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on Central Banking |
| By: | Guido Ascari (Department of Economics and Management, University of Pavia); Anna Florio (Polytechnic of Milan) |
| Abstract: | This paper proves that a higher inflation target unanchors expectations, as feared by Fed Chairman Bernanke. The higher the inflation target, the smaller the E-stability region when a central bank follows a Taylor rule in a New Keynesian model allowing for trend inflation and adaptive learning. Moreover, the higher the inflation target, the more the policy should respond to inflation and the less to output to guarantee E-stability. Hence, a policy that increases the inflation target and increase the monetary policy response to output would be "reckless". Moreover, we show that transparency is an essential component of the inflation targeting framework and it helps anchoring expectations. However, the importance of being transparent diminishes with the level of the inflation target. |
| Keywords: | Trend Inflation, Learning, Monetary Policy, Trasparency |
| JEL: | E5 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:pav:demwpp:022&r=cba |
| By: | Ansgar Belke (University of Duisburg-Essen and IZA Bonn); Andreas Freytag (Friedrich-Schiller-University Jena); Johannes Keil (University of Duisburg-Essen); Friedrich Schneider (Johannes-Kepler-University Linz) |
| Abstract: | Monetary policy rules have been considered as fundamental protection against inflation. However, empirical evidence for a correlation between rules and inflation is relatively weak. In this paper, we first discuss likely causes for this weak link and present the argument that monetary commitment is not credible in itself. It can grant price stability best if it is backed by an adequate assignment of economic policy. An empirical assessment based on panel data covering five decades and 22 OECD countries confirms the crucial role of a credibly backed monetary commitment to price stability. |
| Keywords: | credibility, central bank independence, price stability, monetary commitment |
| JEL: | E31 E50 E52 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:hlj:hljwrp:34-2012&r=cba |
| By: | Shin-ichi Fukuda (Faculty of Economics, University of Tokyo) |
| Abstract: | In many countries, the monetary policy instrument sometimes remains unchanged for a long period and shows infrequent responses to exogenous shocks. The purpose of this paper is to provide a new explanation on why the central bank's policy instrument remains unchanged. In the analysis, we explore how uncertainty on the private agents' expectations affects robust optimal monetary policy. We apply the Choquet expected decision theory to a new Keynesian model. A main result is that the policymaker may frequently keep the interest rate unchanged even when exogenous shocks change output gaps and inflation rates. This happens because a change of the interest rate increases additional uncertainty for the policymaker. To the extent that the policymaker has uncertainty aversion, it can therefore be optimal for the policymaker to maintain an unchanged policy stance for some significant periods and to make discontinuous changes of the target rate. Our analysis departs from previous studies in that we determine an optimal monetary policy rule that allows time-variant feedback parameters in a Taylor rule. We show that if the policymaker has small uncertainty aversion, the calibrated optimal stop-go policy rule can predict actual target rates of FRB and ECB reasonably well. |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2012cf863&r=cba |
| By: | Volker Hahn (Department of Economics, University of Konstanz, Germany) |
| Abstract: | We integrate a monetary policy committee into a New Keynesian model to assess the consequences of the committee's institutional characteristics for welfare. First, we prove that uncertainty about the committee's future composition may be desirable. Second, we show that longer terms of central bankers lead to more effective output stabilization at the expense of higher inflation variability. Third, larger committees allow for more efficient stabilization of both output and inflation, provided that the pool of candidates is sufficiently diverse. Finally, longer terms induce the government to appoint more conservative central bankers, which is conducive to welfare. |
| Keywords: | Monetary policy committees, term length, committee size, New Keynesian model |
| JEL: | E58 D71 |
| Date: | 2012–11–19 |
| URL: | http://d.repec.org/n?u=RePEc:knz:dpteco:1223&r=cba |
| By: | Matthias Neuenkirch (University of Aachen) |
| Abstract: | In this paper, we explore the interest rate setting behavior of newly appointed central bank governors. We use the sample of Kuttner and Posen (2010) which covers 15 OECD countries and estimate an augmented Taylor (1993) rule for the period 1974–2008. Our results are as follows: First, newly appointed governors fight inflation more aggressively during the first four to eight quarters of their tenure in an effort to establish the reputation of being inflation-averse. Second, we find a significantly stronger reaction to inflation for newly appointed governors in monetary policy frameworks with an at least partly independent central bank and an explicit nominal anchor. |
| Keywords: | Central bank governors, credibility, inflation, monetary policy, reputation, Taylor rules. |
| JEL: | E31 E43 E52 E58 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:201246&r=cba |
| By: | Paolo Angelini (Banca d'Italia); Sergio Nicoletti-Altimari (Banca d'Italia); Ignazio Visco (Banca d'Italia) |
| Abstract: | We review the recent literature on macroprudential policy and its interaction with other policies, extracting several points. First, there are externalities in the financial sector, often in the form of excessive credit growth. Second, monetary policy needs to take financial stability into account. Third, macroprudential instruments can moderate the financial cycle. Finally, there are complementarities between monetary and macroprudential policies, but also potential conflict. We then relate these points to recent events in the euro area where, following the sovereign debt crisis, a retrenchment of finance within national borders is taking place, amplifying the divergences across economies. We argue that in principle national authorities would like to adjust macroprudential instruments to compensate for the highly heterogeneous financial conditions, but at present they have little leeway to do so, since in the run-up to the crisis insufficient capital buffers had been accumulated. Various factors may explain low bank capitalization levels worldwide. We discuss the role of risk-weighted assets, which may have inadequately captured actual risks in many jurisdictions; we also document that European and US banks’ capital ratios decline monotonically with bank size. This confirms that key features of the microprudential apparatus are crucial for preventing financial instability. |
| Keywords: | macroprudential policy, monetary policy, capital requirements |
| JEL: | E44 E58 E61 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_140_12&r=cba |
| By: | Edoardo Gaffeo (University of Trento); Ivan Petrella (Birkbeck, University of London); Damjan Pfajfar (University of Tilburg); Emiliano Santoro (Catholic University of Milan and University of Copenhagen) |
| Abstract: | There is widespread evidence that monetary policy exerts asymmetric effects on output over contractions and expansions in economic activity, while price responses display no sizeable asymmetry. To rationalize these facts we develop a dynamic general equilibrium model where households' utility depends on consumption deviations from a reference level below which loss aversion is displayed. In line with the prospect theory pioneered by Kahneman and Tversky (1979), losses in consumption loom larger than gains. State-dependent degrees of real rigidity and elasticity of intertemporal substitution in consumption generate competing effects on output and infl?ation. The resulting state-dependent trade-off between output and infl?ation stabilization recommends stronger policy activism towards in?flation during expansions |
| Keywords: | Asymmetry, Monetary Policy, Business Cycle, Prospect Theory |
| JEL: | E32 E42 E52 D03 D11 |
| Date: | 2012–07–16 |
| URL: | http://d.repec.org/n?u=RePEc:kud:kuiedp:1221&r=cba |
| By: | Benigno, Gianluca; Chen, Huigang; Otrok, Christopher; Rebucci, Alessandro; Young, Eric R |
| Abstract: | In this paper we study whether policy makers should wait to intervene until a financial crisis strikes or rather act in a preemptive manner. We study this question in a relatively simple dynamic stochastic general equilibrium model in which crises are endogenous events induced by the presence of an occasionally binding borrowing constraint as in Mendoza (2010). First, we show that the same set of taxes that replicates the constrained social planner allocation could be used optimally by a Ramsey planner to achieve the first best unconstrained equilibrium: in both cases without any precautionary intervention. Second, we show that the extent to which policymakers should intervene in a preemptive manner depends critically on the set of policy tools available and what these instruments can achieve when a crisis strikes. For example, in the context of our model, we find that, if the policy tools is constrained so that the first best cannot be achieved and the policy maker has access to only one tax instrument, it is always desirable to intervene before the crisis regardless of the instrument used. If however the policy maker has access to two instruments, it is optimal to act only during crisis times. Third and finally, we propose a computational algorithm to solve Markov-Perfect optimal policy for problems in which the policy function is not differentiable. |
| Keywords: | Bailouts; Capital Controls; Exchange Rate Policy; Financial Crises; Financial Frictions; Macro-Financial Stability; Macro-Prudential Policies |
| JEL: | E52 F37 F41 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9223&r=cba |
| By: | Sophie Brana; Marie-Louise Djigbenou; Stéphanie Prat (Larefi, Université Bordeaux IV) |
| Abstract: | The overly accommodating monetary policy is often accused of creating surplus liquidity and bubbles on the asset markets. In particular, it could have contributed to strong capital inflows in emerging countries, which may have had a significant impact on financial stability in these countries, affecting domestic financing conditions and creating a risk of upward pressures on asset prices. We focus in this paper on the impact of global excess liquidity on good and asset prices for a set of emerging market countries by estimating a panel VAR model. We define first global liquidity and highlight situations of excess liquidity. We then find that excess liquidity at the global level has spillover effects on output and price level in emerging countries. The impact on real estate and commodity prices in emerging countries is less clear. |
| Keywords: | Global liquidity, excess liquidity indicators, crises indicators, emerging countries, financial crisis |
| JEL: | E44 E52 F3 G01 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:laf:wpaper:cr1203&r=cba |
| By: | Viral V. Acharya (Asian Development Bank Institute (ADBI)) |
| Abstract: | This paper is an attempt to explain the changes to finance sector reforms under the Dodd-Frank Act in the United States and Basel III requirements globally; their unintended consequences; and lessons for currently fast-growing emerging markets concerning finance sector reforms, government involvement in the finance sector, possible macroprudential safeguards against spillover risks from the global economy, and, finally, management of government debt and fiscal conditions. The paper starts with a summary of reforms under the Dodd-Frank Act and highlights four of its primary shortcomings. It then focuses on the new capital and liquidity requirements under Basel III reforms, arguing that, like its predecessors, Basel III is fundamentally flawed as a way of designing macroprudential regulation of the finance sector. In contrast, the Dodd-Frank Act has several redeeming features, including requirements of stress-test-based macroprudential regulation and explicit investigation of systemic risk in designating some financial firms as systemically important. It argues that India should resist the call for blind adherence to Basel III and persist with its (Reserve Bank of India) asset-level leverage restrictions and dynamic sector risk-weight adjustment approach. It concludes with some important lessons for regulation of the finance sector in emerging markets based on the global financial crisis and proposed reforms that have followed in the aftermath. |
| Keywords: | The Dodd-Frank Act, Basel III, Emerging Markets, spillover risks, Macroprudential regulation, global financial crisis |
| JEL: | G2 G21 G28 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:eab:govern:23352&r=cba |
| By: | Gaston Giordana; Ingmar Schumacher |
| Abstract: | We study how the Basel III regulations, namely the Capital-to-assets ratio (CAR), the Net Stable Funding Ratio (NSFR) and the Liquidity Coverage Ratio (LCR), are likely to impact the banks? profitabilities (i.e. ROA), capital levels and default. We estimate historical series of the new Basel III regulations for a panel of Luxembourgish banks for a period covering 2003q2 to 2011q3. We econometrically investigate whether historical LCR and NSFR components as well as CAR positions are able to explain the variation in a measure of a bank?s default risk (proxied by Z-Score), and how these effects make their way through banks? ROA and CAR. We find that the liquidity regulations induce a decrease in average probabilities of default. Conversely, while we find that the LCR has an insignificant impact on banks? profitability, those banks with higher NSFR (through lower required stable funding, the NSFR denominator) are found to be more profitable. Additionally, we use a model of bank behavior to simulate the banks? optimal adjustments of their balance sheets as if they had had to adhere to the regulations starting in 2003q2. Then we predict, using our preferred econometric model and based on the simulated data, the banks? Z-Score and ROA. The simulation exercise suggests that basically all banks would have seen a decrease in their default risk if they had previously adhered to Basel III. |
| Keywords: | Basel III, bank default, Z-Score, profitability, ROA, GMM estimator, simulation, Luxembourg |
| JEL: | G21 G28 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:bcl:bclwop:bclwp079&r=cba |
| By: | Gottschalk Ballo, Jannike |
| Abstract: | This paper deals with the actors and the changing power relations involved in global financial regulation. It explores the private sector's influence on Basel III regulatory reforms, which were formulated by the Basel Committee on Banking Supervision as a response to the global financial crisis following the US subprime mortgage crisis in 2007-2008. Scholars argue that the dynamic between market actors and regulators of international finance has experienced a shift in power during the last couple of decades. Banks and other financial institutions have become more influential at the expense of states and regulatory institutions. This essay argues that private actors are important to ensure legitimacy and efficiency of regulation, and finds that they possess far greater powers than their consultative positions towards regulators might indicate. -- |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fubipe:132012&r=cba |
| By: | Karl Whelan (University College Dublin) |
| Abstract: | The Eurosystem’s TARGET2 payments system has featured heavily in academic and popular discussions in recent years. Much of this commentary had described the system as being responsible for a “secret bailout” of Europe’s periphery which has led to huge credit risks for the Bundesbank should the euro break up. This paper discusses the TARGET2 system, focusing in particular on how it impacts the balance sheets of the central banks that participate in the system. It concludes that the TARGET2 is largely innocent of the charges that have been levelled against it. Arguments that TARGET2 facilitated a bailout of the periphery or that the system is playing a key role in facilitating peripheral current account deficits turn out to be wide of the mark. Risks to Germany due to the loss of TARGET2-related revenues for the Bundesbank after a euro break-up turn out to relatively small because these revenues are limited and because there are potentially large gains from new seigniorage revenues in this scenario. Many criticisms involving TARGET2 turn out, on closer examination, to be criticisms of the ECB’s core principle of treating credit institutions across the euro area in an equal manner. Proposals that the ECB adopt procedures that discriminate between banks in different countries (or that restrict the operation of payments systems in certain countries) are likely to be incompatible with the continuation of the euro as a common currency. |
| Keywords: | TARGET2, ECB, Euro Crisis |
| JEL: | E51 E52 E58 |
| Date: | 2012–11–21 |
| URL: | http://d.repec.org/n?u=RePEc:ucn:wpaper:201229&r=cba |
| By: | Agnès Bénassy-Quéré (Centre d'Economie de la Sorbonne - Paris School of Economics); Guillaume Roussellet (CREST-ENSAE) |
| Abstract: | We provide a first attempt to include off-balance sheet, implicit insurance to SIFIs into a consistent assessment of fiscal sustainability, for 27 countries of the European Union. We first calculate tax gaps à la Blanchard (1990) and Blanchard et al. (1990). We then introduce two alternative measures of implicit off-balance sheet liabilities related to the risk of a systemic bank crisis. The first one relies of microeconomic data at the bank level. The second one relies on econometric estimations of the probability and the cost of a systemic banking crisis, based on historical data. The former approach provides an upper evaluation of the fiscal cost of systemic banking crises, whereas the latter one provides a lower one. Hence, we believe that the combined use of these two methodologies helps to gauge the range of fiscal risk. |
| Keywords: | Fiscal sustainability, tax gap, systemic banking risk, off-balance sheet liabilities. |
| JEL: | H21 H23 J41 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:12077&r=cba |
| By: | Tarisa Watanagase (Asian Development Bank Institute (ADBI)) |
| Abstract: | This paper discusses the relevance of Basel III to Asian emerging markets. It reviews some of the proposed regulations of Basel III in order to evaluate their likely implications for, and their ability to enhance, the stability of the banking and financial system. This is followed by a discussion on the challenges faced by the regulators of Asian emerging markets in effectively managing their financial regulations, given their capacity and institutional constraints. The paper concludes with policy recommendations for Asian emerging markets to strengthen and enhance the stability of their banking and financial systems. |
| Keywords: | Global Financial Regulatory Landscape, Asian Emerging Markets, Basel, banking and financial systems |
| JEL: | E52 G21 G28 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:eab:govern:23351&r=cba |
| By: | Reimers, Hans-Eggert |
| Abstract: | The recent financial crisis has demonstrated in an impressive way that boom/bust cycles can have devastating effects on the real economy. This paper aims at contributing to the literature on early warning indicator exercises for asset price development. Using a sample of 17 industrialised OECD countries and the euro area over the period 1969 Q1 - 2011 Q2, an asset price composite indicator incorporating developments in both stock and house price markets is constructed. The latter is then further developed in order to identify periods that can be characterised as asset price booms and busts. The subsequent empirical analysis is based on an ordered logit-type approach incorporating several monetary, financial and real variables. Following some statistical tests, credit aggregates, the interest rate spread together with the house price growth gap and stock price developments appear to be useful indicators for the prediction of asset price developments. -- |
| JEL: | E37 E44 E51 G01 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:hswwdp:062012&r=cba |
| By: | Matthias Bauer (Graduate Programme "Global Financial Markets"); Martin Zenker (Graduate Programme "Soziale Marktwirtschaft") |
| Abstract: | Does a multilateral fiscal rule improve market discipline in a monetary union? This paper studies the impact of political events that systematically undermined the Stability and Growth Pact (SGP) on EMU sovereign default risk for the period 2001 to 2005. For various EMU member countries our findings suggest that credit risk did not increase in the SGP's early years in response to the political undermining of the Pact. Due to the existence of systematic volatility effects we conclude that from its beginning the Pact was not perceived as a credible institution by financial markets. Bond markets have not been the watchdogs the proponents of transparency enhancing fiscal rules frequently claim them to be. Investors did not anticipate any serious consequences arriving from political non-ownership of the Pact and corresponding fiscal leeway on national public finances in the euro zone back then. In this context, policymakers working on a reform of Europe's fiscal framework should abstain from enhancing multilateral fiscal rules lacking political ownership, including the reformed SGP and the new "European Fiscal Compact". |
| Keywords: | fiscal rules, market discipline, sovereign credit risk, GARCH |
| JEL: | E62 F55 C22 C58 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:hlj:hljwrp:35-2012&r=cba |
| By: | Di Maggio, Marco; Pagano, Marco |
| Abstract: | We study a model where some investors (“hedgers”) are bad at information processing, while others (“speculators”) have superior information-processing ability and trade purely to exploit it. The disclosure of financial information induces a trade externality: if speculators refrain from trading, hedgers do the same, depressing the asset price. Market transparency reinforces this mechanism, by making speculators’ trades more visible to hedgers. As a consequence, asset sellers will oppose both the disclosure of fundamentals and trading transparency. This is socially inefficient if a large fraction of market participants are speculators and hedgers have low processing costs. But in these circumstances, forbidding hedgers’ access to the market may dominate mandatory disclosure. |
| Keywords: | financial disclosure; information processing; liquidity; market transparency; rational inattention |
| JEL: | D83 D84 G18 G38 K22 M48 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9207&r=cba |
| By: | Leonardo Becchetti (Università di Roma "Tor Vergata"); Stefano Castriota (Università di Roma "Tor Vergata"); Pierluigi Conzo (Università di Torino and CSEF) |
| Abstract: | The poor in developing countries are the most exposed to natural catastrophes and microfinance organizations may potentially ease their economic recovery. Yet, no evidence on MFIs strategies after natural disasters exists. We aim to fill this gap by building adataset which merges bank records of loans, issued before and after the 2004 Tsunami by a Sri Lankan MFI recapitalized by Western donors, with detailed survey data on the corresponding borrowers. Evidence of effective post-calamity intervention is supported since the defaults in the post-Tsunami years (2004-2006) do not imply smaller loans in the period following the recovery (2007-2011) while people hit by the calamity receive more money. Furthermore, a cross-subsidization mechanism is in place: clients with a long successful credit history and those not damaged by the calamity pay higher interest rates. All these features helped damaged people to recover and repay both new and previous loans. However, we also document an abnormal and significant increase in default rates of non victims suggesting the existence of contagion and/or strategic default problems. For this reason we suggest reconversion of donor aid into financial support to compulsory microinsurance schemes for borrowers. |
| Keywords: | Tsunami, disaster recovery, microfinance, strategic default, contagion, microinsurance. |
| JEL: | G21 G32 G33 |
| Date: | 2012–10–25 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:324&r=cba |
| By: | Gust, Christopher; López-Salido, J David; Smith, Matthew E |
| Abstract: | Using Bayesian methods, we estimate a nonlinear DSGE model in which the interest-rate lower bound is occasionally binding. We quantify the size and nature of disturbances that pushed the U.S. economy to the lower bound in late 2008 as well as the contribution of the lower bound constraint to the resulting economic slump. Compared with the hypothetical situation in which monetary policy can act in an unconstrained fashion, our estimates imply that U.S. output was more than 1 percent lower, on average, over the 2009{2011 period. Moreover, around 20 percent of the drop in U.S. GDP during the recession of 2008-2009 was due to the interest-rate lower bound. We show that the estimated model is capable of generating lower bound episodes that resemble salient characteristics of the observed U.S. episode, including its expected duration. |
| Keywords: | Bayesian estimation; DSGE model; zero lower bound |
| JEL: | C11 C32 E32 E52 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9214&r=cba |
| By: | Manfred Jaeger-Ambrozewicz |
| Abstract: | This paper derives -- considering a Gaussian setting -- closed form solutions of the statistics that Adrian and Brunnermeier and Acharya et al. have suggested as measures of systemic risk to be attached to individual banks. The statistics equal the product of statistic specific Beta-coefficients with the mean corrected Value at Risk. Hence, the measures of systemic risks are closely related to well known concepts of financial economics. Another benefit of the analysis is that it is revealed how the concepts are related to each other. Also, it may be relatively easy to convince the regulators to consider a closed form solution, especially so if the statistics involved are well known and can easily be communicated to the financial community. |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1211.4173&r=cba |