nep-mon New Economics Papers
on Monetary Economics
Issue of 2018‒09‒17
29 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Requiem for the Interest-Rate Controls in China By Rongrong Sun
  2. Monetary Policy News and Systemic Risk at the Zero Lower Bound By Pavel Kapinos
  3. Evaluating the Effects of Forward Guidance and Large-scale Asset Purchases By Xu Zhang
  4. Lean against the wind or float with the storm? Revisiting the monetary policy asset price nexus by means of a novel statistical identification approach By Herwartz, Helmut; Maxand, Simone; Rohloff, Hannes
  5. The Political Economy of Exchange Rate Stability During the Gold Standard. Spain 1874—1914 By MARTÍNEZ-RUIZ, Elena; NOGUES-MARCO, Pilar
  6. A Macroeconomic Model with Financial Panics By Mark Gertler; Andrea Prestipino; Nobuhiro Kiyotaki
  7. How to intervene in foreign exchange market without buying/selling dollars? By Pal, Sumantra
  8. Uninsured Unemployment Risk and Optimal Monetary Policy By Edouard Challe
  9. The stochastic lower bound By Masolo, Riccardo; Winant, Pablo
  10. The Risk-Taking Channel of Liquidity Regulations and Monetary Policy By Stephan Imhof; Cyril Monnet; Shengxing Zhang
  11. Empirical analysis of fiscal dominance and the conduct of monetary policy in Nigeria By Afolabi, Joseph Olarewaju; Atolagbe, Oluwafemi
  12. Inflation Expectations Anchoring Across Different Types of Agents: the Case of South Africa By Ken Miyajima; James Yetman
  13. Testing for Inflation Convergence among European Union Countries:A Panel Approach By Maria Tsafa-Karakatsanidou; Stilianos Fountas
  14. Optimal Trend Inflation By Klaus Adam; Henning Weber
  15. Puzzling Exchange Rate Dynamics and Delayed Portfolio Adjustment By Philippe Bacchetta; Eric van Wincoop
  16. Virtual currencies and their potential impact on financial markets and monetary policy By Marek Dabrowski; Lukasz Janikowski
  17. Banks, money and the zero lower bound By Kumhof, Michael; Wang, Xuan
  18. Measuring the Effects of US Unconventional Monetary Policy on International Financial Markets By Francisco Ilabaca
  20. 'Credit Risk, Excess Reserves and Monetary Policy: The Deposits Channel' By George Bratsiotis
  21. Dollarization and the “Unbundling” of Globalization in sub-Saharan Africa By Kazeem B. Ajide; Ibrahim D. Raheem; Simplice A. Asongu
  22. HANK meets Ramsey: Optimal Coordination of Monetary and Labor Market Policies By Nils Mattis Gornemann
  23. Currency Unions, Trade, and Heterogeneity By Natalie Chen; Dennis Novy
  24. Business investment, cash holding and uncertainty since the Great Financial Crisis By Smietanka, Pawel; Bloom, Nicholas; Mizen, Paul
  25. Optimal Capital Account Liberalization in China By Liu, Zheng; Spiegel, Mark M.; Zhang, Jingyi
  26. 'Credit Risk, Excess Reserves and Monetary Policy: The Deposits Channel' By M.Emranul Haque; Paul Middleditch; Shuonan Zhang
  27. Macroprudential Policy with Leakages By Bengui, Julien; Bianchi, Javier
  28. An Estimate of the Long-Term Neutral Rate of Interest By John M. Roberts
  29. A Behavioral Approach to Financial Supervision, Regulation, and Central Banking By Ashraf Khan

  1. By: Rongrong Sun (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan)
    Abstract: This paper reviews the retail interest-rate-control deregulation in China over the 1993-2015 period and provides a preliminary assessment of the PBC’s replacement monetary framework. I show that the interest-rate controls triggered the development of deposit substitutes that banks used to circumvent the restrictions, which in turn drove deposits out of commercial banks. Concerned by deterioration of bank profits and build-up of financial frangibility, the PBC has been pushing strongly for interest-rate liberalization. I quantify the distortionary effects of these controls: disintermediation, a rising shadow banking system and financial repression. Despite the official lift-off of the controls, the retail interest rates are still subject to the PBC’s window guidance and other pricing mechanism guidance. The interest-rate corridor does not function well in confining money market rates. This suggests that the PBC adopt a target money market rate system.
    Keywords: interest-rate control, deregulation, China, financial repression, interest-rate corridor
    JEL: E52 E58
  2. By: Pavel Kapinos (FRB Dallas)
    Abstract: This paper employs a recent contribution to the construction of the shadow nominal interest rate during the zero lower bound episode of the Great Recession of 2008-2009 and the Greenbook forecasts to obtain a measure of monetary policy shocks over that time period. It then identifies monetary policy news shocks as a novel measure of the forward-looking conduct of monetary policy in the U.S. Using the data from 1987-2010 and impulse responses from the method of local projections, it shows that contractionary monetary surprise and news shocks tended to reduce systemic risk measures over the full sample. In contrast, expansionary monetary news shocks reduced systemic risk at the zero lower bound, whereas surprises had little effect. These findings suggest that the Federal Reserve's efforts at providing expansionary forward guidance at the zero lower bound were successful in stabilizing measures of systemic risk during the Great Recession.
    Date: 2018
  3. By: Xu Zhang (University of California, San Diego)
    Abstract: This paper evaluates the effects of forward guidance and large-scale asset purchases (LSAP) when the nominal interest rate reaches the zero lower bound. I investigate the effects of the two policies in a dynamic new Keynesian model with financial frictions adapted from Gertler & Karadi (2011, 2013), with changes implemented so that the framework delivers realistic predictions for the effects of each policy on the entire yield curve. I then match the change that the model predicts would arise from a linear combination of the two shocks with the observed change in the yield curve in a high-frequency window around Federal Reserve announcements, allowing me to identify the separate contributions of each shock to the effects of the announcement. My estimates correspond closely to narrative elements of the FOMC announcements. My estimates imply that forward guidance was more important in influencing inflation, while LSAP was more important in influencing output.
    Date: 2018
  4. By: Herwartz, Helmut; Maxand, Simone; Rohloff, Hannes
    Abstract: This paper revisits the monetary policy asset price nexus employing a novel identification approach for structural VARs in a framework of non-Gaussian independent shocks. This allows us to remain "agnostic" about the contemporaneous relations between the variables. We provide empirical evidence on the U.S. economy for monetary policy shocks and shocks originating from two asset markets: Equity and housing. Our results indicate that contractionary monetary policy shocks have a mildly negative impact on both asset prices. The effect is less pronounced for equity. Moreover, we find considerable differences in the speed of monetary policy transmission among both asset classes.
    JEL: C32 E44 E52
    Date: 2018
    Abstract: This article contributes to the literature on central bank independence and monetary stability during the classical gold standard era. On the eve of the First World War, European periphery had not achieved stable adherence to gold despite the protection of central banks against political pressures to monetize debt. In the 19th century, most issuing institutions were private banks whose main objective was profit maximization. As a result, monetary stability depended on negotiations between monetary and fiscal authorities and not directly on central bank independence as is the case nowadays. Strong governments were needed to impose the objective of monetary stability on central banks in negotiation practices. To test our argument, we have constructed indicators of government strength and central bank independence to measure bargaining power for the case of Spain. Results confirm that a highly independent private central bank avoided the responsibility of defending gold adherence when negotiating with weak government, even in a stable macroeconomic environment. Our research suggests that the success of central bank independence in generating monetary stability during the gold standard period depended on sound political institutions.
    Keywords: gold standard, monetary stability, political economy, central bank independence, institutional design, Spain
    JEL: E02 E42 E58 F33 N13
    Date: 2018–09
  6. By: Mark Gertler (New York University); Andrea Prestipino (Federal Reserve Board); Nobuhiro Kiyotaki (Princeton University)
    Abstract: This paper incorporates banks and banking panics within a conventional macroeconomic framework to analyze the dynamics of a financial crisis of the kind recently experienced. We are particularly interested in characterizing the sudden and discrete nature of the banking panics as well as the circumstances that makes an economy vulnerable to such panics in some instances but not in others. Having a conventional macroeconomic model allows us to study the channels by which the crisis affects real activity and the effects of policies in containing crises.
    Date: 2018
  7. By: Pal, Sumantra
    Abstract: The Emerging Market Economies are vulnerable to adverse external shocks. Such shocks cause excessive volatility in foreign exchange markets. Faced with high volatility, the central banks in EMEs often end up, in futility, depleting their foreign exchange reserves by selling dollars to restore stability. Few central banks use currency-options based intervention to contain volatility and anchor market expectations. In the Indian context, this paper demonstrates that such options-based intervention policies can be considered to contain excessive volatility and anchoring market expectations. Using the risk-neutral densities extracted from currency options data, it is demonstrated that certain options-trading strategy can be effective in stabilizing markets. Therefore, options-based intervention may be a viable policy alternative, which is more cost-effective than the conventional spot-market intervention.
    Keywords: Fx interventions,risk-neutral density,currency options
    JEL: O24 G13 G17
    Date: 2018
  8. By: Edouard Challe (CREST & Ecole Polytechnique)
    Abstract: I study optimal monetary policy in a New Keynesian economy wherein house- holds precautionary-save against uninsured, endogenous unemployment risk. In this economy greater unemployment risk raises desired savings, causing aggregate demand to fall and ul- timately feed back to greater unemployment risk. I show this deationary feedback loop to be constrained-ine¢ cient and to call for an accommodative monetary policy response: after a contractionary aggregate shock the policy rate should be kept signi cantly lower and for longer than in the perfect-insurance benchmark. For example, the usual prescription obtained under perfect insurance of a hike in the policy rate in the face of a bad supply (i.e., productivity or cost-push) shock is easily overturned. If implemented, the optimal policy e¤ectively breaks the deflationary feedback loop and takes the dynamics of the imperfect-insurance economy close to that of the perfect-insurance benchmark.
    Date: 2018
  9. By: Masolo, Riccardo (Bank of England); Winant, Pablo (Bank of England)
    Abstract: Since the Great Recession policy rates have been extremely low, but neither absolutely constant, nor exactly set to zero. We thus augment a standard zero lower bound model to study the effects of a stochastic lower bound (SLB) on policy rates. We find that a less predictable SLB helps keep inflation closer to target by lowering expectations of future values of the SLB when interest rate cuts are not an option.
    Keywords: Zero lower bound; DSGE
    JEL: E31 E52
    Date: 2018–08–24
  10. By: Stephan Imhof; Cyril Monnet; Shengxing Zhang
    Abstract: We develop a theoretical model to study the implications of liquidity regulations and monetary policy on deposit-making and risk-taking. Banks give risky loans by creating deposits that firms use to pay suppliers. Firms and banks can take more or less risk. In equilibrium, higher liquidity requirements always lower risk at the cost of lower investment. Nevertheless, a positive liquidity requirement is always optimal. Monetary conditions affect the optimal size of liquidity requirements, and the optimal size is countercyclical. It is only optimal to impose a 100% liquidity requirement when the nominal interest rate is sufficiently low.
    Date: 2018
  11. By: Afolabi, Joseph Olarewaju; Atolagbe, Oluwafemi
    Abstract: The study empirically investigates fiscal dominance and the conduct of monetary policy in Nigeria, using quarterly data from 1986Q1 to 2016Q4. It adopts the vector error correction mechanism (VECM) and cointegration technique to analyze the data and make inference. The findings reveal that there is no evidence of fiscal dominance in Nigeria. The empirical results show that budget deficit, domestic debt and money supply have no significant influence on the average price level. However, budget deficit and domestic debt are shown to have significant influence on money supply, but only in the short-run. The policy implication is that the government should enforce fiscal discipline through the appropriate institution and the Central Bank should be given autonomy to perform the primary function of long-term price stability, among other functions.
    Keywords: Fiscal dominance, fiscal policy, monetary policy, VECM, Nigeria.
    JEL: E52 E58 E62 E63
    Date: 2018–09–02
  12. By: Ken Miyajima; James Yetman
    Abstract: Inflation forecasts are modelled as monotonically diverging from an estimated long-run anchor point, or “implicit anchor”, towards actual inflation as the forecast horizon shortens. Fitting the model with forecasts by analysts, businesses and trade unions for South Africa, we find that inflation expectations have become increasingly strongly anchored. That is, the degree to which the estimated implicit anchor pins down inflation expectations at longer horizons has generally increased. Estimated inflation anchors of analysts lie within the 3–6 percent inflation target range of the central bank. However, the implicit anchors of businesses and trade unions, who are directly involved in the setting of wages and prices that drive the inflation process, have remained above the top end of the official target range. Possible explanations for these phenomena are discussed.
    Keywords: Inflation expectations;Central banks and their policies;South Africa;Sub-Saharan Africa;decay function, inflation anchoring, inflation targeting
    Date: 2018–08–02
  13. By: Maria Tsafa-Karakatsanidou (Department of Economics, University of Macedonia); Stilianos Fountas (Department of Economics, University of Macedonia)
    Abstract: This paper attempts to test for inflation convergence in a sample of twenty-four European Union countries. To tackle this issue, first- and second-generation panel unit root and stationarity tests are employed so as to provide evidence of inflation convergence before and after the launch of the single currency, the euro. We also test for and then allow for cross-sectional dependence. In general, the findings reveal that conditional inflation convergence exists for all panels under study. The estimation of half lives shows that the evidence for faster speed of convergence applies for the new member states followed by the core countries and the old member states.
    Keywords: Inflation Convergence, EU, Maastricht Criteria, Panel data.
    JEL: C33 E3 F33
    Date: 2018–09
  14. By: Klaus Adam (University of Mannheim); Henning Weber (Bundesbank)
    Abstract: We present a sticky-price model incorporating heterogeneous firms and systematic firm-level productivity trends. Aggregating the model in closed form, we show that it delivers radically different predictions for the optimal inflation rate than canonical sticky price models featuring homogenous firms: (1) the optimal steady- state inflation rate generically differs from zero and (2) inflation optimally responds to productivity disturbances. Using micro data from the US Census Bureau to es- timate the inflation-relevant productivity trends at the firm level, we find that the optimal US inflation rate is positive. It was slightly above 2 percent in the year 1986, but continuously declined thereafter, reaching about 1 percent in the year 2013.
    Date: 2018
  15. By: Philippe Bacchetta (University of Lausanne); Eric van Wincoop (University of Virginia)
    Abstract: This objective of this paper is to show that the proposal by Froot and Thaler (2000) of delayed portfolio adjustment can account for a broad set of puzzles about the relationship between interest rates and exchange rates. The puzzles include: i) the delayed overshooting puzzle; ii) the forward discount puzzle (or Fama puzzle); iii) the predictability reversal puzzle; iv) the Engel puzzle (high interest rate currencies are stronger than implied by UIP); v) the forward guidance exchange rate puzzle; vi) the absence of a forward discount puzzle with long-term bonds. These results are derived analytically in a simple two-country model with portfolio adjustment costs. Quantitatively, this approach can match all the moments related to these puzzles.
    Date: 2018
  16. By: Marek Dabrowski; Lukasz Janikowski
    Abstract: Virtual currencies are a contemporary form of private money. Thanks to their technological properties, their global transaction networks are relatively safe, transparent, and fast. This gives them good prospects for further development. However, they remain unlikely to challenge the dominant position of sovereign currencies and central banks, especially those in major currency areas. As with other innovations, virtual currencies pose a challenge to financial regulators, in particular because of their anonymity and trans-border character.
    Keywords: virtual currency, private money, sovereign currency, free banking, monetary policy, central bank, financial regulation, financial market, currency substitution
    JEL: E42 E58 F31 G18 G28 N21 N23
    Date: 2018
  17. By: Kumhof, Michael (Bank of England); Wang, Xuan (University of Oxford)
    Abstract: We study a New Keynesian model where banks create deposits through loans, subject to increasing marginal cost of lending. Banks do not intermediate commodity deposits between savers and borrowers, instead they offer a payment system that intermediates ledger-entry deposits between different spenders. We discuss three implications. First, non-banks’ aggregate purchasing power consists not only of their income but also of new loans/deposits. Second, near the ZLB policy rate reductions compress spreads, and thereby reduce bank profitability, deposit creation and output. Third, near the ZLB Phillips curves are flatter, because lower factor cost inflation is partly offset by inflationary credit rationing.
    Keywords: Banks; financial intermediation; endogenous money creation; bank loans; bank deposits; money demand; deposits-in-advance; Phillips curve; zero lower bound; monetary policy rules.
    JEL: E41 E44 E51 G21
    Date: 2018–08–24
  18. By: Francisco Ilabaca (University of California, Irvine)
    Abstract: I replicate the analysis of Swanson 2017 to separately identify the effects of U.S. forward guidance and large-scale asset purchases during the US zero lower bound period. I then estimate the effects of these two unconventional monetary policy tools on bond yields, stock indices, and exchange rates for the UK, Canada, Australia, Japan, and Germany. I find that these two factors have substantial effects on international bond yields, but these effects vary across countries and across maturities. I find small effects on exchange rates, and no effect on stock indices. I compute a spillover rate for each factor to facilitate cross country analysis. I extend this analysis to a larger panel of countries, and find similar results. I conclude that there are significant spillover effects on international bond yields from US monetary policy across countries and maturities.
    Date: 2018
    Abstract: This study investigated the foreign exchange market in Nigeria to determine the significance of past exchange rates in predicting the present exchange rates which is a test of weak form efficiency. It examined the cointegration between selected pairs of exchange rates to determine the semi strong form efficiency, and inspected the variant of the Random Walk Model that exchange rates in Nigeria conformed to. Secondary data sourced mainly from the Central Bank of Nigeria Statistical Bulletin 2014 and its official websites were used. The study?s data were the spot and nominal monthly average foreign exchange rate series from the official market of Naira to Dollar, Naira to Pounds, Naira to Yen, Naira to Swiss Franc and Naira to CFA Franc between January, 1986 and December, 2015. Methods used include the autocorrellation function, unit root test and Johansen Cointegration test Autocorrelation and unit root tests revealed that all the series were non-stationary at level and became stationary at first difference. In addition, the Johansen cointegration test revealed that there were no cointegrating equations between selected pairs of exchange rates and the coefficients of determination were highest with the assumption of intercept and trend. The findings implied that the foreign exchange market in Nigeria within the sample period was efficient in the weak and semi strong forms, that is, information in past exchange rate series and public information were fully reflected in current exchange rates, the exchange rate series lacked exploitable pattern and conformed to the Random Walk Model with intercept and deterministic trend. The study therefore recommended that a more liberalized flexible exchange rate regime and improvements in money supply, national income, local and foreign bonds.
    Keywords: Exchange Market Efficiency, Nigeria foreign exchange market, Unit root, Cointegration, Granger causality test.
    JEL: E44
    Date: 2018–06
  20. By: George Bratsiotis
    Abstract: This paper examines the role of precautionary liquidity (reserves) and the interest on reserves as two potential determinants of the deposits channel that can help explain the role of monetary policy, particularly at the near zero-bound. Through the deposits channel and balance sheet channel either of these determinants can explain a number of effects including, (i) zero-bound optimal policy rates, (ii) a negative deposit rate spread, but also (iii) determinacy at the lower-zero bound. Similarly, through its effect on the deposits channel and balance sheet channel the interest on reserves can act as the main tool of monetary policy, that is shown to provide higher welfare gains in relation to a simple Taylor rule. This result is shown to hold at the zero-bound and it is independent of precautionary liquidity, or the fiscal theory of the price level.
    Date: 2018
  21. By: Kazeem B. Ajide (University of Lagos, Nigeria); Ibrahim D. Raheem (University of Kent, Canterbury, UK); Simplice A. Asongu (Yaoundé/Cameroon)
    Abstract: This study contributes to the dollarization literature by expanding its determinants to account for different dimensions of globalization, using the widely employed KOF index of globalization. Specifically, globalization is “unbundled” into three different layers namely: economic, social and political dimensions. The study focuses on 25 sub-Saharan African (SSA) countries for the period 2001-2012.Using the Tobit regression approach, the following findings are established. First, from both economic and statistical relevance, the social and political dimensions of globalization constitute the key dollarization amplifiers, while the explanatory power of the economic component is weaker on dollarization. Second, consistent with the theoretical underpinnings, macroeconomic instabilities (such as inflation and exchange rate volatilities) have the positive expected signs. Third, the positive association between the accumulation of international reserves and dollarization is also apparent. Policy implications are discussed.
    Keywords: Dollarization; Globalization; sub-Saharan Africa; Tobit regression
    JEL: E41 F41 C21
    Date: 2018–01
  22. By: Nils Mattis Gornemann (International Finance Board of Governors)
    Abstract: We study the design of coordinated labor market and monetary policy in a heterogeneous agent model with incomplete markets, search frictions, and nominal rigidities. We allow for self-insurance through savings and moral hazard in search behavior. In such a model a rise in labor market risk during a recession causes an increase in desired precautionary savings by households leading to a fall in aggregate demand which amplifies the initial downturn. Increasing unemployment benefits or cutting interest rates can both help to counteract this amplification effect. Therefore, gains from coordinating policies arise which are the focus of our analysis. Extending recent methods for the solution of heterogeneous agent models with aggregate risk we solve a sequence of Ramsey problems with a varying sets of policy instruments in this economy to quantify the effects of policy coordination and optimal policy behavior over the business cycle.
    Date: 2018
  23. By: Natalie Chen (Warwick University); Dennis Novy (University of Warwick)
    Abstract: What is the effect of currency unions on international trade? This paper offers a new approach. We rely on a translog gravity equation that predicts variable trade cost elasticities, both across and within country pairs. While we estimate that currency unions are associated with a trade increase of around 38 percent on average, we find substantial underlying heterogeneity. Consistent with the predictions of our model, we find effects around three times as strong for country pairs associated with small import shares, and a zero effect for large import shares. Our results imply that conventional homogeneous currency union estimates do not provide helpful guidance for countries considering to join a currency union such as the euro.
    Date: 2018
  24. By: Smietanka, Pawel (Bank of England); Bloom, Nicholas (Stanford University); Mizen, Paul (University of Nottingham)
    Abstract: The Lehman Brothers event in 2008 created a large uncertainty shock that triggered an economic slowdown lasting a decade. The macroeconomic effects are well documented, but the effect on business decisions much less so. In this paper, we explore corporate data to investigate how economic uncertainty affected investment, dividend payouts and cash holdings, based on over 10,000 UK firm-year observations. We offer new insights into the relationship between business decisions and uncertainty, by exploiting two surveys of macroeconomic uncertainty from professional forecasters and CFOs collected by the Bank of England. These data demonstrate that heightened economic uncertainty lowered investment even after controlling for investment opportunities, sales growth, and the firm’s own stock volatility. Economic uncertainty also explains the rise in cash holdings and the fall in payouts. Hence, our results help explain why UK firms invested so little and held so much cash at a time of historically low interest rates, and also why they paid out smaller dividends. These results may help explain recent sluggish productivity in the UK economy, and they also are important, because they provide a benchmark for future studies of Brexit-related uncertainty.
    Keywords: uncertainty; investment; cash holdings; dividend policy; survey forecasts
    JEL: E22 G31 G32 G35
    Date: 2018–08–24
  25. By: Liu, Zheng (Federal Reserve Bank of San Francisco); Spiegel, Mark M. (Federal Reserve Bank of San Francisco); Zhang, Jingyi (Shanghai University)
    Abstract: China maintains tight controls over its capital account. Its prevailing regime also features financial repression, under which banks are often required to extend a fraction of funds to state-owned enterprises (SOEs) at below-market interest rates. We incorporate these features into a general equilibrium model. We find that capital account liberalization under financial repression incurs a tradeoff between aggregate productivity and intertemporal allocative efficiency. Along a transition path with a declining SOE share, the second-best policy calls for a rapid removal of financial repression, but gradual liberalization of the capital account.
    JEL: G18 O41
    Date: 2018–08–02
  26. By: M.Emranul Haque; Paul Middleditch; Shuonan Zhang
    Abstract: This paper investigates the contrasting business cycle characteristics of China and the US, speci cally in terms of economic activity and total factor productivity. To help explain the differing pro les for these two variables for both countries, we build and estimate a DSGE model with extended fi nancial markets and endogenous technology creation to identify key structural parameters, comparing the decomposition of the shock processes in our analysis. We reveal stark differences in the contributing factors of business cycle fluctuations for both countries, and demonstrate the importance of the stock market for economic recovery after a sizable and persistent financial shock. Macroeconomic intervention in China works well but is unable to smooth total factor productivity (TFP) due to the presence of multiple shocks transmitted through the endogenous technology creation channel. Whilst the US achieves a similar pro le for economic activity with less volatility in TFP, it also contends with additional risks, fed in by the existence of the stock market. The stock market allows firms to hedge fi nance during periods of fi nancial instability, though this is not cost free.
    Date: 2018
  27. By: Bengui, Julien (University of Montreal); Bianchi, Javier (Federal Reserve Bank of Minneapolis)
    Abstract: The outreach of macroprudential policies is likely limited in practice by imperfect regulation enforcement, whether due to shadow banking, regulatory arbitrage, or other regulation circumvention schemes. We study how such concerns affect the design of optimal regulatory policy in a workhorse model in which pecuniary externalities call for macroprudential taxes on debt, but with the addition of a novel constraint that financial regulators lack the ability to enforce taxes on a subset of agents. While regulated agents reduce risk taking in response to debt taxes, unregulated agents react to the safer environment by taking on more risk. These leakages undermine the effectiveness of macroprudential taxes but do not necessarily call for weaker interventions. A quantitative analysis of the model suggests that aggregate welfare gains and reductions in the severity and frequency of financial crises remain, on average, largely unaffected by even significant leakages.
    Keywords: Macroprudential policy; Regulatory arbitrage; Financial crises; Limited regulation enforcement
    JEL: D62 E32 E44 F32 F41
    Date: 2018–09–11
  28. By: John M. Roberts
    Abstract: This note proposes a new measure of the high-frequency equilibrium interest rate, one that falls naturally out of a common textbook notion of the economy's equilibrium interest rate--and which is rooted in one particularly simple and well-known model.
    Date: 2018–09–05
  29. By: Ashraf Khan
    Abstract: This paper describes how behavioral elements are relevant to financial supervision, regulation, and central banking. It focuses on (1) behavioral effects of norms (social, legal, and market); (2) behavior of others (internalization, identification, and compliance); and (3) psychological biases. It stresses that financial supervisors, regulators, and central banks have not yet realized the full potential that these behavioral elements hold. To do so, they need to devise a behavioral approach that includes aspects relating to individual and group behavior. The paper provides case examples of experiments with such an approach, including behavioral supervision. Finally, it highlights areas for further research.
    Keywords: Governance;Central banks and their policies;Remuneration;Central banking;behavior, culture, financial supervision, financial regulation, risk management, behavioral economics, Microeconomic Behavior: Underlying Principles, General, Government Policy and Regulation, General, Illegal Behavior and the Enforcement of Law, Marketing and Advertising: Government Policy and Regulation, General, Religion
    Date: 2018–08–02

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