nep-cba New Economics Papers
on Central Banking
Issue of 2018‒11‒12
eighteen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Resurrecting the New-Keynesian Model: (Un)conventional Policy and the Taylor rule By Posch, Olaf
  2. Euro area unconventional monetary policy and bank resilience By Fernando Avalos; Emmanuel C Mamatzakis
  3. An Empirical Test for the Effectiveness of Central Bank Interventions in Foreign Exchange Markets: An Application to the Canadian and Swiss Central Banks By ABBUY, Kwami Edem
  4. Slow Post-Financial Crisis Recovery and Monetary Policy By Ikeda, Daisuke; Kurozumi, Takushi
  5. Monetary Easing, Investment and Financial Instability By Viral Acharya; Guillaume Plantin
  6. Bank Capital in the Short and in the Long Run By Caterina Mendicino; Kalin Nikolov; Javier Suarez; Dominik Supera
  7. Exchange Rates and Monetary Spillovers By Guillaume Plantin; Hyun Song Shin
  8. Fiscal and Monetary Regimes: A Strategic Approach By Guillaume Plantin; Jean Barthélemy
  9. Hierarchical Bank Supervision By Rafael Repullo
  10. What are the Consequences of Global Banking for the International Transmission of Shocks? A Quantitative Analysis By José L. Fillat; Stefania Garetto; Arthur V. Smith
  11. U.S. Monetary Policy and Emerging Market Credit Cycles By Falk Bräuning; Victoria Ivashina
  12. Monetary and Fiscal History of Peru 1960-2010: Radical Policy Experiments, Inflation and Stabilization By Cesar Martinelli; Marco Vega
  13. Markets, Banks, and Shadow Banks By David Martinez-Miera; Rafael Repullo
  14. Negative Interest Rate Policy and the Yield Curve By Jing Cynthia Wu; Fan Dora Xia
  15. Bank to sovereign risk spillovers across borders: evidence from the ECB’s Comprehensive Assessment By Breckenfelder, Johannes; Schwaab, Bernd
  16. A Behavioral Model of the Credit Cycle By Barbara Annicchiarico; Silvia Surricchio; Robert J. Waldmann
  17. Implications of bank regulation for loan supply and bank stability: A dynamic perspective By Bucher, Monika; Dietrich, Diemo; Hauck, Achim
  18. Time-Frequency Response Analysis of Monetary Policy Transmission By Lubos Hanus; Lukas Vacha

  1. By: Posch, Olaf
    Abstract: This paper explores the ability of the New-Keynesian (NK) model to explain the recent periods of quiet and stable inflation at near-zero nominal interest rates. We show how (conventional and unconventional) monetary policy shocks enlarge the ability to explain the facts, such that the theory supports both a negative and a positive response of inflation. Central to our finding is that monetary policy shocks may have temporary and/or permanent components. We find that the NK model can explain the recent episodes, even if one considers an active role of monetary policy and restrict ourselves to the regions of (local) determinacy. We also show that a new global solution, capturing highly nonlinear dynamics, is necessary to generate a prolonged period of near-zero interest rates as a policy choice.
    Keywords: Continuous-time dynamic equilibrium models,Calvo price setting
    JEL: E32 E12 C61
    Date: 2018
  2. By: Fernando Avalos; Emmanuel C Mamatzakis
    Abstract: This paper examines whether euro area unconventional monetary policies have affected the loss-absorbing buffers (that is the resilience) of the banking industry. We employ various measures to capture the effect of the broad array of programmes used by the ECB to implement balance sheet policies, while we control for the effect of conventional and negative (or very low) interest rate policy. The results suggest that, above and away from the zero-lower bound, looser interest rate policy tends to weaken our measure of euro area banks' loss-absorbing buffers. On the contrary, further lowering interest rates near and below the zero lower bound seems to strengthen (or weaken less) such buffers, which points towards non-linearities arising in the vicinity of the lower bound. Moreover, balance sheet easing policies enhance bank level resilience overall. However, unconventional monetary policies seem to have increased the fragility of banks in the member states hardest hit by the 2011 sovereign debt crisis. In fact, the evidence presented in this paper suggest that the resilience gains of unconventional monetary policies have accrued mostly to banks headquartered in the so-called core euro area countries (Austria, Belgium, Finland, France, Germany, Luxembourg and Netherlands). Finally, unconventional monetary policies seem to have enhanced more the resilience of banks that were relatively stronger, i.e. that were in the higher deciles of the distribution of loss-absorbing buffers.
    Keywords: unconventional monetary policy, ECB, asset purchases, loss-absorbing buffer
    JEL: G21 E52 E43
    Date: 2018–11
  3. By: ABBUY, Kwami Edem
    Abstract: This paper investigates the effectiveness of foreign exchange intervention of central banks of Canada and Switzerland. We examine the effectiveness of Canada and Switzerland interventions policies on Canadian dollar against US dollar and Swiss franc against US dollar exchange rates volatility over the 1980-2014 period. A behavioral exchange rate equation is estimated with instrumental variables methodology. The main results indicate that interventions generally reduce exchange rates volatility. However, the Swiss National Bank seems to be more efficient by stabilizing the Swiss franc than the Bank of Canada, whose interventions, despite its effectiveness, remains weak.
    Keywords: Keywords: Volatility, Exchange rate, Official international reserves.
    JEL: E58
    Date: 2018–10–22
  4. By: Ikeda, Daisuke (Bank of Japan); Kurozumi, Takushi (Bank of Japan)
    Abstract: Post-financial crisis recoveries tend to be slow and be accompanied by slowdowns in TFP and permanent losses in GDP. To prevent them, how should monetary policy be conducted? We address this issue by developing a model with endogenous TFP growth in which an adverse financial shock can induce a slow recovery. In the model, a welfare-maximizing monetary policy rule features a strong response to output, and the welfare gain from output stabilization is much larger than when TFP expands exogenously. Moreover, inflation stabilization results in a sizable welfare loss, while nominal GDP stabilization works well, albeit causing high interest-rate volatility.
    JEL: E52 O33
    Date: 2018–10–01
  5. By: Viral Acharya (Reserve Bank of India); Guillaume Plantin (Département d'économie)
    Abstract: This paper studies a model of the interest-rate channel of monetary policy in which a low policy rate lowers the cost of capital for firms thereby spurring investment, but also induces destabilizing “carry trades” against their assets. If the public sector does not have sufficient fiscal capacity to cope with the large resulting private borrowing, then carry trades and productive investment compete for scarce funds, and so the former crowd out the latter. Below an endogenous lower bound, monetary easing generates only limited investment at the cost of large and socially wasteful financial risk taking.
    Keywords: Monetary policy; Financial stability; Shadow banking; Carry trades
    JEL: E52 E58 G01 G21 G23 G28
    Date: 2018–07
  6. By: Caterina Mendicino (European Central Bank); Kalin Nikolov (European Central Bank); Javier Suarez (CEMFI); Dominik Supera (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: How far should capital requirements be raised in order to ensure a strong and resilient banking system without imposing undue costs on the real economy? Capital requirement increases make banks safer and are beneficial in the long run but carry transition costs because their imposition reduces aggregate demand on impact. Under accommodative monetary policy, increasing capital requirements addresses financial stability risks without imposing large transition costs on the economy. In contrast, when the policy rate hits the lower bound, monetary policy loses the ability to dampen the effects of the capital requirement increase on the real economy. The long-run benefits of higher capital requirements are larger and the transition costs are smaller when the risk that causes bank failure is high.
    Keywords: Macroprudential policy, bank fragility, financial frictions, default risk, effective lower bound, transition dynamics.
    JEL: E3 E44 G01 G21
    Date: 2018–08
  7. By: Guillaume Plantin (Département d'économie); Hyun Song Shin (Princeton University)
    Abstract: When do flexible exchange rates prevent monetary and financial conditions from spilling over across currencies? We examine a model in which international investors strategically supply capital to a small inflation‐targeting economy with flexible exchange rates. For some combination of parameters, the unique equilibrium exhibits the observed empirical feature of prolonged episodes of capital inflows and appreciation of the domestic currency, followed by reversals where capital outflows go hand‐in‐hand with currency depreciation, a rise in domestic interest rates, and inflationary pressure. Arbitrarily small shocks to global financial conditions suffice to trigger these dynamics.
    Keywords: Currency appreciation; Capital flows; Global games
    JEL: C7 E5 F4
    Date: 2018–05
  8. By: Guillaume Plantin (Département d'économie); Jean Barthélemy (Département d'économie)
    Abstract: This paper develops a full-fledged strategic analysis of Wallace’s “game of chicken”. A public sector facing legacy nominal liabilities is comprised of fiscal and monetary authorities that respectively set the primary surplus and the price level in a non-cooperative fashion. We find that the post 2008 feature of indefinitely postponed fiscal consolidation and rapid expansion of the Federal Reserve’s balance sheet is consistent with a strategic setting in which neither authority can commit to a policy beyond its current mandate, and the fiscal authority has more bargaining power than the monetary one at each date.
    Date: 2018–05
  9. By: Rafael Repullo (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: This paper presents a model in which a central and a local supervisor contribute their efforts to obtain information on the solvency of a local bank, which is then used by the central supervisor to decide on its early liquidation. This hierarchical model is contrasted with the alternatives of decentralized and centralized supervision, where only the local or the central supervisor collects information and decides on liquidation. The local supervisor has a higher bias against liquidation (supervisory capture) and a lower cost of getting local information (proximity). Hierarchical supervision is the optimal institutional design when the bias of the local supervisor is high but not too high and the costs of getting local information from the center are low but not too low. With low (high) bias and high (low) cost it is better to concentrate all responsibilities in the local (central) supervisor.
    Keywords: Centralized vs decentralized supervision, strategic information acquisition, bank solvency, bank liquidation, supervisory capture, optimal institutional design.
    JEL: G21 G23 D02
    Date: 2017–11
  10. By: José L. Fillat; Stefania Garetto; Arthur V. Smith
    Abstract: The global financial crisis of 2008 was followed by a wave of regulatory reforms that affected large banks, especially those with a global presence. These reforms were reactive to the crisis.In this paper we propose a structural model of global banking that can be used proactively to perform counterfactual analysis on the effects of alternative regulatory policies. The structure of the model mimics the US regulatory framework and highlights the rganizational choices that banks face when entering a foreign market: branching versus subsidiarization. When calibrated to match moments from a sample of European banks, the model is able to replicate the response of the US banking sector to the European sovereign debt crisis. Our counterfactual analysis suggests that pervasive subsidiarization, higher capital requirements, or ad hoc monetary policy interventions would have mitigated the effects of the crisis on US lending.
    JEL: F12 F23 F36 G21
    Date: 2018–10
  11. By: Falk Bräuning; Victoria Ivashina
    Abstract: Foreign banks’ lending to firms in emerging market economies (EMEs) is large and denominated predominantly in U.S. dollars. This creates a direct connection between U.S. monetary policy and EME credit cycles. We estimate that over a typical U.S. monetary easing cycle, EME borrowers experience a 32-percentage-point greater increase in the volume of loans issued by foreign banks than do borrowers from developed markets, followed by a fast credit contraction of a similar magnitude upon reversal of the U.S. monetary policy stance. This result is robust across different geographies and industries, and holds for U.S. and non-U.S. lenders, including those with little direct exposure to the U.S. economy. EME local lenders do not offset the foreign bank capital flows, and U.S. monetary policy affects credit conditions for EME firms, both at the extensive and intensive margin. Consistent with a risk-driven credit-supply adjustment, we show that the spillover is stronger for riskier EMEs, and, within countries, for higher-risk firms.
    JEL: E52 F34 F44 G21
    Date: 2018–10
  12. By: Cesar Martinelli (Interdisciplinary Center for Economic Science and Department of Economics, George Mason University); Marco Vega (Banco Central de Reserva del Peru’ and Universidad Cat’olica del Peru Ì)
    Abstract: We show Peru’s chronic inflation through the 1970s and 1980s was a result of the need for inflationary taxation in a regime of fiscal dominance of monetary policy. Hyperinflation occurred when further debt accumulation became unavailable, and a populist administration engaged in a counterproductive policy of price controls and loose credit. We interpret the fiscal difficulties preceding the stabilization as a process of social learning to live within the realities of fiscal budget balance. The credibility of policy regime change in the 1990s may be linked ultimately to the change in public opinion giving proper incentives to politicians, after the traumatic consequences of the hyper stagflation of 1987-1990.
    Date: 2018–08
  13. By: David Martinez-Miera (Universidad Carlos III de Madrid); Rafael Repullo (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: We analyze the effect of bank capital requirements on the structure and risk of a financial system where markets, regulated banks, and shadow banks coexist. Banks face a moral hazard problem in screening entrepreneurs' projects, and they choose whether to be regulated or not. If regulated, a supervisor certifies their capital; if not, they have to rely on more expensive private certification. Under both risk-insensitive and risk-sensitive requirements, safer entrepreneurs borrow from the market and riskier entrepreneurs borrow from banks. But risk-insensitive (sensitive) requirements are especially costly for relatively safe (risky) entrepreneurs, which may shift from regulated to shadow banks.
    Keywords: Bank regulation, bank supervision, capital requirements, credit screening, credit spreads, loan defaults, optimal regulation, market finance, shadow banks.
    JEL: G21 G23 G28
    Date: 2018–10
  14. By: Jing Cynthia Wu; Fan Dora Xia
    Abstract: We evaluate the implications of the ECB's negative interest rate policy (NIRP) on the yield curve. To capture various shapes of the short end of the yield curve induced by the NIRP, we introduce two policy indicators, which summarize the immediate and longer-horizon future monetary policy stances. We find the four NIRP events lowered the short term interest rate by the same amount. The impact is dampened at longer maturities for the first two event dates due to lack of forward guidance. In contrast, in the last two dates, forward guidance drives the largest effects in two years.
    JEL: E43 E52
    Date: 2018–10
  15. By: Breckenfelder, Johannes; Schwaab, Bernd
    Abstract: We study spillovers from bank to sovereign risk in the euro area using difference specifications around the European Central Bank’s release of stress test results for 130 significant banks on October 26, 2014. We document that following this information release bank equity prices in stressed countries declined. Surprisingly, bank risk in stressed countries was not absorbed by their sovereigns but spilled over to non-stressed euro area sovereigns. As a result, in non-stressed countries, the co-movement between sovereign and bank risk increased. This suggests that market participants perceived that bank risk is shared within the euro area. JEL Classification: C68, F34
    Keywords: bank-sovereign nexus, Comprehensive Assessment, European Central Bank, risk spillovers, stress test
    Date: 2018–11
  16. By: Barbara Annicchiarico (DEF & CEIS,University of Rome "Tor Vergata"); Silvia Surricchio (DEF,University of Rome "Tor Vergata"); Robert J. Waldmann (DEF & CEIS,University of Rome "Tor Vergata")
    Abstract: In a behavioral variant of a New Keynesian model, in which individuals use simple heuristic rules to forecast future in ation and output gap, if there are limits on the amount of debt that economic agents are allowed to bear, we observe occasionally severe downturns. Differences in beliefs combined with borrowing constraints tend to dampen expansions, but give rise to a chain reaction that exacerbates the recessions. The model is an example of endogenous credit cycles with expansions, severe recessions, and persistent inequality in the distribution of wealth. Monetary policy can both stabilize the economy and cause increased average output.
    Keywords: Credit cycle, heuristic rules, monetary policy
    JEL: E10 E32 D83
    Date: 2018–10–30
  17. By: Bucher, Monika; Dietrich, Diemo; Hauck, Achim
    Abstract: A bank's decision on loan supply and capital structure determines its immediate bankruptcy risk as well as the future availability of internal funds. These internal funds in turn determine a bank's future costs of external finance and future vulnerability to bankruptcy risks. We study these intra- and intertemporal links and analyze the influence of risk-weighted capital-to-asset ratios, liquidity coverage ratios and regulatory margin calls on the dynamics of loan supply and bank stability. Only regulatory margin calls or large liquidity coverage ratios achieve bank stability for all risk levels, but for large risks a bank will stop credit intermediation.
    Keywords: bank lending,banking crisis,bank capital regulation,liquidity regulation
    JEL: G01 G21 G28 E32
    Date: 2018
  18. By: Lubos Hanus (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; Institute of Information Theory and Automation, Academy of Sciences of the Czech Republic, Pod Vodarenskou Vezi 4, 182 00, Prague, Czech Republic); Lukas Vacha (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; Institute of Information Theory and Automation, Academy of Sciences of the Czech Republic, Pod Vodarenskou Vezi 4, 182 00, Prague, Czech Republic)
    Abstract: In our study, we consider a new approach to quantify the effects of economic shocks on monetary transmission. We analyse the widely known phenomenon of price puzzle in a time-varying environment using the frequency decomposition. We use the frequency response function to measure the power of shocks transferred to different economic cycles. Considering both time and frequency domains, we quantify the dynamics of shocks implied by monetary policy within an economic system. While studying the monetary policy transmission of the U.S., the empirical evidence shows that low-frequency cycles of output are prevalent and have positive transfers. Examination of the inflation reveals that the frequency responses vary significantly in time and alter the direction of transmission for all cyclical lengths.
    Keywords: cyclicality, frequency, economic systems, monetary policy
    Date: 2018–10

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