nep-cba New Economics Papers
on Central Banking
Issue of 2020‒01‒06
24 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Banking supervision, monetary policy and risk-taking: big data evidence from 15 credit registers By Altavilla, Carlo; Boucinha, Miguel; Peydró, José-Luis; Smets, Frank
  2. Private news and monetary policy - Forward guidance as Bayesian persuasion By Ippei Fujiwara; Yuichiro Waki
  3. New VAR evidence on monetary transmission channels: temporary interest rate versus inflation target shocks By Elizaveta Lukmanova; Katrin Rabitsch
  4. How Central Bankers Learned to Love Financialization: The Fed, the Bank, and the Enlisting of Unfettered Markets in the Conduct of Monetary Policy By Walter, Timo; Wansleben, Leon
  5. Unconventional monetary policy and funding liquidity risk By d'Avernas, Adrien; Vandeweyer, Quentin; Darracq Pariès, Matthieu
  6. (Un)expected monetary policy shocks and term premia By Kliem, Martin; Meyer-Gohde, Alexander
  7. Electoral cycles in macroprudential regulation By Müller, Karsten
  8. Risk endogeneity at the lender/investor-of-last-resort By Caballero, Diego; Lucas, Andr e; Schwaab, Bernd; Zhang, Xin
  9. Mexico’s Monetary Policy Communication and Money Markets By Alicia Garcia-Herrero; Eric Girardin; Arnoldo Lopez-Marmolejo
  10. European macroprudential database By Boh, Samo; Borgioli, Stefano; Coman, Andra; Chiriacescu, Bogdan; Koban, Anne; Kusmierczyk, Piotr; Pirovano, Mara; Schepens, Thomas; Veiga, Joao
  11. The Effect of Central Bank Credibility on Forward Guidance in an Estimated New Keynesian Model By Enrique Martinez-Garcia; Stephen J. Cole
  12. Asymmetric Transmission of the Monetary Policy: Empirical Evidence from the Consumer Credit Rates in Indonesia By Fitri Ami Handayani; Febrio Nathan Kacaribu
  13. CBDC – in a whirlpool of discussion By Aiste Juskaite; Sigitas Siaudinis; Tomas Reichenbachas
  14. A regime-switching model for the federal funds rate target By Andrei Sirchenko
  15. Romania's Unsustainable Stabilization: 1929-1933 By Raphaël Chiappini; Dominique Torre; Elise Tosi
  16. Measuring the output gap, potential output growth and natural interest rate from a semi-structural dynamic model for Peru By Luis Eduardo Castillo; David Florián Hoyle
  17. The role of global relative price changes in international comovement of inflation By Aleksei Kiselev; Aleksandra Zhivaykina
  18. The Economic Impact of Yield Curve Compression: Evidence from Euro Area Conventional and Unconventional Monetary Policy By Goodhead, Robert
  19. Sovereign debt crisis in Portugal and in Spain By António Afonso; Nuno Verdial
  20. Euro area longer-term inflation expectations revisited By Byrne, David; Zekaite, Zivile
  21. Mortgage Cash-flows and Employment By Fergus Cumming
  22. Dynamic effects of persistent shocks By Mario Alloza; Jesús Gonzalo; Carlos Sanz
  23. Capital regulations and the management of credit commitments during crisis times By Paul Pelzl; María Teresa Valderrama
  24. Bank Restructuring without Government Intervention By Marcella Lucchetta; Bruno Maria Parigi; Jean-Charles Rochet

  1. By: Altavilla, Carlo; Boucinha, Miguel; Peydró, José-Luis; Smets, Frank
    Abstract: We analyse the effects of supranational versus national banking supervision on credit supply, and its interactions with monetary policy. For identification, we exploit: (i) a new, proprietary dataset based on 15 European credit registers; (ii) the institutional change leading to the centralisation of European banking supervision; (iii) high-frequency monetary policy surprises; (iv) differences across euro area countries, also vis-à-vis non-euro area countries. We show that supranational supervision reduces credit supply to firms with very high ex-ante and ex-post credit risk, while stimulating credit supply to firms without loan delinquencies. Moreover, the increased risk-sensitivity of credit supply driven by centralised supervision is stronger for banks operating in stressed countries. Exploiting heterogeneity across banks, we find that the mechanism driving the results is higher quantity and quality of human resources available to the supranational supervisor rather than changes in incentives due to the reallocation of supervisory responsibility to the new institution. Finally, there are crucial complementarities between supervision and monetary policy: centralised supervision offsets excessive bank risk-taking induced by a more accommodative monetary policy stance, but does not offset more productive risk-taking. Overall, we show that using multiple credit registers – first time in the literature – is crucial for external validity. JEL Classification: E51, E52, E58, G01, G21, G28
    Keywords: AnaCredit, banking, euro area crisis, monetary policy, supervision
    Date: 2020–01
  2. By: Ippei Fujiwara; Yuichiro Waki
    Abstract: When the central bank has information that can help the private sector predict the future better, should it communicate such information to the public? In a simple New Keynesian model, such Delphic forward guidance unambiguously reduces ex ante welfare by increasing the variability of inflation and the output gap. In other words, it cannot persuade private agents to change their actions in favor of the central bank. In more elaborate DSGE models, the welfare effect may be either positive or negative, depending on the type of shock as well as distortions and frictions. These results suggest that improving welfare by Delphic forward guidance may be particularly difficult under model uncertainty.
    Keywords: news shock, optimal monetary policy, private information, Bayesian persuasion, forward guidance, New Keynesian models
    JEL: E30 E40 E50
    Date: 2019–12
  3. By: Elizaveta Lukmanova; Katrin Rabitsch
    Abstract: We augment a standard monetary VAR on output growth, inflation and the nominal interest rate with the central bank's inflation target, which we estimate from a New Keynesian DSGE model. Inflation target shocks give rise to a simultaneous increase in inflation and the nominal interest rate in the short run, at no output expense, which stands at the center of an active current debate on the Neo-Fisher effect. In addition, accounting for persistent monetary policy changes reflected in inflation target changes improves identification of a standard temporary nominal interest rate shock in that it strongly alleviates the price puzzle.
    Date: 2018–11–28
  4. By: Walter, Timo; Wansleben, Leon (London School of Economics and Political Science)
    Abstract: Central banks’ role in financialization has received increasing attention in recent years. These debates have predominantly revolved around authorities’ “benign neglect” of asset bubbles, their de-regulatory policies, and the safety-nets they provide for speculative exuberance. Most analyses refer to the dominance of pro-market interests and ideas to explain these actions. The present article moves beyond these accounts by showing how an alignment between techniques of monetary governance and ‘unfettered’ financial markets can explain central banks’ endorsement of increasingly fragile structures of liquidity and their strategic ignorance towards growing amounts of debt. We analyze the processes of abstraction and formalization by which the “programmes” and “technologies” of monetary governance have been made compatible with the texture of contemporary finance; and we show how central banks’ attempts to make markets more amenable to their methods of policy implementation shaped new conduits for financial growth. As empirical cases, we discuss the Federal Reserve’s experiments with different policy frameworks in the 1980s and the Bank of England’s twisted path to inflation targeting from 1979 to 1997. These cases allow us to demonstrate that the infrastructural power of contemporary central banking is predicated on the same institutional foundations that have made financialization possible.
    Date: 2018–11–07
  5. By: d'Avernas, Adrien; Vandeweyer, Quentin; Darracq Pariès, Matthieu
    Abstract: This paper investigates the efficiency of various monetary policy instruments to stabilize asset prices in a liquidity crisis. We propose a macro-finance model featuring both traditional and shadow banks subject to funding risk. When banks are well capitalized, they have access to money markets and efficiently mitigate funding shocks. When aggregate bank capital is low, a vicious cycle arises between declining asset prices and funding risks. The central bank can partially counter these dynamics. Increasing the supply of reserves reduces liquidity risk in the traditional banking sector, but fails to reach the shadow banking sector. When the shadow banking sector is large, as in the US in 2008, the central bank can further stabilize asset prices by directly purchasing illiquid securities. JEL Classification: E43, E44, E52, G12
    Keywords: asset pricing, money markets, quantitative easing, shadow banks
    Date: 2020–01
  6. By: Kliem, Martin; Meyer-Gohde, Alexander
    Abstract: The term structure of interest rates is crucial for the transmission of monetary policy to financial markets and the macroeconomy. Disentangling the impact of monetary policy on the components of interest rates, expected short rates and term premia, is essential to understanding this channel. To accomplish this, we provide a quantitative structural model with endogenous, time-varying term premia that are consistent with empirical findings. News about future policy, in contrast to unexpected policy shocks, has quantitatively significant effects on term premia along the entire term structure. This provides a plausible explanation for partly contradictory estimates in the empirical literature.
    Keywords: DSGE model,Bayesian estimation,Time-varying risk premia,Monetary policy
    JEL: E13 E31 E43 E44 E52
    Date: 2019
  7. By: Müller, Karsten
    Abstract: Do politics matter for macroprudential policy? I show that changes to macroprudential regulation exhibit a predictable electoral cycle in the run-up to 221 elections across 58 countries from 2000 through 2014. Policies restricting mortgages and consumer credit are systematically less likely to be tightened before elections during credit booms and economic expansions. Consistent with theories of opportunistic political cycles, this pattern is stronger when election outcomes are uncertain or in countries where political interference is more likely. In contrast to monetary policy, I find limited evidence that central banks are uniquely insulated from political cycles in macroprudential policy. These results suggest that political pressures may limit the ability of regulators to “lean against the wind.” JEL Classification: G18, G21, G28, D72, D73, P16
    Keywords: central bank independence, electoral cycles, macroprudential regulation, political economy, regulatory cycles
    Date: 2019–12
  8. By: Caballero, Diego (European Central Bank); Lucas, Andr e (Vrije Universiteit Amsterdam and Tinbergen Institute); Schwaab, Bernd (European Central Bank); Zhang, Xin (Research Department, Central Bank of Sweden)
    Abstract: To what extent can a central bank influence its own balance sheet credit risks during a financial crisis through unconventional monetary policy operations? To study this question we develop a risk measurement framework to infer the time-variation in portfolio credit risks at a high (weekly) frequency. Focusing on the Eurosystem's experience during the euro area sovereign debt crisis between 2010 and 2012, we find that the announcement and implementation of unconventional monetary policy operations generated beneficial risk spill-overs across policy portfolios. This caused overall risk to be nonlinear in exposures. In some instances the Eurosystem reduced its overall balance sheet credit risk by doing more, in line with Bagehot's well-known assertion that occasionally "only the brave plan is the safe plan."
    Keywords: lender-of-last-resort; unconventional monetary policy; portfolio credit risk; longer-term operational framework; central bank communication.
    JEL: C33 G21
    Date: 2019–10–01
  9. By: Alicia Garcia-Herrero (Bruegel - affiliation inconnue, HKUST - Hong Kong University of Science and Technology); Eric Girardin (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Arnoldo Lopez-Marmolejo (Inter-American Development Bank - Inter-American Development Bank)
    Abstract: Central bank communication is becoming a key aspect of monetary policy. How much financial markets listen and, possibly, understand Banco de Mexico's communication on its monetary policy stance should be a key consideration for the central bank to further modernize its monetary policy toolkit. In this paper, we tackle this issue empirically by using our own index of the tone of communication based on Banco de Mexico's speeches and statements and find that Mexican money markets do not only listen but they also understand the stance of monetary policy conveyed in the central bank's words. Regarding the ability to listen we find that both the volatility and volume in the money market rates change right after communication from Banco de Mexico's governing body. As for the markets' understanding, we document a statistically significant rise in money market rates the more hawkish communication is. All in all, our results show strong evidence of effective oral and written communication from the Central Bank towards Mexico's money markets.
    Keywords: Mexico monetary policy communication,money market
    Date: 2019–02
  10. By: Boh, Samo; Borgioli, Stefano; Coman, Andra; Chiriacescu, Bogdan; Koban, Anne; Kusmierczyk, Piotr; Pirovano, Mara; Schepens, Thomas; Veiga, Joao
    Abstract: This paper describes the Macroprudential Database (MPDB) of the European CentralBank (ECB), which is an important component of the ECB’s Statistical DataWarehouse. After explaining the rationale for creating the MPDB, the paper illustrateshow it supports the macroprudential analysis conducted by the European System ofCentral Banks (ESCB), the European Systemic Risk Board (ESRB) and the nationalauthorities of the Single Supervisory Mechanism (SSM) and the European Union. Thestructure of the database and a broad overview of available indicators are thenpresented, with a description of the relevant confidentiality issues. Examples illustratehow the MPDB is used for monitoring purposes and econometric modelling. Finally,the paper discusses remaining data gaps and expected future enhancements of thedatabase. JEL Classification: C82, E60
    Keywords: macroprudential, statistics
    Date: 2019–12
  11. By: Enrique Martinez-Garcia; Stephen J. Cole
    Abstract: This paper examines the effectiveness of forward guidance in an estimated New Keynesian model with imperfect central bank credibility. Forward guidance and the credibility of the central bank are uniquely modeled by utilizing a game-theoretic evolutionary framework. We estimate credibility for the U.S. Federal Reserve with Bayesian methods exploiting survey data on interest rate expectations from the Survey of Professional Forecasters (SPF). The results provide important takeaways: (1) The estimate of Federal Reserve credibility in terms of forward guidance announcements is relatively high, which indicates a degree of forward guidance effectiveness, but still one that is below the fully credible case. (2) If a central bank is perceived as less credible, anticipation effects are attenuated and, accordingly, output and inflation do not respond as favorably to forward guidance announcements. (3) Imperfect credibility and forward guidance are an important aspect to resolve the so-called “forward guidance puzzle,” which the literature shows arises from the unrealistically large responses of macroeconomic variables to forward guidance statements in structural models with perfect credibility. (4) Imperfect central bank credibility can also explain the evidence of forecasting error predictability based on forecasting disagreement found in the SPF data. Thus, accounting for imperfect credibility is important to model the formation of expectations in the economy and to understand the transmission mechanism of forward guidance announcements.
    Keywords: Evolutionary Games; Expectations; Monetary Policy; Forward Guidance; Central Bank Credibility
    JEL: D84 E30 E50 E52 E58 E60
    Date: 2019–12–16
  12. By: Fitri Ami Handayani (Graduate School of Economic Science Faculty of Economics and Business Universitas Indonesia); Febrio Nathan Kacaribu (Institute for Economic and Social Research Faculty of Economics and Business Universitas Indonesia (LPEM FEB UI))
    Abstract: This paper empirically examines asymmetric transmissions from money market rates to various consumer rates throughout a sample period that comprises monetary policy shifting in Indonesia from 2011 to 2017. We adopt modification of Asymmetric Error Correction Models (AECM), which incorporate three-error correction term. This allows us to inspect the different adjustment when the disequilibria are: large-positive, large-negative, and small. Our findings shows that there are varying asymmetric adjustment in response to different shocks across products in lending market. Thus, the monetary authorities should notice that both easing and tightening monetary policy appear to have varying impact to different credit market.
    Keywords: monetary policy — asymmetric adjustment — Indonesia
    JEL: C22 E43 G21
    Date: 2019–09
  13. By: Aiste Juskaite (Bank of Lithuania); Sigitas Siaudinis (Bank of Lithuania); Tomas Reichenbachas (Bank of Lithuania)
    Abstract: The topic of central bank digital currency (henceforth - CBDC) has recently gained significant share of attention among policy makers and academics. A wide range of CBDC setups are discussed from the universally accessible central bank accounts or digital tokens to less extreme suggestions of only partly broadening central bank balance sheet access by providing CBDC to wholesale consumers or getting private sector to mediate in the process by providing synthetic CBDC. This paper recalls the possible CBDC implementation types that are discussed in the current context; reviews some of the discussions among those researching the topic; gives a brief overview of the next-step initiatives taking place among central banks with a potential to lay ground for the practical CBDC implementation; and discusses the main policy implications from financial stability and monetary policy perspectives.
    Keywords: LBChain, LBCoin, central bank digital currency (CBDC)
    Date: 2019–12–10
  14. By: Andrei Sirchenko (University of Amsterdam)
    Abstract: This paper develops an ordered choice model for the federal funds rate target with endogenous switching among three latent regimes and possibly endogenous explanatory variables. Estimated for the Greenspan era (1987-2006), the new model detects recurring switches among three policy regimes (interpreted as loose, neutral and tight policy stances) in response to the state of economy, outperforms the Taylor rule and the existing discrete-choice models both in and out of sample, correctly predicts out of sample 90% of the Fed decisions during the next thirteen years, successfully handles the zero lower bound period by a prolonged switch to a loose policy regime with no-change to the target rate (while the Taylor rule and the conventional ordered probit model predict further cuts), and delivers markedly different inference. The empirical results suggest that the endogeneity of explanatory variables does matter in modelling monetary policy and can distort the inference: the marginal effects on the choice probabilities can differ by several times and even have the opposite signs.
    Date: 2019–12–18
  15. By: Raphaël Chiappini (Université Côte d'Azur; GREDEG CNRS); Dominique Torre (Université Côte d'Azur, France; GREDEG CNRS); Elise Tosi (Skema Business School)
    Abstract: The Banque de France's (BDF's) conducted a mission to the National Bank of Romania (NBR) and the National Romanian Government between 1929 and 1933 to advise Romanian monetary and financial authorities. It took place in complement to two loans respectively provided in 1929 and 1931 to stabilize the leu and to develop the economy. After 4 years of cooperation, Romanian authorities were obliged to restrict convertibility to defend the leu. The Romanian Government was also unable to follow French's advice and finally defaulted. After the contributions of Mouré (2003), Cotrell (2006), Torre and Tosi (2010), and Raceanu (2012), this paper contributes to the analysis of this sequence: it supports the thesis that the Great Depression and its effects were not the primary causes of the failure of this cooperation episode. Two other reasons were indeed both sufficient to cause a default of the Romanian part and a failure of the cooperation sequence, unexpected by the French part: (i) a change of repudiation costs of the loans between 1929 and 1933, (ii) unadapted advices from the French mission / excessive cost for the Romanian part to follow them. To obtain this result, we first use archive documents to determine at which moment the Romanian and French parts agreed or disagreed during the 4-year cooperation. Second, we develop a game theoretic model analyzing on rational basis the motives which could explain a late default of the Romanian part, unexpected by the French part. Third, we apply a cliometric analysis onto original data from the National Bank of Romania, which shows that the advices were probably unadapted / too costly to follow. We conclude that at least one of the sufficient conditions exhibited by the theoretical model is empirically validated, which makes inessential the Great Depression as a cause of the default.
    Keywords: Nominal stabilization, Financial stabilisation, Central Banks cooperation, National Bank of Romania, Charles Rist, sovereign default, cliometrics
    Date: 2019–12
  16. By: Luis Eduardo Castillo (Central Reserve Bank of Peru); David Florián Hoyle (Central Reserve Bank of Peru)
    Abstract: This paper uses a calibrated version of the Quarterly Projection Model (MPT, for its acronym in Spanish), a semi-structural dynamic model used by the Central Reserve Bank of Peru for forecasting and policy scenario analysis, to jointly estimate the output gap, potential output growth and natural interest rate of the Peruvian economy during the inflation targeting regime (between 2002 and 2017). The model is employed as a multivariate filter with a sophisticated economic structure that allows us to infer the dynamics of non-observable variables from the information provided by other variables defined ex-ante as observable. As the results from the Kalman filter are sensible to the variables declared as observable, we use five groups of variables to be defined as such to build probable ranges for our estimates. The results indicate that the estimated output gap is large in amplitude and highly persistent while potential output growth is very smooth. Therefore, most of the variation in Peruvian economic activity during the inflation targeting regime can be attributed to the former. The estimation of the output gap also proves that monetary policy has been extensively responsive to this leading indicator of inflation. Meanwhile, the real natural interest rate is estimated to be considerable stable, averaging 1,6 percent in the sample with only a sharp decline to 1,3 percent during the financial crisis. The main finding of the paper, however, is that there has been a steady deceleration of potential output growth since 2012. A growth-accounting exercise proves that this trend follows mostly a reduction in total factor productivity (TFP) growth during the same time frame (although the drop of capital and labour contributions jointly explain almost a third part of average potential output growth slowdown between 2010-2013 and 2014-2017).
    Keywords: Potential output, Output gap, Natural Interest Rate, Kalman Filter, Peru
    JEL: C51 E32 E52
    Date: 2019–12
  17. By: Aleksei Kiselev (Bank of Russia, Russian Federation); Aleksandra Zhivaykina (Bank of Russia, Russian Federation)
    Abstract: In this paper we investigate the impact of global relative price changes on domestic inflation. We use a dynamic hierarchical factor model (DHFM) to decompose consumer basket products’ inflation in a panel of countries into (i) a global factor, common to all price series and all countries, (ii) a price change shock at product group level, (iii) a price change shock at product subgroup level, and (iv) an idiosyncratic component. Using monthly data for 29 economies from 2003 to 2018 we find that product inflation rates demonstrate different sensitivity to common price shocks. For energy, some food and manufactured goods, global relative price changes may account for up to 49% of inflation variation which is quite high for this frequency and level of disaggregation. Moreover, common factors from the DHFM have significant explanatory power for overall CPI and its aggregate components across different countries.
    Keywords: Dynamic hierarchical factor model, global inflation, relative prices, Russia
    JEL: C38 E31 F42
    Date: 2019–12
  18. By: Goodhead, Robert (Central Bank of Ireland)
    Abstract: This Economic Letter studies the eects of conventional and unconventional monetary policy on nancial and macroeconomic variables using euro area data. I use market movements during meeting days of the ECB Governing Council as measures of policy surprises and then distinguish between conventional and unconventional surprises in a general way. Surprises that reduce rates and steepen the yield curve are understood to represent conventional policy, and surprises that reduce rates and atten the yield curve as unconventional policy. I study the eects of these surprises in an empirical model of the euro area macroeconomy. I provide conditional and unconditional forecasts of key euro area aggregates under dierent policy actions by the ECB Governing Council. Unconventional monetary policy surprises are found to have strong eects on macroeconomic variables, though they have a somewhat delayed eect relative to conventional policy.
    Date: 2019–11
  19. By: António Afonso; Nuno Verdial
    Abstract: The 2007-2008 financial crisis and the European sovereign debt crisis effects rippled through the financial system, banks and sovereign states. We analyze these events, focusing on the Portuguese and Spanish case after providing an insight into the Eurozone. We assessed the pricing of sovereign risk by performing an OLS/2SLS fixed effects panel analysis on a pool of Eurozone countries and a SUR regression with Portugal and Spain covering the period 1999:11 until 2019:6. Our results show that the pricing of sovereign risk changed with the crisis and the “whatever it takes” speech of Mario Draghi. Specifically, market pricing of the Eurozone credit risk, liquidity risk and the risk appetite increased after the crisis and it relaxed afterwards. We did not find evidence of specific pricing regime changes after the speech in the Portuguese and Spanish case.
    Keywords: Sovereign debt, Yield spreads, Crises, Unconventional Monetary Policy, Portugal, Spain
    JEL: C23 E44 E52 G01
    Date: 2019–12
  20. By: Byrne, David (Central Bank of Ireland); Zekaite, Zivile (Central Bank of Ireland)
    Abstract: This Letter examines recent dynamics in ination expectations, which are an important determinant of actual ination, as they impact economic decisions, such as households’ spending decisions and rms’ pricing plans. It is therefore important that expectations are well-anchored and that longer-term expectations are at levels consistent with the Eurosystem’s ination objective and insensitive to shocks to the economy or prices. We show some evidence for weaker anchoring since 2013 through increased sensitivity to shocks. As both the ination risk premium and the expected level of ination have declined more recently, monetary policymakers should continue monitoring developments in ination expectations closely.
    Date: 2019–10
  21. By: Fergus Cumming (Centre for Macroeconomics (CFM); Bank of England)
    Abstract: This paper quantifies the impact of the cash-flow channel of monetary policy on employment by combining novel micro datasets with near-universal coverage. When policy interest rates fall, families with a mortgage spend the extra cash-flow in their local economy and this increases labor demand. Overall, a reduction in mortgage payments of £1,000 per household led to a 0.3 percentage point increase in locally non-tradable employment growth over three years of the Great Recession, with the most pronounced effects in the restaurant sector. Spatial variation in labor and mortgage market structures leads to regional heterogeneity in the traction of monetary policy.
    Keywords: Employment, Interest rates, Monetary policy, Mortgages
    JEL: E24 E52 G21
    Date: 2019–12
  22. By: Mario Alloza (Banco de España); Jesús Gonzalo (Universidad Carlos III de Madrid); Carlos Sanz (Banco de España)
    Abstract: We show that several shocks identified without restrictions from a model, and frequently used in the empirical literature, display some persistence. We demonstrate that the two leading methods to recover impulse responses to shocks (moving average representations and local projections) treat persistence differently, hence identifying different objects. In particular, standard local projections identify responses that include an effect due to the persistence of the shock, while moving average representations implicitly account for it. We propose methods to re-establish the equivalence between local projections and moving average representations. In particular, the inclusion of leads of the shock in local projections allows to control for its persistence and renders the resulting responses equivalent to those associated to counterfactual non-serially correlated shocks. We apply this method to well-known empirical work on fiscal and monetary policy and find that accounting for persistence has a sizable impact on the estimates of dynamic effects.
    Keywords: impulse response function, local projection, shock, fiscal policy, monetary policy
    JEL: C32 E32 E52 E62
    Date: 2019–12
  23. By: Paul Pelzl; María Teresa Valderrama
    Abstract: Drawdowns on credit commitments by firms reduce a bank's regulatory capital ratio. Using the Austrian Credit Register, we provide novel evidence that during the 2008-09 financial crisis, capital-constrained banks managed this concern by substantially cutting partly or fully unused credit commitments. Controlling for a bank's capital position, we also find that greater liquidity problems induced banks to considerably cut such credit commitments during the crisis. These results suggest that banks actively manage both capital and liquidity risk caused by undrawn credit commitments in periods of financial distress, but thereby reduce liquidity provision to firms exactly when they need it most.
    Keywords: Capital Regulations; Credit Commitments; Financial Crisis
    JEL: E51 G01 G21 G28 G32
    Date: 2019–12
  24. By: Marcella Lucchetta (Ca Foscari University of Venice); Bruno Maria Parigi (University of Padua - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)); Jean-Charles Rochet (GFRI, University of Geneva; Swiss Finance Institute; University of Zurich - Swiss Banking Institute (ISB))
    Abstract: When a bank is burdened with Non Performing Loans, an underinvestment problem may arise. Banking Authorities often take the initiative to segregate these Non Performing Loans into a Bad Bank (BB), so that the remaining part of the bank, the Good Bank, finds it profitable to make new loans. These BBs typically involve an injection of public funds. We propose a different type of bank break up that does not require any government subsidy. The idea is to give to the bank’s shareholders the option to create a BB on their own, and finance it ex-ante by requiring the bank to issue a bail-inable bond that is drawn down when the option is exercised. No tax payer money is involved. Such a restructuring differs from the bail-in regimes in the Bank Recovery and Resolution Directive in the EU and the Dodd-Frank Act in the USA in that it recognizes to the bank’s shareholders the information rents that result from their private information on the bank’s legacy loans.
    Keywords: Bad banks, Under-investment, Debt overhang, Bail-inable bond
    JEL: G00 G20 G21
    Date: 2019–12

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