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on Monetary Economics |
| By: | Camille Cornand (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France); Cheick Kader M’Baye (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France) |
| Abstract: | We use laboratory experiments with human subjects to test the relevance of different inflation targeting regimes. In particular and within the standard New Keynesian model, we evaluate to what extent communication of the inflation target is relevant to the success of inflation targeting. We find that if the central bank only cares about inflation stabilization, announcing the inflation target does not make a di-fference in terms of macroeconomic performances compared to a standard active monetary policy. However, if the central bank also cares about the stabilization of the economic activity, communicating the target helps to reduce the volatility of inflation, interest rate, and output gap although their average levels are not affected. This finding is consistent with those of the theoretical literature and provides a rationale for the adoption of a flexible inflation targeting regime. |
| Keywords: | Inflation targeting, inflation expectations, monetary policy, New Keynesian model, laboratory experiments |
| JEL: | D82 D83 E52 E58 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:1330&r=mon |
| By: | Kozmenko, Serhiy; Savchenko, Taras |
| Abstract: | The paper explains the expediency of developing an explicit rule of monetary policy for the economy of Ukraine. It studies the stages of its development, proving the expediency of formation of monetary rules for money aggregates, evaluates equilibrium values of the rule’s parameters based on the use of the modified Hodrick-Prescott filter, and determines the possible parameters of the monetary rule and their estimated coefficients by developing multivariate regression models. |
| Keywords: | monetary policy rule, central bank, monetary policy, the Hodrick-Prescott filter, inflation targeting. |
| JEL: | E50 E52 E58 |
| Date: | 2013–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:50793&r=mon |
| By: | James L. Butkiewicz (Department of Economics,University of Delaware); Zeliha Ozdogan (Research and Statistics,SBT ANALYSIS) |
| Abstract: | Turkey experienced a financial crisis in 2000-2001 that led to significant financial reforms. The reforms resulted in a switch to a floating exchange rate, granted greater central bank independence and pursuit of a more credible monetary policy. Investigation of the channels of monetary policy in both periods finds that monetary policy's output effects have been strengthened considerable by the reforms. In the pre-crisis period monetary policy was highly inflationary, while in the post-crisis period, monetary policy targets low inflation and has become a tool for output stabilization. These results support the importance of central bank independence and a credible policy. |
| Keywords: | Financial Crisis, monetary policy, monetary transmission, Turkey |
| JEL: | J16 J30 J31 J70 J71 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:dlw:wpaper:13-08.&r=mon |
| By: | William B. English; J. David López-Salido; Robert J. Tetlow |
| Abstract: | In recent years, the Federal Reserve has made substantial changes to its framework for monetary policymaking by providing greater clarity regarding its objectives, its intentions regarding the use of monetary policy--including nontraditional policy tools such as forward guidance and asset purchases--in the pursuit of those objectives, and its broader policy strategy. These changes reflected both a response to changes in economists' understanding of the most effective way to implement monetary policy and a response to specific challenges posed by the financial crisis and its aftermath, particularly the effective lower bound on nominal interest rates. We trace the recent evolution of the Federal Reserve's framework, and use a small-scale macro model and a simple static model to help illuminate the approaches taken with nontraditional monetary policy tools. A number of foreign central banks have made similar innovations in response to similar developments. On balance, the Federal Reserve has moved closer to "flexible inflation targeting," but the Federal Reserve's approach includes a balanced focus on two objectives and the use of a flexible horizon over which policy aims to foster those objectives. Going forward, further changes in central banks' frameworks may be needed to address issues raised by the financial crisis. For example, some have suggested that the sustained period at the effective lower bound points to the need for central banks to establish a different policy objective, such as a higher inflation target or a nominal income target. We use our small-scale model of the U.S. economy to examine the potential benefits and costs of such changes. We also discuss the broad issue of how central banks should integrate financial stability policy and monetary policy. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2013-76&r=mon |
| By: | Michal Brzoza-Brzezina (National Bank of Poland, Warsaw School of Economics); Krzysztof Makarski (National Bank of Poland, Warsaw School of Economics); Grzegorz Wesolowski (National Bank of Poland, Warsaw School of Economics) |
| Abstract: | Giving up an independent monetary policy and a flexible exchange rate are the key sources of costs and benefits entailed to joining a monetary union. In this paper we analyze their ex post impact on the stability of the Polish economy during the recent financial crisis. To this end we construct a small open economy DSGE model and estimate it for Poland and the euro area. Then we run a counterfactual simulation, assuming Poland's euro area accession in 1q2007. The results are striking - volatilities of GDP and inflation increase substantially. In particular, had Poland adopted the euro, GDP growth would have oscillated between -6% and +9% (-9% to +11% under more extreme assumptions) instead of between 1% and 7%. We conclude that during the analyzed period independent monetary policy and, in particular, the flexible exchange rate played an important stabilizing role for the Polish economy. |
| Keywords: | optimum currency area, euro-area accession, emerging market |
| JEL: | E32 E58 E65 |
| Date: | 2013–10–23 |
| URL: | http://d.repec.org/n?u=RePEc:wse:wpaper:70&r=mon |
| By: | Eric S. Rosengren |
| Abstract: | Remarks by Eric S. Rosengren, President and Chief Executive Officer, Federal Reserve Bank of Boston, at the Federal Reserve Bank of Boston's 57th economic conference, "Fulfilling the Full Employment Mandate - Monetary Policy and the Labor Market", Federal Reserve Bank of Boston, Boston, Massachusetts, April 12, 2013. |
| Keywords: | Employment (Economic theory) ; Monetary policy ; Banks and banking, Central |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbsp:70&r=mon |
| By: | Dong He (Hong Kong Monetary Authority and Hong Kong Institute for Monetary Research); Honglin Wang (Hong Kong Institute for Monetary Research) |
| Abstract: | We investigate how monetary policy in a mixed financial system such as that of China, which is characterized by a juxtaposition of quantity- and price-based policy instruments and the co-existence of regulated and market-determined interest rates, affects bank lending. Using a newly constructed loan-level dataset, we find that loan rates but not loan size are affected by both the regulated and the market-determined interest rates and that loan size is instead affected by an implicit quota that is imposed on aggregate bank lending through window guidance. We interpret this finding to be evidence of credit rationing. |
| Keywords: | Monetary Policy, Bank Lending, The People's Bank of China (PBC) |
| JEL: | E52 E58 G21 G34 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:162013&r=mon |
| By: | Pierre-Richard Agénor; Luiz A. Pereira da Silva |
| Abstract: | This paper discusses recent experiences with inflation targeting (IT), the challenges that it faces since the global financial crisis, and ways to address them. The discussion is conducted from the perspective of upper middle-income countries (MICs). As background for the analysis, the second part provides a review of financial systems in MICs (with a focus on the role of bank credit), the extent to which exposure to capital flows affect economic stability in these countries, and the link between excessive credit growth and financial crises. The third and fourth parts review the main features and evidence on the performance of IT regimes in MICs. The fifth part discusses a number of challenges that IT faces, including fiscal dominance, fear or floating, imperfect credibility, and with respect to an explicit financial stability objective assigned to monetary policy. The issue of complementarity between macroprudential regulation and monetary policy, in the context of an “integrated” IT (or IIT) regime, is taken up next. The nature of monetary policy rules in an IIT regime, and their practical implementation, is also discussed. Our analysis suggests that there are robust arguments to support the view that in an IIT regime monetary policy should react in a state contingent fashion to a credit gap measure – and possibly to the real exchange rate – to address the time-series dimension of systemic risk. However, monetary policy and macroprudential policy are largely complementary instruments. They must be calibrated jointly, in the context of macroeconomic models that account for the type of credit market imperfections observed in MICs and for the fact that macroprudential regimes may affect in substantial ways the monetary transmission mechanism. |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:324&r=mon |
| By: | Eric S. Rosengren |
| Abstract: | Remarks by Eric S. Rosengren, President and Chief Executive Officer, Federal Reserve Bank of Boston, at the U. S. Monetary Policy Forum, New York, New York, February 22, 2013. |
| Keywords: | Financial crises ; Monetary policy |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbsp:66&r=mon |
| By: | Jens H.E. Christensen |
| Abstract: | This paper presents a regime-switching model of the yield curve with two states: a normal state and a zero-bound state for the case when the monetary policy target rate is stuck at the nominal zero bound, as the U.S. economy has been since December 2008. The model delivers estimates of the time-varying probability of exiting the zero-bound state and can be applied to generate outcome-contingent forecasts useful for portfolio stress tests. The results show that the probability of remaining in the zero-bound state has trended upward since 2009, with notable upticks following Federal Reserve decisions to provide further monetary stimulus, whether through asset purchases or forward guidance. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2013-34&r=mon |
| By: | Eric S. Rosengren |
| Abstract: | Remarks by Eric S. Rosengren, President and Chief Executive Officer, Federal Reserve Bank of Boston, to the Business and Industry Association of New Hampshire and the New Hampshire Bankers Association, Saint Anselm College, Manchester, New Hampshire, March 27, 2013. |
| Keywords: | Monetary policy ; Financial stability |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbsp:68&r=mon |
| By: | James Bullard |
| Abstract: | June 10, 2013. Presentation. "The U.S. Economy and Monetary Policy." 19th Conference of Montreal—Entering the Next Economy: New Realities, New Frontiers, Montreal, Canada. |
| Keywords: | Monetary policy ; Economic conditions |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlps:217&r=mon |
| By: | Daniel L. Thornton |
| Abstract: | There is a consensus in monetary policy circles that the Federal Reserve’s large-scale asset purchases, known as quantitative easing (QE), have significantly reduced long-term yields. The consensus is due in part to event studies, which show that long-term yields decline on QE announcement days. The quality of the event-study evidence depends critically on whether these announcement effects are identified. This paper undertakes a detailed analysis of the identification of the QE announcement effects using three bond yields and the announcements used in the literature. Because identification using the event-study methodology typically involves some judgment, the analysis relies on the reasonable person standard, which the U.S. Supreme Court recently broadened to include questions such as “are the QE announcement effects identified?” |
| Keywords: | Monetary policy - United States |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2013-033&r=mon |
| By: | Pidong Huang (Korea University); Yoske Igarashi (Department of Economics, University of Exeter) |
| Abstract: | This paper investigates a Trejos-Wright random matching model of money with a consumer take-it-or-leave-it offer and with individual money holdings in the set {0, 1, 2}. It is shown that three kinds of monetary steady state exist generically: (1) pure-strategy full-support steady states, (2) mixed-strategy full-support steady states, and (3) non-full-support steady states. A full-support steady state exists if and only if a non-full-support steady state exists. Stability of these steady states is also studied. Both pure-strategy and mixedstrategy full-support steady states are locally stable. However, non-full-support steady states are unstable. |
| Keywords: | random matching model; monetary steady state; local stability; determinacy; instability; Zhu (2003). |
| JEL: | C62 C78 E40 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:exe:wpaper:1311&r=mon |
| By: | John C. Williams |
| Abstract: | Presentation to the Semiconductor Materials and Equipment International (SEMI) 2013 Industry Strategy Symposium, Half Moon Bay, California, January 14, 2013 |
| Keywords: | Economic conditions ; Monetary policy |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfsp:115&r=mon |
| By: | Pidong Huang (Korea University); Yoske Igarashi (Department of Economics, University of Exeter) |
| Abstract: | We study the stability of monetary steady states in a random matching model of money where money is indivisible, the bound on individual money holding is finite, and the trading protocol is buyer take-it-or-leave-it offers. The class of steady states we study have a non-full-support money-holding distribution and are constructed from the steady states of Zhu (2003). We show that no equilibrium path converges to those steady states if the initial distribution has a different support. |
| Keywords: | random matching model; monetary steady state; instability; Zhu (2003). |
| JEL: | C62 C78 E40 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:exe:wpaper:1310&r=mon |
| By: | James Bullard |
| Abstract: | January 4, 2013. Presentation. "The Global Battle Over Central Bank Independence." NABE Panel Discussion: "Federal Reserve Independence in the Aftermath of the Financial Crisis: Should We Be Worried?" AEA/ASSA Annual Meeting, San Diego, California. |
| Keywords: | Banks and banking, Central ; Federal Reserve System - Independence ; Transparency |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlps:208&r=mon |
| By: | Jeff W. Huther; Jason S. Seligman |
| Abstract: | In 2011 and 2012, the Federal Reserve sold Treasury securities from the short end of the yield curve at the same time it was providing market participants with date-specific assurances that overnight interest rates would not rise. We investigate how these two policies, which had conflicting pricing pressures, were absorbed by the market. We analyze the impacts of sales on the volume and composition of inventories of the Federal Reserve's counterparties, and examine how announcements of accommodative monetary policy affected spreads and prices across maturities. Our results suggest that these two reserve-neutral policies affected interest rates both within and beyond the stated policy periods. The finding that Federal Reserve's sales, conducted during periods of date-based forward guidance, were associated with higher interest rates suggests that the policy effects were not limited to the anticipated path of federal funds rates. We also find that the accumulation of Treasury securities by Federal Reserve counterparties was consistent with the idea that those dealers responded opportunistically to the forward guidance on rates. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2013-72&r=mon |
| By: | Eric S. Rosengren |
| Abstract: | Remarks by Eric S. Rosengren, President and Chief Executive Officer, Federal Reserve Bank of Boston, at The Global Interdependence Center Central Banking Conference, Milan, Italy, May 16, 2013. |
| Keywords: | Monetary policy ; Fiscal policy |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbsp:72&r=mon |
| By: | John C. Williams |
| Abstract: | Presentation to the Portland Business Journal CFO of the Year Awards Luncheon, Portland, Oregon, May 16, 2013 |
| Keywords: | Economic conditions ; Monetary policy |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfsp:118&r=mon |
| By: | John C. Williams |
| Abstract: | Presentation to Town Hall Los Angeles, Los Angeles, California, April 3, 2013 |
| Keywords: | Economic conditions ; Monetary policy |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfsp:117&r=mon |
| By: | John C. Williams |
| Abstract: | Panel discussion at the NBER Conference, Boston, Massachusetts, October 18, 2013 |
| Keywords: | Monetary policy |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfsp:125&r=mon |
| By: | William C. Dudley |
| Abstract: | Remarks at Fordham Wall Street Council, Fordham University Graduate School of Business, New York City. |
| Keywords: | Federal Reserve Bank of New York ; Economic conditions ; Monetary policy ; Housing - Prices ; Bank loans ; Budget ; Fiscal policy ; Consumer behavior ; Universities and colleges ; Housing - Finance ; International trade ; Inflation (Finance) ; Labor market ; Repurchase agreements ; Money market ; Government-sponsored enterprises |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsp:115&r=mon |
| By: | Astarita, Caterina; Purificato, Francesco |
| Abstract: | This paper analyses the issue of the dynamics of the TARGET2 system balances during the sovereign debt crisis. The development of these balances reflects the change in the distribution of the monetary base among the EMU Member States. During the sovereign debt crisis, while some countries, among which Germany, registered a decisive inflow of monetary base, some others, as Italy, shown an outflow. The main conclusion of the paper is that the dynamics in TARGET2 is rather due to a fall in the level of confidence in the capacity of the EMU to survive than to disparities in the level of competitiveness among countries of the Eurozone as a part of the literature maintained. In turn, this crisis of confidence has to be considered as the consequence of the implicit refusal of the European institutions of creating a mechanism working as “lender of last resort” for the Eurozone Member States. Two elements, in particular, support this thesis. On the one hand, most of the monetary base outflow occurred in coincidence with those political decisions which determined deterioration in the expectation about the degree of solvency of the periphery countries. On the other hand, the fiscal consolidation that the periphery countries implemented destabilized the economy as a result of a negative conjuncture and a monetary policy ineffective in reducing the interest rate. |
| Keywords: | payment system, monetary policy, fiscal policy, financial crisis |
| JEL: | E42 E52 E58 E62 F32 F34 F36 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:51124&r=mon |
| By: | James Bullard |
| Abstract: | August 15, 2013. Presentation. "An Update on the Tapering Debate." Louisville, Kentucky. |
| Keywords: | Monetary policy |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlps:220&r=mon |
| By: | Zhongbo Jing; Jakob de Haan; Jan Jacobs; Haizhen Yang |
| Abstract: | We construct a money market pressure index based on central bank reserves and the short-term nominal interest rate to identify banking crises, thereby extending the index proposed by Von Hagen and Ho (2007). We compare the crises identified by both indices with banking crises according to the benchmark of Laeven and Valencia (2010). Both indices identify more crises than these benchmarks. The crises identified by our index are more in line with the benchmark than the crises identified by the Von Hagen and Ho index, while our index also gives fewer false signals. |
| Keywords: | banking crises; money market pressure index |
| JEL: | C43 E44 G21 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:397&r=mon |
| By: | James Bullard |
| Abstract: | August 2, 2013. Presentation. "The Tapering Debate." 2013 Municipal Finance Conference, Boston, Massachusetts |
| Keywords: | Monetary policy |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlps:219&r=mon |
| By: | William C. Dudley |
| Abstract: | Remarks at the Japan Society, New York City. |
| Keywords: | Monetary policy - Japan ; Interest rates ; Financial risk management ; Fiscal policy ; Economic conditions - Japan ; Deflation (Finance) ; Banks and banking - Japan ; Bank of Japan ; Federal Reserve Act ; Labor market ; Mortgage-backed securities |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsp:105&r=mon |
| By: | Richard W. Fisher |
| Abstract: | Remarks before Columbia University's School of International and Public Affairs, New York, N.Y., February 27, 2013 ; "The bottom line is that rather than achieve the intended theoretical effect, I believe the policy of super-abundant money at costs deviating substantially from normal equilibrium levels may ultimately prove to be counterproductive. Or it may restrain the benefits that theory might suggest." |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddsp:128&r=mon |
| By: | dogru, bulent |
| Abstract: | In this study, relationship between inflation and inflation uncertainty is analyzed using Granger causality tests with annual inflation series covering the time period 1923 to 2012 for Turkish Economy. Inflation uncertainty is measured by Exponential Generalized Autoregressive Conditional Heteroskedastic model. Econometric findings suggest that although in long run the Friedman's hypothesis that high inflation increases inflation uncertainty is strongly supported, in short run the Holland hypothesis proposing that the increase in the inflation uncertainty decreases inflation is also supported for Turkish Economy. We also make analysis for subsample periods selected due to the major policy changes in Turkish economic history. The causality between inflation and inflation uncertainty in these subsample periods is mixed and depends on time period analyzed. |
| Keywords: | Inflation Uncertainty, Conditional Variance, Granger Causality, Exponential Generalized Autoregressive Conditional Heteroskedastic Model |
| JEL: | C32 E31 |
| Date: | 2013–06–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:51232&r=mon |
| By: | Abbassi, Puriya; Fecht, Falko; Weber, Patrick |
| Abstract: | We use a unique data set that comprises each bank's bids in the Eurosystem's main refinancing operations and its recourse to the LOLR facility (a) to derive banks' willingness-to-pay for liquidity through a one-week repo and (b) to show that a bank's willingness-to-pay is a good indicator for the probability that this bank draws on the LOLR facility. Our results suggest (i) that banks' willingness-to-pay for liquidity indeed reflects refinancing conditions in the interbank market and (ii) that the willingness-to-pay can serve as an early warning indicator for banking distress. -- |
| Keywords: | banks,liquidity,LOLR facility,repos,money markets,frictions |
| JEL: | D44 E42 E58 G21 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:402013&r=mon |
| By: | Ivan Kitov; Oleg Kitov |
| Abstract: | We re-estimate statistical properties and predictive power of a set of Phillips curves, which are expressed as linear and lagged relationships between the rates of inflation, unemployment, and change in labour force. For France, several relationships were estimated eight years ago. The change rate of labour force was used as a driving force of inflation and unemployment within the Phillips curve framework. The set of nested models starts with a simplistic version without autoregressive terms and one lagged term of explanatory variable. The lag is determined empirically together with all coefficients. The model is estimated using the Boundary Element Method (BEM) with the least squares method applied to the integral solutions of the differential equations. All models include one structural break might be associated with revisions to definitions and measurement procedures in the 1980s and 1990s as well as with the change in monetary policy in 1994-1995. For the GDP deflator, our original model provided a root mean squared forecast error (RMSFE) of 1.0% per year at a four-year horizon for the period between 1971 and 2004. The rate of CPI inflation is predicted with RMSFE=1.5% per year. For the naive (no change) forecast, RMSFE at the same time horizon is 2.95% and 3.3% per year, respectively. Our model outperforms the naive one by a factor of 2 to 3. The relationships for inflation were successfully tested for cointegration. We have formally estimated several vector error correction (VEC) models for two measures of inflation. At a four year horizon, the estimated VECMs provide significant statistical improvements on the results obtained by the BEM: RMSFE=0.8% per year for the GDP deflator and ~1.2% per year for CPI. For a two year horizon, the VECMs improve RMSFEs by a factor of 2, with the smallest RMSFE=0.5% per year for the GDP deflator. |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1311.1097&r=mon |
| By: | Eric S. Rosengren |
| Abstract: | Remarks by Eric S. Rosengren, President and Chief Executive Officer, Federal Reserve Bank of Boston, at the Conference on Stable Funding, New York, New York, September 27, 2013. |
| Keywords: | Money market funds |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbsp:74&r=mon |
| By: | Su-Hsin Chang; Silvio Contessi; Johanna L. Francis |
| Abstract: | The level of aggregate excess reserves held by U.S. depository institutions increased significantly at the peak of the financial crisis of 2007-09. Although the amount of aggregate reserves is almost entirely determined by the policy initiatives of the central bank that act on the asset side of its balance sheet, the motivations of individual banks in accumulating reserves differ and respond to the impact of changes in the economic environment on individual institutions. We undertake a systematic analysis of this massive accumulation of excess reserves using bank-level data for more than 7,000 commercial banks and almost 1,000 savings institutions during the U.S. financial crisis. We propose a testable stochastic model of reserves determination when interest is paid on reserves, which we estimate using bank-level data and censored regression methods. We find evidence primarily of a precautionary motive for reserves accumulation with some notable het- erogeneity in the response of reserves accumulation to external and internal factors of the largest banks compared with smaller banks. We combine propensity score matching and a difference-in- difference approach to determine whether the beneficiaries of the Capital Purchase Program of the Troubled Assets Relief Program accumulated lower reserves than non-beneficiaries. Contrary to anecdotal evidence, we find that banks that participated in the program accumulated fewer reserves than non-participants in the initial quarters after the capital injection. |
| Keywords: | Financial crises ; Bank reserves |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2013-029&r=mon |