nep-mon New Economics Papers
on Monetary Economics
Issue of 2015‒06‒27
thirty-one papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Forward Guidance By Svensson, Lars E O
  2. The euro as an international currency By Agnès Bénassy-Quéré
  3. The ‘visible hand’ of the ECB’s quantitative easing By Valiante, Diego
  4. The interest rate pass-through in the euro area during the sovereign debt crisis By von Borstel, Julia; Eickmeier, Sandra; Krippner, Leo
  5. Central Bank Collateral Frameworks By Nyborg, Kjell G
  6. The Monetary Policy of the European Central Bank (2002-2015) By Micossi, Stefano
  7. Monetary Policy Report to the Minnesota Business Partnership / Narayana Kocherlakota, President ... Minneapolis, Minnesota ... July 8, 2014 By Kocherlakota, Narayana R.
  8. Lessons from Quantitative Easing: Much ado about so little? By Gros, Daniel; Alcidi, Cinzia; De Groen, Willem Pieter
  9. Central Bank Screening, Moral Hazard, and the Lender of Last Resort Policy By Mei Li; Frank Milne; Junfeng Qiu
  10. Large-Scale Asset Purchases: Impact on Commodity Prices and International Spillover Effects By Sharon Kozicki; Eric Santor; Lena Suchanek
  11. Uncertainty in an Interconnected Financial System, Contagion, and Market Freezes By Mei Li; Frank Milne; Junfeng Qiu
  12. Криптовалюта как ключ к развитию мировой экономики By Kessler, Kristina
  13. Forecasting Core Inflation: The Case of South Africa By Franz Ruch; Mehmet Balcilar; Mampho P. Modise; Rangan Gupta
  14. Exchange Rate Implications of Reserve Changes: How Non-EZ European Countries Fared during the Great Recession By Kathryn M. E. Dominguez
  15. Monetary policy and sovereign debt vulnerability By Galo Nuño; Carlos Thomas
  16. Some Clarity on Banks as Financial Intermediaries and Money 'Creators' By Robert W Vivian and Nicholas Spearman
  17. Ordoliberalism, pragmatism and the eurozone crisis: How the German tradition shaped economic policy in Europe By Feld, Lars P.; Köhler, Ekkehard A.; Nientiedt, Daniel
  18. A national public bank to finance a euro zone government: Getting the funds for investment and recovery packages By Oliver Picek
  19. Core Inflation and Trend Inflation By James H. Stock; Mark W. Watson
  20. European monetary integration and aggregate relative deprivation: The dull side of the shiny euro By Stark, Oded; Wlodarczyk, Julia
  21. Monetary policy and informal finance: Is there a pecking order? By Ghosh, Saibal; Kumar, Rakesh
  22. Monetary Financing in the Euro Area: A Free Lunch? By Silke Tober
  23. Forecasting Inflation in an Inflation Targeting Economy: Structural Versus Non-Structural Models By Rangan Gupta; Alessia Paccagnini; Charles Rahal
  24. Placing bank supervision in the Central Bank : implications for financial stability based on evidence from the global crisis By Melecky,Martin; Podpiera,Anca Maria
  25. How Might Sovereign Bond Yields in Asia Pacific React to US Monetary Normalisation under Turbulent Market Conditions? By Tom Fong; Ceara Hui; Alfred Wong
  26. From the Chiang Mai Initiative to an Asian Monetary Fund By Kawai, Masahiro
  27. Macroeconomic Effects of Banking Sector Losses across Structural Models By Guerrieri, Luca; Iacoviello, Matteo; Covas, Francisco; Driscoll, John C.; Kiley, Michael T.; Jahan-Parvar, Mohammad; Queraltó, Albert; Sim, Jae W.
  28. The ECB’s QE: Time to break the doom loop between banks and their governments By De Groen, Willem Pieter
  29. Money, Finance and the Real Economy: What went wrong? By Brender, Anton; Pisani, Florence; Gagna, Emile
  30. A Parallel Currency for Greece By Mayer, Thomas
  31. Capital Controls, Exchange Market Intervention and International Reserve Accumulation in India By Naveen Srinivasan; Vidya Mahambare; M. Ramachandran

  1. By: Svensson, Lars E O
    Abstract: Forward guidance about future policy settings, in the form of a published policy-rate path, has for many years been a natural part of normal monetary policy for several central banks, including the Reserve Bank of New Zealand and the Swedish Riksbank. More recently, the Federal Reserve has started to publish FOMC participants’ policy-rate projections. The Swedish, New Zealand, and U.S. experience of a published policy-rate path is examined, especially to what extent the market has anticipated the path (the predictability of the path) and to what extent market expectations line up with the path after publication (the credibility of the path). The recent Swedish experience is quite dramatic. In particular, it shows a case with a large discrepancy between a high and rising Riksbank path and a low and falling market path, with the market path providing a good forecast of the future policy rate. The discrepancy is explained by the Riksbank’s leaning against the wind in recent years and related circumstances. The New Zealand experience is less dramatic, but shows cases where the market implements either a substantially tighter or easier policy than intended by the RBNZ. There are also cases of the market being ahead of the RBNZ and the RBNZ later following the market. The U.S. experience includes a recent case of the market expecting and implementing substantially easier policy consistent with the FOMC projections, the possible explanation of which has been much discussed.
    Keywords: capital taxation; optimal taxation
    JEL: E52 E58 G14
    Date: 2015–06
  2. By: Agnès Bénassy-Quéré (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS)
    Abstract: The euro, in spite of having many of the required attributes put forward by the theoretical literature and past experience, has failed to fulfill all the criteria that would enable it to rival the dollar as an international currency. This does not mean that the euro cannot achieve a status similar to that of the dollar; however, the window of opportunity may not last much more than a decade before the renminbi overtakes the euro. European monetary unification has never explicitly sought for its currency to gain an international status. This makes sense insofar as the key elements required for the euro to expand internationally are also those to be pursued internally: GDP growth; a fiscal backing to the single currency; a deep, liquid and resilient capital market; and a unified external representation of the euro area.
    Date: 2015–03
  3. By: Valiante, Diego
    Abstract: In the midst of the market turbulence of recent years, policy rates have reached the zero lower bound, with central banks aggressively deploying their balance sheet with an array of ‘unconventional’ monetary policies to ensure the transmission of monetary policy impulses in disrupted financial markets, ultimately to set the conditions for economic recovery. Since March 9th, the European Central Bank (ECB) has also joined the club of central banks deploying the most feared monetary policy tool in its armoury. Unsterilised outright asset purchases (so-called ‘quantitative easing’, or QE) aim to re-establish control over the transmission of monetary policy impulse via policy rates by improving conditions for unsecured interbank market activity. This paper examines three dimensions of quantitative easing: i) the rationale behind the ECB’s new monetary policy stance, ii) the operational challenges of QE and iii) preliminary evidence on the effects of QE on markets.
    Date: 2015–05
  4. By: von Borstel, Julia; Eickmeier, Sandra; Krippner, Leo
    Abstract: We investigate the pass-through of monetary policy to bank lending rates in the euro area during the sovereign debt crisis, in comparison to the pre-crisis period. We make the following contributions. First, we use a factor-augmented vector autoregression, which allows us to assess the responses of a large number of country-specific interest rates and spreads. Second, we analyze the effects of monetary policy on the components of the interest rate pass-through, which reflect banks' funding risk (including sovereign risk) and markups charged by banks over funding costs. Third, we not only consider conventional but also unconventional monetary policy. We find that while the transmission of conventional monetary policy to bank lending rates has not changed with the crisis, the composition of the IP has changed. Specifically, expansionary conventional monetary policy lowered sovereign risk in peripheral countries and longer-term bank funding risk in peripheral and core countries during the crisis, but has been unable to lower banks' markups. This was not, or not as much, the case prior to the crisis. Unconventional monetary policy helped decreasing lending rates, mainly due to large shocks rather than a strong propagation.
    Keywords: interest rate pass-through,factor model,sovereign debt crisis,unconventional monetary policy
    JEL: E5 E43 E44 C3
    Date: 2015
  5. By: Nyborg, Kjell G
    Abstract: This paper seeks to inform about a feature of monetary policy that is largely overlooked, yet occupies a central role in modern monetary and financial systems, namely central bank collateral frameworks. Their importance can be understood by the observation that the money at the core of these systems, central bank money, is injected into the economy on terms, not defined in a market, but by the collateral frameworks and interest rate policies of central banks. Using the collateral framework of the Eurosystem as a basis of illustration and case study, the paper brings to light the functioning, reach, and impact of collateral frameworks. A theme that emerges is that collateral frameworks may have distortive effects on financial markets and the wider economy. They can, for example, bias the private provision of real liquidity and thereby also the allocation of resources in the economy as well as contribute to financial instability. Evidence is presented that the collateral framework in the euro area promotes risky and illiquid collateral and, more generally, impairs market forces and discipline. The paper also emphasizes the important role of ratings and government guarantees in the Eurosystem’s collateral framework.
    Keywords: banks; central bank; collateral; ECB; Eurosystem; financial system; guarantees; haircuts; liquidity; monetary policy; monetary system; money; ratings
    JEL: E42 E44 E52 E58 G01 G10 G21
    Date: 2015–06
  6. By: Micossi, Stefano
    Abstract: This Special Report examines the policies pursued by the European Central Bank (ECB) since the inception of the euro. The ECB was originally set up to pursue price stability, with an eye also to economic growth and financial stability as subsidiary goals, once the primary goal was secured. The application of a single monetary policy to a diverse economic area has entailed a pronounced pro-cyclicality in its real economic effects on the eurozone periphery. Later, monetary policy became the main policy instrument to tackle financial instability elicited by the failure of Lehman Brothers and the sovereign debt crisis in the eurozone. In the process, the ECB emerged as the lender of last resort in the sovereign debt markets of participating countries. Persistent economic depression and deflation eventually brought the ECB into the uncharted waters of unconventional policies. That the ECB could legally perform all of these tasks bears witness to the flexibility of the TFEU and its Statute, but its tools and operating procedures were stretched to their limit. In the end, the place of the ECB amongst EU policy-making institutions has been greatly enhanced, but has entailed repeated intrusions into the broader domain of economic policies – not least because of its market intervention policies – whose consequences have yet to be ascertained.
    Date: 2015–05
  7. By: Kocherlakota, Narayana R. (Federal Reserve Bank of Minneapolis)
    Date: 2014–07–08
  8. By: Gros, Daniel; Alcidi, Cinzia; De Groen, Willem Pieter
    Abstract: It is difficult to measure the impact of the different episodes of quantitative easing (QE) undertaken since 2008 in the major advanced economies (the US, the UK and Japan). One can clearly discern QE in the expansion of the balance sheets of the central banks concerned, but the impact on (long-term) interest rates is difficult to isolate, given the global trend toward slower rates and the high degree of co-movement across major currency areas. For example, in the US, QE is credited with a strong fall in interest rates, but rates have also fallen as much in the euro area without the stimulus of QE until now. This simple finding implies that the studies that neglect the global trend might mistakenly credit QE with a fall in interest rates that was global and would have occurred anyway. The observation that QE did not have any impact on interest rate differentials is compatible with the fact that there is little evidence of a systematic effect of QE on the exchange rate. Moreover, the available academic studies find substantial impact when financial markets were in turmoil in 2008-09, but much smaller effects from the later QE operations. The medium-term impact of QE on growth and inflation seems to have been modest. It is too early to estimate the cost of exiting or reversing QE. The logic of the arguments for QE implies that the cost should be equal to the benefits of undertaking QE.
    Date: 2015–03
  9. By: Mei Li (Department of Economics and Finance, University of Guelph); Frank Milne (Department of Economics, Queen’s University); Junfeng Qiu (Economics and Management Academy, Central University of Finance and Economics)
    Abstract: This paper establishes a theoretical model to examine the LOLR policy when a central bank can distinguish solvent banks from insolvent ones only imperfectly. The major results that our model produces are as follows: (1) The pooling equilibria in which, on one hand, all the banks borrow from the central bank and, on the other hand, all the banks do not borrow from the central bank could exist given certain market beliefs off the equilibrium path. However, neither equilibrium is socially efficient because insolvent banks will continue to hold their unproductive assets, rather than efficiently liquidating them. (2) Higher precision in central bank screening will improve social welfare not only by identifying insolvent banks and forcing them to efficiently liquidate their assets, but also by reducing moral hazard and deterring banks from choosing risky assets in the first place. (3) If a central bank can commit to a specific precision level before the banks choose their assets, rather than conducting a discretionary LOLR policy, it will choose a higher precision level to reduce moral hazard and will attain higher social welfare.
    Keywords: Central Bank Screening; Moral Hazard; Lender of Last Resort
    JEL: E58 G20
    Date: 2015
  10. By: Sharon Kozicki; Eric Santor; Lena Suchanek
    Abstract: Prices of commodities, including metals, energy and agricultural products, rose markedly over the 2009–2010 period. Some observers have attributed a significant part of this increase in commodity prices to the U.S. Federal Reserve’s large-scale asset purchase (LSAP) programs. Using event-study methodologies, this paper investigates whether the announcement and subsequent implementation of the Fed’s LSAPs, and communication of the tapering of these purchases, affected commodity prices. Our empirical results suggest that LSAP announcements did not lead to higher commodity prices. However, there is some evidence that the currencies of commodity exporters appreciated and that their stock markets posted gains. The results suggest that other factors, such as supply constraints and robust demand from emerging-market economies, were the likely drivers behind the increase in commodity prices. Last, the paper finds that commodity prices have become more sensitive to macroeconomic news when monetary policy is at the effective lower bound.
    Keywords: International topics
    JEL: E E5 E58 G G1 G14 Q Q0 Q00
    Date: 2015
  11. By: Mei Li (Department of Economics and Finance, University of Guelph); Frank Milne (Department of Economics, Queen’s University); Junfeng Qiu (Economics and Management Academy, Central University of Finance and Economics)
    Abstract: This paper studies contagion and market freezes caused by uncertainty in interconnections among financial institutions, and provides theoretical guidance for central banks to tackle them. We establish a formal model to demonstrate that in a financial system where financial institutions are interconnected, a negative shock to an individual financial institution could spread to other financial institutions and cause market freezes in which creditors charge a higher interest rate, or even refuse to roll over their loans, due to their uncertainty about how the financial institutions are interconnected. In the extreme case, we find that a systematic collapse occurs in which all the financial institutions are run by their creditors, and are forced to liquidate their long-term assets and to recall their interbank loans. Our model reveals that a credible central bank with perfect information about the financial network structure can effectively check contagion. However, when the central bank does not have perfect information, more information provided by a central bank to narrow down the number of financial institutions connected to the stressed one does not necessarily improve social welfare, because social welfare losses caused by contagion do not monotonically increase in the number of financial institutions interconnected in the system. Given that the central bank does not have perfect information, it will have to resort to the bailout policy and the Lender of Last Resort (LOLR) policy to check contagion. In particular, our model reveals that the optimal LOLR policy is the unlimited central bank loans at the riskless rate. Moreover, limited central bank loans with an interest rate lower than the market rate will help alleviate market freezes and improve social welfare.
    Keywords: Interconnection; Market Freezes; Contagion; Financial Crises
    JEL: D82 G2
    Date: 2015
  12. By: Kessler, Kristina
    Abstract: For hundreds of years the world's money has been presented in the international exchange of gold and silver. They were used in their natural form. It is seems to be obvious, that current world’s money can’t take a role of the single world currency, which is a key to rapid and intensive economic growth. The goal of this research is to analyze aspects and features of cryptocurrency as one of the contenders for the role of single world currency.
    Keywords: Digital currency, cryptocurrency, Bitcoin, IT, monetary system, world economy.
    JEL: F00 G2 O1
    Date: 2015–06–18
  13. By: Franz Ruch (South African Reserve Bank); Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Famagusta, Northern Cyprus , via Mersin 10, Turkey; Department of Economics, University of Pretoria, Pretoria, 0002, South Africa.); Mampho P. Modise (National Treasury, 40 Church Square, Pretoria, 0002, South Africa); Rangan Gupta (Department of Economics, University of Pretoria)
    Abstract: Forecasting and estimating core inflation has recently gained attention, especially for inflation targeting countries, following research showing that targeting headline inflation may not be optimal; a Central Bank can miss the signal due to the noise. Despite its importance there is sparse literature on estimating and forecasting core inflation in South Africa, with the focus still on measuring core inflation. This paper emphasises predicting core inflation using large time-varying parameter vector autoregressive models (TVP-VARs), factor augmented VAR, and structural break models using quarterly data from 1981Q1 to 2013Q4. We use mean squared forecast errors (MSFE)and predictive likelihoods to evaluate the forecasts. In general, we find that (i) small TVP-VARs consistently outperform all other models; (ii) models where the errors are heteroscedastic do better than models with homoscedastic errors; (iii) models assuming that the forgetting factor remains 0.99 throughout the forecast period outperforms models that allow for the forgetting factors to change with time; and (iv) allowing for structural break does not improve the predictability of core inflation. Overall, our results imply that additional information on the growth rate of the economy and interest rate is sufficient to forecast core inflation accurately, but the relationship between these three variables needs to be modelled in a time-varying (nonlinear) fashion.
    Keywords: Core inflation, forecasting, small- and large-scale vector autoregressive models, constant and time-varying parameters
    JEL: C22 C32 E27 E31
    Date: 2015–06
  14. By: Kathryn M. E. Dominguez (University of Michigan and NBER)
    Abstract: The relationships between exchange rates, capital controls and foreign reserves during the financial crisis suggest that reserve management plays a much more central role than has typically been emphasized in international finance models. Reserves seem to be especially important for non-EZ European countries, not only for those with currencies in the ERM II, but also for those European countries in intermediate regimes that hope to deter currency market pressure, and in so doing help to mitigate trilemma trade-offs.
    Keywords: foreign exchange reserves, global financial crisis, exchange market pressure
    JEL: F32 F41
  15. By: Galo Nuño (Banco de España); Carlos Thomas (Banco de España)
    Abstract: We investigate the trade-offs between price stability and the sustainability of sovereign debt, using a small open economy model where the government issues nominal defaultable debt and chooses fiscal and monetary policy under discretion. Inflation reduces the real value of outstanding debt, thus making it more sustainable; but it also raises nominal yields and entails direct welfare costs. We compare this scenario with a situation in which the government gives up the ability to deflate debt away, e.g. by issuing foreign currency debt or joining a monetary union with an anti-inflationary stance. We find that the benefits of giving up this adjustment margin outweigh the costs, both for our preferred calibration and for a wide range of parameter values.
    Keywords: monetary-fiscal interactions, discretion, sovereign default, continuous time, optimal stopping
    JEL: E5 E62 F34
    Date: 2015–06
  16. By: Robert W Vivian and Nicholas Spearman
    Abstract: Although the phrase ‘banks create money’ forms part of popular discourse, it has precipitated a factually incorrect understanding of a bank’s role in the money creation process. Bank money creation is the result of an underlying value-for-value exchange transaction; the bank facilitates the transaction, takes over responsibility for obligations created and records the money created—the bank is not the source of money creation. This has long been understood, even if it is not immediately evident, but contemporary explanations have confounded the issue. In exploring and explaining this fact, we clarify the bank’s primary function as financial intermediary between buyer and seller as opposed to borrower and lender. We also address a further problematic belief—that banks create money out of nothing. This opinion has gained popularity, fueling criticism of the banking system by the general public.
    Keywords: Money creation, money supply, Financial intermediation
    JEL: E50 G20
    Date: 2015
  17. By: Feld, Lars P.; Köhler, Ekkehard A.; Nientiedt, Daniel
    Abstract: German policy during the Eurozone crisis supposedly follows an ordoliberal tradition. In this paper, we discuss to what extent this contention holds and to what extent Germany pragmatically responded to different crisis phenomena. A proper analysis of ordoliberal thinking reveals that the European Monetary Union can be justified on ordoliberal grounds as an economic constitution for Europe in which several pillars supposedly aim at ensuring sound money in the Eurozone. The policies the German government pushed during the Eurozone crisis have been informed by the ordoliberal tradition. In particular, this tradition may explain why the German government has been hesitant to support the call for Eurobonds and has only reluctantly established the European Stability Mechanism (ESM). However, the decisions on the ESM and the acceptance of unconventional monetary policy in Europe show that German economic policy largely responded pragmatically to the challenges offered by the crisis.
    Keywords: ordoliberalism,Eurozone crisis,constitutional economics,monetary and fiscal policy
    JEL: B13 B26 B31 D78 E61 E63
    Date: 2015
  18. By: Oliver Picek (Department of Economics, New School for Social Research)
    Abstract: A national public bank may be used to finance the national fiscal policy of a country within the euro zone. The bank would only hold domestic government bonds. It would get its funds from the Eurosystem, pledging government bonds as collateral. The publicly owned bank would apply for funds like any other bank, legally not violating the prohibition of monetary financing provision in EU treaties. Eectively, as the prots of the bank are returned to the government, interest on newly issued bonds can be saved, freeing up additional resources for government spending and investment. The biggest risk to the bank is a margin call by the national central bank in response to a fall in the market price of government bonds. A rule change in the ECB collateral scheme is proposed to remedy this risk. Then, a public bank could insulate the national government from buyer strikes and allow the state to pursue an adequate fiscal policy to create employment while debt servicing costs remain subdued.
    Keywords: Government Finance, Euro Crisis, Public Bank, Euro Area, European Central Bank, Financing Stimulus, Fiscal Policy, Public Debt Reduction, Monetary Financing, Government Bonds, Public Investment, Government Spending
    JEL: E63 E52 E62 H1 H12 H63 E42
    Date: 2015–06
  19. By: James H. Stock; Mark W. Watson
    Abstract: An important input to monetary policymaking is estimating the current level of inflation. This paper examines empirically whether the measurement of trend inflation can be improved by using disaggregated data on sectoral inflation to construct indexes akin to core inflation, but with time-varying distributed lags of weights, where the sectoral weight depends on the time-varying volatility and persistence of the sectoral inflation series, and on the comovement among sectors. The model is estimated using U.S. data on 17 components of the personal consumption expenditure inflation index. The modeling framework is a dynamic factor model with time-varying coefficients and stochastic volatility as in del Negro and Otrok (2008); this is the multivariate extension of the univariate unobserved components-stochastic volatility model of trend inflation in Stock and Watson (2007). Our main empirical results are (i) the resulting multivariate estimate of trend inflation is similar to the univariate estimate of trend inflation computed using core PCE inflation (excluding food and energy) in the first half of the sample, but introduces food in the second half of the sample: early in the sample, food inflation was noisy and a poor indicator of trend inflation, but now food inflation is less volatile, more persistent, and a useful indicator; (ii) the model-based filtering uncertainty about trend inflation is substantially reduced by using the disaggregated series in a multivariate model, relative to computing the trend using only headline inflation; (iii) the multivariate trend and the univariate trend constructed using core measures of inflation forecast average inflation over the 1-3 year horizon more accurately than a variety of other benchmark inflation measures, although there is considerable sampling uncertainty in these forecast comparisons.
    JEL: E31
    Date: 2015–06
  20. By: Stark, Oded; Wlodarczyk, Julia
    Abstract: Drawing on the premise that the integration of economies revises people's social space and their comparators, we quantify social stress by aggregate relative deprivation, ARD; we calculate the effect of monetary mergers on ARD; and we document the validity of the superadditivity property of ARD for successive adoptions of a common currency by European countries. One feature of monetary unification, which replaces diverse currencies with a common currency, is that it brings about a change in the comparison environment, expanding the reference space of individuals in a given country to encompass individuals from the joining countries. Overall, calculations regarding six enlargements of the Economic and Monetary Union between 1999 and 2011 reveal an increase of ARD on six occasions when we hold incomes constant, and on five when we take into consideration changes in incomes. In addition, we observe an uneven distribution of the costs and benefits from monetary integration among the participating countries when these costs and benefits are measured in terms of ARD.
    Keywords: Monetary integration,Aggregate relative deprivation,Superadditivity,Social stress
    JEL: D31 D63 E42 E44 F33 P51
    Date: 2015
  21. By: Ghosh, Saibal; Kumar, Rakesh
    Abstract: The paper utilizes state-level data on household dependence on informal finance for an extended time span to examine whether it is impacted by a monetary contraction. The analysis suggests a substitution effect such that borrowing from moneylenders declines, whereas landlords and relatives turn out to be the preferred financing choices. In addition, the evidence also supports a hierarchy among these preferred financing choices. This suggests that monetary policy needs to take on board its impact on the hitherto neglected informal sector.
    Keywords: informal finance; monetary policy; India
    JEL: E52 O17
    Date: 2014–12
  22. By: Silke Tober
    Abstract: Two recent proposals for overcoming the euro area crisis make the case for monetary financing of the public sector. Watt (2015) proposes that the ECB finances public investment directly, Pâris and Wyplosz (2014) contend that public debt may be effectively restructured by burying parts of it in the balance sheet of the Eurosystem. Both proposals place the ECB at the center of matters generally considered to be fiscal in order to circumvent existing fiscal and political constraints. This paper argues that neither monetary debt retirement nor monetary financing of EU investment are a free lunch. Both proposals fudge the line between monetary and fiscal policy thereby ignoring valid reasons for separating these two macroeconomic policy areas. All monetary policy measures impact on government finances; whether monetary policy actions cross the fiscal policy line, however, depends primarily on the underlying motivation of the action. In the case of the two proposals the motivation is unambiguously fiscal.
    Date: 2015
  23. By: Rangan Gupta (Department of Economics, University of Pretoria); Alessia Paccagnini (Department of Economics, Università degli Studi Milano - Bicocca); Charles Rahal (Department of Economics, University of Birmingham)
    Abstract: We propose a comparison between a group of nested and non-nested atheoretical and theoretical models in forecasting the inflation rate for South Africa, an inflation-targeting country. In a pseudo real-time environment, our results show that for shorter horizons, the atheoretical models, such as Vector Error Correction Models, with and without factors, perform better, while for longer horizons, theoretical (DSGE based) models outperform their competitors.
    Keywords: Inflation, South Africa, Structural, Atheoretical, Factors, DSGE
    JEL: C11 C32 C52
    Date: 2015–06
  24. By: Melecky,Martin; Podpiera,Anca Maria
    Abstract: Although keeping bank supervision independent from macroprudential supervision may ensure more checks and balances, placing bank supervision in the central bank could exploit synergies with macroprudential supervision. This paper studies whether placing microprudential supervision of banks, typically the systemic part of the financial system, under the same roof as financial stability policy, typically entrusted to the central bank, can improve financial stability. Specifically, the paper analyzes whether having bank supervision in the central bank mitigated the likelihood of banking crises during 2007?12. The analysis conditions on crisis indicators commonly found in the early-warning models of banking crises, the quality of microprudential supervision, and the quality of macroprudential supervision. The authors find that countries with deeper financial markets and those undergoing rapid financial deepening can better foster financial stability when they put bank supervision in the central bank.
    Keywords: Access to Finance,Debt Markets,Banks&Banking Reform,Emerging Markets,Financial Crisis Management&Restructuring
    Date: 2015–06–22
  25. By: Tom Fong (Hong Kong Monetary Authority); Ceara Hui (Hong Kong Monetary Authority); Alfred Wong (Hong Kong Monetary Authority)
    Abstract: This paper examines the potential impact of US monetary normalisation on sovereign bond yields in Asia Pacific. We apply the quantile vector autoregressive model with principal component analysis to the assessment of tail risk of sovereign debt, which may not be detectable using traditional OLS-based analysis. Our empirical evidence suggests that US Treasury bond yields can have a significant impact on sovereign bond yields in the region, an important channel through which monetary normalisation by the Fed can affect Asia-Pacific economies. Increases in sovereign bond yields will not only compromise the ability of the sovereigns in the region to service their debt but also translate into higher costs of borrowing for the rest of the economy. The results show how much the outsized impact could potentially be if US monetary normalisation somehow turns out to be much more disorderly than expected.
    Keywords: Sovereign Credit Risk, Tail Risk, Value-at-Risk, Quantile Regression, Vector Autoregression, Impulse Response Function, Principal Components
    Date: 2015–05
  26. By: Kawai, Masahiro (Asian Development Bank Institute)
    Abstract: Following the 1997–1998 Asian financial crisis, financial authorities in ASEAN+3 embarked on several new initiatives for East Asia's financial cooperation, including: (i) regional economic surveillance led by the Economic Review and Policy Dialogue (ERPD); (ii) a regional liquidity support facility, called the Chiang Mai Initiative (CMI); and (iii) local-currency bond market development. The global financial crisis of 2007–2009 demonstrated the need to further strengthen East Asian financial cooperation. This paper summarizes and evaluates the progress of regional financial cooperation, particularly the ERPD, the CMI and its subsequent multilateralization (CMIM), and the ASEAN+3 Macroeconomic Research Office (AMRO). It identifies the challenges in strengthening the CMIM, ERPD, and AMRO and suggests that the CMIM and AMRO be transformed into an Asian monetary fund (AMF). The paper argues that for an AMF to emerge, ASEAN+3 authorities need to: (i) contribute part of their foreign exchange reserves to the fund; (ii) establish a secretariat in charge of all aspects of the CMIM, including its activation; and (iii) delink the CMIM from the International Monetary Fund (IMF) programs by upgrading their capacity to conduct regional surveillance, formulate independent conditionality associated with crisis lending, and monitor policy and economic performance. In the transition period, eligible member countries should be allowed to have more flexible access to the CMIM facility. The CMIM and AMRO should work with the IMF to promote East Asian financial stability, but at the same time the IMF needs to undertake significant operational and governance reforms so that it regains the trust of emerging economy members in the region.
    Keywords: chiang mai initiative; asian monetary fund; bond market development; crisis lending; multilateralization
    JEL: F33 F36
    Date: 2015–06–18
  27. By: Guerrieri, Luca (Board of Governors of the Federal Reserve System (U.S.)); Iacoviello, Matteo (Board of Governors of the Federal Reserve System (U.S.)); Covas, Francisco (Board of Governors of the Federal Reserve System (U.S.)); Driscoll, John C. (Board of Governors of the Federal Reserve System (U.S.)); Kiley, Michael T. (Board of Governors of the Federal Reserve System (U.S.)); Jahan-Parvar, Mohammad (Board of Governors of the Federal Reserve System (U.S.)); Queraltó, Albert (Board of Governors of the Federal Reserve System (U.S.)); Sim, Jae W. (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: The macro spillover effects of capital shortfalls in the financial intermediation sector are compared across five dynamic equilibrium models for policy analysis. Although all the models considered share antecedents and a methodological core, each model emphasizes different transmission channels. This approach delivers "model-based confidence intervals" for the real and financial effects of shocks originating in the financial sector. The range of outcomes predicted by the five models is only slightly narrower than confidence intervals produced by simple vector autoregressions.
    Keywords: Bank losses; banks; capital requirements; DSGE models
    JEL: E42 E44 E47
    Date: 2015–06–03
  28. By: De Groen, Willem Pieter
    Abstract: The recent crises have shown that the eurozone countries’ government debt is not immune to default. Applying a large-exposure requirement also to eurozone government debt would be a logical measure towards breaking the bank-government doom loop, given the low probability and high loss-given government default. But what would be the impact of the application of the large-exposure requirement on the banking sector as well as on government funding? This CEPS Policy Brief presents the results of a simulation exercise performed for 109 systemic banks in the eurozone, showing that their eurozone government debt portfolios would have to decrease by 3.2% or €63 billion, if a 50% of own-funds cap would be applied on large exposures. The eurozone central banks’ demand for sovereign bonds under the extended asset purchase programme further creates momentum to start gradually implementing the restriction.
    Date: 2015–03
  29. By: Brender, Anton; Pisani, Florence; Gagna, Emile
    Abstract: The functions of the financial system of a developed economy are often badly understood. This can largely be attributed to free-market ideology, which has spread the belief that leaving finance to its own devices would provide the best possible mechanism for allocating savings. The latest financial crisis has sparked the beginnings of a new awareness on this point, but it is far from having led to an improved understanding of the role of the financial institutions. For many people, finance remains more an enemy to be resisted than an instrument to be intelligently exploited. Its institutions, which issue and circulate money, play an important role in the working of the real economy that it would be imprudent to neglect. The allocation of savings, but also the level of activity and the growth rate depend on it. In this book, the authors carefully analyse the close links between money, finance and the real economy. In the process, they show why today the existence of a substantial potential of saving, instead of being an opportunity for the world economy, could threaten it with ‘secular stagnation’.
    Date: 2015–03
  30. By: Mayer, Thomas
    Abstract: Greece and its creditors seem to be engaged in a game of chicken: both sides expect the other to yield at the last moment. The game will almost certainly end with each side deviating somewhat from its preferred course. This High-Level Brief discusses how a parallel currency could contribute to a resolution of the conflict. In the author's view, it would be the least-bad option for both sides among three possible options on the table.
    Date: 2015–05
  31. By: Naveen Srinivasan (Madras School of Economics); Vidya Mahambare (Great Lakes Institute of Management, Chennai); M. Ramachandran (Professor, Department of Economics, Pondicherry University)
    Abstract: The build up of international reserves by many Asian countries over the last decade or so has attracted widespread interest and debate. This paper seeks to make a contribution to this discussion from the point of view of India. The empirical results are designed to identify the extent to which the accumulation of reserves in India has been driven by two motives which are commonly identified with respect to the recent accumulation of reserves by the Asian EMEs, namely a demand to have insurance against external shocks and a demand to have a high level of export competitiveness, so as to have export-led growth. Our results provide evidence in support of both the motives in explaining India’s international reserves accumulation strategy, although, their relative importance does seem to vary overtime depending on external factors. This in turn offers some helpful insights into the causes and likely future path of the global imbalances.
    Keywords: Reserve accretion; Capital controls; Exports competitiveness
    JEL: E58 F31 F32
    Date: 2015–04

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