nep-mon New Economics Papers
on Monetary Economics
Issue of 2018‒11‒19
27 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Credit mechanics - a precursor to the current money supply debate By Decker, Frank; Goodhart, Charles A
  2. Nominal exchange rate dynamics and monetary policy: uncovered interest rate parity and purchasing power parity revisited By Saadon, Yossi; Sussman, Nathan
  3. Cryptocurrencies: A Crash Course in Digital Monetary Economics By Jesus Fernandez-Villaverde
  5. Financial Dollarization in Emerging Markets: An Insurance Arrangement By Husnu C. Dalgic
  6. Leaning against housing prices as robustly optimal monetary policy By Adam, Klaus; Woodford, Michael
  7. The Rise and Fall of the Natural Interest Rate By Gabriele Fiorentini; Alessandro Galesi; Gabriel Pérez-Quirós; Enrique Sentana
  8. Monetary Policy Pass-through, Excess Liquidity and Price Spillover: A Comparative Study of Conventional and Islamic Banks of Pakistan By Muhammad Omer
  9. State Dependent Effects of Monetary Policy: the Refinancing Channel By Eichenbaum, Martin; Rebelo, Sérgio; Wong, Arlene
  10. The effectiveness of capital controls By Valerio Nispi Landi; Alessandro Schiavone
  11. On the perils of stabilizing prices when agents are learning By Mele, Antonio; Molnar, Krisztina; Santoro, Sergio
  12. State Dependent Effects of Monetary Policy: the Refinancing Channel By Martin Eichenbaum; Sergio Rebelo; Arlene Wong
  13. Could a large scale asset purchase programme have mitigated the Great Depression? By Garabedian, Garo; Stuart, Rebecca
  14. What Determines Utility of International Currencies? By OGAWA Eiji; MUTO Makoto
  15. Political and institutional determinants of credit booms By Vítor Castro; Rodrigo Martins
  16. Leveraging monetary policy and banking regulation for climate action in Nigeria By Oguntuase, Oluwaseun J.; Ajibare, Adedayo O.
  17. Is Inflation Domestic or Global? Evidence from Emerging Markets By Rudolfs Bems; Francesca G Caselli; Francesco Grigoli; Bertrand Gruss; Weicheng Lian
  18. Estimating nominal interest rate expectations: overnight indexed swaps and the term structure By Lloyd, Simon
  19. Nonfarm Employment, Inflationary Expectations, and Monetary Policy after the Global Financial Crisis By Willem THORBECKE
  20. Where did inflation targeting matter? By Barbosa, Rodrigo dos Santos; Brito, Ricardo D.; Teles, Vladimir Kühl
  21. Should I stay or should I go? A latent threshold approach to large-scale mixture innovation models By Huber, Florian; Kastner, Gregor; Feldkircher, Martin
  22. Monetary Policy, Product Market Competition, and Growth By Aghion, Philippe; Farhi, Emmanuel; Kharroubi, Enisse
  23. What’s behind firms’ inflation forecasts? By Cristina Conflitti; Roberta Zizza
  24. How the banking system is creating a two-way inflation in an economy? By Mehedi Nizam, Ahmed
  25. International yield curves and currency puzzles By Chernov, Mikhail; Creal, Drew
  26. Bank capital constraints, lending supply and economic activity By Antonio M. Conti; Andrea Nobili; Federico M. Signoretti
  27. The Welfare Cost of Inlation with Banking Time By Max Gillman

  1. By: Decker, Frank; Goodhart, Charles A
    Abstract: This paper assesses the theory of credit mechanics within the context of the current money supply debate. Credit mechanics and related approaches were developed by a group of German monetary economists during the 1920s-1960s. Credit mechanics overcomes a one-sided, bank-centric view of money creation, which is often encountered in monetary theory. We show that the money supply is influenced by the interplay of loan creation and repayment rates; the relative share of credit volume neutral debtor-to-debtor and creditor-to-creditor payments; the availability of loan security; and the behavior of non-banks and non-borrowing bank creditors . With the standard textbook models of money creation now discredited, we argue that a more general approach to money supply theory involving credit mechanics needs to be established.
    Keywords: balances mechanics; Bank credit; credit creation; credit mechanics; money supply theory
    JEL: E40 E41 E50 E51
    Date: 2018–10
  2. By: Saadon, Yossi; Sussman, Nathan
    Abstract: The increasing globalization of trade in goods and services and the deepening of financial markets have reduced frictions that may impede the operation of the PPP and UIP relationships in the short run. In this paper, we estimate the short term relative PPP and UIP relationships. Using data from Israel, which has a deep market for inflation expectations for 12 months, we show that relative PPP and UIP cannot be rejected. Deviations from equilibrium last less than a year. Data from Israel's capital account of the balance of payments shows that the deviations are not destabilizing. Our findings suggest that greater globalization and financial deepening contribute to the effectiveness of monetary policy.
    Keywords: Balance sheet effects; Exchange Rates; Inflation expectations; monetary policy; purchasing power parity; uncovered interest rate parity
    JEL: E52 F3 F31 F41 G15
    Date: 2018–10
  3. By: Jesus Fernandez-Villaverde (Department of Economics, University of Pennsylvania)
    Abstract: This paper reviews what cryptocurrencies are, and it frames them within the context of historical monetary experiences and contemporary monetary economics. The paper argues that, as pure duciary private money, cryptocurrencies are a bubble without a fundamental value and that they will not provide, in general, optimal amounts of money or deliver price stability. Nevertheless, cryptocurrencies can play a role in improving the current means of payments and in disciplining central banks into providing better government-run duciary monies.
    Keywords: Private money, currency competition, cryptocurrencies, monetary policy
    JEL: E40 E42 E52
    Date: 2018–09–03
  4. By: Gert Peersman (-)
    Abstract: This paper examines the causal effects of shifts in international food commodity prices on euro area inflation dynamics using a structural VAR model that is identified with an external instrument (i.e. a series of global harvest shocks). The results reveal that exogenous food commodity price shocks have a strong impact on consumer prices, explaining on average 25%-30% of inflation volatility. In addition, large autonomous swings in international food prices contributed significantly to the twin puzzle of missing disinflation and missing inflation in the era after the Great Recession. Specifically, without disruptions in global food markets, inflation in the euro area would have been 0.2%-0.8% lower in the period 2009-2012 and 0.5%-1.0% higher in 2014-2015. An analysis of the transmission mechanism shows that international food price shocks have an impact on food retail prices through the food production chain, but also trigger indirect effects via rising inflation expectations and a depreciation of the euro.
    Keywords: Food commodity prices, inflation, twin puzzle, euro area, SVAR-IV
    JEL: E31 E52 Q17
    Date: 2018–10
  5. By: Husnu C. Dalgic
    Abstract: Households in emerging markets hold significant amounts of dollar deposits while firms have significant amounts of dollar debt. Motivated by the perceived dangers, policymakers often develop regulations to limit dollarization. In this paper, I draw attention to an important benefit of dollarization, which should be taken into account when crafting regulations. I argue that dollarization repre- sents an insurance arrangement in which the entrepreneurs that own firms pro- vide income insurance to households. Emerging market exchange rates tend to depreciate in a recession so that dollar deposits in effect provide households with income insurance. With their preference for holding deposits denominated in dol- lars, households effectively starve local financial markets of local currency, which raises local interest rates. By raising local currency interest rates, they cause entrepreneurs to borrow in dollars. Consistent with my argument, countries in which the exchange depreciates in a recession have a higher level of deposit and credit dollarization. In those countries, I verify that the premium of the local interest rate over the dollar interest rate is higher. This premium is the price paid by households for insurance.
    Keywords: Emerging Markets. Financial Dollarization. Corporate Dollar Debt.
    JEL: E32 E43 E44 F32 F41 F43
    Date: 2018–11
  6. By: Adam, Klaus; Woodford, Michael
    Abstract: We analytically characterize optimal monetary policy for an augmented New Keynesian model with a housing sector. In a setting where the private sector has rational expectations about future housing prices and inflation, optimal monetary policy can be characterized without making reference to housing price developments: commitment to a "target criterion" that refers to inflation and the output gap only is optimal, as in the standard model without a housing sector. When the policymaker is concerned with potential departures of private sector expectations from rational ones and seeks to choose a policy that is robust against such possible departures, then the optimal target criterion must also depend on housing prices. In the empirically realistic case where housing is subsidized and where monopoly power causes output to fall short of its optimal level, the robustly optimal target criterion requires the central bank to "lean against" housing prices: following unexpected housing price increases, policy should adopt a stance that is projected to undershoot its normal targets for inflation and the output gap, and similarly aim to overshoot those targets in the case of unexpected declines in housing prices. The robustly optimal target criterion does not require that policy distinguish between "fundamental" and "non-fundamental" movements in housing prices.
    JEL: D81 D84 E52
    Date: 2018
  7. By: Gabriele Fiorentini; Alessandro Galesi; Gabriel Pérez-Quirós; Enrique Sentana
    Abstract: We document a rise and fall of the natural interest rate (r*) for several advanced economies, which starts increasing in the 1960’s and peaks around the end of the 1980’s. We reach this conclusion after showing that the Laubach and Williams (2003) model cannot estimate r* accurately when either the IS curve or the Phillips curve is flat. In those empirically relevant situations, a local level specification for the observed interest rate can precisely estimate r*. An estimated Panel ECM suggests that the temporary demographic effect of the young baby-boomers mostly accounts for the rise and fall.
    Keywords: Natural rate of interest, Kalman filter, Observability, Demographics
    JEL: E43 E52 C32
    Date: 2018
  8. By: Muhammad Omer (State Bank of Pakistan)
    Abstract: This study investigates the comparative pass-through of policy rate to the retail prices, spillover of prices between Islamic and conventional banking systems, and the impact of excess liquidity on these pass-throughs using data from interbank market of Pakistan. The results suggest that the monetary policy shock affect retail prices of Islamic banks similar to conventional banks, confirming the findings of earlier studies. Moreover, there is a strong spillover between the prices of two systems; Islamic banks are following (leading) the conventional banks in pricing the lending (deposit) products. Islamic bank have acquired advantage in the deposit pricing by taping the religious depositors, which also has promoted financial inclusion in the economy. Our results suggest that the presence of excess liquidity have no effect on pass-through of policy rate in the Islamic system, which is contrary to the prevalent notion. However, excess liquidity significantly affects the spillovers of prices between the systems. These results support the hypothesis that the Islamic banks are investing in government securities indirectly via conventional banks.
    Keywords: Excess Liquidity, Islamic Banks, Monetary Policy Pass-through, VECM, Mediation
    JEL: C43 E31 F41
    Date: 2018–10
  9. By: Eichenbaum, Martin; Rebelo, Sérgio; Wong, Arlene
    Abstract: This paper studies how the impact of monetary policy depends on the dis- tribution of savings from refinancing mortgages. We show that the efficacy of monetary policy is state dependent, varying in a systematic way with the pool of potential savings from refinancing. We construct a quantitative dynamic life- cycle model that accounts for our findings. Motivated by the rapid expansion of Fintech, we study the impact of a fall in refinancing costs on the e cacy of monetary policy. Our model implies that as refinancing costs decline, the effects of monetary policy become less state dependent and more powerful.
    Keywords: monetary policy; Mortgages; refinancing; state dependency
    JEL: E52 G21
    Date: 2018–10
  10. By: Valerio Nispi Landi (Bank of Italy); Alessandro Schiavone (Bank of Italy)
    Abstract: The goal of this work is a systematic analysis of the effectiveness of capital controls in reducing the volume of capital flows and the probability of extreme events (surges and flights), strengthening financial stability and affecting the exchange rate. We find that controls significantly reduce capital flows, even though the effectiveness varies across economies and types of investment. Moreover capital controls tend to reduce the probability of extreme episodes. With regard to financial stability objectives, controls on banking inflows reduce domestic credit growth, but this effect is mainly driven by advanced economies. Controls on capital inflows reduce the share of domestic loans denominated in foreign currency. Finally, our estimates suggest that capital controls on inflows tend to be associated with an undervalued exchange rate only in emerging market economies.
    Keywords: international capital flows, capital controls, prudential tools
    JEL: F21 F32 G11
    Date: 2018–11
  11. By: Mele, Antonio (University of Surrey); Molnar, Krisztina (Dept. of Economics, Norwegian School of Economics and Business Administration); Santoro, Sergio (Bank of Italy)
    Abstract: The main advantage of price level stabilization compared with inflation stabilization rests on the central bank's ability to shape expectations. We show that stabilizing prices is no longer optimal when the central bank can shape expectations of agents with incomplete knowledge, who have to learn about the policy implemented. Disinating in the short run more than agents expect generates short-term gains without triggering an abrupt loss of confidence, because agents update expectations sluggishly. Following this policy, in the long run, the central bank loses the ability to shape agents' beliefs, and the economy converges to a rational expectations equilibrium in which policy does not stabilize prices, economic volatility is high, and agents su er the corresponding welfare losses. However, these losses are outweighed by short-term gains from the learning phase.
    Keywords: Price; stabilization
    JEL: C62 D83 D84 E52
    Date: 2018–10–26
  12. By: Martin Eichenbaum; Sergio Rebelo; Arlene Wong
    Abstract: This paper studies how the impact of monetary policy depends on the distribution of savings from refinancing mortgages. We show that the efficacy of monetary policy is state dependent, varying in a systematic way with the pool of potential savings from refinancing. We construct a quantitative dynamic lifecycle model that accounts for our findings. Motivated by the rapid expansion of Fintech, we study the impact of a fall in refinancing costs on the efficacy of monetary policy. Our model implies that as refinancing costs decline, the effects of monetary policy become less state dependent and more powerful.
    JEL: E52 G31
    Date: 2018–10
  13. By: Garabedian, Garo (Central Bank of Ireland); Stuart, Rebecca (Central Bank of Ireland)
    Abstract: Since Friedman and Schwarz (1963), the role of the Federal Reserve during the Great Depression has been an issue of debate. In this paper, we focus on the purchases of government securities by the Federal Reserve over a four-month period in 1932. Using a Bayesian VAR model, we estimate the effect of an extension of this programme in conjunction with an interest rate cut on a range of variables capturing prices, output and macro-financial linkages. Our results indicate that this policy would have substantially shortened and reduced the impact of the Great Depression.
    Keywords: Federal Reserve, Bayesian VARs, Quantitative easing, Great Depression
    JEL: B16 E51 E58
    Date: 2018–07
  14. By: OGAWA Eiji; MUTO Makoto
    Abstract: Ogawa and Muto (2017a, 2017b) estimated time series of coefficients on five international currencies (the US dollar, the euro, the Japanese yen, the British pound, and the Swiss franc) in a utility function. We call the coefficients as utility of an international currency. The time series show that utility of the US dollar as an international currency has kept at the first position in the changing international monetary system where the euro created as a single common currency in European countries. On one hand, utility of the Japanese yen has been declining as an international currency. In this paper, we investigate what determines utility of the international currencies. We use a dynamic panel data model to analyze the issue with GMM. Specifically, liquidity shortage in terms of an international currency means that it is inconvenient for economic agents to use the relevant currency for international economic transactions. In other words, the liquidity shortage might reduce utility of an international currency. In this analysis we focus on liquidity premium which represents liquidity shortage in terms of an international currency. Our empirical results showed not only inertia in terms of change but also an impact of the liquidity shortage in an international currency on utility of the relevant international currency.
    Date: 2018–11
  15. By: Vítor Castro (Loughborough University and NIPE); Rodrigo Martins (CeBER - Centre for Business and Economics Research)
    Abstract: The literature that investigates credit booms has essentially focused on their economic determinants. The purpose of this paper is to explore the importance of political conditionings and central bank independence. In doing so, a fixed effects logit model is estimated over a panel of 67 countries for the period 1975q1-2016q4. The results show that not only the economic but also the political environment influences significantly the likelihood of credit booms. Even though lending booms have not proven to depend on the electoral cycle, they are less likely when right-wing parties are in office, especially in developing countries, and when the political environment is more unstable. In addition, more independent Central Banks are found to reduce the probability of credit booms. However, when a country’s monetary policy in the hands of a single regional monetary union they are more likely to occur and spread. Some significant differences are also unveiled when comparing industrial with developing countries.
    Keywords: Credit booms; Logit model; Political cycles; Government ideology; Central Bank independence.
    JEL: C25 D72 E32 E51
  16. By: Oguntuase, Oluwaseun J.; Ajibare, Adedayo O.
    Abstract: The paramount question about global climate change is no longer whether climate will change, but how we should respond. There is urgent need for banks and their regulators to respond, as climate change continues to negatively impact economies around the world. This paper examined how the Central Bank of Nigeria (CBN) could align monetary policy and banking regulations to better meet the challenges posed by climate change to the banking sector and financial stability in Nigeria. The paper concluded that the CBN must explore the linkages between monetary policy and banking regulation to mitigate the effects of climate fragilities on Nigerian banks and financial stability in the country.
    Keywords: climate change, monetary policy, banking regulation, financial stability
    JEL: G2 G21
    Date: 2018–07–10
  17. By: Rudolfs Bems; Francesca G Caselli; Francesco Grigoli; Bertrand Gruss; Weicheng Lian
    Abstract: Following a period of disinflation during the 1990s and early 2000s, inflation in emerging markets has remained remarkably low and stable. Was this related to a global disinflation environment triggered by China's integration into world trade and the broader globalization in these economies, or to better domestic policies? In this paper, we review the inflation performance in a sample of 19 large emerging markets in the past couple of decades and quantify the impact of domestic and global factors in determining inflation. We document that the level, volatility, and persistence of inflation declined significantly, albeit not uniformly. Our results suggest that longer-term inflation expectations, linked to domestic factors, were the main determinant of inflation. External factors played a considerably smaller role. The results are a useful piece of evidence as emerging markets craft their monetary policies to navigate the future shift in global financial conditions.
    Date: 2018–11–08
  18. By: Lloyd, Simon (Bank of England)
    Abstract: No-arbitrage dynamic term structure models (DTSMs) have regularly been used to estimate interest rate expectations and term premia, but are beset by an identification problem that results in inaccurate estimates. I propose the augmentation of DTSMs with overnight indexed swap (OIS) rates to better estimate interest rate expectations and term premia along the whole term structure at daily frequencies. I illustrate this with a Gaussian affine DTSM augmented with 3 to 24-month OIS rates, which provide accurate information about interest rate expectations. The OIS-augmented model generates estimates of US interest rate expectations that closely correspond to those implied by federal funds futures rates and survey expectations out to a 10-year horizon, accurately depict their daily frequency evolution, and are more stable across samples. Against these metrics, interest rate expectation estimates, and therefore term premia, from OIS-augmented models are superior to estimates from existing Gaussian affine DTSMs.
    Keywords: Dynamic term structure model; monetary policy expectations; overnight indexed swaps; term premia; term structure of interest rates
    JEL: C32 C58 E43 E47 G12
    Date: 2018–11–02
  19. By: Willem THORBECKE
    Abstract: Unemployment has tumbled since the Global Financial Crisis (GFC). This paper investigates whether news of a tightening labor market since the GFC has generated expectations of an overheating economy or excessive Fed tightening. Evidence from the response of interest rates, exchange rates, Treasury Inflation Protected Securities and other assets indicates that investors did not expect a strong labor market to produce inflation. Neither did they expect the Fed to overreact and derail growth. The Fed has thus succeeded so far in navigating between the shoals of overheating and premature tightening.
    Date: 2018–11
  20. By: Barbosa, Rodrigo dos Santos; Brito, Ricardo D.; Teles, Vladimir Kühl
    Abstract: We investigate the effects of inflation targeting (IT) adoption on industrial economies by comparing each inflation targeter country (ITer) with its synthetic control, defined as the convex combination of non-IT countries that best reproduce the ITer counterfactual inflation trajectory. We show that most of the ITers enjoyed lower inflation and higher output growth than their synthetics in most of the 1990 years’ IT experience. Although those gains could be transitory, they were economically important to justify IT Central Banks optimism with their regime choice, both case-by-case and on average.
    Date: 2018–10
  21. By: Huber, Florian (University of Salzburg); Kastner, Gregor (WU Wirtschaftsuniversität Wien); Feldkircher, Martin (Österreichische Nationalbank (Austrian Central Bank))
    Abstract: We propose a straightforward algorithm to estimate large Bayesian time-varying parameter vector autoregressions with mixture innovation components for each coefficient in the system. The computational burden becomes manageable by approximating the mixture indicators driving the time-variation in the coefficients with a latent threshold process that depends on the absolute size of the shocks. Two applications illustrate the merits of our approach. First, we forecast the US term structure of interest rates and demonstrate forecast gains relative to benchmark models. Second, we apply our approach to US macroeconomic data and find significant evidence for time-varying effects of a monetary policy tightening
    Keywords: Time-varying parameter vector autoregression with stochastic volatility (TVP-VARSV); Change point model; Structural breaks; Term structure of interest rates; Monetary policy; R package threshtvp
    JEL: C11 C32 C52 E42
    Date: 2018–11–07
  22. By: Aghion, Philippe; Farhi, Emmanuel; Kharroubi, Enisse
    Abstract: In this paper we argue that monetary easing fosters growth more in more credit-constrained environments, and the more so the higher the degree of product market competition. Indeed when competition is low, large rents allow firms to stay on the market and reinvest optimally, no matter how funding conditions change with aggregate conditions. To test this prediction, we use industry-level and firm-level data from the Euro Area to look at the effects on sectoral growth and firm-level growth of the unexpected drop in long-term government bond yields following the announcement of the Outright Monetary Transactions program (OMT) by the ECB. We find that the monetary policy easing induced by OMT, contributed to raising sectoral (firm-level) growth more in more highly leveraged sectors (firms), and the more so the higher the degree of product market competition in the country (sector).
    Date: 2018–10
  23. By: Cristina Conflitti (Bank of Italy); Roberta Zizza (Bank of Italy)
    Abstract: How do firms form expectations about future inflation? We investigate this issue by exploiting the Survey of Inflation and Growth Expectations run by Banca d’Italia and Il Sole 24 Ore on Italian firms. Several sources of information might matter in shaping short- and long-term expectations, inter alia media reports, professional forecasts, personal shopping experience, price increases experienced when dealing with suppliers, and the outcome of contract renewals. The specific feature of the wage setting process in Italy allows us to assess the reaction of inflation expectations to exogenous variation in the cost of labour borne by firms. We find that firms’ inflation expectations are significantly affected by contractual wage increases. As to the prices of goods for own consumption, proxied by house and fuel prices, only the latter affect inflation expectations; official inflation data and professional forecasters expectations are also important. Results are robust to several specifications using panel and cross-section estimates.
    Keywords: inflation expectations, survey data, wages
    JEL: C23 E24 E31
    Date: 2018–10
  24. By: Mehedi Nizam, Ahmed
    Abstract: Here we argue that due to the difference between the real GDP growth rate and nominal deposit rate, a demand pull inflation is induced into the economy. On the other hand, due to the difference between real GDP growth rate and nominal lending rate, a cost push inflation is created. We quantitatively measure the amount of nominal interest income the depositors spend on each unit of consumed goods and the amount of nominal interest expense the borrowers pay on each unit of produced goods which is not supported by the accompanying real GDP growth rate and thereby causing inflation in the economy. We examine the process of creating two-fold inflation by the interplay between real GDP growth rate and nominal deposit and lending rate and provide two metrics that tend to link the overall inflation prevailing at any point of time in an economy to the nominal deposit and lending rate in the long run. We compare the performance of our model to the Fisherian one by using Toda and Yamamoto approach of testing Granger Causality in the context of non-stationary data. We then use ARDL Bounds Testing approach to cross-check the results obtained from T-Y approach.
    Keywords: banking, nominal deposit rate, nominal lending rate, demand pull inflation, cost push inflation, Fisher Effect, Fisher Hypothesis, Fisher Equation
    JEL: E31 E43 E44 E52 E58
    Date: 2018–10–12
  25. By: Chernov, Mikhail; Creal, Drew
    Abstract: The depreciation rate is often computed as the ratio of foreign and domestic pricing kernels. Using bond prices to estimate these kernels leads to currency puzzles: inability of models to match violations of the uncovered interest parity and volatility of exchange rates. One cannot use information in bonds alone because exchange rates are not spanned by bonds. This view of the puzzles is distinct from market incompleteness. Incorporating exchange rates into estimation of yield curve models helps with resolving the puzzles. It also allows to connect the differences between international yield curves to characteristics of exchange rates.
    Keywords: affine models; bond valuation; Exchange Rates; market incompleteness
    JEL: F31 G12 G15
    Date: 2018–10
  26. By: Antonio M. Conti (Bank of Italy); Andrea Nobili (Bank of Italy); Federico M. Signoretti (Bank of Italy)
    Abstract: We estimate a Bayesian VAR with a detailed characterization of the banking sector for Italy since the 1990s. We use conditional forecasting techniques to retrieve bank capital shocks related to regulatory and supervisory initiatives and quantify their impact on credit supply and economic activity. We study three episodes characterized by increased regulatory/supervisory pressure and large increases in the Tier 1 capital ratio (the discussion on the Basel III reform; the 2011 EBA stress test and capital exercise; and the ECB’s comprehensive assessment and the launch of the SSM). We find evidence of large and persistent shocks to bank capital in all three episodes, which had significant negative effects on loan supply and GDP. Our results are robust to taking account of possible instabilities in the estimated relationships. The analysis focuses on the potential short-run costs of the regulatory/supervisory initiatives and disregards the potentially much larger long-run benefits of high bank capitalization.
    Keywords: bank capital shocks, Bayesian VAR models, conditional forecasts, time variation
    JEL: C32 E32 F34
    Date: 2018–11
  27. By: Max Gillman
    Abstract: The paper presents the welfare cost of inflation in a banking time economy that models exchange credit through a bank production approach. The estimate of welfare cost uses fundamental parameters of utility and production technologies. It is compared to a cash-only economy, and a Lucas (2000) shopping economy without leisure, as special cases. The paper estimates the welfare cost of a 10% inflation rate instead of zero, for comparison to other estimates, as well as the cost of a 2% inflation rate instead of a zero inflation rate. The zero rate is specified as the US inflation rate target in the 1978 Employment Act amendments. The paper provides a conservative welfare cost estimate of 2% inflation instead of zero at $33 billion a year. Estimates of the percent of government expenditure that can be financed through a 2% vs. zero inflation rate are also provided
    Date: 2018–11–07

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