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on Central Banking |
| By: | Alessandro Flamini (Department of Economics and Management, University of Pavia) |
| Abstract: | Forecast accuracy in macroeconomics is based on statistical techniques for extrapolating time series. This paper takes a new theoretical route studying the relation between forecast accuracy of macroeconomic variables and alternative monetary policies. Considering optimal policy with model-parameter uncertainty in a small open-economy, the paper shows that Domestic Inflation Targeting (DIT) leads to more forecast accuracy than Consumer Price index Inflation Targeting (CPIIT). Furthermore, forecast accuracy and policy aggressiveness turn out to be inversely related, and the trade-o¤ is more severe under CPIIT. These results are obtained in a New-Keynesian model measuring forecast accuracy by the volatility of simulated fan-charts. |
| Keywords: | Multiplicative uncertainty; Markov jump linear quadratic systems; small open-economy; optimal monetary policy; inflation index. |
| JEL: | E52 E58 F41 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:pav:demwpp:020&r=cba |
| By: | Singh, Rajesh; Lahiri, Amartya; Vegh, Carlos A |
| Abstract: | This paper studies optimal monetary policy in a small open economy under flexible prices. The paper's key innovation is to analyze this question in the context of environments where only a fraction of agents participate in asset market transactions (i.e., asset markets are segmented). In this environment, we study three rules: the optimal state contingent monetary policy; the optimal non-state contingent money growth rule; and the optimal non-state contingent devaluation rate rule. We compare welfare and the volatility of macro aggegates like consumption, exchange rate, and money under the different rules. One of our key findings is that amongst non-state contingent rules, policies targeting the exchange rate are, in general, welfare dominated by policies which target monetary aggregates. Crucially, we find that fixed exchange rates are almost never optimal. On the other hand, under some conditions, a non-state contingent rule like a fixed money rule can even implement the first-best allocation. |
| Keywords: | Optimal Monetary Policy; Asset Market Segmentation |
| JEL: | E42 E60 F F30 |
| Date: | 2012–11–13 |
| URL: | http://d.repec.org/n?u=RePEc:isu:genres:35649&r=cba |
| By: | William A Allen; Richhild Moessner |
| Abstract: | We examine the liquidity effects of the euro area sovereign debt crisis, including its effects on euro area banks as a group, on intra-euro area financial flows, on the supply of and demand for collateral, and on international liquidity. The lending capacity of the euro area banking system has been much weakened, despite the remarkable growth of the operations of the Eurosystem, including its greatly increased lending, its intermediation between national central banks in surplus and deficit countries and its collateral policy. The euro crisis has also created international liquidity stresses. We find that central bank swap lines have only had limited effectiveness in alleviating the stresses, probably owing to some stigma being attached to their use. |
| Keywords: | Financial crisis, liquidity, foreign exchange swaps, central bank swap lines |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:390&r=cba |
| By: | Alberto Locarno (Bank of Italy) |
| Abstract: | The applied literature on adaptive learning has mostly focused on small, linear models, with homogenous expectations. In non-linear models heterogeneous expectations prevail and the process through which agents select (and change) a forecasting model becomes a necessary ingredient of the analysis; moreover, the temporary equilibrium of the learning process approaches an asymptotic limit that may be affected by the communication strategies of the monetary policymaker. The objective of this paper is to assess whether in such a model economy the optimal monetary policy exhibits properties that are similar to those found in the literature for small, linear models. The main results are the following: (1) expectations heterogeneity is an intrinsic feature of the economy: no PLM succeeds in ruling out all the other forecasting models; (2) contrary to previous findings, the monetary policymaker has no incentive to adopt highly inflation-averse policies: too strong a reaction to price shocks increases both inflation and output volatility; (3) partial transparency seems to enhance somewhat welfare (but fully transparent policies do not); (4) a higher degree of transparency calls for stronger inflation aversion. |
| Keywords: | Bounded rationality, generalised stochastic gradient learning, transparency. |
| JEL: | E52 E31 D84 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_888_12&r=cba |
| By: | Martina Cecioni (Banca d'Italia); Giuseppe Ferrero (Banca d'Italia) |
| Abstract: | The paper analyzes developments in TARGET2 imbalances within the euro area since 2007, from two perspectives: national central banks’ balance sheets and countries’ balance of payments (BoP). We examine the relationship between TARGET2 balances and the Eurosystem liquidity provision, analyzing how the circulation of the latter has changed during the crisis. We then study BoP developments in Greece, Portugal, Italy and Spain, investigating which of the following explanations accounts for the growing TARGET2 imbalances: (i) current account deficit, (ii) decrease of net inflows of private capital from securities and interbank markets and (iii) run on deposits. The results of our analysis suggest that while the increase in TARGET2 liabilities is related to the current account deficit in Greece, there is no evidence of this in Italy, Spain and Portugal. In all countries the increase is mostly driven by private capital outflows in securities and interbank markets; deposit runs are apparent only in Greece. In Italy, the reduction of capital inflows consisted entirely in a decrease in the interbank market cross-border activity and in portfolio investments by non-residents. |
| Keywords: | payment system, financial crisis, monetary policy |
| JEL: | E42 E52 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_136_12&r=cba |
| By: | Morten Bech; Leonardo Gambacorta |
| Abstract: | Accommodative monetary policy during the financial crisis was instrumental in preventing a deeper recession. Views differ, however, on how long such measures should be kept in place. At the heart of this debate is the notion that a protracted period of policy accommodation could create distortions. Some would argue that any distortions will be limited in extent and that further monetary stimuli should bolster the recovery. Others fear that prolonged easing may delay much-needed balance sheet adjustments, thus entrenching weak economic performance. Our analysis, based on a sample of 24 developed countries, indicates that monetary policy is less effective in a financial crisis, when impairments in the monetary transmission mechanism may occur. In particular, the results show that the benefits of accommodative monetary policy during a downturn for the subsequent recovery are more elusive when the downturn is associated with a financial crisis. In addition, we find that private sector deleveraging during a downturn helps to induce a stronger recovery. Both results hold even after controlling for the fiscal policy stance, real exchange rate movements and developments in the international environment. That said, the evidence is tentative owing to the restricted size and other limitations of our sample. |
| Keywords: | monetary policy, financial crisis, recession, deleveraging |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:388&r=cba |
| By: | Seidler, Jakub; Gersl, Adam |
| Abstract: | Excessive credit growth is often considered to be an indicator of future problems in the financial sector. This paper examines the issue of how best to determine whether the observed level of private sector credit is excessive in the context of the “countercyclical capital buffer”, a macroprudential tool proposed in the new regulatory framework of Basel II by the Basel Committee on Banking Supervision. An empirical analysis of selected Central and Eastern European countries, including the Czech Republic, provides alternative estimates of excessive private credit and shows that the HP filter calculation proposed by the Basel Committee is not necessarily a suitable indicator of excessive credit growth for converging countries. |
| Keywords: | credit growth; financial crisis; countercyclical capital buffer; Basel II |
| JEL: | G18 G01 G21 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:42541&r=cba |
| By: | Damien S.Eldridge (School Economics, La Trobe University); Heajin H.Ryoo (School of Economics, La Trobe University); Axel Wieneke (School of Economics, La Trobe University) |
| Abstract: | Financial markets are increasingly globalized, so that the impacts of na- tional banking regulations extend beyond national borders. Strict regulation reduces global loan supply and thus widens interest rate spreads. This is an externality insofar as it affects foreign banks profitability and stability. The sovereigns' motivation to join an internationally coordinated regulatory regime, such as the Basel Accords, has been discussed in the literature. How- ever, regulatory enforcement remains a domestic responsibility. In combina- tion with asymmetric information, this gives national authorities room to deviate in the form of lax regulation. We show that each regulator's en- forcement choice is affected by the relative country size. Lax enforcement improves the profitability of home banks, but diminishes the global interest rate spreads. An authority regulating a small market has only a small effect on global interest rates. As such, it may choose lax regulation to improve domestic bank profitability without significantly diminishing global spreads. In contrast, an authority regulating a large market will have a significant im- pact on global spreads. Therefore, small country regulators have a stronger incentive to deviate from strict international regulatory standards. |
| Keywords: | Bank regulation, Market integration, Regulatory competition. EDIRC Provider-Institution: RePEc:edi:sblatau |
| JEL: | G21 G18 F36 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:trb:wpaper:2012.08&r=cba |
| By: | Francesco cannata (Bank of Italy); Simone Casellina (Bank of Italy); Gregorio Guidi (Bank of Italy) |
| Abstract: | Many studies have questioned the reliability of banks’ calculations of risk-weighted assets (RWA) for prudential purposes. The significant divergences found at international level are taken as indicating excessive subjectivity in the current rules governing banks’ risk measurement and capital requirement calculations. This paper emphasises the need for appropriate metrics to compare banks’ riskiness under a risk-sensitive framework (either Basel 2 or Basel 3). The ratio of RWA to total assets – which is widely used for peer analyses – is a valuable starting point, but when analysis becomes more detailed it needs to be supplemented by other indicators. Focusing on credit risk, we propose an analytical methodology to disentangle the major factors in RWA differences and, using data from Italian banks (given the inadequate degree of detail of Pillar 3 reports), we show that a large part of the interbank dispersion is explained by the business mix of individual institutions as well as the use of different prudential approaches (standardised and IRB). In conclusion we propose a simple data template that international banks could use to apply the framework suggested. |
| Keywords: | Basel Accord, risk-weighted assets, banking supervision, credit risk |
| JEL: | G18 G21 G28 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_132_12&r=cba |
| By: | Fort, Margherita (University of Bologna); Manaresi, Francesco (Bank of Italy); Trucchi, Serena (University of Bologna) |
| Abstract: | We investigate the causal effect of financial literacy on financial assets, exploiting banks information policies for identification. In Italy, banks who belong to the PattiChiari consortium have implemented policies aimed at increasing transparency and procedural simplification. These policies may affect individuals' financial literacy without involving any direct cost for clients in terms of time, effort or resources, as we show in the paper. We exploit confidential information on whether individuals have their main bank account in one bank in the PattiChiari consortium to instrument their financial literacy level. We show that these policies have a positive and significant effect on both knowledge of financial instruments and household financial assets. Our results suggest that banks information policies have the potential to be an effective tool to increase individuals' financial literacy and that the relationship between financial literacy and wealth is largely underestimated by standard regression models. |
| Keywords: | instrumental variables, wealth, financial literacy |
| JEL: | D14 G11 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp6989&r=cba |