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on Central Banking |
| By: | Clemens J.M. Kool; Daniel L. Thornton |
| Abstract: | In this paper, we use survey forecasts to investigate the impact of forward guidance on the predictability of future short- and long-term interest rates in four countries: New Zealand, Norway, Sweden, and the United States. New Zealand began providing forward guidance in 1997, Norway in 2005, and Sweden in 2007. The United States had two periods of implicit forward guidance: 2003-2005 and 2008-2011. Overall, we find little or no convincing evidence that forward guidance actually improves markets' ability to forecast future rates or that any improvement in forecasting short-term rates is reflected in longer-term yields. The weak support we do find is at the short end of the yield curve and at relatively short forecast horizons and only for Norway and Sweden. There is no evidence that forward guidance has increased the efficacy of monetary for New Zealand, the country with the longest--15-year--forward guidance history. |
| Keywords: | monetary policy; central bank transparency; interest rates; term structure; forecasting |
| JEL: | E52 E43 E47 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:use:tkiwps:1205&r=cba |
| By: | Coroneo, Laura (University of Manchester, Economics - School of Social Sciences); Corradi, Valentina (University of Warwick, Department of Economics); Santos Monteiro, Paulo (University of Warwick, Department of Economics) |
| Abstract: | The specification of an optimizing model of the monetary transmission mechanism requires selecting a policy regime, commonly commitment or discretion. In this paper we propose a new procedure for testing optimal monetary policy, relying on moment inequalities that nest commitment and discretion as two special cases. The approach is based on the derivation of bounds for inflation that are consistent with optimal policy under either policy regime. We derive testable implications that allow for specification tests and discrimination between the two alternative regimes. The proposed procedure is implemented to examine the conduct of monetary policy in the United States economy. Key words: Bootstrap ; GMM ; Moment Inequalities ; Optimal Monetary Policy. JEL Classification: C12 ; C52 ; E52 ; E58 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:985&r=cba |
| By: | Domenico Colucci (Dipartimento di Matematica per le Decisioni - Università degli Studi di Firenze); Vincenzo Valori (Dipartimento di Matematica per le Decisioni - Università degli Studi di Firenze) |
| Abstract: | We study a simple monetary model in which a central bank faces a boundedly rational private sector and has the goal of stabilizing inflation. The system’s dynamics is generated by the interaction of the expectations about inflation of the various agents involved. A modest degree of heterogeneity in such expectations is found to have interesting consequences, in particular when the central bank is uncertain about the relevant behavioral parameters. We find that a simple heuristic based on mean and variance of the distribution of behavioural parameters stabilizes the system for a wide parametric region. |
| Keywords: | inflation targeting, monetary policy, adaptive expectations, heterogeneous agents |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:flo:wpaper:2012-03&r=cba |
| By: | Nobuhiro Kiyotaki; John Moore |
| Abstract: | The paper presents a model of a monetary economy where there are differences in liquidity across assets. Money circulates because it is more liquid than other assets, not because it has any special function. There is a spectrum of returns on assets, reflecting their differences in liquidity. The model is used, first, to investigate how aggregate activity and asset prices fluctuate with shocks to productivity and liquidity; second, to examine what role government policy might have through open market operations that change the mix of assets held by the private sector. With its emphasis on liquidity rather than sticky prices, the model harks back to an earlier interpretation of Keynes (1936), following Tobin (1969). |
| JEL: | E10 E44 E50 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17934&r=cba |
| By: | Singh, Aarti; Stone, Sophie |
| Abstract: | We study whether central banks should respond to asset prices in their policy rules. Using a modified version of Bernanke, Gertler and Gilchrist's (1999) model—a standard dynamic stochastic general equilibrium New Keynesian model with a financial accelerator effect—we explore how equilibrium determinacy is impacted when the central bank reacts to asset prices. Our results indicate that by reacting to asset price movements in its Taylor-type nominal interest rate feedback rule, a central bank makes determinacy of the rational expectations equilibrium more likely relative to a standard policy rule where the central bank does not react to asset prices. |
| Keywords: | financial accelerator; determinacy; monetary policy; Asset prices |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:syd:wpaper:2123/8187&r=cba |
| By: | Marcelo Ferman |
| Abstract: | In this paper I propose a regime-switching approach to explain why the U.S. nominal yield curve on average has been steeper since the mid-1980s than during the Great Inflation of the 1970s. I show that, once the possibility of regime switches in the short-rate process is incorporated into investors beliefs, the average slope of the yield curve generally will contain a new component called .level risk.. Level-risk estimates, based on a Markov-Switching VAR model of the U.S. economy, are then provided. I find that the level risk was large and negative during the Great Inflation, reflecting a possible switch to lower short-rate levels in the future. Since the mid-1980s the level risk has been moderate and positive, reflecting a small but still relevant possibility of a return to the regime of the 1970s. I replicate these results in a Markov- Switching dynamic general equilibrium model, where the monetary policy rule followed by the Fed shifts between an active and a passive regime. The model also explains why in recent decades the U.S. yield curve on average has been steeper than the yield curve in countries that adopted explicit inflation targeting frameworks. |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgdps:dp678&r=cba |
| By: | Bodenstein, Martin; Guerrieri, Luca; Kilian, Lutz |
| Abstract: | The recent volatility in global commodity prices and in the price of oil, in particular, has created renewed interest in the question of how monetary policy makers should respond to oil price fluctuations. In this paper, we discuss why this question is ill-posed and has no general answer. The central message of our analysis is that the best central bank policy response to oil price fluctuations depends on why the price of crude oil has changed. For example, an unexpected oil supply disruption in the Middle East calls for a different policy response than an unexpected increase in Chinese productivity or oil intensity. This means that policy makers need to disentangle the structural shocks that are jointly driving the price of oil and the macroeconomy and tailor their response to the observed mix of shocks. We use a multi-country DSGE model to quantify the appropriate policy responses and to analyze the optimal responses from a welfare point of view. We also reexamine the welfare gains from global monetary policy coordination in a world with trade in oil. |
| Keywords: | endogeneity; global economy; monetary policy; oil price; open economy; policy rule; welfare |
| JEL: | E32 E43 F32 Q43 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8928&r=cba |
| By: | Stefano d'Addona (Department of International Studies, University of Rome 3); Ilaria Musumeci (Department of International Studies, University of Rome 3) |
| Abstract: | We analyze the current state of monetary integration in Europe, focusing on the United Kingdom’s position regarding the European Monetary Union (EMU). The interest rate decisions of the European Central Bank and the Bank of England are compared through different specifications of the Taylor rule. Comparison of the monetary conduct of these two institutions provides useful guidance in identifying the differences that the British Government claims motivating its refusal to join the EMU. Testing for forward-looking behavior and possible asymmetries in policy responses, we show evidence supporting the opt-out decision taken by the British Government. |
| Keywords: | Taylor rule; European monetary integration; Regime switching models; Interest rate smoothing |
| JEL: | E32 E52 |
| Date: | 2012–03–26 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:225&r=cba |
| By: | Clements, Michael P. (University of Warwick, Department of Economics) |
| Abstract: | The recent literature has suggested that macroeconomic forecasters may have asymmetric loss functions, and that there may be heterogeneity across forecasters in the degree to which they weigh under and over-predictions. Using an individual-level analysis that exploits the SPF respondents’ histogram forecasts, we find little evidence of asymmetric loss for the in‡ation forecasters. Key words: Disagreement ; forecast uncertainty ; asymmetric loss ; Survey of Professional Forecasters JEL Classification: C53 ; E31 ; E37 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:986&r=cba |
| By: | Edouard Djeutem (Simon Fraser University); Ken Kasa (Simon Fraser University) |
| Abstract: | This paper studies exchange rate volatility within the context of the monetary model of exchange rates. We assume agents regard this model as merely a benchmark, or reference model, and attempt to construct forecasts that are robust to model misspecification. We show that revisions of robust forecasts are more volatile than revisions of nonrobust forecasts, and that empirically plausible concerns for model misspecification can easily explain observed exchange rate volatility. |
| Keywords: | Exchange rates; Volatility; Robustness |
| JEL: | F31 D81 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:sfu:sfudps:dp12-01&r=cba |
| By: | Balázs Égert |
| Abstract: | This paper addresses difficulties in modelling exchange rates in South Africa. Real exchange rate models of earlier research seem to be sensitive to the sample period considered, alternative variable definition, data frequency and estimation methods. Alternative exchange rate models proposed in this paper including the stock-flow approach and variants of the monetary model are not fully robust to data frequency and alternative estimation periods, either. Nevertheless, adding openness to the stock-flow approach and augmenting the monetary model with share prices and the country risk premium improves significantly the fit of the models around the large (nominal and real) depreciation episodes of 2002 and 2008. Interestingly, real commodity prices do not help explain the large depreciations. While these models do a reasonably good job in-sample, their out-of-sample forecasting properties remain poor. |
| Keywords: | exchange rate, real exchange rate, nominal exchange rate, commodity, Balassa-Samuelson, productivity, monetary model, stock-flow approach, openness, country risk |
| JEL: | E31 F31 O11 P17 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2012-18&r=cba |
| By: | Silvia Merler; Jean Pisani-Ferry |
| Abstract: | The single currency was expected to make balance of payments irrelevant between the euro-area member states. This benign view has been challenged by recent developments, especially as imbalances between euro-area central banks have widened within the TARGET2 settlement system. Current-account developments can be misleading as indicators of financial account developments in countries that receive significant official support. Greece, Ireland, Italy, Portugal and Spain experienced significant private-capital inflows from 2002 to 2007-09, followed by unambiguously massive outflows. We show that such reversals qualify as â??sudden stopsâ??. Euro-area sudden-stop episodes were clustered in three periods: the global financial crisis, a period following the agreement of the Greek programme and summer 2011. The timeline suggests contagion effects were present. We find evidence of substitution of the private capital flows with publiccomponents. In particular, weak banks in distressed countries took up a major share of the central bank refinancing. The steady divergence of intra Eurosystem net balances mirrors this. In the short term, TARGET2 imbalances could be addressed by tightening collateral requirements for central bank liquidity. For the longer term, the evidence that the euro area has been subject to internal balance-of-payment crises should be taken as a strong signal of weakness and as an invitation to reform its structures. |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polcon:718&r=cba |
| By: | Giorgio Fagiolo; Andrea Roventini |
| Abstract: | The Great Recession seems to be a natural experiment for macroeconomics showing the inadequacy of the predominant theoretical framework - the New Neoclassical Synthesis - grounded on the DSGE model. In this paper, we present a critical discussion of the theoretical, empirical and political-economy pitfalls of the DSGE-based approach to policy analysis. We suggest that a more fruitful research avenue to pursue is to explore alternative theoretical paradigms, which can escape the strong theoretical requirements of neoclassical models (e.g., equilibrium, rationality, representative agent, etc.). We briefly introduce one of the most successful alternative research projects - known in the literature as agent-based computational economics (ACE) - and we present the way it has been applied to policy analysis issues. We then provide a survey of agent-based models addressing macroeconomic policy issues. Finally, we conclude by discussing the methodological status of ACE, as well as the (many) problems it raises. |
| Keywords: | Economic Policy, Monetary and Fiscal Policies, New Neoclassical Synthesis, New Keynesian Models, DSGE Models, Agent-Based Computational Economics, Agent-Based Models, Great Recession, Crisis |
| JEL: | B41 B50 E32 E52 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2012-17&r=cba |
| By: | Pierpaolo Benigno; Federica Romei |
| Abstract: | Deleveraging from high debt can provoke deep recession with significant international side effects. The exchange rate of the deleveraging country will depreciate in the short run and appreciate in the long run. The real interest rate will fall by more than in the rest of the world. Bounds and policies that constrain the adjustment can prolong and deepen the recession. Early exit strategies from accommodating monetary policy can be quite harmful, as can such other policies as keeping interest rates too high during the deleveraging period. The analysis also applies to a monetary union facing internal adjustment of current account imbalances. |
| JEL: | E52 F32 F41 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17944&r=cba |
| By: | Christian Buelens |
| Abstract: | This paper analyses how euro area inflation forecasts have been affected by the financial and economic crisis. Its first objective is to evaluate the accuracy of three representative groups of inflation forecasting models (rules of thumb and benchmark models; autoregressive moving average models; autoregressive distributed lag models) under a direct and an indirect approach, respectively. The second objective of the paper is to study how the absolute and relative forecasting performances of the models and approaches have been impacted by the economic and financial crisis. The paper finds that direct forecasting models selected on the basis of a penalty function generally dominate simple benchmark models. The analysis furthermore suggests that when an appropriate specification for the component-specific models is found, indirect forecasts outperform the corresponding direct forecasts. Nonetheless, in line with the findings from earlier studies, there are insufficient elements to assert a systematic superiority of one of the two approaches. Concerning the second objective, the across-the-board rise in the forecast errors of all models considered, confirms that inflation forecasting has become substantially more difficult after the onset of the crisis. However, the deterioration of the different models has been uneven: indeed, direct autoregressive distributed lag models and indirect models improved in relative terms during the crisis. |
| JEL: | C32 C52 C53 E31 E37 E58 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0451&r=cba |
| By: | R. Anton Braun; Lena Mareen Körber; Yuichiro Waki |
| Abstract: | A growing body of recent research examines the nonlinearity created by a zero lower bound on the nominal interest rate. It is common practice in the literature to log-linearize the other equilibrium restrictions around a deterministic steady state with a stable price level. This paper shows that the resulting log-linearized equilibria can have some very unpleasant properties. We make this point using a tractable stochastic New Keynesian model that admits an exact solution. We characterize the log-linearized equilibrium. This characterization is highly misleading. Using the log-linearized equilibrium conditions gives incorrect results about existence and uniqueness of equilibrium and provides an incorrect classification of the types of zero-bound equilibria that can arise in the true economy. These problems are severe. For instance, using empirically relevant parameterizations of the model labor falls in response to a tax cut in the log-linearized economy but rises in the true nonlinear economy. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2012-05&r=cba |
| By: | Müller-Plantenberg, Nikolas (Departamento de Análisis Económico (Teoría e Historia Económica). Universidad Autónoma de Madrid.) |
| Abstract: | Monetary models of exchange rates tend to focus on inflation differentials to explain exchange rate movements. This paper assesses the ability of currency flows to predict exchange rate changes. The focus is on Japan. Currency flows are assumed to depend on the level of the current account and on the international investment position, where the latter is used as a proxy for international debt repayments. A state space model is used to predict simultaneously the exchange rate and its determinants. Using rolling regressions and out-of-sample predictions, it is shown that a model featuring currency flows can predict the direction of exchange rate movements better than a random walk (with or without drift). However, as happens with standard macroeconomic models, the model is not able to outperform a random walk in terms of the mean square prediction error criterion. |
| Keywords: | balance of payments flows, international investment position, exchange rate prediction, out-of-sample prediction, random walk. |
| JEL: | F31 F32 F34 F37 C22 C53 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:uam:wpaper:201209&r=cba |
| By: | Ippei Fujiwara; Kozo Ueda |
| Abstract: | We consider the fiscal multiplier and spillover in an environment in which two countries are caught simultaneously in a liquidity trap. Using a standard New Open Economy Macroeconomics (NOEM) model, an optimizing two-country sticky price model, we show that the fiscal multiplier and spillover are contrary to those predicted in textbook economics. For the country with government expenditure, the fiscal multiplier exceeds one, the currency depreciates, and the terms of trade worsen. The fiscal spillover is negative if the intertemporal elasticity of substitution in consumption is less than one and positive if the parameter is greater than one. Incomplete stabilization of marginal costs due to the existence of the zero lower bound is a crucial factor in understanding the effects of fiscal policy in open economies. |
| JEL: | E52 E62 E63 F41 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2012-17&r=cba |
| By: | Paolo Canofari (Faculty of Economics, University of Rome "Tor Vergata"); Giancarlo Marini (Faculty of Economics, University of Rome "Tor Vergata"); Giovanni Piersanti (University of Teramo) |
| Abstract: | This paper aims to propose a new measure of exchange market pressure for countries operating in hard peg regimes, such as currency unions, currency boards or full dollarization. We use a general model of currency crisis to derive a sustainability index based upon the relationship between the shadow exchange rate and the output gap required to maintain the currency peg. We apply the new index to European Union countries in order to assess the sustainability of the Euro. |
| Keywords: | shadow exchange rate, currency crisis, exchange market pressure |
| JEL: | F3 F31 F41 G01 |
| Date: | 2012–03–27 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:226&r=cba |
| By: | L. Randall Wray |
| Abstract: | This paper provides a quick review of the causes of the Global Financial Crisis that began in 2007. There were many contributing factors, but among the most important were rising inequality and stagnant incomes for most American workers, growing private sector debt in the United States and many other countries, financialization of the global economy (itself a very complex process), deregulation and desupervision of financial institutions, and overly tight fiscal policy in many nations. The analysis adopts the "stages" approach developed by Hyman P. Minsky, according to which a gradual transformation of the economy over the postwar period has in many ways reproduced the conditions that led to the Great Depression. The paper then moves on to an examination of the US government's bailout of the global financial system. While other governments played a role, the US Treasury and the Federal Reserve assumed much of the responsibility for the bailout. A detailed examination of the Fed's response shows how unprecedented—and possibly illegal-was its extension of the government's "safety net" to the biggest financial institutions. The paper closes with an assessment of the problems the bailout itself poses for the future. |
| Keywords: | Hyman Minsky; Global Financial Crisis; Financialization; Money Manager Capitalism; Bank Bailout; Quantitative Easing; Financial Crisis Inquiry Report; Fraud; Minsky Moment; Real Estate Bubble; MERS; Federal Reserve |
| JEL: | B31 E30 E32 E50 G21 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_711&r=cba |
| By: | Jagjit S. Chadha |
| Abstract: | Global real interest rates were driven up in the 1980s, partly to encourage disinflation, while subsequently structural and conjunctural factors have driven rates to lower levels. The increase in the global pool of savings and the fiscal correction associated with the long economic expansion from 1992 to 2007 had put downward pressure on real rates and the extraordinary monetary policy responses since 2008 have sustained that trend into negative territory. The initial consequences of low real rates in the early part of this century had been to elevate asset prices, promote leverage in financial institutions and, as a counterparty, increase private sector indebtedness. The management of deleveraging by policymakers implies setting a low path for real rates along the yield curve by using a combination of traditional and non-traditional monetary and fiscal policies for as long as the economic dislocation persists. Facing a public and private debt overhang, low real rates help the adjustment of global balance sheets but cannot be driven low permanently by policymakers. My analysis suggests that there are two regimes for real rates; those for normal times are positive and vary with the global economic cycle, while those that deal with economic dislocation are negative. Once growth is secured, real rates will rise quickly to more normal levels, not least because, in order to limit any increase in funding costs that may result from capital inadequacy (apparent or real), banks themselves have a considerable appetite for capital, and that will also start to crank up real rates given a fixed pool of savings. It therefore seems likely that, over the medium term, real yields are likely to be in the range of 2-4%, rather than their current levels. |
| Keywords: | Real rates; trends; globalisation |
| JEL: | E31 E40 E51 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:1205&r=cba |
| By: | Eo, Yunjong; Kim, Chang-Jin |
| Abstract: | In this paper, we relax the assumption of constant regime-specific mean growth rates in Hamilton's (1989) two-state Markov-switching model of the business cycle. We first present a benchmark model, in which each regime-specific mean growth rate evolves according to a random walk process over different episodes of booms or recessions. We then present a model with vector error correction dynamics for the regime-specific mean growth rates, by deriving and imposing a condition for the existence of a long-run equilibrium growth rate for real output. In the Bayesian Markov Chain Monte Carlo (MCMC) approach developed in this paper, the counterfactual priors, as well as the hierarchical priors for the regime-specific parameters, play critical roles. By applying the proposed model and approach to the postwar real GDP growth data (1947Q4-2011Q3), we uncover the evolving nature of the regime-specific mean growth rates of real output in the U.S. business cycle. An additional feature of the postwar U.S. business cycle that we uncover is a steady decline in the long-run equilibrium output growth. The decline started in the mid-1950s and ended in the mid-1980s, coinciding with the beginning of the Great Moderation. Our empirical results also provide partial, if not decisive, evidence that the central bank has been more successful in restoring the economy back to its long-run equilibrium growth path after unusually severe recessions than after unusually good booms. |
| Keywords: | State- Space Model; MCM; Hamilton Model; Markov Switching; Hierarchical Prior; Evolving Regime- Specific Parameters; Counterfactual Prior; Business Cycle; Bayesian Approach |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:syd:wpaper:2123/8150&r=cba |
| By: | Douglas Gale; Tanju Yorulmazer |
| Abstract: | Banks hold liquid and illiquid assets. An illiquid bank that receives a liquidity shock sells assets to liquid banks in exchange for cash. We characterize the constrained efficient allocation as the solution to a planners problem and show that the market equilibrium is constrained inefficient, with too little liquidity and inefficient hoarding. Our model features a precautionary as well as a speculative motive for hoarding liquidity, but the inefficiency of liquidity provision can be traced to the incompleteness of markets (due to private information) and the increased price volatility that results from trading assets for cash. |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgdps:dp682&r=cba |
| By: | Arturo Galindo; Liliana Rojas-Suárez; Marielle del Valle |
| Abstract: | Since the eruption of the global financial crisis in 2008 international setting bodies and local regulators around the world have been hard at work designing and implementing new regulatory frameworks to deal with the regulatory deficiencies that were exposed during the crisis. In particular, there is now a consensus that existing regulations in developed countries were not able to contain excessive risk-taking activities by financial institutions in this group of countries during the pre-crisis period. Among these regulations, the newly proposed set of reform measures developed by the Basel Committee on Banking Supervision (BCBS): "Basel III: A global regulatory framework for more resilient banks and banking systems" (2011) is perhaps the one that has attracted most attention worldwide because a central focus of the recommendations lies on important changes in banks' regulatory capital requirements. Where does Latin America stand with respect to capital requirements? Can banks in the region satisfy with ease the new capital requirements of Basel III or will the implementation of this new set of capital recommendations require large efforts from banks in the region? This paper deals with these questions for the case of four Andean countries: Bolivia, Colombia, Ecuador and Peru. |
| Keywords: | Financial Sector :: Financial Policy, Capital Requirements under Basel III, financial framework, financial reform |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:idb:brikps:65038&r=cba |
| By: | Fuest, Clemens (University of Oxford); Peichl, Andreas (IZA) |
| Abstract: | The view is widespread that there are just two options for the future of the Eurozone – either it is complemented by a fiscal union, or it will fall apart. In this paper, we discuss five possible elements of a fiscal union, of which three are in the centre of the current debate on fiscal union in the Eurozone. Second, we argue that the fiscal union will only work if political integration in Europe goes significantly beyond the current state of affairs. Third, we suggest an alternative approach, which places less emphasis on centralised fiscal policy coordination and focuses on financial sector reform, decentralised responsibility for government debt and sovereign debt restructurings in the case of fiscal crises. |
| Keywords: | Fiscal Union, EU, EMU, Euro, ESM |
| JEL: | E62 H77 H87 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izapps:pp39&r=cba |
| By: | R. Alton Gilbert; Kevin L. Kliesen; Andrew P. Meyer; David C. Wheelock |
| Abstract: | Numerous commentaries have questioned both the legality and appropriateness of Federal Reserve lending to banks during the recent financial crisis. This article addresses two questions motivated by such commentary: 1) Did the Federal Reserve violate either the letter or spirit of the law by lending to undercapitalized banks? 2) Did Federal Reserve credit constitute a large fraction of the deposit liabilities of failed banks during their last year prior to failure? The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) imposed limits on the number of days that the Federal Reserve may lend to undercapitalized or critically undercapitalized depository institutions. We find no evidence that the Federal Reserve ever exceeded statutory limits during the recent financial crisis, recession and recovery periods. In most cases, the number of days that Federal Reserve credit was extended to an undercapitalized or critically undercapitalized depository institution was appreciably less than the number of days permitted under law. Furthermore, compared with patterns of Fed lending during 1985-90, we find that few banks that failed during 2008-10 borrowed from the Fed during their last year prior to failure, and only a few had outstanding Fed loans when they failed. Moreover, Federal Reserve loans averaged less than 1 percent of total deposit liabilities among nearly all banks that did borrow from the Fed during their last year. It is impossible to know whether the enactment of FDICIA explains differences in Federal Reserve lending practices during 2007-10 and the previous period of financial distress in the 1980s. However, it does seem clear that Federal Reserve lending to depository institutions during the recent episode was consistent with the Congressional intent of this legislation. |
| Keywords: | Financial crises ; Discount window ; Federal Deposit Insurance Corporation Improvement Act of 1991 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2012-006&r=cba |
| By: | Charles Goodhart; Anil K Kashyap; Dimitrios Tsomocos; Alexandros Vardoulakis |
| Abstract: | This paper explores how different types of financial regulation could combat many of the phenomena that were observed in the financial crisis of 2007 to 2009. The primary contribution is the introduction of a model that includes both a banking system and a “shadow banking system” that each help households finance their expenditures. Households sometimes choose to default on their loans, and when they do this triggers forced selling by the shadow banks. Because the forced selling comes when net worth of potential buyers is low, the ensuing price dynamics can be described as a fire sale. The proposed framework can assess five different policy options that officials have advocated for combating defaults, credit crunches and fire sales,namely: limits on loan to value ratios, capital requirements for banks, liquidity coverage ratios for banks, dynamic loan loss provisioning for banks, and margin requirements on repurchase agreements used by shadow banks. The paper aims to develop some general intuition about the interactions between the tools and to determine whether they act as complements and substitutes. |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgdps:dp702&r=cba |
| By: | Matthieu Bouvard; Pierre Chaigneau; Adolfo de Motta |
| Abstract: | The paper presents a theory of optimal transparency in the nancial system when nancial institutions have short-term liabilities and are exposed to rollover risk. Our analysis indicates that transparency enhances the stability of the - nancial system during crises but may have a destabilizing eect during normal economic times. Thus, the optimal level of transparency is contingent on the state of the economy, with the regulator increasing disclosure in times of crises. Under this policy, however, an increase in disclosure signals a deterioration of the economy's fundamentals, so the regulator has incentives to withhold information ex-post. In that case, the regulator may have to commit ex-ante to a degree of transparency which trades o the frequency and magnitude of nancial crises. The analysis also considers the possibility that nancial institutions, in an attempt to deal with rollover risk, either diversify their risks or increase the liquidity of their balance sheets. |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgdps:dp700&r=cba |
| By: | Carmen M. Reinhart |
| Abstract: | We document that the global scope and depth of the crisis the began with the collapse of the subprime mortgage market in the summer of 2007 is unprecedented in the post World War II era and, as such, the most relevant comparison benchmark is the Great Depression (or the Great Contraction, as dubbed by Friedman and Schwartz, 1963) of the 1930s. Some of the similarities between these two global episodes are examined but the analysis of the aftermath of severe financial crises is extended to also include the most severe post-WWII crises as well. As to the causes of these great crises, we focus on those factors that are common across time and geography. We discriminate between root causes of the crises, recurring crises symptoms, and common features (such as misguided financial regulation or inadequate supervision) which serve as amplifiers of the boom-bust cycle. There are recurring temporal patterns in the boom-bust cycle and their broad sequencing is analyzed. |
| JEL: | E32 E44 E50 F30 F33 G01 N20 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17941&r=cba |
| By: | Inoue, Takeshi; Toyoshima, Yuki; Hamori, Shigeyuki |
| Abstract: | This paper empirically analyzes whether and to what extent the adoption of inflation targeting (IT) in Korea, Indonesia, Thailand and the Philippines has affected their business cycle synchronization with the rest of the world. By employing the dynamic conditional correlation (DCC) model developed by Engle (2002), we find that IT in Asia has little effect on international business cycle synchronization and the effect is positive in some of the countries, if any. These findings basically seem to be consistent with the evidence from relevant literature. |
| Keywords: | Southeast Asia, Indonesia, Thailand, Philippines, South Korea, Inflation, Business cycles, Asia, Business cycle synchronization, DCC, Inflation targeting |
| JEL: | E31 E32 E52 E58 F42 F44 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:jet:dpaper:dpaper328&r=cba |
| By: | Acharya, Viral V; Öncü, T Sabri |
| Abstract: | One of the several regulatory failures behind the global financial crisis that started in 2007 has been the regulatory focus on individual, rather than systemic, risk of financial institutions. Focusing on systemically important assets and liabilities (SIALs) rather than individual financial institutions, we propose a set of resolution mechanisms, which is not only capable of inducing market discipline and mitigating moral hazard, but also capable of addressing the associated systemic risk, for instance, due to the risk of fire sales of collateral assets. Furthermore, because of our focus on SIALs, our proposed resolution mechanisms would be easier to implement at the global level compared to mechanisms that operate at the level of individual institutional forms. We, then, outline how our approach can be specialized to the repo market and propose a repo resolution authority for reforming this market. |
| Keywords: | crises; fire sales; macroprudential regulation; resolution authority; runs; sale and repurchase agreements; systemic risk |
| JEL: | E58 G01 G28 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8927&r=cba |
| By: | Seitz, Franz; Jost, Thomas |
| Abstract: | This paper gives an overview of the role of the IMF in the European debt crisis. It describes the rescue packages and the involvement of the IMF. The main part discusses the pros and cons of the participation of the IMF in elaborating and monitoring the economic adjustment programs for the countries in crisis. A last section concludes and tries to answer the question whether the Troika model might be suited to solve future international crises. -- |
| Keywords: | IMF,Europe,debt,euro |
| JEL: | F02 F53 F59 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:hawdps:32&r=cba |
| By: | Gravier-Rymaszewska, Joanna |
| Abstract: | The strong interdependence between the developed and developing worlds surfaced with the recent economic downturn. Due to the global character of the economy, the downturn affected not only the North but also the South. In addition, the Official Development Assistance (ODA) is subject to a pro-cyclical trend in aid which falls when donors encounter recession. We attempt to answer the question of whether and how donors adjust aid budgets in response to various macroeconomic shocks. The main objective of the study is to explore the channels as well as behavioural consequences of unexpected financial shocks on aid budget adjustments in the short run. Crises are found to affect aid budgets and their trend through two channels: directly through lower revenues and indirectly by increasing fiscal costs through exchange rates and financial volatility. In addition, this relationship between aid and the donor economy is not solely economic as the donor.s internal political orientation also plays an important role. |
| Keywords: | financial crisis, aid, donors, panel VAR |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:unu:wpaper:wp2012-25&r=cba |
| By: | Mosley, Paul |
| Abstract: | In accounting for the rather gloomy trend of the aid effectiveness literature over the last few years, one explanatory strand has been fiscal, suggesting in particular that aid flows in weak states have tended to erode the taxbase and the structure of institutions. We pursue this idea, tracing the link from politics to domestic tax effort and then using the influence of this on expenditure to explain the leverage of aid. Thus, we argue that in the long run, tax effort determines the effectiveness of aid, and this relationship operates simultaneously in some countries with the negative link in the opposite direction, from aid to domestic tax effort, as observed by Bräutigam and Knack (2004) and others. We find that tax effort and the ability of the state to diversify its taxation structure are important determinants of long-term growth and aid effectiveness, and in our model, we find that overall aid effectiveness is, in a 3SLS model, weakly positive and significant, echoing the findings of Arndt, Jones and Tarp (2009) and Minoiu and Reddy (2010); however, these findings are not robust when retested using the GMMapproach favoured by the literature. A more robust finding, and a key message for policy, is that a broadening of the tax structure in low-income countries is crucial in order to enable those countries to escape from the .weak state . low tax trap., and to make aid more effective. |
| Keywords: | aid effectiveness, tax policy |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:unu:wpaper:wp2012-29&r=cba |
| By: | Jurgen von Hagen (University of Bonn, Indiana University and CEPR); Haiping Zhang (School of Economics, Singapore Management University) |
| Abstract: | We develop a tractable two-country overlapping-generations model and show that cross-country differences in financial development can explain three recent empirical patterns of international capital flows: Financial capital flows from relatively poor to relatively rich countries while foreign direct investment fl ows in the opposite direction; net capital flows go from poor to rich countries; despite of its negative net international investment positions, the United States receives a positive net investment income. We also explore the welfare and distributional effects of international capital fl ows and show that the patterns of capital fl ows may reverse along the convergence process of a developing country. |
| Keywords: | Capital account liberalization, financial development, foreign direct investment, symmetry breaking |
| JEL: | E44 F41 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:siu:wpaper:21-2011&r=cba |