|
on Macroeconomics |
|
Issue of 2012‒07‒01
thirty-two papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Business Management |
| By: | Mimir, Yasin; Sunel, Enes; Taskin, Temel |
| Abstract: | This paper conducts a quantitative investigation of the role of reserve requirements as a macroprudential policy tool. We build a monetary DSGE model with a banking sector in which (i) an agency problem between households and banks leads to endogenous capital constraints for banks in obtaining funds from households, (ii) banks are subject to time-varying reserve requirements that countercyclically respond to expected credit growth, (iii) households face cash-in-advance constraints, requiring them to hold real balances, and (iv) standard productivity and money growth shocks are two sources of aggregate uncertainty. We calibrate the model to the Turkish economy which is representative of using reserve requirements as a macroprudential policy tool recently. We also consider the impact of financial shocks that affect the net worth of financial intermediaries. We find that (i) the time-varying required reserve ratio rule countervails the negative effects of the financial accelerator mechanism triggered by adverse macroeconomic and financial shocks, (ii) in response to TFP and money growth shocks, countercyclical reserves policy reduces the volatilities of key real macroeconomic and financial variables compared to fixed reserves policy over the business cycle, and (iii) a time-varying reserve requirement policy is welfare superior to a fixed reserve requirement policy. The credit policy is most effective when the economy is hit by a financial shock. Time-varying required reserves policy reduces the intertemporal distortions created by the credit spreads at expense of generating higher inflation volatility, indicating an interesting trade-off between price stability and financial stability. |
| Keywords: | Banking sector; time-varying reserve requirements; macroeconomic and financial shocks |
| JEL: | E51 E44 G28 G21 |
| Date: | 2012–06–22 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:39613&r=mac |
| By: | Michael T. Belongia (University of Mississippi); Peter N. Ireland (Boston College) |
| Abstract: | Over the last twenty-five years, a set of influential studies has placed interest rates at the heart of analyses that interpret and evaluate monetary policies. In light of this work, the Federal Reserve’s recent policy of "quantitative easing," with its goal of affecting the supply of liquid assets, appears as a radical break from standard practice. Superlative (Divisia) measures of money, however, often help in forecasting movements in key macroeconomic variables, and the statistical fit of a structural vector autoregression deteriorates significantly if such measures of money are excluded when identifying monetary policy shocks. These results cast doubt on the adequacy of conventional models that focus on interest rates alone. They also highlight that all monetary disturbances have an important "quantitative" component, which is captured by movements in a properly measured monetary aggregate. |
| Keywords: | quantitative easing, interest rates, Divisia index, monetary policy |
| JEL: | E51 E52 E58 |
| Date: | 2012–06–18 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:801&r=mac |
| By: | Carlos A. Vegh; Guillermo Vuletin |
| Abstract: | Developing countries have typically pursued procyclical macroeconomic policies, which tend to amplify the underlying business cycle (the “when-it-rains-it-pours” phenomenon). There is, however, evidence to suggest that about a third of developing countries have shifted from procyclical to countercyclical fiscal policy over the last decade. We show that the same is true of monetary policy: around 35 percent of developing countries have become countercyclical over the last decade. We provide evidence that links procyclical monetary policy in developing countries to what we refer as the “fear of free falling;” that is, the need to raise interest rates in bad times to defend the domestic currency. |
| JEL: | E52 F41 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18175&r=mac |
| By: | Jaromir Baxa; Miroslav Plasil; Borek Vasicek |
| Abstract: | The purpose of this paper is to provide a novel look at the evolution of inflation dynamics in selected Central European (CE) countries. We use the lens of the New Keynesian Phillips Curve (NKPC) nested within a time-varying framework. Exploiting a time-varying regression model with stochastic volatility estimated using Bayesian techniques, we analyze both the closed and open-economy version of the NKPC. The results point to significant differences between the inflation processes in three CE countries. While inflation persistence has almost disappeared in the Czech Republic, it remains rather high in Hungary and Poland. In addition, the volatility of inflation shocks decreased quickly a few years after the adoption of inflation targeting in the Czech Republic and Poland, whereas it remains quite stable in Hungary even after ten years' experience of inflation targeting. Our results thus suggest that the degree of anchoring of inflation expectations varies across CE coutries. In addition, we found some evidence that the 'structural' parameters of the NKPC are somewhat related to the macroeconomic environment. |
| Keywords: | Bayesian model averaging, Central European countries, inflation dynamics, New Keynesian Phillips curve, time-varying parameter |
| JEL: | C11 C22 E31 E52 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2012/04&r=mac |
| By: | Isabelle SALLE (GREThA, CNRS, UMR 5113); Murat YILDIZOGLU (GREThA, CNRS, UMR 5113); Marc-Alexandre SENEGAS (GREThA, CNRS, UMR 5113) |
| Abstract: | This paper investigates the performances of an inflation targeting regime in a learning economy, whose functioning is tackled through an Agent-Based Model (ABM). While the structure of our ABM has common features with that of the New Keynesian canonical modelling framework, we model individual agents\' forms of behaviour under procedural rationality in the sense of Simon (1971). Instead of assuming that they fully optimize on an intertemporal basis beforehand, and make use of rational expectations in that respect, agents are supposed to adopt economic forms of behaviour that are guided by simple rules of thumb -- or heuristics -- while a continuous learning process governs the evolution of those simple rules. Departures from the rational expectations equilibrium endogenously arise from those learning rules. Subsequently, the central bank implements an inflation targeting regime via a monetary policy rule. Our aim is to analyse the interplay between the learning mechanisms operating at the individual level, and the features and performances of the inflation targeting regime. In such a setting, we show the primary importance of the credibility of central bank announcements regarding macroeconomic stabilization outcomes, as well as the beneficial role played by the inflation target as an anchoring device for private inflation expectations. We also demonstrate the potential welfare cost of imperfect public information, and contribute to the debate on optimal monetary policy rule under uncertainty |
| Keywords: | inflation targeting; agent-based model; central bank communication; expectations; learning |
| JEL: | E52 E58 C63 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:grt:wpegrt:2012-15&r=mac |
| By: | Olivier Coibion; Yuriy Gorodnichenko; Lorenz Kueng; John Silvia |
| Abstract: | We study the effects and historical contribution of monetary policy shocks to consumption and income inequality in the United States since 1980. Contractionary monetary policy actions systematically increase inequality in labor earnings, total income, consumption and total expenditures. Furthermore, monetary shocks can account for a significant component of the historical cyclical variation in income and consumption inequality. Using detailed micro-level data on income and consumption, we document the different channels via which monetary policy shocks affect inequality, as well as how these channels depend on the nature of the change in monetary policy. |
| JEL: | E2 E3 E4 E5 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18170&r=mac |
| By: | Yunus Aksoy (University of London); Henrique S. Basso (University of Warwick) |
| Abstract: | We propose a model that delivers endogenous variations in term spreads driven primarily by banks’ portfolio decision and their appetite to bear the risk of maturity transformation. We first show that fluctuations of the future profitability of banks’ portfolios affect their ability to cover for any liquidity shortage and hence influence the premium they require to carry maturity risk. During a boom, profitability is increasing and thus spreads are low, while during a recession profitability is decreasing and spreads are high, in accordance with the cyclical properties of term spreads in the data. Second, we use the model to look at monetary policy and show that allowing banks to sell long-term assets to the central bank after a liquidity shock leads to a sharp decrease in long-term rates and term spreads. Such interventions have significant impact on long-term investment, decreasing the amplitude of output responses after a liquidity shock. The short-term rate does not need to be decreased as much and inflation turns out to be much higher than if no QE interventions were implemented. Finally, we provide macro and micro-econometric evidence for the U.S. confirming the importance of expected financial business profitability in the determination of term spread fluctuations |
| Keywords: | Yield Curve, Quantitative Easing, Maturity Risk, Bank Portfolio |
| JEL: | E43 E44 E52 G20 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1223&r=mac |
| By: | Kaushik Mitra; George W. Evans; Seppo Honkapohja |
| Abstract: | Using the standard real business cycle model with lump-sum taxes, we analyze the impact of fiscal policy when agents form expectations using adaptive learning rather than rational expectations (RE). The output multipliers for government purchases are significantly higher under learning, and fall within empirical bounds reported in the literature (in sharp contrast to the implausibly low values under RE). Effectiveness of fiscal policy is demonstrated during times of economic stress like the recent Great Recession. Finally it is shown how learning can lead to dynamics empirically documented during episodes of "fiscal consolidations." |
| Keywords: | Government Purchases, Expectations, Output Multiplier, Fiscal Consolidation, Taxation. |
| JEL: | E62 D84 E21 E43 |
| Date: | 2012–01–17 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:1202&r=mac |
| By: | Jordi Galí; Frank Smets; Rafael Wouters |
| Abstract: | An analysis of the performance of GDP, employment and other labor market variables following the troughs in postwar U.S. business cycles points to much slower recoveries in the three most recent episodes, but does not reveal any significant change over time in the relation between GDP and employment. This leads us to characterize the last three episodes as slow recoveries, as opposed to jobless recoveries. We use the estimated New Keynesian model in Galí-Smets- Wouters (2011) to provide a structural interpretation for the slower recoveries since the early nineties. |
| Keywords: | jobless recoveries, U.S. business cycle, estimated DSGE models, Okun's law. |
| JEL: | E32 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1317&r=mac |
| By: | Detzer, Daniel |
| Abstract: | This paper analyzes two instruments - asset-based reserve requirements put forward by Thomas Palley and asset-based capital requirements proposed by Charles Goodhart and Avinash Persaud - regarding their merits in reducing excessive asset price inflation. A theoretical framework of asset pricing based on the ideas of Keynes and Minsky is developed, within which the working of the instruments is demonstrated and analyzed. It is shown that in theory both instruments are able to reduce excessive asset price inflation by reducing the amount of credit money and investment flowing from financial institutions into a booming sector. It is found that asset-based reserve requirements will only work through a predictable price effect, while the effect of asset-based capital requirements is hard to predict and may even become a quantitative supply constraint. Hence, it is concluded that due to the higher predictability of asset-based reserve requirements those are more suitable for the task of tackling asset price bubbles. -- |
| Keywords: | Monetary Policy,Banking Regulation,Asset Prices,Bubbles,Minsky,Financial Instability Hypothesis,Asset Based Reserve Requirements,Capital Requirements,Macroprudential Regulation |
| JEL: | E12 E52 G12 G18 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ipewps:132012&r=mac |
| By: | Gunes Kamber; Christie Smith; Christoph Thoenissen |
| Abstract: | Various papers have identified shocks to investment as major drivers of output, investment, hours, and interest rates. These investment shocks have been linked to financial frictions because financial markets are instrumental in transforming consumption goods into installed capital. However, the importance of investment shocks is not robust once we explicitly account for a simple financial friction. We estimate a medium scale dynamic stochastic general equilibrium model with collateral constraints. When entrepreneurs are subject to binding collateral constraints, a reduction in the value of installed capital reduces the value of collateral and thus the amount an entrepreneur can borrow. As a result, aggregate consumption no longer co-moves with GDP and the response of investment to a positive investment shock is attenuated. In the model with collateral constraints, the role of risk premium shocks in the business cycle increases markedly, whereas investment shocks have a much diminished role. |
| Keywords: | DSGE model, financial frictions, risk premium shocks, investment specific technology shocks, Bayesian estimation |
| JEL: | C11 E22 E32 E44 |
| Date: | 2012–06–08 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:1206&r=mac |
| By: | Sumru Altug; Fabio Canova |
| Abstract: | We examine the relationship between institutions, culture and cyclical fluctuations for a sample of 45 European, Middle Eastern and North African countries. Better governance is associated with shorter and less severe contractions and milder expansions. Certain cultural traits, such as lack of acceptance of power distance and individualism, are also linked business cycle features. Business cycle synchronization is tightly related to similarities in the institutional environment. Mediterranean countries conform to these general tendencies. |
| Keywords: | Business cycles, institutions, culture, Mediterranean countries, synchronization. |
| JEL: | C32 E32 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1314&r=mac |
| By: | John Taylor (Stanford University); John Cogan (Stanford University); Volker Wieland (Goethe University Frankfurt); Maik Wolters (Goethe University Frankfurt) |
| Abstract: | In the aftermath of the global financial crisis and great recession, many countries face substantial deficits and growing debts. In the United States, federal government outlays as a ratio to GDP rose substantially from about 19.5 percent before the crisis to over 24 percent after the crisis. In this paper we consider a fiscal consolidation strategy that brings the budget to balance by gradually reducing this spending ratio over time to the level that prevailed prior to the crisis. A crucial issue is the impact of such a consolidation strategy on the economy. We use structural macroeconomic models to estimate this impact. We consider two types of dynamic stochastic general equilibrium models: a neoclassical growth model and more complicated models with price and wage rigidities and adjustment costs. We separate out the impact of reductions in government purchases and transfers, and we allow for a reduction in both distortionary taxes and government debt relative to the baseline of no consolidation. According to the initial model simulations GDP rises in the short run upon announcement and implementation of this fiscal consolidation strategy and remains higher than the baseline in the long run. Creation Date: 2012-06 Revision Date: |
| URL: | http://d.repec.org/n?u=RePEc:sip:dpaper:11-015&r=mac |
| By: | Pfajfar, D.; Santoro, E. (Tilburg University, Center for Economic Research) |
| Abstract: | Abstract: This paper examines the nexus between news coverage on inflation and households' inflation expectations. In doing so, we test the epidemiological foundations of the sticky information model (Carroll, 2003, 2006). We use both aggregate and household-level data from the Survey Research Center at the University of Michigan. We highlight a fundamental disconnection between news on inflation, consumers' frequency of expectation updating and the accuracy of their expectations. Our evidence provides at best weak support to the epidemiological framework, as most of the consumers who update their expectations do not revise them towards professional forecasters' mean forecast. |
| Keywords: | Inflation;Survey Expectations;News;Information Stickiness. |
| JEL: | C53 D84 E31 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2012048&r=mac |
| By: | Hanif, M. Nadim; Khan, Mahmood ul Hassan |
| Abstract: | Market based implementation of monetary policy embeds a swift and complete pass-through of changes in policy rate to market interest rates. This impacts the lending and deposit rates (retail rates) of the banking system. Incomplete and slow pass-through impairs the effectiveness of monetary policy transmission mechanism. This study estimates the degree and the speed of interest rate pass-through in case of Pakistan. Monthly data on State Bank of Pakistan (SBP) policy rate, money market rates and banks’ retail lending/deposit rates from July 2001 to August 2011 is used to estimate an unrestricted autoregressive distributed lag (ARDL) model. The standard ARDL model allows for the estimation of an error correction model, which helps in differentiating short run impact of changes in policy rate from its long run impact on the banks’ lending rates. The results indicate that while there is a swift pass-through from the policy rate (T-bill rates and overnight rate) to money market rate, the impact of changes in money market rates on the bank deposit rates is not only sluggish, but also incomplete. However, banks’ lending rates on fresh loans are more responsive to changes in money market rates as the banks have the luxury to take into account the changes in opportunity cost of funding. |
| Keywords: | Policy Interest Rate; Market Interest Rate; Monetary Policy |
| JEL: | E52 |
| Date: | 2012–06–20 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:39587&r=mac |
| By: | Gabriel Jiménez; Steven Ongena; José-Luis Peydró; Jesús Saurina |
| Abstract: | We analyze the impact of the countercyclical capital buffers held by banks on the supply of credit to firms and their subsequent performance. Countercyclical "dynamic" provisioning that is unrelated to specific loan losses was introduced in Spain in 2000, and modified in 2005 and 2008. These policy experiments which entailed bank-specific shocks to capital buffers, combined with the financial crisis that shocked banks according to their available pre-crisis buffers, underpin our identification strategy. Our estimates from comprehensive bank-, firm-, loan-, and loan application-level data suggest that countercyclical capital buffers help smooth credit supply cycles and in bad times have positive effects on firm credit availability, assets, employment and survival. Our findings therefore hold important implications for theory and macroprudential policy. |
| Keywords: | bank capital, dynamic provisioning, credit availability, financial crisis. |
| JEL: | E51 E58 E60 G21 G28 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1315&r=mac |
| By: | Gros, Daniel |
| Abstract: | Lax financial conditions can foster credit booms. The global credit boom of the last decade led to large capital flows across the world, including large movements of resources from the Northern countries of the euro area towards the Southern part. Since the start of the crisis and more markedly after 2009, these flows have suddenly stopped, creating severe adjustment pressures. This paper argues that, at this point, the common monetary policy can only try to mitigate the unavoidable adjustment by maintaining overall financial stability. The challenge is to strike a delicate balance between providing liquidity for solvent institutions while keeping the overall pressure on for a rapid correction of the imbalances. |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:eps:cepswp:6865&r=mac |
| By: | Philip Hans Franses (Econometric Institute Erasmus School of Economics, Erasmus University Rotterdam); Michael McAleer (Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam and Tinbergen Institute, The Netherlands, Department of Quantitative Economics, Complutense University of Madrid, and Institute of Economic Research, Kyoto University.); Rianne Legerstee (Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam and Tinbergen Institute The Netherlands) |
| Abstract: | Macroeconomic forecasts are frequently produced, widely published, intensively discussed and comprehensively used. The formal evaluation of such forecasts has a long research history. Recently, a new angle to the evaluation of forecasts has been addressed, and in this review we analyse some recent developments from that perspective. The literature on forecast evaluation predominantly assumes that macroeconomic forecasts are generated from econometric models. In practice, however, most macroeconomic forecasts, such as those from the IMF, World Bank, OECD, Federal Reserve Board, Federal Open Market Committee (FOMC) and the ECB, are typically based on econometric model forecasts jointly with human intuition. This seemingly inevitable combination renders most of these forecasts biased and, as such, their evaluation becomes non-standard. In this review, we consider the evaluation of two forecasts in which: (i) the two forecasts are generated from two distinct econometric models; (ii) one forecast is generated from an econometric model and the other is obtained as a combination of a model and intuition; and (iii) the two forecasts are generated from two distinct (but unknown) combinations of different models and intuition. It is shown that alternative tools are needed to compare and evaluate the forecasts in each of these three situations. These alternative techniques are illustrated by comparing the forecasts from the (econometric) Staff of the Federal Reserve Board and the FOMC on inflation, unemployment and real GDP growth. It is shown that the FOMC does not forecast significantly better than the Staff, and that the intuition of the FOMC does not add significantly in forecasting the actual values of the economic fundamentals. This would seem to belie the purported expertise of the FOMC. |
| Keywords: | Macroeconomic forecasts, econometric models, human intuition, biased forecasts, forecast performance, forecast evaluation, forecast comparison. |
| JEL: | C22 C51 C52 C53 E27 E37 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:ucm:doicae:1214&r=mac |
| By: | Tatiana Damjanovic; Vladislav Damjanovic; Charles Nolan |
| Abstract: | A stylized macroeconomic model is developed with an indebted, heterogeneous Investment Banking Sector funded by borrowing from a retail banking sector. The government guarantees retail deposits. Investment banks choose how risky their activities should be. We compared the benefits of separated vs. universal banking modelled as a vertical integration of the retail and investment banks. The incidence of banking default is considered under different constellations of shocks and degrees of competitiveness. The benefits of universal banking rise in the volatility of idiosyncratic shocks to trading strategies and are positive even for very bad common shocks, even though government bailouts, which are costly, are larger compared to the case of separated banking entities. The welfare assessment of the structure of banks may depend crucially on the kinds of shock hitting the economy as well as on the efficiency of government intervention. |
| Keywords: | Risk in DSGE models, investment banking, financial intermediation, separating commercial and investment banking, competition and risk, moral hazard in banking, prudential regulation, systematic vs. idiosyncratic risks. |
| JEL: | E13 E44 G11 G24 G28 |
| Date: | 2012–01–17 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:1205&r=mac |
| By: | Hanif, M. Nadim; Malik, Muhammad Jahanzeb; Iqbal, Javed |
| Abstract: | This study estimates degree of intrinsic inflation persistence in Pakistan using aggregate price index, group level price indices, and individual commodity prices. We find no evidence of a unit root in (MoM) inflation at any level, except for house rent. Using monthly data from 1959 to 2011 we find that the estimate of (overall) inflation persistence is 0.16, which is low but significant. During 2001-2011 (overall) inflation persistence is insignificant. Food inflation does not exhibit any persistence during the last decade. However, the degree of persistence is very high (0.80) and significant for core inflation (NFNE), which weakens slightly (to 0.69) when we account for commodities price shock of 2008. At micro level, the estimated degree of inflation persistence for various groups is found to be relatively higher, in almost 60 percent of the cases, compared to corresponding degree of persistence at aggregate level. This may be because in micro analysis we consider only those commodities for which the estimated degree of inflation persistence is significant. |
| Keywords: | Persistence; Inflation; Food Inflation; Core Inflation |
| JEL: | E31 |
| Date: | 2012–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:39583&r=mac |
| By: | Gracia, Eduard |
| Abstract: | A popular interpretation of the Rational Expectations/Efficient Markets hypothesis states that, if the hypothesis holds, then market valuations must follow a random walk. This postulate has frequently been criticized on the basis of empirical evidence. Yet the assertion itself incurs what we could call 'fallacy of probability diffusion symmetry': although market efficiency does indeed imply that the mean (i.e. expected) path must be a random walk, if the probability diffusion process is asymmetric then the observed path will most closely resemble not the mean but the median, which does not necessarily follow a random walk. To illustrate the implications, this paper develops an efficient markets model where the median path of Tobin's q ratio displays regular cycles of bubbles and crashes reflecting an agency problem between investors and producers. The model is tested against US market data, with results suggesting that such a regular cycle does indeed exist and is statistically significant. The aggregate production function in Gracia (Uncertainty and Capacity Constraints: Reconsidering the Aggregate Production Function, 2011) is then put forward to show how financial fluctuations can drive the business cycle by periodically impacting aggregate productivity and, as a consequence, GDP growth. -- |
| Keywords: | Rational Expectations,efficient markets,financial bubbles,stock markets,booms and crashes,Tobin's q,business cycles,economic rents |
| JEL: | E22 E23 E32 G12 G14 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:201227&r=mac |
| By: | De Grauwe, Paul |
| Abstract: | The analysis in this Commentary provides strong evidence showing that the burden of the adjustments to the imbalances in the eurozone between the surplus and the deficit countries is borne almost exclusively by the deficit countries in the periphery. And although the European Commission has now been invested with an important responsibility of monitoring and correcting macroeconomic imbalances in the framework of the Macroeconomic Imbalance Procedure (MIP), the author finds that up to now it imposes a lot of pressure on the deficit countries but fails to impose a similar pressure on the surplus countries, with the effect that the eurozone is being kept in a deflationary straightjacket. |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:eps:cepswp:6901&r=mac |
| By: | Alessandri, Piergiorgio (Bank of England); Nelson, Benjamin (Bank of England) |
| Abstract: | How does bank profitability vary with interest rates? We present a model of a monopolistically competitive bank subject to repricing frictions, and test the model’s predictions using a unique panel data set on UK banks. We find evidence that large banks retain a residual exposure to interest rates, even after accounting for hedging activity operating through the trading book. In the long run, both level and slope of the yield curve contribute positively to profitability. In the short run, however, increases in market rates compress interest margins, consistent with the presence of non negligible loan pricing frictions. |
| JEL: | E40 G21 |
| Date: | 2012–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0452&r=mac |
| By: | Rafael Repullo (CEMFI, Centro de Estudios Monetarios y Financieros); Javier Suarez (CEMFI, Centro de Estudios Monetarios y Financieros) |
| Abstract: | We develop and calibrate a dynamic equilibrium model of relationship lending in which banks are unable to access the equity markets every period and the business cycle is a Markov process that determines loans’ probabilities of default. Banks anticipate that shocks to their earnings and the possible variation of capital requirements over the cycle can impair their future lending capacity and, as a precaution, hold capital buffers. We compare the relative performance of several capital regulation regimes, including one that maximizes a measure of social welfare. We show that Basel II is significantly more procyclical than Basel I, but makes banks safer. For this reason, it dominates Basel I in terms of welfare except for small social costs of bank failure. We also show that for high values of this cost, Basel III points in the right direction, with higher but less cyclically-varying capital requirements. |
| Keywords: | Banking regulation, Basel capital requirements, Capital market frictions, Credit rationing, Loan defaults, Relationship banking, Social cost of bank failure. |
| JEL: | G21 G28 E44 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:cmf:wpaper:wp2012_1202&r=mac |
| By: | Virginie Coudert; Cécile Couharde; Valérie Mignon |
| Abstract: | Although nominal parities have been completely fixed within the euro area since the launch of the single currency, real effective exchange rates have continued to vary under the effect of inflation disparities, exhibiting a strong appreciation in the peripheral countries. In this paper, we assess real exchange rate misalignments for euro area countries by using a Behavioral Equilibrium Exchange Rate (BEER) approach on the period 1980-2010. The results show that the peripheral member countries have been suffering from increasingly overvalued exchange rates since the mid-2000s, as their real appreciation has not stemmed from improving fundamentals in terms of productivity or external position. In addition, currency misalignments have been increased on average for all euro area countries since monetary union, while becoming more persistent. More worryingly, our findings highlight different patterns across members, as misalignments have been larger and more persistent in peripheral countries than in core countries. |
| Keywords: | euro area, real equilibrium exchange rates, misalignments, panel cointegration |
| JEL: | F31 C23 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2012-30&r=mac |
| By: | Tommaso, Proietti; Alessandra, Luati |
| Abstract: | The purpose of this chapter is to provide a comprehensive treatment of likelihood inference for state space models. These are a class of time series models relating an observable time series to quantities called states, which are characterized by a simple temporal dependence structure, typically a first order Markov process. The states have sometimes substantial interpretation. Key estimation problems in economics concern latent variables, such as the output gap, potential output, the non-accelerating-inflation rate of unemployment, or NAIRU, core inflation, and so forth. Time-varying volatility, which is quintessential to finance, is an important feature also in macroeconomics. In the multivariate framework relevant features can be common to different series, meaning that the driving forces of a particular feature and/or the transmission mechanism are the same. The objective of this chapter is reviewing this algorithm and discussing maximum likelihood inference, starting from the linear Gaussian case and discussing the extensions to a nonlinear and non Gaussian framework. |
| Keywords: | Time series models; Unobserved components; |
| JEL: | C13 C22 |
| Date: | 2012–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:39600&r=mac |
| By: | Nathan Bedock; Dalibor Stevanoviæ |
| Abstract: | In this paper we identify and measure the effects of credit shocks in a small open economy. To incorporate information from a large number of economic and financial indicators we use the structural factor-augmented VARMA model. In the theoretical framework of the financial accelerator, we approximate the external finance premium with credit spreads. We find that an adverse global credit shock generates a significant and persistent economic slowdown in Canada; the Canadian external finance premium rises immediately while interest rates and credit measures decline. Variance decomposition reveals that the credit shock has an important effect on real activity measures, including price and leading indicators, and credit spreads. On the other hand, an unexpected increase in the Canadian external finance premium shows no significant effect in Canada, suggesting that the effects of credit shocks in Canada are essentially caused by the unexpected changes in foreign credit market conditions. Given the identification procedure our structural factors have an economic interpretation. <P> |
| Keywords: | Credit shock, structural factor analysis, factor-augmented VARMA, |
| Date: | 2012–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2012s-16&r=mac |
| By: | Miguel Ramirez (Department of Economics, Trinity College); Racha Menhem (Department of Economics, Trinity College) |
| Abstract: | Following the lead of Arghyrou and Kontonikas (2010), this paper presents an endogenous expectations-based model that conceptualizes the ongoing Greek sovereign debt crisis as a currency crisis in disguise. That is, instead of the crisis culminating in a real devaluation of the drachma, it has been diverted to, and erupted in, the bond market where it has significantly raised interest rates, reduced economic growth, and spread it to other weak EMU economies. The empirical results indicate that poor economic fundamentals and international risk did not penalize bond spreads during the pre-crisis period, but are doing so in the crisis period. The estimates suggest that for both the pre-crisis and crisis periods, contagion is generally determined by economic and financial links among countries which, under certain conditions, can spread the crisis in a “fast and furious” manner. The reported estimates also confirm Arghyrou and Tsoukalas’s (2010) theoretical model by showing that an adverse shift in expectations occurred first in November 2009 and then on January 2010, thus significantly increasing bond spreads and slowing economic growth. Finally, the paper extends previous work and presents estimates which indicate that a third adverse shift in expectations took place in May 2010 following the announcement and implementation of the ECB and IMF-sponsored adjustment package. Investors apparently concluded that the draconian austerity measures associated with the latest rescue loan package would actually make economic conditions worse by inducing a self-reinforcing downward spiral in an economy which was already reeling from weak economic fundamentals and high levels of indebtedness. |
| Keywords: | Akaike Information Criterion (AIC), austerity measures, contagion, currency crisis, European Monetary Union (EMU), expectations, fiscal guarantees, Newey-West HAC methodology, spreads. |
| JEL: | C22 E44 F33 F34 F41 O52 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:tri:wpaper:1203&r=mac |
| By: | Enzo A. Cerletti (CEMFI, Centro de Estudios Monetarios y Financieros); Josep Pijoan-Mas (CEMFI, Centro de Estudios Monetarios y Financieros) |
| Abstract: | In this paper we study the transmission of income shocks into nondurable consumption in the presence of durable goods. We use a standard a life-cycle model with two goods to characterize the interaction of durability of goods, durability of shocks, and borrowing constraints as determinants of shock transmission. We show that borrowing constraints lead to a substitution between durable and non-durable goods upon arrival of an unexpected income change. This substitution biases the conventional measures of insurance based on the response of non-durable consumption to income changes. The sign of this bias depends critically on the persistence of the shock. We show that households have less insurance against transitory shocks and more insurance against permanent shocks than commonly measured. We calibrate the model economy to the US in order to measure the size of this bias. |
| Keywords: | Consumption insurance, durable goods, incomplete markets, borrowing constraints, persistence of income shocks. |
| JEL: | E21 D91 D12 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:cmf:wpaper:wp2012_1206&r=mac |
| By: | Benos, Evangelos (Bank of England); Garratt, Rodney (University of California at Santa Barbara); zimmerman, Peter (Bank of England) |
| Abstract: | We use payments data for the period 2006-09 to study the impact of the global financial crisis on payment patterns in CHAPS, the United Kingdom’s large-value wholesale payments system. CHAPS functioned smoothly throughout the crisis and all CHAPS settlement banks continued to meet their payment obligations. However, the data show that in the two months following the Lehman Brothers failure, banks did, on average, make payments at a slower pace than before the failure. Our analysis suggests this was partly explained by concerns about counterparty default risk as well as system-wide risk. The ratio of payments made to liquidity used was 30% lower in the period from 15 September 2008 to 30 September 2009 than in the period preceding the default of Lehman Brothers. This was due initially to payment delay, but later was due to banks making more payments with their own liquidity, probably because quantitative easing increased the amount of reserves in the system. To assess the economic significance of the observed delays in the value of payments settled, we develop risk indicators, based on Markov models, to quantify the theoretical liquidity impact of delays during an operational outage. We find that payment delays in the months following the failure of Lehman Brothers led to a statistically significant but economically modest increase in these risk measures. |
| Keywords: | Payments; Intraday liquidity; Credit default swap; Operational outage; Insurance |
| JEL: | E42 |
| Date: | 2012–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0451&r=mac |
| By: | Moen, Espen R. (Norwegian Business School (BI)); Yashiv, Eran (Tel Aviv University) |
| Abstract: | This paper studies the value of firms and their hiring and firing decisions in an environment where the productivity of the workers depends on how well they match with their co-workers and the firm acts as a coordinating device. Match quality derives from a production technology whereby workers are randomly located on the Salop circle, and depends negatively on the distance between the workers. It is shown that a worker's contribution in a given firm changes over time in a nontrivial way as co-workers are replaced with new workers. The paper derives optimal hiring and replacement policies, including an optimal stopping rule, and characterizes the resulting equilibrium in terms of employment, wages and distribution of firm values. The paper stresses the role of horizontal differences in worker productivity, as opposed to vertical, assortative matching issues. Simulations of the model show the dynamics of worker replacement policy, the resulting firm value and age distributions, and the connections between them. |
| Keywords: | firm value, complementarity, worker value, Salop circle, hiring, firing, match quality, optimal stopping |
| JEL: | E23 J62 J63 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp6657&r=mac |
| By: | Stefan Haigner; Friedrich Schneider; Florian Wakolbinger |
| Abstract: | Policy programs on anti-money laundering and combating the financing of terrorism (AML/CFT) have largely called for preventive measures like keeping record of financial transactions and reporting suspicious ones. In this survey study, we analyze the extent of global money laundering and terrorist financing and discuss the preventive policies and their evaluations. Moreover, we investigate whether more effective tax information exchange would bolster AML/CFT policies in that it reduced tax evasion, thus the volume of transnational financial flows (i.e. to and from offshore financial centres) and thus in turn cover given to money laundering and terrorist financing. We conclude that such a strategy can reduce financial flows, yet due to a "weakest link problem" even a few countries not participating can greatly undo what others have achieved. |
| Keywords: | money laundering, terrorist financing, tax information exchange |
| JEL: | K42 H26 H56 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diweos:diweos65&r=mac |