have chosen if it had retained its own currency and independent monetary policy. If it is detached from the centrally imposed policy rate and the two behave differently, we take it as an indication that the country should be constrained by the common central bank and has low degree of macroeconomic independence (MAI).We find that the original twelve members have indeed enjoyed varying degrees of MAI. Austria, France, Germany, Italy, and Luxembourg retain highest degree of MAI while Ireland, Greece, and Spain seem to have suffered from the lowest degree of MAI. The newly proposed MAI performs well as an OCA index, if not better than existing indices. On the one hand, so called the ?core? countries show up as those that have maintained high MAI. On the one hand, the ?periphery? countries have retained low MAI in the currency union. |
| Keywords: | eurozone, optimum currency area, monetary independence |
| JEL: | F00 E40 E52 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:sek:iacpro:7708970&r=cba |
| By: | Robert J. Tetlow |
| Abstract: | This FEDS Note considers the implications of uncertainty regarding the persistence of inflation for the conduct of monetary policy. |
| Date: | 2018–08–29 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfn:2018-08-29&r=cba |
| By: | Miranda-Agrippino, Silvia; Ricco, Giovanni |
| Abstract: | Despite years of research, there is still uncertainty around the effects of monetary policy shocks. We reassess the empirical evidence by combining a new identification that accounts for informational rigidities, with a flexible econometric method robust to misspecifications that bridges between VARs and Local Projections. We show that most of the lack of robustness of the results in the extant literature is due to compounding unrealistic assumptions of full information with the use of severely misspecified models. Using our novel methodology, we find that a monetary tightening is unequivocally contractionary, with no evidence of either price or output puzzles. |
| Keywords: | Financial Economics |
| Date: | 2017–02–28 |
| URL: | http://d.repec.org/n?u=RePEc:ags:uwarer:269310&r=cba |
| By: | Hasenzagl, Thomas; Pellegrino, Filippo; Reichlin, Lucrezia; Ricco, Giovanni |
| Abstract: | A view often expressed by the Fed is that three components matter in inflation dynamics: a trend anchored by long run inflation expectations; a cycle connecting nominal and real variables; and oil prices. This paper proposes an econometric structural model of inflation formalising this view. Our findings point to a stable expectational trend, a sizeable and well identified Phillips curve and an oil cycle which, contrary to the standard rational expectation model, affects inflation via expectations without being reflected in the output gap. The latter often overpowers the Phillips curve. In fact, the joint dynamics of the Phillips curve cycle and the oil cycles explain the inflation puzzles of the last ten years. |
| Keywords: | Financial Economics |
| Date: | 2017–12–20 |
| URL: | http://d.repec.org/n?u=RePEc:ags:uwarer:269087&r=cba |
| By: | MacDonald, Margaux; Popiel, Michal |
| Abstract: | This paper investigates the effects of unconventional monetary policy in Canada. We use recently proposed methods to construct a shadow interest rate that captures monetary policy at the zero lower bound (ZLB) and estimate a small open economy Bayesian structural vector autoregressive (B-SVAR) model. Controlling for the US macroeconomic and monetary policy variables, we find that Canadian unconventional monetary policy increased Canadian output by 0.23% per month on average between April 2009 and June 2010. Our empirical framework also allows us to quantify the effects of US unconventional monetary policy, which raised US and Canadian output by 1.21% and 1.94% per month, respectively, on average over the 2008-2015 period. |
| Keywords: | Financial Economics, Public Economics |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:ags:quedwp:274693&r=cba |
| By: | Qureshi, Irfan |
| Abstract: | Is the classic Taylor rule misspecified? I show that the inability of the Taylor rule to explain the federal funds rate using real-time data stems from the omission of a money growth objective. I highlight the significant role played by money in the policy discourse during the Volcker-Greenspan era using new FOMC data, benchmarking a novel characterization of “good” policy. An application of this framework offers a unified policy-based explanation of the Great Moderation and Recession. Welfare analysis based on the New-Keynesian model endorses the rule with money. The evidence raises significant concerns about relying on the simple Taylor rule as a policy benchmark and suggests why money may serve as a useful indicator in guiding future monetary policy decisions. |
| Keywords: | Financial Economics |
| Date: | 2016–11–11 |
| URL: | http://d.repec.org/n?u=RePEc:ags:uwarer:269313&r=cba |
| By: | Elisabeth Falck (Goethe University Frankfurt); Mathias Hoffmann (Deutsche Bundesbank); Patrick Hürtgen (Deutsche Bundesbank) |
| Abstract: | Time-variation in disagreement about inflation expectations is a stylized fact in survey data, but little is known on how disagreement interacts with the efficacy of monetary policy. In times of high disagreement we estimate that a 100 bps increase in the U.S. policy rate leads to a significant short-term increase in inflation and in inflation expectations of up to 1.0 percentage point, whereas in times of low disagreement we find a significant decline of close to 1.0 percentage point. We reconcile these state-dependent effects with a dispersed information New Keynesian model, where we calibrate the level of disagreement to U.S. data. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:655&r=cba |
| By: | Christopher J. Erceg; James Hebden; Michael T. Kiley; J. David Lopez-Salido; Robert J. Tetlow |
| Abstract: | When choosing a strategy for monetary policy, policymakers must grapple with mismeasurement of labor market slack, and of the responsiveness of price inflation to that slack. Using stochastic simulations of a small-scale version of the Federal Reserve Board’s principal New Keynesian macroeconomic model, we evaluate representative rule-based policy strategies, paying particular attention to how those strategies interact with initial conditions in the U.S. as they are seen today and with the current outlook. To do this, we construct a current relevant baseline forecast, one that is loosely constructed based on a recent FOMC forecast, and conduct our experiments around that baseline. We find the initial conditions and forecast that policymakers face affects decisions in a material way. The standard advice from the literature, that in the presence of mismeasurement of resource slack policymakers should substantially reduce the weight attached to those measures in setting the policy rate, and substitute toward a more forceful response to inflation, is overstated. We find that a notable response to the unemployment gap is typically beneficial, even if that gap is mismeasured. Even when the dynamics of inflation are governed by a 1970s-style Phillips curve, meaningful response to resource utilization is likely to turn out to be worthwhile, particularly in environments where resource utilization is thought to be tight to begin with and inflation is close to its target level. |
| Keywords: | Stochastic simulation ; Mismeasurement ; Monetary policy ; Policy analysis ; Uncertainty |
| JEL: | E31 E32 E52 C63 |
| Date: | 2018–08–23 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2018-59&r=cba |
| By: | Jean-Bernard Chatelain (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique); Kirsten Ralf (ESCE – International Business School) |
| Abstract: | Giannoni and Woodford (2003) found that the equilibrium determined by com- mitment to a super-inertial rule (where the sum of the parameters of lags of interest rate exceed ones and does not depend on the auto-correlation of shocks) corresponds to the unique bounded solution of Ramsey optimal policy for the new-Keynesian model. By contrast, this note demonstrates that commitment to an inertial rule (where the sum of the parameters of lags of interest rate is below one and depends on the auto-correlation of shocks) corresponds to the unique bounded solution. |
| Keywords: | Ramsey optimal policy,Interest rate smoothing,Super-inertial rule,Inertial rule,New-Keynesian model |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:hal:psewpa:halshs-01863367&r=cba |
| By: | Kairong Xiao |
| Abstract: | This paper documents a new transmission channel of monetary policy: the shadow money channel. Analyzing U.S. money supply data from 1987 to 2012, I find that shadow money, namely liquid deposits created by shadow banks, expands significantly when the Federal Reserve tightens monetary policy. Using a structural model of bank competition, I show that this new channel is a result of imperfect competition between commercial and shadow banks in the deposit market with heterogeneous depositors. Due to a lack of a bank charter, shadow banks offer lower transaction convenience and hence must compete on yields. During periods of monetary tightening, shadow banks pass through more rate hikes to depositors, thereby poaching yield-sensitive deposits from commercial banks. Fitting my model to institution-level data from commercial banks and money market funds, I show that shadow money creation offsets 35 cents of each dollar in commercial bank deposit reductions, significantly dampening the impact of monetary tightening. My results suggest that monetary tightening may unintentionally drive more deposits into the uninsured shadow banking sector, thereby amplifying the risk of bank runs. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:616&r=cba |
| By: | Markus Pasche (FSU Jena) |
| Abstract: | Empirical tests of the quantity theory and particularly the neutrality of money are based on the idea that money growth "explains", to some extent, inflation. Modern macroeconomic theory, however, considers inflation targeting central banks which use the interest rate as a policy tool, while money is seen as an endogenous outcome of financial intermediation, i.e. credit creation. A simple NKM model with fiat money demonstrates that money growth is tied to inflation, changes of output and interest rate changes. The latter are determined by inflation and output gap if we consider an inflation-targeting central bank. The quantity equation emerges from the macroeconomic transmission process but the economic causalities run from output and inflation to money creation. Hence, money growth does not explain inflation. Besides, the result does not require a sophisticated microfoundation of money demand but simply emerges from the transmission process. |
| Keywords: | quantity equation, endogenous money, New Keynesian Macroeconomics, inflation targeting, money demand |
| JEL: | E44 E51 |
| Date: | 2018–08–29 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2018-011&r=cba |
| By: | Pablo D'Erasmo (FRB Philadelphia); Dean Corbae (University of Wisconsin) |
| Abstract: | We develop a model of banking industry dynamics to study the quantitative impact of capital requirements on bank risk taking, commercial bank failure, and market structure. We propose a market structure where big banks with market power interact with small, competitive fringe banks. Banks face idiosyncratic funding shocks as well as aggregate shocks to the fraction of performing loans in their portfolio. A nontrivial size distribution of banks arises out of endogenous entry and exit, as well as banks' buffer stock of net worth. We test the model using business cycle properties and the bank lending channel across banks of different sizes. We then conduct a series of counterfactuals (including countercyclical requirements and size contingent (e.g. SIFI) requirements). We find that regulatory policies can have an important impact on market structure itself. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1221&r=cba |
| By: | Tsutomu Watanabe (Graduate School of Economics,University of Tokyo); Tomoyoshi Yabu (Faculty of Business and Commerce, Keio University) |
| Abstract: | This paper estimates a money demand function using US data from 1980 onward, including the period of near-zero interest rates following the global financial crisis. We conduct cointegration tests to show that the substantial increase in the money-income ratio during the period of near-zero interest rates is captured well by the money demand function in log-log form, but not by that in semi-log form. Our result is the opposite of the result obtained by Ireland (2009), who, using data up until 2006, found that the semi-log specification performs better. The difference in the result from Ireland (2009) mainly stems from the difference in the observation period employed: our observation period contains 24 quarters with interest rates below 1 percent, while Ireland’s (2009) observation period contains only three quarters. We also compute the welfare cost of inflation based on the estimated money demand function to find that it is very small: the welfare cost of 2 percent inflation is only 0.04 percent of national income, which is of a similar magnitude as the estimate obtained by Ireland (2009) but much smaller than the estimate by Lucas (2000). |
| Keywords: | : money demand function; cointegration; zero lower bound; near-zero interest rates; welfare cost of inflation; log-log form; semi-log form; interest elasticity of money demand |
| JEL: | C22 C52 E31 E41 E43 E52 |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:upd:utmpwp:002&r=cba |
| By: | Dirk Niepelt |
| Abstract: | I offer a macroeconomic perspective on the “Reserves for All” (RFA) proposal to let the general public use electronic central bank money. After distinguishing RFA from cryptocurrencies and relating the proposal to discussions about narrow banking and the abolition of cash I propose an equivalence result according to which a marginal substitution of outside for inside money does not affect macroeconomic outcomes. I identify key conditions on bank and government (central bank) incentives for equivalence and argue that these conditions likely are violated, implying that RFA would change macroeconomic outcomes. I also relate my analysis to common arguments in the discussion about RFA and point to inconsistencies and open questions. |
| Keywords: | central bank digital currency, Fedcoin, CADcoin, e-krona, e-Peso, J Coin, reserves for all, deposits, narrow banking, cash, equivalence, central bank, lender of last resort, politico-economic equivalence |
| JEL: | E42 E51 E58 E61 E63 H63 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7176&r=cba |
| By: | Galí, Jordi |
| Abstract: | I take stock of the state of New Keynesian economics by reviewing some of its main insights and by providing an overview of some recent developments. In particular, I discuss some recent work on two very active research programs: the implications of the zero lower bound on nominal interest rates and the interaction of monetary policy and household heterogeneity. Finally, I discuss what I view as some of the main shortcomings of the New Keynesian model and possible areas for future research. |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13095&r=cba |
| By: | Michael B. Devereux (University of British Columbia); Gregor W. Smith (Queen's University) |
| Abstract: | Countries that specialize in commodity exports often exhibit a correlation between the relevant commodity price and the value of their currency. We explore a natural but little-studied explanation for this correlation. An increase in the commodity price leads to increases in the future values of the international differential in policy interest rates. The tightening of expected future monetary policy relative to the US then leads to an immediate appreciation. We show theoretically that this correlation depends on the stance of monetary policy. We then derive a statistical model that embodies this mechanism and test the over-identifying restrictions for Australia, Canada, and New Zealand. For all three countries, controlling for the effect of commodity prices in predicting current and future monetary policy leaves them no significant, remaining role in statistically explaining exchange rates. |
| Keywords: | commodity currency, exchange rate, monetary policy |
| JEL: | F31 F41 E52 |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1408&r=cba |
| By: | Benigno, Pierpaolo; Robatto, Roberto |
| Abstract: | We study the joint supply of public and private liquidity when financial intermediaries issue both riskless and risky debt and the economy is vulnerable to liquidity crises. Government interventions in the form of asset purchases and deposit insurance are equivalent (in the sense that they sustain the same equilibrium allocations), increase welfare, and, if fiscal capacity is sufficiently large, eliminate liquidity crises. In contrast, restricting intermediaries to invest in low-risk projects always eliminates liquidity crises but reduces welfare. Under some conditions, deposit insurance gives rise to an equilibrium in which intermediaries that issue insured debt (i.e., traditional banks) coexist with others that issue uninsured debt (i.e., shadow banks), despite the two being ex ante identical. |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13091&r=cba |
| By: | Iovino, Luigi; Sergeyev, Dmitriy |
| Abstract: | We study the effects of central bank balance sheet policies-namely, quantitative easing and foreign exchange interventions-in a model where people form expectations through the level-k thinking process, which is consistent with experimental evidence on the behavior of people in strategic environments. We emphasize two main theoretical results. First, under a broad set of conditions, central bank interventions are effective under level-k thinking, while they are neutral in the rational expectations equilibrium. Second, forecast errors about future endogenous variables are predictable by balance sheet interventions. We confirm these predictions using data on mortgage purchases by US government sponsored enterprises. |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13100&r=cba |
| By: | Mertens, Thomas M. (Federal Reserve Bank of San Francisco); Williams, John C. (Federal Reserve Bank of New York) |
| Abstract: | This paper analyzes the effects of the lower bound for interest rates on the distributions of expectations for future inflation and interest rates. We study a stylized New Keynesian model where the policy instrument is subject to a lower bound to motivate the empirical analysis. Two equilibria emerge: In the “target equilibrium,” policy is unconstrained most or all of the time, whereas in the “liquidity trap equilibrium,” policy is mostly or always constrained. We use options data on future interest rates and inflation to study whether the decrease in the natural rate of interest leads to forecast densities consistent with the theoretical model. We develop a lower bound indicator that captures the effects of the lower bound on the distribution of interest rates. Qualitatively, we find that the evidence is largely consistent with the theoretical predictions in the target equilibrium and find no evidence in favor of the liquidity trap equilibrium. Quantitatively, while the lower bound has a sizable effect on the distribution of future interest rates, its impact on forecast densities for inflation is relatively modest. |
| Keywords: | zero lower bound; inflation expectations; monetary policy; multiple equilibria |
| JEL: | E43 E52 G12 |
| Date: | 2018–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:865&r=cba |