nep-mon New Economics Papers
on Monetary Economics
Issue of 2014‒06‒28
24 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Optimal Taylor Rules in New Keynesian Models By Christoph E. Boehm; Christopher L. House
  2. The simple analytics of Helicopter money: Why it works - always By Buiter, Willem H.
  3. How might a central bank report uncertainty? By Fair, Ray C.
  4. Marriner S. Eccles and the 1951 Treasury–Federal Reserve Accord: Lessons for central bank By Thorvald Grung Moe
  5. Investigating the Zero Lower Bound on the Nominal Interest Rate Under Financial Instability By Julio A. Carrillo; Céline Poilly    
  6. Is India ready for flexible inflation-targeting? By Abhijit Sen Gupta; Rajeswari Sengupta
  7. A note on the long-run neutrality of monetary policy: new empirics By Asongu, Simplice
  8. Effects of Unconventional Monetary Policy on Financial Institutions By Gabriel Chodorow-Reich
  9. The European Central Bank’s outright monetary transactions and the Federal Constitutional Court of Germany By Siekmann, Helmut; Wieland, Volker
  10. The Bitcoin Question: Currency versus Trust-less Transfer Technology By Adrian Blundell-Wignall
  11. Small and large price changes and the propagation of monetary shocks. By F. Alvarez; H. Le Bihan; F. Lippi
  12. Banking and Sovereign Debt Crises in a Monetary Union Without Central Bank Intervention By Jing Cheng; Meixing Dai; Frédéric Dufourt
  13. Escaping the Great Recession By Francesco Bianchi; Leonardo Melosi
  14. Central BanksÕ Transparency: Words as Signals By Francesco Cendron; Gianfranco Tusset
  15. The impact of the Term Auction Facility on the liquidity risk premium and unsecured interbank spreads By Olav Syrstad
  16. Peso-Dollar Forward Market Analysis: Explaining Arbitrage Opportunities during the Financial Crisis By Juan R. Hernández
  17. Forecast rationality tests in the presence of instabilities, with applications to Federal Reserve and survey forecasts By Barbara Rossi; Tatevik Sekhposyan
  18. The Eurocrisis: Muddling Through, or On the Way to a More Perfect Euro Union? By Joshua Aizenman
  19. Consumer Attitudes and the Epidemiology of Inflation Expectations By Michael Ehrmann; Damjan Pfajfar; Emiliano Santoro
  20. International Financial Market Integration, Asset Compositions and the Falling Exchange Rate Pass-Through By Buzaushina, Almira; Enders, Zeno; Hoffmann, Mathias
  21. On Understanding the Cyclical Behavior of the Price Level and Inflation By Joseph Haslag; William Brock
  22. Exchange Rate Regimes and Business Cycles: An Empirical Investigation By Fatma Pinar Erdem; Erdal Ozmen
  23. A macro-financial analysis of the euro area sovereign bond market By Hans Dewachter; Leonardo Iania; Marco Lyrio; Maite de Sola Perea
  24. Did the EBA Capital Exercise Cause a Credit Crunch in the Euro Area? By J-S. Mésonnier; A. Monks

  1. By: Christoph E. Boehm; Christopher L. House
    Abstract: We analyze the optimal Taylor rule in a standard New Keynesian model. If the central bank can observe the output gap and the inflation rate without error, then it is typically optimal to respond infinitely strongly to observed deviations from the central bank’s targets. If it observes inflation and the output gap with error, the central bank will temper its responses to observed deviations so as not to impart unnecessary volatility to the economy. If the Taylor rule is expressed in terms of estimated output and inflation then it is optimal to respond infinitely strongly to estimated deviations from the targets. Because filtered estimates are based on current and past observations, such Taylor rules appear to have an interest smoothing component. Under such a Taylor rule, if the central bank is behaving optimally, the estimates of inflation and the output gap should be perfectly negatively correlated. In the data, inflation and the output gap are weakly correlated, suggesting that the central bank is systematically underreacting to its estimates of inflation and the output gap.
    JEL: E3 E31 E4 E43 E5 E52 E58
    Date: 2014–06
  2. By: Buiter, Willem H.
    Abstract: The authors provides a rigorous analysis of Milton Friedman's parable of the 'helicopter' drop of money - a permanent/irreversible increase in the nominal stock of fiat base money which respects the intertemporal budget constraint of the consolidated Central Bank and Treasury - the State. Examples are a temporary fiscal stimulus funded permanently through an increase in the stock of base money and permanent QE - an irreversible, monetised open market purchase by the Central Bank of non-monetary sovereign debt. Three conditions must be satisfied for helicopter money always to boost aggregate demand. First, there must be benefits from holding fiat base money other than its pecuniary rate of return. Second, fiat base money is irredeemable - viewed as an asset by the holder but not as a liability by the issuer. Third, the price of money is positive. Given these three conditions, there always exists a combined monetary and fiscal policy action that boosts private demand - in principle without limit. Deflation, 'lowflation' and secular stagnation are therefore unnecessary. They are policy choices. --
    Keywords: helicopter money,liquidity trap,seigniorage,secular stagnation,central bank,quantitative easing
    JEL: E2 E4 E5 E6 H6
    Date: 2014
  3. By: Fair, Ray C.
    Abstract: An important question for central banks is how they should report the uncertainty of their forecasts. This paper discusses a way in which a central bank could report the uncertainty of its forecasts in a world in which it used a single macroeconometric model to make its forecasts and guide its policies. Suggestions are then made as to what might be feasible for a central bank to report given that it is unlikely to be willing to commit to a single model. A particular model is used as an illustration. --
    Keywords: central bank,uncertainty,stochastic simulation
    JEL: E50
    Date: 2014
  4. By: Thorvald Grung Moe (Norges Bank)
    Abstract: The 1951 Treasury–Federal Reserve Accord is an important milestone in central bank history. It led to a lasting separation between monetary policy and the Treasury's debtmanagement powers and established an independent central bank focused on price and macroeconomic stability. This paper revisits the history of the Accord and elaborates on the role played by Marriner Eccles in the events leading up to the Accord. As chairman of the Board of Governors since 1934, Eccles was also instrumental in drafting key banking legislation that enabled the Federal Reserve System to assume a more independent role following the Accord. The global financial crisis has generated renewed interest in the Accord and its lessons for central bank independence. This paper shows that Eccles' support for the Accord—and central bank independence—was clearly linked to the strong inflationary pressures in the US economy at the time, and that he was equally supportive of deficit financing in the 1930s. This broader interpretation of the Accord holds the key to a more balanced view of Eccles's role at the Federal Reserve, where his contributions from the mid-1930s up to the Accord are seen as equally important. Accordingly, the Accord should not be viewed as the final triumph of central bank independence, but rather as an enlightened vision for a more symmetric policy role for central banks, with equal weight given to fighting inflation and preventing depressions.
    Keywords: Marriner Eccles; Central Banking; Monetary Policy; Fiscal Policy
    JEL: B31 E52 E58 E63 N12
    Date: 2014–05–15
  5. By: Julio A. Carrillo; Céline Poilly    
    Abstract: This paper studies the effects of three financial shocks in the economy: a net-worth shock, an uncertainty or risk shock, and a credit-spread shock. We argue that only the latter can push the nominal interest rate against its zero lower bound. Further, a recessionary shock to the net worth or the credit spread generates a positive response for loans, which is counter-intuitive during an economic downturn. Finally, we find that there is an optimal commitment period for the central bank to keep the nominal interest rate equal to zero (forward guidance) after a financial turmoil. Beyond that optimal period, the volatility of inflation and output rise quick and sharply. Thus, an excessive forward guidance policy may destabilize the economy.
    Keywords: Zero Lower Bound, Financial Accelerator, Financial Shocks
    JEL: E31 E44 E52 E58
    Date: 2014–01
  6. By: Abhijit Sen Gupta (Asian Development Bank); Rajeswari Sengupta (Indira Gandhi Institute of Development Research)
    Abstract: In this paper we analyze whether the current macroeconomic environment in India is suitable for implementation of inflation targeting as a monetary policy strategy, in light of the recommendation of the Urjit Patel Committee Report. Our results indicate that historically the Reserve Bank of India has given more importance to inflation compared to output growth and exchange rate changes in its monetary policy conduct and that in recent times there has been an increased emphasis on monetary independence thereby comfortably placing the RBI on a path to move towards flexible inflation targeting. However we also find factors, which are traditionally outside the control of monetary policy do exert a strong impact on aggregate prices in India thereby making the choice of nominal anchor a tricky one. Furthermore, the success of monetary policy in containing inflation is found to be crucially contingent on an appropriate fiscal policy as well.
    Keywords: Reserve Bank of India, Monetary Policy, Taylor Rule, Financial trilemma, Inflation, Nominal anchor, Fiscal deficit
    JEL: E43 E52 E58
    Date: 2014–06
  7. By: Asongu, Simplice
    Abstract: Economic theory traditionally suggests that monetary policy can influence the business cycle, but not the long-run potential output. Despite well documented theoretical and empirical consensus on money neutrality in the literature, the role of money as an informational variable for monetary policy decision has remained opened to debate with empirical works providing mixed outcomes. This paper addresses two substantial challenges to this debate: the neglect of developing countries in the literature and the use of new financial dynamic fundamentals that broadly reflect monetary policy. The empirics are based on annual data from 34 African countries for the period 1980 to 2010. Using a battery of tests for integration and long-run equilibrium properties, results offer overall support for the traditional economic theory.
    Keywords: Monetary policy; Credit; Empirics; Africa
    JEL: E51 E52 E58 E59 O55
    Date: 2013–09–15
  8. By: Gabriel Chodorow-Reich
    Abstract: Monetary policy affects the real economy in part through its effects on financial institutions. High frequency event studies show the introduction of unconventional monetary policy in the winter of 2008-09 had a strong, beneficial impact on banks and especially on life insurance companies. I interpret the positive effects on life insurers as expansionary policy recapitalizing the sector by raising the value of legacy assets. Expansionary policy had small positive or neutral effects on banks and life insurers through 2013. The interaction of low nominal interest rates and administrative costs forced money market funds to waive fees, producing a possible incentive to reach for yield to reduce waivers. I show money market funds with higher costs reached for higher returns in 2009-11, but not thereafter. Some private defined benefit pension funds increased their risk taking beginning in 2009, but again such behavior largely dissipated by 2012. In sum, unconventional monetary policy helped to stabilize some sectors and provoked modest additional risk taking in others. I do not find evidence that the financial institutions studied formented a tradeoff between expansionary policy and financial stability at the end of 2013.
    JEL: E44 E52 G20
    Date: 2014–06
  9. By: Siekmann, Helmut; Wieland, Volker
    Abstract: This note reviews the legal issues and concerns that are likely to play an important role in the ongoing deliberations of the Federal Constitutional Court of Germany concerning the legality of ECB government bond purchases such as those conducted in the context of its earlier Securities Market Programme or potential future Outright Monetary Transactions. --
    Date: 2013
  10. By: Adrian Blundell-Wignall
    Abstract: The financial crisis has led to a widespread loss of trust in financial intermediaries of all kinds, perhaps helping to open the way towards the general acceptance of alternative technologies. This paper briefly summarises the crypto-currency phenomenon, separating the ‘currency’ issues from the potential technology benefits. With respect to crypto currencies, the paper argues that these can’t undermine the ability of central banks to conduct monetary policy. They do, however, raise consumer protection and bank secrecy issues. The valuation of Bitcoins and price volatility issues are discussed, as well as electronic theft, contract failures, etc., all of which could result in large losses to users and hence ultimate costs to the taxpayer (e.g. the failure to provide adequate private pensions resulting in increased reliance on public pensions). The anonymity features of the crypto-currencies also facilitate tax evasion and money laundering, both of which are major public policy concerns. The technology associated with crypto-currencies, on the other hand, could ultimately shift the entire basis of trust involved in any financial transaction. It is an innovation that creates the ability to carry out transactions without the need for a trusted third party; i.e. a move towards trust-less transactions. This mechanism could work to eliminate the role of many intermediaries, thereby reducing transactions costs by introducing much needed competition to incumbent firms. The generic issues that policy makers need to examine are summarised.
    Keywords: monetary policy, intermediaries, plenary powers, Bitcoin, Gold standard, trust-less transaction, payment technology, legal tender
    JEL: E5 F39 G19 G2
    Date: 2014–06–16
  11. By: F. Alvarez; H. Le Bihan; F. Lippi
    Abstract: We document the presence of both small and large price changes in individual price records from the CPI in France and the US. After correcting for measurement error and cross-section heterogeneity, the size-distribution of price changes has a positive excess kurtosis. We propose an analytical menu cost model that encompasses several classic models, as Taylor (1980), Calvo (1983), Reis (2006), Golosov and Lucas (2007) and accounts for observed cross-sectional patterns. We show that the ratio of kurtosis to the frequency of price changes is a sufficient statistics for the real effects of monetary policy in a large class of models.
    Keywords: price setting, micro evidence, size-distribution of price changes, kurtosis of price changes, menu-cost, Calvo pricing rule, output response to monetary shocks.
    JEL: E3 E5
    Date: 2014
  12. By: Jing Cheng (Université de Strasbourg (BETA), CNRS); Meixing Dai (Université de Strasbourg (BETA), CNRS); Frédéric Dufourt (Aix-Marseille UniversitÈ (Aix-Marseille School of Economics), CNRS-GREQAM & EHESS and Institut Universitaire de France)
    Abstract: We analyze the conditions of emergence of a twin banking and sovereign debt crisis within a monetary union in which: (i) the central bank is not allowed to provide direct financial support to stressed member states or to play the role of lender of last resort in sovereign bond markets, and (ii) the responsibility of fighting against large scale bank runs, ascribed to domestic governments, is ensured through the implementation of a financial safety net (banking regulation and government deposit guarantee). We show that this broad institutional architecture, typical of the Eurozone at the onset of the financial crisis, is not always able to prevent the occurrence of a twin banking and sovereign debt crisis triggered by pessimistic investors' expectations. Without significant backstop by the central bank, the financial safety net may actually aggravate, instead of improve, the financial situation of banks and of the government.
    Keywords: banking crisis, sovereign debt crisis, bank runs, financial safety net, liquidity regulation, government deposit guarantee, self-fulfilling propheties
    JEL: E32 E44 F3 F4 G01 G28
    Date: 2014–06
  13. By: Francesco Bianchi; Leonardo Melosi
    Abstract: While high uncertainty is an inherent implication of the economy entering the zero lower bound, deflation is not, because agents are likely to be uncertain about the way policymakers will deal with the large stock of debt arising from a severe recession. We draw this conclusion based on a new-Keynesian model in which the monetary/fiscal policy mix can change over time and zero-lower-bound episodes are recurrent. Given that policymakers' behavior is constrained at the zero lower bound, beliefs about the exit strategy play a key role. Announcing a period of austerity is detrimental in the short run, but it preserves macroeconomic stability in the long run. A large recession can be avoided by abandoning fiscal discipline, but this results in a sharp increase in macroeconomic instability once the economy is out of the recession. Contradictory announcements by the fiscal and monetary authorities can lead to high inflation and large output losses. The policy trade-off can be resolved by committing to inflate away only the portion of debt resulting from an unusually large recession.
    JEL: D83 E31 E52 E62 E63
    Date: 2014–06
  14. By: Francesco Cendron; Gianfranco Tusset (University of Padova)
    Abstract: Evidence of the evolution of ideas on central bank transparency can be found in the central bankersÕ speeches during the period 1997-2012. Exploratory analysis of the central bankersÕ speeches provides an overview of their use of language: speeches define the historical evolution of central banksÕ discourses, and thus suggest how the concept of transparency has evolved. The paper invites reconsideration of the role of central banksÕ transparency through analysis of central bankersÕ speeches and their use of language as a part of their communication framework. While literature on transparency indexes shows increasing central bank transparency, the semantic area of transparency in central bankersÕ speeches changed over the period 1997-2012. The paper investigates this evolution until recent shift towards new semantic areas pertaining more to the financial and real economy than to traditional inflation concerns.
    Keywords: central banks; transparency; language; speeches; content analysis.
    JEL: B59 E58
    Date: 2014–04
  15. By: Olav Syrstad (Norges Bank)
    Abstract: This paper investigates the effectiveness of the Federal Reserve's Term Auction Facility (TAF) in alleviating the liquidity shortage in USD and reducing the spread between the 3-month Libor rate and the expected policy rate. I construct a proxy for the 3-month liquidity risk premium based on data from the FX forward market which enables me to (i) decompose the Libor spread into a liquidity premium and a credit premium, and (ii) test the effectiveness of the TAF in reducing the liquidity premium in money market spreads. I find that long-term (84-day) TAF auctions were effective in reducing the 3-month liquidity premium. Furthermore, a reduction in the liquidity premium led to a fall in the 3-month Libor spread in USD. Credit risk, however, seems to have been a rather modest factor in explaining the increase in the Libor spread during the financial crisis.
    Keywords: Term Auction Facility, liquidity premium, credit premium, Libor-OIS spread
    JEL: E41 E43 E51
    Date: 2014–05–15
  16. By: Juan R. Hernández
    Abstract: Using a vector error correction model I test whether shocks in the funding liquidity conditions in the U.S. and Europe separately explain deviations from the covered interest parity (CIP) between the U.S. Dollar and the Mexican Peso. I find that: (1) Apparent deviations from the CIP seem to be persistent, unless a closer measure to the true costs of funding for the agents is considered. (2) A stable long-run equilibrium relation emerges when I include the effects of funding liquidity shocks stemming from the U.S. and Europe. (3) The exchange rate forward premium adjusts towards a long-run equilibrium relation given by the CIP. (4) Surprisingly, the yield on 1-month Mexican CETEs has its own stochastic trend despite the strong relation between the U.S. and Mexico's economies. (5) Analysis confirms that both future and spot exchange rates are affected by shocks stemming from the U.S. Treasury Bills, the funding liquidity in the U.S. and Europe, and the Mexican CETEs.
    Keywords: Covered Interest Parity, Forward and Spot Exchange Rates, Structural Vector, Error Correction Model.
    JEL: C58 F31 G12 G13 G14
    Date: 2014–05
  17. By: Barbara Rossi; Tatevik Sekhposyan
    Abstract: This paper proposes a framework to implement regression-based tests of predictive ability in unstable environments, including, in particular, forecast unbiasedness and efficiency tests, commonly referred to as tests of forecast rationality. Our framework is general: it can be applied to model-based forecasts obtained either with recursive or rolling window estimation schemes, as well as to forecasts that are model-free. The proposed tests provide more evidence against forecast rationality than previously found in the Federal Reserve's Greenbook forecasts as well as survey-based private forecasts. It confirms, however, that the Federal Reserve has additional information about current and future states of the economy relative to market participants.
    Keywords: Forecasting, forecast rationality, regression-based tests of forecasting ability, Greenbook forecasts, survey forecasts, real-time data
    JEL: C22 C52 C53
    Date: 2014–06
  18. By: Joshua Aizenman
    Abstract: This paper looks at the short history of the Eurozone through the lens of an evolutionary approach to forming new institutions. The euro has operated as a currency without a state, under the dominance of Germany. This has so far allowed the euro to achieve a number of design objectives, and this may continue, as long as Germany does not shirk its growing responsibility for the euro’s future. Germany’s resilience and dominant size within the EU may explain its “muddling-through” approach towards the Eurozone crisis. We review several manifestations of this muddling through process. Greater mobility of labor and lower mobility of under-regulated capital may be the costly “second best” adjustment until the arrival of more mature institutions in the Eurozone.
    JEL: F32 F36 F41
    Date: 2014–06
  19. By: Michael Ehrmann; Damjan Pfajfar; Emiliano Santoro
    Abstract: This paper studies the formation of consumers’ inflation expectations using micro-level data from the Michigan Survey. It shows that beyond the well-established socio-economic determinants of inflation expectations such as gender, income or education, other characteristics such as the households’ financial situation and their purchasing attitudes also matter. Respondents with current or expected financial difficulties, pessimistic attitudes about major purchases, or expectations that income will go down in the future have considerably higher forecast errors, are further away from professional forecasts, and have a stronger upward bias in their expectations than other households. However, their bias shrinks by more than that of the average household in response to increasing media reporting about inflation.
    Keywords: Inflation and prices
    JEL: C53 D84 E31
    Date: 2014
  20. By: Buzaushina, Almira; Enders, Zeno; Hoffmann, Mathias
    Abstract: This paper provides an explanation for the observed decline of the exchange rate pass-through into import prices by modeling the effects of financial market integration on the optimal choice of the pricing currency in the context of rigid nominal goods prices. Contrary to previous literature, the interdependence of this choice with the optimal portfolio choice of internationally traded financial assets is explicitly taken into account. In particular, price setters move towards more local-currency pricing while the debt portfolio includes more foreign assets following increased financial integration. Both predictions are in line with novel empirical evidence.
    Keywords: Exchange rate pass-through; financial integration;portfolio home bias; international price setting
    Date: 2014–06–18
  21. By: Joseph Haslag (Department of Economics, University of Missouri-Columbia); William Brock (Department of Economics, University of Missouri-Columbia)
    Abstract: In this paper, we examine the relationship between the price level and output and the inflation rate and output at business-cycle frequencies. In the first part of the paper, we develop a methodological approach to characterizing joint business cycle correlations. In particular, we are interested in providing a characterization of the frequency that a pair of correlation coefficients will occur. We apply this methodology to the contemporaneous correlation between the price level and output and between the inflation rate and output. We apply linear filters to the cyclical components, create a time series and compute the correlations. It is straightforward to construct histograms of the two correlation co-efficients. In the second part, we specify a model economy with a form of rational inattention. In this setting, we perform numerical simulations to determine if the model economy can generate correlations quantitatively similar to those observed in the data. It can.
    Keywords: countercyclical price level, acyclical inflation, phase shift, model uncertainty
    JEL: C82 E31 E32
    Date: 2014–03–04
  22. By: Fatma Pinar Erdem (Central Bank of the Republic of Turkey); Erdal Ozmen (Department of Economics, METU)
    Abstract: This paper investigates the impacts of domestic and external factors along with exchange rate regimes on business cycles in a large panel of advanced and emerging market economies by employing panel logit, cointegration and autoregressive distributed lag model estimation procedures. The results for classical business cycles suggest that emerging market economies tend to experience much deeper recessions and relatively steeper expansions during almost the same duration. The probability of expansions significantly increases with exchange rate regimes flexibility. Our results, different from the bipolar view, strongly support exchange rate regime flexibility for both AE and EME other than the East Asian countries. The impacts of external real and financial shocks and domestic variables are significantly greater under managed regimes as compared to floats. Our results strongly suggest that the evolution and determinants of both classical business and growth cycles are not invariant to the prevailing exchange rate regimes.
    Keywords: Business cycles, Exchange rate regimes, Emerging markets.
    JEL: C33 E32 F33 F41
    Date: 2014–06
  23. By: Hans Dewachter (National Bank of Belgium, Research Department; Center for Economic Studies, University of Leuven; CESifo); Leonardo Iania (Louvain School of Management, Université Catholique de Louvain; Center for Economic Studies, University of Leuven); Marco Lyrio (Insper Institute of Education and Research); Maite de Sola Perea (National Bank of Belgium, Research Department)
    Abstract: We estimate the 'fundamental' component of euro area sovereign bond yield spreads, i.e. the part of bond spreads that can be justified by country-specific economic factors, euro area economic fundamentals, and international influences. The yield spread decomposition is achieved using a multi-market, no-arbitrage affine term structure model with a unique pricing kernel. More specifically, we use the canonical representation proposed by Joslin, Singleton, and Zhu (2011) and introduce next to standard spanned factors a set of unspanned macro factors, as in Joslin, Priebsch, and Singleton (2013). The model is applied to yield curve data from Belgium, France, Germany, Italy, and Spain over the period 2005-2013. Overall, our results show that economic fundamentals are the dominant drivers behind sovereign bond spreads. Nevertheless, shocks unrelated to the fundamental component of the spread have played an important role in the dynamics of bond spreads since the intensification of the sovereign debt crisis in the summer of 2011.
    Keywords: Euro area sovereign bonds, yield spread decomposition, unspanned macro factors, fair spreads
    JEL: E43 E44 E47
    Date: 2014–06
  24. By: J-S. Mésonnier; A. Monks
    Abstract: We exploit a unique monthly dataset of bank balance sheets to document the lending behaviour of euro area banks that were subject to the EBA's 2011/12 Capital Exercise. This exercise was announced in October 2011 and required large European banking groups to meet a higher Tier 1 capital ratio by June 2012, after accounting for an unprecedented temporary buffer against exposure to sovereign debt. Controlling for bank characteristics and demand at the level of country of residence, we find that banks in a banking group that had to increase its capital by 1 percent of risk-weighted assets tended to have annualized loan growth (over the 9 month period of the exercise) that was between 1.2 and 1.6 percentage points lower than for banks in groups that did not have to increase their capital ratio. Looking at aggregate effects at the country level, we also find that banks that did not have to recapitalize did not substitute for more constrained lenders. Our results are of particular relevance for the decisions facing the new European Single Supervisor in advance of its Asset Quality Review due in November 2014.
    Keywords: bank capital ratios, credit supply, EBA, euro area, asset quality review.
    JEL: C21 E51 G21 G28
    Date: 2014

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