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on Central Banking |
| By: | Claessens, Stijn; Kose, Ayhan; Terrones, Marco E |
| Abstract: | This paper provides a comprehensive analysis of financial cycles using a large database covering 21 advanced countries over the period 1960:1-2007:4. Specifically, we analyze cycles in credit, house prices, and equity prices. We report three main results. First, financial cycles tend to be long and severe, especially those in housing and equity markets. Second, they are highly synchronized within countries, particularly credit and house price cycles. The extent of synchronization of financial cycles across countries is high as well, mainly for credit and equity cycles, and has been increasing over time. Third financial cycles accentuate each other and become magnified, especially during coincident downturns in credit and housing markets. Moreover, globally synchronized downturns tend to be associated with more prolonged and costly episodes, especially for credit and equity cycles. We discuss how these findings can guide future research on various aspects of financial market developments. |
| Keywords: | asset busts; credit booms; credit cycles; crunches; equity prices; house prices |
| JEL: | E32 F42 G12 G15 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8379&r=cba |
| By: | Rebeca Anguren Martín (Banco de España) |
| Abstract: | We propose an econometric analysis of the evolution of bank credit to the private sector in order to describe credit cycles and identify phases of particularly low (or negative) credit growth such as those that typically accompany financial or banking crises. We use a sample of twelve developed countries, which improves the reliability of our estimation results and provides a global view of the situation of credit for developed countries. In our preferred specification, the credit cycle is characterized as a three-state Markov-switching model that identifies episodes of credit expansion, intermediate credit growth and subpar growth or credit crisis. This specification identifies six of the countries as having experienced period of credit adjustment after the beginning of the financial crisis in 2007 (Canada, Germany, Netherlands, Spain, Switzerland and US). By the end of the sample period, credit growth was still impaired in three of these countries (Germany and Spain in 2010:I; and United States in 2009:IV). The analysis also uncovers a systematic cyclical pattern in the bank lending sector of the group of advanced countries considered in our sample, which have experienced five episodes of synchronous restrictions in bank lending: 1974-75, 1980-82, 1991-93, 2001-02 and from 2008 to the end of the sample. |
| Keywords: | credit cycle, banking crisis, fi nancial crisis, Markov, business cycle |
| JEL: | E44 E51 G21 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1113&r=cba |
| By: | Jordi Galí; Frank Smets; Rafael Wouters |
| Abstract: | We reformulate the Smets-Wouters (2007) framework by embedding the theory of unemployment proposed in Galí (2011a,b). We estimate the resulting model using postwar U.S. data, while treating the unemployment rate as an additional observable variable. Our approach overcomes the lack of identification of wage markup and labor supply shocks highlighted by Chari, Kehoe and McGrattan (2008) in their criticism of New Keynesian models, and allows us to estimate a "correct" measure of the output gap. In addition, the estimated model can be used to analyze the sources of unemployment fluctuations. |
| JEL: | D58 E24 E31 E32 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17084&r=cba |
| By: | Koop, G.; Pesaran, M.H.; Smith, R. |
| Abstract: | In recent years there has been increasing concern about the identification of parameters in dynamic stochastic general equilibrium (DSGE) models. Given the structure of DSGE models it may be difficult to determine whether a parameter is identified. For the researcher using Bayesian methods, a lack of identification may not be evident since the posterior of a parameter of interest may differ from its prior even if the parameter is unidentified. We show that this can even be the case even if the priors assumed on the structural parameters are independent. We suggest two Bayesian identification indicators that do not suffer from this difficulty and are relatively easy to compute. The first applies to DSGE models where the parameters can be partitioned into those that are known to be identified and the rest where it is not known whether they are identified. In such cases the marginal posterior of an unidentified parameter will equal the posterior expectation of the prior for that parameter conditional on the identified parameters. The second indicator is more generally applicable and considers the rate at which the posterior precision gets updated as the sample size (<em>T</em>) is increased. For identified parameters the posterior precision rises with <em>T</em>, whilst for an unidentified parameter its posterior precision may be updated but its rate of update will be slower than <em>T</em>. This result assumes that the identified parameters are <img src="http://www.econ.cam.ac.uk/faculty/pesaran/wp11/imageT.png" width="21" height="15" />-consistent, but similar differential rates of updates for identified and unidentified parameters can be established in the case of super consistent estimators. These results are illustrated by means of simple DSGE models. |
| JEL: | C11 C15 E17 |
| Date: | 2011–03–30 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:1131&r=cba |
| By: | Claudio Borio; Piti Disyatat |
| Abstract: | Global current account imbalances have been at the forefront of policy debates over the past few years. Many observers have recently singled them out as a key factor contributing to the global financial crisis. Current account surpluses in several emerging market economies are said to have helped fuel the credit booms and risk-taking in the major advanced deficit countries at the core of the crisis, by putting significant downward pressure on world interest rates and/or by simply financing the booms in those countries (the "excess saving" view). We argue that this perspective on global imbalances bears reconsideration. We highlight two conceptual problems: (i) drawing inferences about a country's cross-border financing activity based on observations of net capital flows; and (ii) explaining market interest rates through the saving-investment framework. We trace the shortcomings of this perspective to a failure to consider the distinguishing characteristics of a monetary economy. We conjecture that the main contributing factor to the financial crisis was not "excess saving" but the "excess elasticity" of the international monetary and financial system: the monetary and financial regimes in place failed to restrain the build-up of unsustainable credit and asset price booms ("financial imbalances"). Credit creation, a defining feature of a monetary economy, plays a key role in this story. |
| Keywords: | global imbalances, saving glut, money, credit, capital flows, current account, interest rates, financial crisis |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:346&r=cba |
| By: | Hall Pamela |
| Abstract: | Central banks have won in credibility as from the mid-eighties by keeping inflation under control. However, confidence in low inflation might have encouraged agents to excessive risk-taking, leading asset prices to rise. Moreover, the belief in a Federal Reserve guarantee against a sharp market decline spread across US markets as from the nineties. This belief, commonly referred to as the Greenspan put, raised again the question about the role of asset prices in monetary policy decisions. The problem is addressed by modeling the reaction of the Fed to stockmarket deviations from fundamentals over the period stretching from August 1987 to October 2008, which corresponds to the periods where Greenspan until January 2006 and Bernanke from thereon were chairmen. A Taylor rule describing the Fed's nominal feedback rule to inflation and economic activity on a monthly basis is extended to take account of asset prices. The indicators considered are deflation and volatility in stock prices. Furthermore, a Markov switching process allows to capture contemporaneous as well as forward-looking monetary policy responses to asset prices over the period. We find out that taking asset price deflation improves the Taylor rule fit by some 8%. In periods when the Fed was actively pursuing an expansive or restrictive monetary policy, its reaction to volatility or deflation of financial markets was significant. We also see that the reaction of the Fed to asset prices was greater during financial crises, especially when modeling a forward-looking decision process. Agents' confidence in a stronger response of the US central bank to significant market declines urging to an easing of monetary conditions in their favour was therefore not unfounded. |
| Keywords: | monetary policy, nominal feedback rule, asset prices, United States |
| JEL: | C11 C22 E44 E52 E58 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2011-06&r=cba |
| By: | Pesaran, M. H.; Smith, R. P. |
| Abstract: | Academic macroeconomics and the research department of central banks have come to be dominated by Dynamic, Stochastic, General Equilibrium (DSGE) models based on micro-foundations of optimising representative agents with rational expectations. We argue that the dominance of this particular sort of DSGE and the resistance of some in the profession to alternatives has become a straitjacket that restricts empirical and theoretical experimentation and inhibits innovation and that the profession should embrace a more flexible approach to macroeconometric modelling. We describe one possible approach. |
| JEL: | C1 E1 |
| Date: | 2011–04–13 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:1138&r=cba |
| By: | Nikolai Stähler (Deutsche Bundesbank); Carlos Thomas (Banco de España) |
| Abstract: | This paper develops a medium-scale dynamic, stochastic, general equilibrium (DSGE) model for fiscal policy simulations. Relative to existing models of this type, our model incorporates two important features. First, we consider a two-country monetary union structure, which makes it well suited to simulate fiscal measures by relatively large countries in a currency area. Second, we provide a notable degree of disaggregation on the government expenditures side, by explicitly distinguishing between (productivity-enhancing) public investment, public purchases and the public sector wage bill. In addition, we consider a labor market characterized by search and matching frictions, which allows to analyze the response of equilibrium unemployment to fiscal measures. In order to illustrate some of its applications, and motivated by recent policy debate in the Euro Area, we calibrate the model to Spain and the rest of the area and simulate a number of fiscal consolidation scenarios. We find that, in terms of output and employment losses, fiscal consolidation is the least damaging when achieved by reducing the public sector wage bill, whereas it is most damaging when carried out by cutting public investment. |
| Keywords: | DSGE model, fiscal policy, two-country monetary union, disaggregation of fiscal expenditures, labor market frictions |
| JEL: | E62 H30 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1110&r=cba |
| By: | Zsolt Darvas; Valentina Kostyleva (OECD Public Governance and Territorial Development Directorate) |
| Abstract: | This paper studies the role of fiscal and monetary institutions in macroeconomic stability and budgetary control in central, eastern and south-eastern European countries (CESEE) in comparison with other OECD countries. CESEE countries tend to grow faster and have more volatile output than non-CESEE OECD countries, which has implications for macroeconomic management: better fiscal and monetary institutions are needed to avoid pro-cyclical policies. The paper develops a Budgetary Discipline Index to assess whether good fiscal institutions underpin good fiscal outcomes. Even though most CESEE countries have low scores, the debt/GDP ratios declined before the crisis. This was largely the consequence of a very favourable relationship between the economic growth rate and the interest rate, but such a favourable relationship is not expected in the future. Econometric estimations confirm that better monetary institutions reduce macroeconomic volatility and that countries with better budgetary procedures have better fiscal outcomes. All these factors call for improved monetary institutions, stronger fiscal rules and better budgetary procedures in CESEE countries. |
| Keywords: | CESEE countries, Budgetary Discipline Index, budget process, fiscal institutions, budgetary institutions, monetary institutions, macroeconomic stability, econometric analysis, budgetary procedures, fiscal outcomes, fiscal rules |
| JEL: | E32 E50 H11 H60 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:mkg:wpaper:1102&r=cba |
| By: | Francisco de Castro (Banco de España, Madrid, Spain.); Javier J. Pérez (Banco de España, Madrid, Spain.); Marta Rodríguez-Vives (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | Public deficit figures are subject to revisions, as most macroeconomic aggregates are. Nevertheless, in the case of Europe, the latter could be particularly worrisome given the role of fiscal data in the functioning of EU’s multilateral surveillance rules. Adherence to such rules is judged upon initial releases of data, in the framework of the so-called Excessive Deficit Procedure (EDP) Notifications. In addition, the lack of reliability of fiscal data may hinder the credibility of fiscal consolidation plans. In this paper we document the empirical properties of revisions to annual government deficit figures in Europe by exploiting the information contained in a pool of real-time vintages of data pertaining to fifteen EU countries over the period 1995-2008. We build up such real-time dataset from official publications. Our main findings are as follows: (i) preliminary deficit data releases are biased and non-efficient predictors of subsequent releases, with later vintages of data tending to show larger deficits on average; (ii) such systematic bias in deficit revisions is a general feature of the sample, and cannot solely be attributed to the behaviour of a small number of countries, even though the Greek case is clearly an outlier; (iii) Methodological improvements and clarifications stemming from Eurostat’s decisions that may lead to data revisions explain a significant share of the bias, providing some evidence of window dressing on the side of individual countries; (iv) expected real GDP growth, political cycles and the strength of fiscal rules also contribute to explain revision patterns; (v) nevertheless, if the systematic bias is excluded, revisions can be considered rational after two years. JEL Classification: E01, E21, E24, E31, E5, H600. |
| Keywords: | data revisions, real-time data, news and noise, fiscal statistics, rationality. |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111342&r=cba |
| By: | Lieven Baele; Geert Bekaert; Seonghoon Cho; Koen Inghelbrecht; Antonio Moreno |
| Abstract: | We estimate a New-Keynesian macro model accommodating regime-switching behavior in monetary policy and in macro shocks. Key to our estimation strategy is the use of survey-based expectations for inflation and output. We identify accommodating monetary policy before 1980, with activist monetary policy prevailing most but not 100% of the time thereafter. Systematic monetary policy switched to the activist regime in the 2000-2005 period through an aggressive lowering of interest rates. Discretionary policy spells became less frequent since 1985, but the Volcker period is identified as a discretionary period. Output shocks shift to the low volatility regime around 1985 whereas inflation shocks do so only around 1990, suggesting active monetary policy may have played role in anchoring inflation expectations. Shocks and policy regimes jointly drive the volatility of the macro variables. We provide new estimates of the onset and demise of the Great Moderation and the relative role played by macro-shocks and monetary policy. |
| JEL: | C42 C53 E31 E32 E52 E58 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17090&r=cba |
| By: | Nicolás de Roux; Marc Hofstetter |
| Abstract: | Over the last quarter of a century, inflation targeting has become a popular monetary regime. Nevertheless, empirical evaluations of IT have shown contradictory results. Part of the reason is that IT in and of itself constitutes an endogenous decision and thus needs to be properly instrumented. In this paper, we show that preferences over inflation constitute a crucial determinant of IT: countries exhibiting greater inflation aversion are more likely to adopt IT. |
| Date: | 2011–02–20 |
| URL: | http://d.repec.org/n?u=RePEc:col:000089:008731&r=cba |
| By: | Liu, Philip (International Monetary Fund); Mumtaz, Haroon (Bank of England); Theophilopoulou, Angeliki (University of Westminister) |
| Abstract: | A growing literature has documented changes to the dynamics of key macroeconomic variables in industrialised countries and highlighted the possibility that these variables may react differently to structural shocks over time. However, existing empirical work on the international transmission of shocks largely abstracts from the possibility of changes to the international transmission mechanism across time. In addition, the literature has largely employed small-scale models with limited number of variables. This paper introduces an empirical model which allows the estimation of time-varying response of a large set of domestic variables to foreign money supply, demand and supply shocks. The key results show that a foreign monetary policy tightening resembles the classic beggar-thy-neighbour scenario for the United Kingdom in the period 1975-90. In more recent periods, the response is negative but largely insignificant. |
| Keywords: | Factor augmented VAR; Time-variation; Gibbs sampling. |
| Date: | 2011–05–27 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0425&r=cba |
| By: | Daniel Kaufmann; Sarah Lein |
| Abstract: | This paper disentangles fluctuations in disaggregate prices into macroeconomic and idiosyncratic components using a factor-augmented vector autoregression (FAVAR) in order to shed light on sectoral inflation dynamics in Switzerland. We find that disaggregated prices react only slowly to monetary policy and other macroeconomic shocks, but relatively quickly to idiosyncratic shocks. We document that there is a large heterogeneity across sectors in the reaction to monetary policy shocks and show that sectors with larger volatility of idiosyncratic shocks react more readily to monetary policy. This finding stands in contrast to the rational inattention model of price setting. We also find that sectors, which change prices infrequently, react less strongly but if they do change their prices, they adjust them by a large amount. This suggests that the source of sluggish response to aggregate shocks is heterogeneity in menu costs rather than rational inattention. Furthermore, even though prices respond with a significant delay to identified monetary policy shocks, we find no evidence of a price puzzle on average. For single sectors, however, we still find a hump-shaped response which can partially be explained by the fact that, by law, rents are tied to interest rates in Switzerland. |
| Keywords: | monetary policy transmission, idiosyncratic shocks, rational inattention, heterogeneity in price setting, cost channel, price puzzle |
| JEL: | E31 E4 E5 C3 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2011-07&r=cba |
| By: | Magnus Andersson (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Antonello D’Agostino (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Gabe J. de Bondt (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Moreno Roma (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper examines the out-of-sample forecast performance of sectoral stock market indicators for real GDP, private consumption and investment growth up to 4 quarters ahead in the US and the euro area. Our findings are that the predictive content of sectoral stock market indicators: i) is potentially strong, particularly for the financial sector, and is stronger than that of financial spreads; ii) varies over time, with a substantial improvement after 1999 for the euro area; iii) is stronger for investment than for private consumption; and iv) is stronger in the euro area than in the United States. JEL Classification: C53, E37, G12. |
| Keywords: | forecasting real GDP, consumption and investment, sectoral stock prices, stock market valuation metrics, US, Euro Area. |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111343&r=cba |
| By: | Filipa Sá (University of Cambridge); Francesca Viani (Banco de España) |
| Abstract: | Reversals in capital inflows can have severe economic consequences. This paper develops a dynamic general equilibrium model to analyse the effect on interest rates, asset prices, investment, consumption, output, the exchange rate and the current account of a shift in portfolio preferences of foreign investors. The model has two countries and two asset classes (equities and bonds). It is characterised by imperfect substitutability between assets and allows for endogenous adjustment in interest rates and asset prices. Therefore, it accounts for capital gains arising from equity price movements, in addition to valuation effects caused by changes in the exchange rate. To illustrate the mechanics of the model, we calibrate it to analyse the consequences of an increase in the importance of sovereign wealth funds (SWFs). Specifically, we ask what would happen if ‘excess’ reserves held by emerging markets were transferred from central banks to SWFs. We look separately at two diversification paths: one in which SWFs keep the same allocation across bonds and equities as central banks, but move away from dollar assets (path 1); and another in which they choose the same currency composition as central banks, but shift from US bonds to US equities (path 2). In path 1, the dollar depreciates and US net debt falls on impact and increases in the long run. In path 2, the dollar depreciates and US net debt increases in the long run. In both cases, there is a reduction in the ‘exorbitant privilege’, ie, the excess return the United States receives on its assets over what it pays on its liabilities. The model is applicable to other episodes in which foreign investors change the composition of their portfolios. |
| Keywords: | portfolio preferences, sudden stops, imperfect substitutability, global imbalances, sovereign wealth funds |
| JEL: | F32 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1112&r=cba |
| By: | Midrigan, Virgiliu; Philippon, Thomas |
| Abstract: | A salient feature of the recent U.S. recession is that output and employment have declined more in regions (states, counties) where household leverage had increased more during the credit boom. This pattern is difficult to explain with standard models of financing frictions. We propose a theory that can account for these cross-sectional facts. We study a cash-in-advance economy in which home equity borrowing, alongside public money, is used to conduct transactions. A decline in home equity borrowing tightens the cash-in-advance constraint, thus triggering a recession. We show that the evidence on house prices, leverage and employment across US regions identifies the key parameters of the model. Models estimated with cross-sectional evidence display high sensitivity of real activity to nominal credit shocks. Since home equity borrowing and public money are, in the model, perfect substitutes, our counter-factual experiments suggest that monetary policy actions have significantly reduced the severity of the recent recession. |
| Keywords: | cash-in-advance; household credit; housing; leverage; monetary policy; Recession |
| JEL: | E2 E4 E5 G0 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8381&r=cba |
| By: | Sá, F.; Wieladek, T. |
| Abstract: | We estimate an open economy VAR model to quantify the effect of monetary policy and capital inflows shocks on the US housing market. The shocks are identified with sign restrictions derived from a standard DSGE model. We find that monetary policy shocks have a limited effect on house prices and residential investment. In contrast, capital inflows shocks driven by an increase in foreign savings have a positive and persistent effect on both housing variables. Other sources of capital inflows shocks, such as foreign monetary expansion or an increase in aggregate demand in the US, have a more limited role. |
| JEL: | E5 F3 |
| Date: | 2011–05–30 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:1141&r=cba |
| By: | Francesco Carravetta; Marco M. Sorge |
| Abstract: | This paper describes a method for solving a class of forward-looking Markov-switching Rational Expectations models under noisy measurement, by specifying the unobservable expectations component as a general-measurable function of the observable states of the system, to be determined optimally via stochastic control and filtering theory. Solution existence is proved by setting this function to the regime-dependent feedback control minimizing the mean-square deviation of the equilibrium path from the corresponding perfect-foresight autoregressive Markov jump state motion. As the exact expression of the conditional (rational) expectations term is derived both in finite and infinite horizon model formulations, no (asymptotic) stationarity assumptions are needed to solve forward the system, for only initial values knowledge is required. A simple sufficient condition for the mean-square stability of the obtained rational expectations equilibrium is also provided. |
| Keywords: | Rational Expectations, Markov-switching dynamic systems, Dynamic programming, Time-varying Kalman filter |
| JEL: | C5 C61 C62 C63 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:bon:bonedp:bgse05_2011&r=cba |
| By: | Gianni Amisano (DG-Research, European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany and Department of Economics University of Brescia.); Oreste Tristani (DG-Research, European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.) |
| Abstract: | Phenomena such as the Great Moderation have increased the attention of macro-economists towards models where shock processes are not (log-)normal. This paper studies a class of discrete-time rational expectations models where the variance of exogenous innovations is subject to stochastic regime shifts. We first show that, up to a second-order approximation using perturbation methods, regime switching in the variances has an impact only on the intercept coefficients of the decision rules. We then demonstrate how to derive the exact model likelihood for the second-order approximation of the solution when there are as many shocks as observable variables. We illustrate the applicability of the proposed solution and estimation methods in the case of a small DSGE model. JEL Classification: E0, C63. |
| Keywords: | DSGE models, second-order approximation, regime switching, time-varying volatility. |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111341&r=cba |
| By: | Demosthenes Ioannou (European Central Bank, DG International and European Relations, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Livio Stracca (European Central Bank, DG International and European Relations, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper examines the out-of-sample forecast performance of sectoral stock market indicators for real GDP, private consumption and investment growth up to 4 quarters ahead in the US and the euro area. Our findings are that the predictive content of sectoral stock market indicators: i) is potentially strong, particularly for the financial sector, and is stronger than that of financial spreads; ii) varies over time, with a substantial improvement after 1999 for the euro area; iii) is stronger for investment than for private consumption; and iv) is stronger in the euro area than in the United States. JEL Classification: E62, E63, H63, O43. |
| Keywords: | Stability and Growth Pact, Lisbon Strategy, euro area, European Union, governance, institutions. |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111344&r=cba |
| By: | Iva Cecchin |
| Abstract: | This paper investigates the speed and completeness of the pass-through from market rates to mortgage rates in Switzerland. The pass-through dynamics are studied under a marginal funding cost perspective. By choosing the appropriate benchmark rates, this study takes into account banks' forecasts of the evolution of their funding costs. It is found that the passthrough of rates of adjustable-rate mortgages is incomplete and sluggish compared to the rates of mortgages with a fixed maturity. For the latter, changes in market rates appear to be transmitted quickly and completely, particularly when benchmark rates are falling. This finding suggests that a low-interest-rate environment stimulates competition among financial institutions. Evidence for a structural change is found for all interest rates. The structural change occurred around the beginning of 2007 for fixed-rate mortgages and in mid-2005 for floating-rate mortgages. For all mortgage rates, asymmetries are detected in the pre-break period. More specifically, the adjustment of fixed-rate-mortgage rates is characterized by downward rigidity, which supports the existence of some form of imperfect competition. By contrast, the rates of adjustable-rate mortgages exhibit upward price stickiness. This result suggests that competition was stronger in this specific mortgage-lending market. In the post-break period, no clear evidence is found in favor of asymmetries with respect to the adjustment coefficient. |
| Keywords: | Interest Rate Pass-Through, Monetary Policy, Mortgages, Cointegration analysis, Panel Data |
| JEL: | E43 E52 G21 C23 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2011-08&r=cba |