nep-mon New Economics Papers
on Monetary Economics
Issue of 2013‒08‒23
thirty papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. What's in a Second Opinion? Shadowing the ECB and the Bank of England By Matthias Neuenkirch; Pierre L. Siklos
  2. Are Central Bank Independence Reforms Necessary for Achieving Low and Stable Inflation? By Daunfeldt, Sve-Olov; Landström, Mats; Rudholm, Niklas
  3. The industrial impact of monetary shocks during the inflation targeting era in Australia By Vespignani, Joaquin L.
  4. Monetary policy, macroprudential policy and banking stability: evidence from the euro area By Maddaloni, Angela; Peydró, José-Luis
  5. The Seductive Myth of Canada’s “Overvalued” Dollar By Christopher Ragan
  6. Bank lending and monetary transmission in the euro area By De Santis, Roberto A.; Surico, Paolo
  7. Building a financial conditions index for the euro area and selected euro area countries: what does it tell us about the crisis? By Angelopoulou, Eleni; Balfoussia, Hiona; Gibson, Heather
  8. Optimal Macroprudential Policy By Ko Munakata; Koji Nakamura; Yuki Teranishi
  9. Heterogeneous transmission mechanism: monetary policy and financial fragility in the euro area By Ciccarelli, Matteo; Maddaloni, Angela; Peydró, José-Luis
  10. International monetary transmission to the Euro area: Evidence from the U.S., Japan and China By Vespignani, Joaquin L.; Ratti, Ronald A.
  11. The effectiveness of the non-standard policy measures during the financial crises: the experiences of the federal reserve and the European Central Bank By Carpenter, Seth; Demiralp, Selva; Eisenschmidt, Jens
  12. The ECB’s non-standard monetary policy measures: the role of institutional factors and financial structure By Cour-Thimann, Philippine; Winkler, Bernhard
  13. Risk, uncertainty and monetary policy By Bekaert, Geert; Hoerova, Marie; Lo Duca, Marco
  14. Exchange Market Pressures during the Financial Crisis: A Bayesian Model Averaging Evidence By Martin Feldkircher; Roman Horvath; Marek Rusnak
  15. Instability: Monetary and Real By Michael T. Belongia; Peter N. Ireland
  16. Interest Rate Pass-Through and Monetary Policy Asymmetry: A Journey into the Caucasian Black Box By Rustam Jamilov; Balázs Égert
  17. The euro exchange rate during the European sovereign debt crisis - dancing to its own tune? By Ehrmann, Michael; Osbat, Chiara; Stráský, Jan; Uusküla, Lenno
  18. Non-uniform wage-staggering: European evidence and monetary policy implications. By Juillard, M.; Le Bihan, H.; Millard, S.
  19. On the international spillovers of US quantitative easing By Fratzscher, Marcel; Lo Duca, Marco; Straub, Roland
  20. The U.S. Dollar Safety Premium By Matteo Maggiori
  21. A non-standard monetary policy shock: the ECB’s 3-year LTROs and the shift in credit supply By Darracq Pariès, Matthieu; De Santis, Roberto A.
  22. Banking, Liquidity and Bank Runs in an Infinite Horizon Economy By Nobuhiro Kiyotaki
  23. Real exchange rate forecasting: a calibrated half-life PPP model can beat the random walk By Ca' Zorzi, Michele; Muck, Jakub; Rubaszek, Michał
  24. Central bank liquidity provision, risk-taking and economic efficiency By Bindseil, Ulrich; Jabłecki, Juliusz
  25. Impact of Financial Deregulation on Monetary and Economic Policy in the Czech Republic, Hungary and Poland: 1990-2003 By Patricia McGrath
  26. Current account reversals in industrial countries: does the exchange rate regime matter? By Pancaro, Cosimo
  27. Fiscal policy coordination in monetary unions By Josef Schroth
  28. Economic Policy Coordination in the Economic and Monetary Union: From Maastricht via the SGP to the Fiscal Pact By Mortensen, Jørgen
  29. The Benefits and Costs of Highly Expansionary Monetary Policy By Łukasz Rawdanowicz; Romain Bouis; Shingo Watanabe
  30. A Tale of Two Eurozones: Banks’s Funding, Sovereign Risk & Unconventional Monetary Policies By Fulli-Lemaire, Nicolas

  1. By: Matthias Neuenkirch; Pierre L. Siklos
    Abstract: One way of evaluating how well monetary authorities perform is to provide the public with a regular and independent second opinion. The European Central Bank (ECB) and the Bank of England (BoE) are shadowed by professional and academic economists who provide a separate policy rate recommendation in advance of the central bank announcement. In this paper, we systematically evaluate this second opinion and find that, first, the shadow committee of the ECB tends to be relatively less inflation averse than the ECB. In contrast, the shadow committee of the BoE proposes a more hawkish monetary policy stance than the BoE. Second, consensus within a shadow committee is far easier to reach when there is no pressure to change the policy rate. Third, the ECB’s shadow committee is more activist than the ECB’s Governing Council and a larger degree of consensus within the former brings about a greater likelihood that the two committees will agree.
    Keywords: Committee Behavior, Monetary Policy Committees, Shadow Councils, Taylor Rules
    JEL: E43 E52 E58 E61
    Date: 2013–07
  2. By: Daunfeldt, Sve-Olov (The Swedish Retail Institute (HUI)); Landström, Mats (Department of Economics, University of Gävle); Rudholm, Niklas (Department of Economics)
    Abstract: Using data on the occurrence of central bank independence (CBI) reforms in 131 countries during 1980-2005, we test whether they were important in reducing inflation and maintaining price stability. CBI reforms are found to have reduced inflation on average 3.31% when countries with historically high inflation rates are included. But countries with lower inflation have reduced it without institutional reforms granting central banks more independence, undermining the theoretical time-inconsistency case for CBI. There is furthermore no evidence that CBI reforms have helped reduce inflation variability.
    Keywords: inflation; institutional reform; monetary policy; time-inconsistency
    JEL: E52 E58 P48
    Date: 2013–08–13
  3. By: Vespignani, Joaquin L. (School of Economics and Finance, University of Tasmania)
    Abstract: In this article we analyse the industrial impact of monetary shocks since inflation targeting has been introduced in Australia (1990). These impacts are quantified by constructing a structural vector autoregressive (SVAR) model for a small open economy. Our results show that construction and manufacturing industries exhibit a significant reduction in gross value added (GVA) after an unanticipated rise in the official cash rate. However, the finance and insurance industry, and the mining industry, seem to be unaffected by these shocks.
    Keywords: Monetary shocks, Industrial response, Industrial composition and VAR model
    JEL: E50 E58 C32
    Date: 2013–01–17
  4. By: Maddaloni, Angela; Peydró, José-Luis
    Abstract: We analyze the impact on lending standards of short-term interest rates and macroprudential policy before the 2008 crisis, and of the provision of central bank liquidity during the crisis. Exploiting the euro area institutional setting for monetary and prudential policy and using the Bank Lending Survey, we show that in the period prior to the crisis, in an environment of low monetary policy interest rates, bank lending conditions unrelated to borrowers’ risk were softened. During the same period, we also provide some suggestive evidence of excessive risktaking for mortgages loans. At the same time, we show that the impact of low monetary policy rates on the softening of standards may be reduced by more stringent prudential policies on either bank capital or loan-to-value ratios. After the start of the 2008 crisis, we find that low monetary rates helped to soften lending conditions that were tightened because of bank capital and liquidity constraints, especially for business loans. Importantly, this softening effect is stronger for banks that borrow more long-term liquidity from the Eurosystem. Therefore, the results suggest that monetary policy rates and central bank provision of long-term liquidity complement each other in working against a possible credit crunch for firms. JEL Classification: E51, E52, E58, G01, G21, G28
    Keywords: banking stability, Macroprudential policy, monetary policy
    Date: 2013–07
  5. By: Christopher Ragan (McGill University)
    Abstract: A confluence of factors promises to put pressure on the new Bank of Canada governor to direct monetary policy at fixing Canada’s so-called “overvalued” currency, according to a report released today by the C.D. Howe Institute. But in “The Seductive Myth of Canada’s “Overvalued” Dollar,” author Christopher Ragan provides two strong arguments against doing so: the importance of the Bank’s focus on inflation, and the weakness of the “overvalued” dollar argument.
    Keywords: Monetary Policy
    JEL: E58 O24
  6. By: De Santis, Roberto A.; Surico, Paolo
    Abstract: To what extent does the availability of credit depend on monetary policy? And, does this relationship vary with bank characteristics? Based on a common source of balance sheet data for the four largest economies of the euro area over the period 1999-2011, we uncover three main regularities. First, the effect of monetary policy on bank lending is significant and heterogeneous in Germany and Italy, which are characterised by a large number of banks; but it is very weak in Spain and more homogeneous in France, where the banking industry has a higher degree of market concentration. Second, there is some evidence that monetary policy exerts larger effects on cooperative and savings banks with lower liquidity and less capital in Germany and savings banks with smaller size in Italy. Third, heterogeneity across groups of banks belonging to the same category in any particular country is found to be less pronounced. JEL Classification: C33, E44, E52, G21
    Keywords: commercial, cooperative, credit availability, heterogeneous effects, monetary policy, savings banks
    Date: 2013–07
  7. By: Angelopoulou, Eleni; Balfoussia, Hiona; Gibson, Heather
    Abstract: In this paper we construct Financial Conditions Indices (FCIs) for the euro area, for the period 2003 to 2011, using a wide range of prices, quantities, spreads and survey data, grounded in the theoretical literature. One FCI includes monetary policy variables, while two versions without monetary policy are also constructed, enabling us to study the impact of monetary policy on financial conditions. The FCIs constructed fit in well with a narrative of financial conditions since the creation of the monetary union. FCIs for individual euro area countries are also provided, with a view to comparing financial conditions in core and periphery countries. There is evidence of significant divergence both before and during the crisis, which becomes less pronounced when monetary policy variables are included in the FCI. However, the impact of monetary policy on financial conditions appears not to be entirely symmetric across the euro area. JEL Classification: E52, E51, E61, E63, E65
    Keywords: financial conditions, financial crisis, monetary policy
    Date: 2013–05
  8. By: Ko Munakata; Koji Nakamura; Yuki Teranishi
    Abstract: We introduce financial market friction through search and matching in the loan market into a standard New Keynesian model. We reveal that the second order approximation of social welfare includes the terms related to credit, such as credit market tightness, the volume of credit, and the loan separation rate, in addition to the inflation rate and consumption under financial market friction. Our analytical result justifies why optimal policy should take credit variation into account. We introduce monetary policy and macroprudential policy measures for financial stability into the model. The optimal outcome is achieved through monetary and macroprudential policies by taking into account not only price stability but also financial stability.
    Keywords: Optimal macroprudential policy; optimal monetary policy; financial market friction
    JEL: E44 E52 E61
    Date: 2013–08
  9. By: Ciccarelli, Matteo; Maddaloni, Angela; Peydró, José-Luis
    Abstract: The Euro area economic activity and banking sector have shown substantial fragility over the last years with remarkable country heterogeneity. Using detailed data on lending conditions and standards, we analyse how financial fragility has affected the transmission mechanism of the single Euro area monetary policy during the crisis until the end of 2011. The analysis shows that the monetary transmission mechanism has been time-varying and influenced by the financial fragility of the sovereigns, banks, firms and households. The impact of monetary policy on aggregate output is stronger during the financial crisis, especially in countries facing increased sovereign financial distress. This amplification mechanism, moreover, operates mainly through the credit channel, both the bank lending and the non-financial borrower balance-sheet channel. Our results suggest that the bank-lending channel has been partly mitigated by the ECB nonstandard monetary policy interventions. At the same time, when looking at the transmission through banks of different sizes, it seems that, until the end of 2011, the impact of credit frictions of borrowers have not been significantly reduced, especially in distressed countries. Since small banks tend to lend primarily to SME, we infer that the policies adopted until the end of 2011 might have fall short of reducing credit availability problems stemming from deteriorated firm net worth and risk conditions, especially for small firms in countries under stress. JEL Classification: E44, E52, E58, G01, G21, G28
    Keywords: credit channel, financial crisis, heterogeneity, monetary policy, non-standard measures
    Date: 2013–03
  10. By: Vespignani, Joaquin L.; Ratti, Ronald A.
    Abstract: There are marked differences in the effect of increases in monetary aggregates in China, Japan and the U.S. on Euro area economic and financial variables over 1999-2012. Increases in monetary aggregates in China are associated with significant increases in the world price of commodities and with increases in Euro area inflation, industrial production and exports. Results are consistent with shocks to China’s M2 facilitating domestic growth with expansionary consequences for the Euro area economy. In contrast, increases in monetary aggregates in Japan are associated with significant appreciation of the Euro and decreases in Euro area industrial production and exports. Production of goods highly competitive with European goods in Japan and expenditure switching in Japan are consistent with the results. U.S. monetary expansion has relatively small effects on the Euro area over this period compared to results reported in the literature for earlier sample periods.
    Keywords: International monetary transmission, China’s monetary aggregates, Euro area Commodity prices
    JEL: E52 E58 F31 F42
    Date: 2013–06–15
  11. By: Carpenter, Seth; Demiralp, Selva; Eisenschmidt, Jens
    Abstract: A growing number of studies have sought to measure the effects of non-standard policy on bank funding markets. The purpose of this paper is to carry those estimates a step further by looking at the effects of bank funding market stress on the volume of bank lending, using a simultaneous equation approach. By separately modeling loan supply and demand, we determine how nonstandard central bank measures affected bank lending by reducing stress in bank funding markets. We focus on the Federal Reserve and the European Central Bank. Our results suggest that non-standard policy measures lowered bank funding volatility. Lower bank funding volatility in turn increased loan supply in both regions, contributing to sustain lending activity. We consider this as strong evidence for a “bank liquidity risk channel”, operative in crisis environments, which complements the usual channels of transmission of monetary policy. JEL Classification: E58, G32, G21
    Keywords: bank funding volatility, bank lending, non-standard policy
    Date: 2013–07
  12. By: Cour-Thimann, Philippine; Winkler, Bernhard
    Abstract: This paper aims to make two contributions: to review the ECB’s non-standard monetary policy measures in response to the financial and sovereign debt crisis against the background of the institutional framework and financial structure of the euro area; and to interpret this response from a flow-of-funds perspective. The paper highlights how the rationale behind the ECB’s nonstandard measures differs from that underlying quantitative easing policies. As a complement to rather than a substitute for standard interest rate decisions, the non-standard measures are aimed at supporting the effective transmission of monetary policy to the economy rather than at delivering additional direct monetary stimulus. The flow-of-funds analysis proposes an interpretation of central banks’ crisis responses as fulfilling their traditional role as lender of last resort to the banking system and, more broadly, reflecting their capacity to act as the “ultimate sector” that can take on leverage when other sectors are under pressure to deleverage. It also provides examples that trace the impact of non-standard measures across different sectors and markets. JEL Classification: E02, E40, E50, E58
    Keywords: asset purchases, Economic and Monetary Union, financial structure, flow of funds, monetary policy, sovereign debt crisis
    Date: 2013–04
  13. By: Bekaert, Geert; Hoerova, Marie; Lo Duca, Marco
    Abstract: The VIX, the stock market option-based implied volatility, strongly co-moves with measures of the monetary policy stance. When decomposing the VIX into two components, a proxy for risk aversion and expected stock market volatility (“uncertainty”), we find that a lax monetary policy decreases both risk aversion and uncertainty, with the former effect being stronger. The result holds in a structural vector autoregressive framework, controlling for business cycle movements and using a variety of identification schemes for the vector autoregression in general and monetary policy shocks in particular. The effect of monetary policy on risk aversion is also apparent in regressions using high frequency data. JEL Classification: E44, E52, G12, G20, E32
    Keywords: business cycle, monetary policy, option implied volatility, risk aversion, uncertainty
    Date: 2013–07
  14. By: Martin Feldkircher (Oesterreichische Nationalbank); Roman Horvath; Marek Rusnak
    Abstract: In this paper, we examine whether pre-crisis leading indicators help explain pressures on the exchange rate (and its volatility) during the globalfinancial crisis. We use a unique data set that covers 149 countries and 58 indicators, and estimation techniques that are robust to model uncertainty. Our results are threefold: First and foremost, we find that price stability plays a pivotal role as a determinant of exchange rate pressures. More specifically, the currencies of countries that experienced higher inflation prior to the crisis tend to be more affected in times of stress. Second, we investigate potential effects that vary with the level of pre-crisis inflation. In this vein, our results reveal that domestic savings reduce the severity of pressures in countries that experienced a low-inflation environment prior to the crisis. Finally, we find evidence of the mitigating effects of international reserves on the volatility of exchange rate pressures.
    Keywords: Exchange market pressures, financial crisis
    JEL: F31 F37
    Date: 2013–07
  15. By: Michael T. Belongia (University of Mississippi); Peter N. Ireland (Boston College)
    Abstract: Fifty years ago, Friedman and Schwartz presented evidence of pro-cyclical movements in the money stock, exhibiting a lead over corresponding movements in output, found in historical monetary statistics for the United States. Very similar relationships appear in more recent data. To see them clearly, however, one must use Divisia monetary aggregates in place of the Federal Reserve’s official, simple-sum measures. One must also split the data sample to focus, separately, on episodes before and after 1984 and on a new episode of instability beginning in 2000. A structural VAR draws tight links between Divisia money and output during each of these three periods.
    Keywords: money, output, Divisia aggregates, structural VAR
    JEL: E31 E32 E51 E52
    Date: 2013–08–01
  16. By: Rustam Jamilov; Balázs Égert
    Abstract: This paper analyses the interest rate pass-through for five economies of the Caucasus – Armenia, Azerbaijan, Georgia, Kazakhstan, and Russia. Employing an autoregressive distributed lag (ARDL) specification to monthly data, we find that the interest rate pass-through is systematically incomplete and sluggish, probably due to macroeconomic instability and low banking sector competition. It is not clear whether pass-through has improved over time and asymmetric adjustment is found to characterize the pass-through only occasionally. Overall, our results show a considerable degree of cross-country heterogeneity in the size and speed of the pass-through.
    Keywords: Interest Rate Pass-Through; Asymmetric Adjustment; Caucasus
    JEL: E43 E52 N25
    Date: 2013–01–02
  17. By: Ehrmann, Michael; Osbat, Chiara; Stráský, Jan; Uusküla, Lenno
    Abstract: This paper studies the determinants of the euro exchange rate during the European sovereign debt crisis, allowing a role for macroeconomic fundamentals, policy actions and the public debate by policy makers. It finds that the euro exchange rate mainly danced to its own tune, with a particularly low explanatory power for macroeconomic fundamentals. Among the few factors that are found to have affected changes in exchanges rate levels are policy actions at the EU level and by the ECB. The findings of the paper also suggest that financial markets might have been less reactive to the public debate by policy makers than previously feared. Still, there are instances where exchange rate volatility was increasing in response to news, such as on days when several politicians from AAA-rated countries went public with negative statements, suggesting that communication by policy makers at times of crisis should be cautious about triggering undesirable financial market reactions. JEL Classification: E52, E62, F31, F42, G14
    Keywords: announcements, Exchange Rates, fundamentals, sovereign debt crisis
    Date: 2013–04
  18. By: Juillard, M.; Le Bihan, H.; Millard, S.
    Abstract: In many countries, wage changes tend to be clustered in the beginning of the year, with wages being set for fixed durations of typically one year. This has been, in particular, documented in recent years for European countries using microeconomic data. Motivated by this evidence we build a model of uneven wage staggering, embedded in a standard DSGE model of the euro area, and investigate the monetary policy consequences of non-synchronised wage-setting. The model has the potential to generate responses to monetary policy shocks that differ according to the timing of the shock. Using a realistic calibration of the seasonality in wage-setting, based on a wide survey of European firms, the quantitative difference across quarters turns out however to be moderate. Relatedly, we obtain that the optimal monetary policy rule does not vary much across quarters.
    Keywords: wage-setting, wage-staggering, wage synchronisation, monetary policy shocks, optimal simple monetary policy rules.
    JEL: E27 E52
    Date: 2013
  19. By: Fratzscher, Marcel; Lo Duca, Marco; Straub, Roland
    Abstract: The paper analyses the global spillovers of the Federal Reserve’s unconventional monetary policy measures. First, we find that Fed measures in the early phase of the crisis (QE1) were highly effective in lowering sovereign yields and raising equity markets, especially in the US relative to other countries. Fed measures since 2010 (QE2) boosted equities worldwide, while they had muted impact on yields across countries. Yet Fed policies functioned in a procyclical manner for capital flows to emerging markets (EMEs) and a counter-cyclical way for the US, triggering a portfolio rebalancing across countries out of EMEs into US equity and bond funds under QE1, and in the opposite direction under QE2. Second, the impact of Fed operations, such as Treasury and MBS purchases, on portfolio allocations and asset prices dwarfed those of Fed announcements, underlining the importance of the market repair and liquidity functions of Fed policies. Third, we find no evidence that FX or capital account policies helped countries shield themselves from these US policy spillovers, but rather that responses to Fed policies are related to country risk. The results thus illustrate how US unconventional measures have contributed to portfolio reallocation as well as a re-pricing of risk in global financial markets. JEL Classification: E52, E58, F32, F34, G11
    Keywords: Capital flows, emerging markets, Federal Reserve, monetary policy, panel data, policy responses, Portfolio Choice, quantitative easing, United States
    Date: 2013–06
  20. By: Matteo Maggiori (NYU)
    Abstract: I show that the US dollar earns a safety premium versus a basket of foreign currencies and that this premium is particularly high in times of global financial stress. These findings support the view that the dollar acts as the reserve currency for the international monetary system and that it is a natural safe haven in times of crisis, when a global flight to quality toward the reserve currency takes place. During such episodes, investors are willing to earn negative expected returns as compensation for holding safe dollars. I estimate the time varying dollar safety premium by using instrumental variable techniques to condition information down.
    Date: 2013
  21. By: Darracq Pariès, Matthieu; De Santis, Roberto A.
    Abstract: The identification of non-standard monetary policy shocks is a key challenge for econometricians, not least as these measures are somewhat unprecedented in modern central banking history and as the instruments vary widely across the various non-standard measures. This paper focuses on the 3-year long-term re-financing operations (LTROs), implemented by the ECB in December 2011 and February 2012. The macroeconomic impact of this measure is identified using the April 2012 Bank Lending Survey (BLS) as well as the special ad-hoc questions on the LTROs conducted in mid-February 2012. We estimate a panel-VAR for the euro area countries, which include relevant BLS variables, and identify credit supply shocks both recursively and with sign restriction methods. The macroeconomic effects of the 3-year LTROs are associated with the favorable credit supply shocks extracted through BLS information for the first half of 2012. Compared with the most likely developments one could have expected at the end of 2011 when financial tensions culminated, our counterfactual exercises suggest that the 3-year LTROs significantly lifted prospects for real GDP and loan provision to non-financial corporations over the next two-to-three years. JEL Classification: C23, E52
    Keywords: Non-standard monetary policy measures, Panel VAR
    Date: 2013–01
  22. By: Nobuhiro Kiyotaki (Princeton University)
    Abstract: We develop a variation of the macroeconomic model of banking in Gertler and Kiyotaki (2011) that allows for household liquidity risks and bank runs as in Diamond and Dybvig (1983). As in Gertler and Kiyotaki, because bank net worth fluctuates with aggregate production, the spread in the expected rates of return on bank asset and deposit fluctuates countercyclically. However, because bank assets have a longer maturity than deposits, bank runs are possible as in Diamond and Dybvig. Whether a bank run equilibrium exists depends on bank balance sheets and a liquidation price for bank assets in equilibrium. While in normal times a bank run equilibrium may not exist, the possibility can arise in a recession. Overall, the goal is to present a framework that synthesizes the macroeconomic and microeconomic approaches to banking and banking instability.
    Date: 2013
  23. By: Ca' Zorzi, Michele; Muck, Jakub; Rubaszek, Michał
    Abstract: This paper brings three new insights into the Purchasing Power Parity (PPP) debate. First, we show that a half-life PPP model is able to forecast real exchange rates (RER) better than the random walk (RW) model at both short and long-term horizons. Secondly, we find that this result holds only if the speed of adjustment to the sample mean is calibrated at reasonable values rather than estimated. Finally, we find that it is also preferable to calibrate, rather than to elicit as a prior, the parameter determining the speed of adjustment to PPP. JEL Classification: C32, F31, F37
    Keywords: Exchange rate forecasting, half-life, purchasing power parity
    Date: 2013–08
  24. By: Bindseil, Ulrich; Jabłecki, Juliusz
    Abstract: After the Lehman default, but also during the euro area sovereign debt crisis, central banks have tended to extend the ability of banks to take recourse to central bank credit operations through changes of the collateral framework (e.g. CGFS, 2008 - in consistence with previous narratives, such as Bagehot, 1873). We provide a simple four sector model of the economy in which we illustrate the relevant trade-offs, derive optimal central bank collateral policies, and show why in a financial crisis, in which liquidity shocks become more erratic and the total costs of defaults increase, central banks may want to allow for greater potential recourse of banks to central bank credit. The model also illustrates that the credit riskiness of counterparties and issuers is endogenous to the central bank's credit policies and related risk control framework. Finally, the model allows identifying the circumstances under which the counterintuitive case arises in which a relaxation of the central bank collateral policy may reduce its expected losses. JEL Classification: E58, G32
    Keywords: Central Bank, collateral policy, economic efficiency, Risk-taking
    Date: 2013–05
  25. By: Patricia McGrath
    Abstract: The three countries took different stances in regards to economic policy; the Czech Republic pursued a shock therapy regime which aimed to stabilise the economy, Hungary’s policy was more relaxed whilst Poland had an aggressive reform programme. Regarding monetary policy the Czech Republic used the discount rate as a tool for monetary policy, Hungary used indirect monetary policy and Poland had strict monetary policies which raised interest rates and devalued the zloty. After financial deregulation the impact of economic and monetary policy led to positive economic growth in the Czech Republic year on year. Hungary had a similar experience whilst Poland had an initial high increase in economic growth. This reduced over time but they still recorded positive economic growth over the period studied.
    Keywords: Transition Economies, Financial Deregulation, Economic Growth, Eastern Europe.
    JEL: E E2 E4 E5 G G15 G21
    Date: 2013–05–15
  26. By: Pancaro, Cosimo
    Abstract: This paper studies current account reversals in industrial countries across different exchange rate regimes. There are two major findings which have important implications for industrial economies with external imbalances: first, triggers of current account reversals differ between exchange rate regimes. While the current account deficit and the output gap are significant predictors of reversals across all regimes, reserve coverage, credit booms, openness to trade and the US short term interest rate determine the likelihood of reversals only under more rigid regimes. Conversely, the real exchange rate affects the probability of experiencing a reversal only under flexible arrangements. Second, current account reversals in advanced economies do not have an independent effect on growth. This result holds not only for industrial economies in general but also for countries with fixed exchange rate regimes in particular. JEL Classification: F32, F41
    Keywords: current account, exchange rate regime, reversals
    Date: 2013–05
  27. By: Josef Schroth (Bank of Canada)
    Abstract: The paper studies the design of optimal fiscal rules for members of a monetary union when there are privately observed shocks to countries’ social cost of domestic taxation. First, I show that optimal fiscal rules prescribe policy coordination in the sense of domestic taxation efforts that are positively correlated across member countries. In particular, coordination achieves higher ex-ante joint welfare than any fixed upper bound on domestic deficits. Second, I show that a history of asymmetric domestic taxation efforts leads to tighter policy coordination in the sense of an emergence of retaliatory fiscal policies. As a result, past disagreement leads to an increase in expected domestic deficits across the monetary union.
    Date: 2013
  28. By: Mortensen, Jørgen
    Abstract: This paper first takes a step backwards with an attempt to situate the recent adoption of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union in the context of discussions on the Stability and Growth Pact (SGP) and the ‘Maastricht criteria’, as fixed in the Maastricht Treaty for membership in the Economic and Monetary Union (EMU) in a longer perspective of the sharing of competences for macroeconomic policy-making within the EU. It then presents the main features of the new so-called ‘Fiscal Compact’ and its relationship to the SGP and draws some conclusions as regards the importance and relevance of this new step in the process of economic policy coordination. It concludes that the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union does not seem to offer a definitive solution to the problem of finding the appropriate budgetary-monetary policy mix in EMU, which was already well identified in the Delors report in 1989 and regularly emphasised ever since and is now seriously aggravated due to the crisis in the eurozone. Furthermore, implementation of this Treaty may under certain circumstances contribute to an increase in the uncertainties as regards the distribution of the competences between the European Parliament and national parliaments and between the former and the Commission and the Council.
    Date: 2013–08
  29. By: Łukasz Rawdanowicz; Romain Bouis; Shingo Watanabe
    Abstract: How far to go – and to remain – in the direction of highly expansionary monetary policy hinges on the balance of marginal benefits and costs of additional monetary easing and its expected evolution over time. This paper sketches a framework for assessing this balance and applies it to four OECD economic areas: the euro area, Japan, the United Kingdom and the United States. The effectiveness of further stimulus via quantitative easing or forward guidance in affecting asset prices, interest rates and credit flows will depend on the state of the economy and the functioning of financial markets. Marginal costs could rise due to excessive risk-taking; higher inflation expectations; higher likelihood of ever-greening; and higher risks of financial instability in the exit phase, especially when exit from monetary accommodation is close in time and signs of negative effects are already apparent. The balance of marginal benefits and costs is found to be different across the main OECD areas. In the United States, the case for additional stimulus is weakening, while the opposite is true for the euro area and Japan. In the United Kingdom, the assessment is less clear cut.<P>Les avantages et coûts d'une politique monétaire très expansionniste<BR>Jusqu’où aller – et demeurer – dans la direction d’une politique monétaire hautement expansionniste dépend du solde entre les avantages et coûts de l’assouplissement monétaire additionnel et de son évolution attendue dans le temps. Ce document propose une ébauche d’un cadre d’analyse pour évaluer ce solde et l’applique à quatre principales régions économiques de l’OCDE : les États-Unis, la zone euro, le Japon et le Royaume-Uni. L’efficacité d’un stimulus additionnel via l’assouplissement quantitatif ou des indications prospectives pour affecter les prix d’actifs, les taux d’intérêt et les flux de crédit dépendra de l’état de l’économie et du fonctionnement des marchés financiers. Les coûts marginaux pourraient croître en raison d’une prise de risques excessive ; d’anticipations d’inflation plus élevées ; d’une plus grande probabilité de régénération des créances douteuses ; et de risques accrus d’instabilité financière dans la phase de sortie, surtout lorsque la sortie de la politique monétaire accommodante est proche dans le temps et que les signes d’effets négatifs sont déjà apparents. Le solde entre les avantages et coûts est estimé être différent au sein des principales régions de l’OCDE. Aux États-Unis, l’argument en faveur d’un stimulus additionnel s’est affaibli, tandis que l’opposé est vrai pour la zone euro et le Japon. Au Royaume-Uni, le diagnostic est moins clair.
    Keywords: monetary policy, spillovers, quantitative easing, forward guidance, asset price booms, ever-greening, politique monétaire, assouplissement quantitatif, indications prospectives, boom de prix d’actifs, régénération, retombées
    JEL: E31 E43 E44 E5 F31 F32 G12 G21
    Date: 2013–08–12
  30. By: Fulli-Lemaire, Nicolas
    Abstract: The admission by the Greek government on October 18, 2009, of large-scale accounting fraud in its national accounts sparked an unprecedented sovereign debt crisis that rapidly spread to the Eurozone’s weakest member states. As the crisis increasingly drove a wedge between a seemingly resilient Eurozone core and its faltering periphery, its first collateral victims were the private banks of the hardest-hit sovereigns. They were rapidly followed by the rest of the Eurozone’s banks as a result of their large exposure to not only their home country’s sovereign debt, but also to the debt securities of other member states. Measuring each bank’s precise exposure to every sovereign issuer became a key issue for credit analysis in the attempt to assess the potential impact of a selective sovereign default if worse came to worst. Yet finding that information in a timely manner is hardly an easy task, as banks are not required to disclose it. Building on the efficient market hypothesis in the presence of informed traders, we tested the sensitivity of each of the largest Eurozone private banks’ CDSs to sovereign CDSs using a simple autoregressive model estimated by time-series regressions and panel regressions, comparing the results to news releases to assess its reliability. Eventually, we used the Oaxaca Blinder decomposition to measure whether the unconventional monetary policies, namely the LTRO and the OMT, that the ECB has implemented to stem the crisis have helped banks directly or whether banks were actually helped by the reduction in sovereign CDS spreads.
    Keywords: Private Banks, Central Banks, Sovereign Debt Risk, OMT, LTRO, Non-Conventional Monetary Policies, Eurozone’s Sovereign Debt Crisis, Oaxaca-Blinder Decomposition.
    JEL: C58 D82 E52 G01 G14 G15 G21 G24 N14
    Date: 2013–08–01

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