|
on Central Banking |
| By: | Knüppel, Malte; Schultefrankenfeld, Guido |
| Abstract: | The interest rate assumptions for macroeconomic forecasts differ considerably among central banks. Common approaches are given by the assumption of constant interest rates, interest rates expected by market participants, or the central bank's own interest rate expectations. From a theoretical point of view, the latter should yield the highest forecast accuracy. The lowest accuracy can be expected from forecasts conditioned on constant interest rates. However, when investigating the predictive accuracy of the forecasts for interest rates, inflation and output growth made by the Bank of England and the Banco do Brasil, we hardly find any significant differences between the forecasts based on different interest assumptions. We conclude that the choice of the interest rate assumption, while being a major concern from a theoretical point of view, appears to be at best of minor relevance empirically. -- |
| JEL: | C12 C53 E58 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:80042&r=cba |
| By: | Winkelmann, Lars; Bibinger, Markus; Linzert, Tobias |
| Abstract: | We propose a new monetary policy surprise measure based on cojumps in tick-data of a short and long term interest rate. We extend a recently proposed test for cojumps to distinguish policy announcements that shift the short and long end of the yield curve in the same direction (level shift) and policy announcements that shift both ends in opposite directions (rotation). Through level shifts and rotations we identify the source of a policy surprise in a standard Taylor-rule context. Empirical evidence on 133 ECB policy announcements from 2001 to 2012 suggest that markets perceptions about ECB policy preferences has been remarkably stable. -- |
| JEL: | E58 C14 C58 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79721&r=cba |
| By: | Sacht, Stephen |
| Abstract: | In this we investigate the welfare effects of optimal monetary policy measurements within a high-frequency New-Keynesian model i.e. under variation of the period length. Our results indicate that the policy maker faces a higher welfare loss on a higher relative to a lower frequency of the agents' decision making. While overall inertia in the model increases, we show that the more the pass-through of output gap movements into inflation rate dynamics is dampened on a higher frequency, this amplifies the trade-off of the central bank in case of a cost-push shock. This is caused by the impact of so-called frequency-dependent persistence effects, which mimic the impact of the increase in the amount of market days on the dynamics of the model. This result is less severe in the optimal monetary policy regime under Commitment because of a time-invariant history dependence effect with respect to the period length. -- |
| Keywords: | Hybrid New-Keynesian model,high-frequency modelling,optimal monetary policy,frequency-dependent persistence |
| JEL: | C61 C63 E32 E52 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cauewp:201403&r=cba |
| By: | Konstantin Kiesel; Maik Wolters |
| Abstract: | Monetary policy rule parameters estimated with conventional estimation techniques can be severely biased if the estimation sample includes periods of low interest rates. Nominal interest rates cannot be negative, so that censored regression methods like Tobit estimation have to be used to achieve unbiased estimates. We use IV-Tobit regression to estimate monetary policy responses for Japan, the US and the Euro area. The estimation results show that the bias of conventional estimation methods is sizeable for the inflation response parameter, while it is very small for the output gap response and the interest rate smoothing parameter. We demonstrate how IV-Tobit estimation can be used to study how policy responses change when the zero lower bound is approached. Further, we show how one can use the IV-Tobit approach to distinguish between desired policy responses, that the central bank would implement if there was no zero lower bound, and the actual ones and provide estimates of both |
| Keywords: | monetary reaction function, zero lower bound, IV-Tobit estimator, censored regressions, non-linearity |
| JEL: | E52 E58 E65 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1898&r=cba |
| By: | Markus Hoermann; Andreas Schabert |
| Abstract: | We augment a standard macroeconomic model to analyze the effects and limitations of balance sheet policies. We show that the central bank can stimulate real activity by changing the size or the composition of its balance sheet, when interest rate policy is ineffective. Specifically, the central bank can stabilize the economy by increasing money supply against eligible assets even when the policy rate is at the zero lower bound. By changing the composition of its balance sheet, it can affect interest rates and, for example, neutralize increases in firms' borrowing costs, which is not possible under a single instrument regime. We further analyze the limitations of balance sheet policies and show that they are particularly useful under liquidity demand shocks. |
| Keywords: | Unconventional monetary policy, collateralized lending, quantitative easing, liquidity premium, zero lower bound |
| JEL: | E32 E52 E58 |
| Date: | 2013–12–29 |
| URL: | http://d.repec.org/n?u=RePEc:kls:series:0068&r=cba |
| By: | Detmers, Gunda-Alexandra; Nautz, Dieter |
| Abstract: | The Reserve Bank of New Zealand guides interest rate expectations of financial markets by projections of future short-term rates that are updated only once a quarter. As a consequence, projections become stale when time evolves and new information enters the market. This paper investigates the dynamic impact of probably outdated interest rate projections on the expectations management of central banks. Confirming the stabilizing effect of fresh central bank announcements, we show that interest rate uncertainty increases with the time elapsing since the recent interest rate projection. In contrast, we find that stale projections may hamper central bank communication. In fact, interest rate uncertainty increases when the market perceives the projections to be outdated. -- |
| JEL: | E52 E58 G14 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79861&r=cba |
| By: | Afanasyeva, Elena; Karasulu, Meral |
| Abstract: | We use a microfounded dynamic stochastic general equilibrium (DSGE) model with banks to study interactions between monetary and macroprudential policies in a small open economy. The model is calibrated/estimated for Korea. Cooperation of monetary and macroprudential policies is optimal under a financial shock. Prolonged periods of monetary accommodation lead to inflationary pressures, lower the effectiveness of macroprudential instrument (loan-to-value ratio) and contribute to further credit growth, increasing vulnerabilities. -- |
| JEL: | E58 E61 G28 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79884&r=cba |
| By: | Groll, Dominik |
| Abstract: | The New Keynesian DSGE literature has come to the consensus that, from the perspective of business cycle stabilization, countries are worse off in terms of welfare by forming a monetary union. This consensus, however, is based on the assumption of monetary policy being optimal. Using a standard two-country model, this paper shows that under suboptimal monetary policy, countries may gain in welfare by forming a monetary union, highlighting an important inherent benefit of fixing the exchange rate. Whether countries benefit from a monetary union depends primarily on the degree of price stickiness and how monetary policy is conducted: If prices are rather sticky and if monetary policy is not very aggressive towards inflation, forming a monetary union is beneficial. In contrast, asymmetries in the degree of price stickiness between countries are not of any importance for a monetary union to be welfare-enhancing or not. -- |
| JEL: | F41 F33 E52 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79787&r=cba |
| By: | Matthias Neuenkirch; Pierre L. Siklos |
| Abstract: | Monetary policy decisions are typically taken after a committee has deliberated and voted on a proposal. However, there are well-known risks associated with committee-based decisions. In this paper we examine the record of the shadow Monetary Policy Council in Canada. Given the structure of the committee, how decision-making takes place, as well as the voting arrangements, the MPC does not face the same information cascades and group polarization risks faced by actual decision-makers in central bank monetary policy councils. We find a considerable diversity of opinion about the recommended future path of interest rates inside the MPC. Beginning with the explicit forward guidance provided by the Bank of Canada market determined forward rates diverge considerably from the recommendations implied by the MPC. There is little evidence that the Bank and the MPC coordinate their future views about the interest rate path. However, it is difficult to explain the basis on which median voter inside the MPC, as well as doves and hawks on the committee, change their views about future changes in policy rates. This implies that there remain challenges in understanding the evolution of future interest rate paths over time. |
| Keywords: | Bank of Canada, central bank communication, committee behaviour, monetary policy committees, shadow councils, Taylor rules |
| JEL: | E43 E52 E58 E61 E69 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:trr:wpaper:201403&r=cba |
| By: | James M. Nason; Gregor W. Smith |
| Abstract: | Much research studies US inflation history with a trend-cycle model with unobserved components. A key feature of this model is that the trend may be viewed as the Fed’s evolving inflation target or long-horizon expected inflation. We provide a new way to measure the slowly evolving trend and the cycle (or inflation gap), based on forecasts from the Survey of Professional Forecasters. These forecasts may be treated either as rational expectations or as adjusting to those with sticky information. We find considerable evidence of inflation-gap persistence and some evidence of implicit sticky information. But statistical tests show we cannot reconcile these two widely used perspectives on US inflation and professional forecasts, the unobserved-components model and the sticky-information model. |
| Keywords: | US inflation, professional forecasts, sticky information, Beveridge-Nelson |
| JEL: | E31 E37 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2014-07&r=cba |
| By: | SZCZERBOWICZ, Urszula |
| Abstract: | This paper evaluates the impact of the European Central Bank's (ECB) unconventional policies on bank and government borrowing costs. We employ event-based regressions to assess and compare the effects of asset purchases and exceptional liquidity announcements on the money markets, covered bond markets, and sovereign bond markets. The results show that (i) exceptional liquidity measures (3-year loans to banks and setting the ECB deposit rate to zero) significantly reduced persistent money market tensions and that (ii) asset purchases were the most effective in lowering the refinancing costs of banks and governments in the presence of high sovereign risk. In particular, we show how the interdependence between sovereign and bank risk amplifies the effectiveness of the ECB's asset purchases: bank-covered bond purchases diminish sovereign spreads while sovereign bond purchases reduce covered bond spreads. |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:14008&r=cba |
| By: | Denis Beau; Christophe Cahn; Laurent Clerc; Benoît Mojon |
| Abstract: | In this paper, we analyse the interactions between monetary and macro-prudential policies and the circumstances under which such interactions call for their coordinated implementation. We start with a review of the interdependencies between monetary and macro-prudential policies. Then, we use a DSGE model incorporating financial frictions, heterogeneous agents and housing, which is estimated for the euro area over the period 1985 -2010, to identify the circumstances under which monetary and macro-prudential policies may have compounding, neutral or conflicting impacts on price stability. We compare inflation dynamics across four “policy regimes” depending on: (a) the monetary policy objectives – that is, whether the policy instrument, the short-term interest rate factors in financial stability considerations by leaning against credit growth; and (b) the existence, or not, of an authority in charge of a financial stability objective through the implementation of macroprudential policies that can “lean against credit” without affecting the short-term interest rate. Our main result is that under most circumstances, macro-prudential policies have either a limited or a stabilizing effect on inflation. |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:715&r=cba |
| By: | Kellermann, Kersten; Schlag, Carsten |
| Abstract: | In September 2009, G20 representatives called for introducing a minimum leverage ratio as an instrument of financial regulation. It is supposed to assure a certain degree of core capital for banks, independent of the controversial procedures used to assess risk. This paper discusses the interaction and tensions between the leverage ratio and risk-based capital requirements, using financial data of the Swiss systemically important bank UBS. It can be shown that the leverage ratio potentially undermines risk weighting such that banks feel encouraged to take greater risks. The paper proposes an alternative instrument that is conceived as a base risk weight and functions as a backstop. It ensures a minimum core capital ratio, based on unweighted total exposure by ensuring a minimum ratio of risk-weighted to total assets for all banks. The proposed measure is easy to compute like the leverage ratio, and also like the latter, it is independent of risk weighting. Yet, its primary advantage is that it does not supersede risk-based capital adequacy targets, but rather supplements them. -- |
| JEL: | G28 G21 G01 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79901&r=cba |
| By: | Khundrakpam, Jeevan Kumar |
| Abstract: | The paper attempts to analyse asymmetric effects of monetary policy in India using quarterly data from 1996-97Q1 to 2011-12Q4. It finds that an unanticipated hike and an unanticipated cut in policy rate have a symmetric impact of on real GDP growth, but differentially impact the components of real aggregate demand. While the impact on real investment is symmetric, it is asymmetric on real private and government consumption in that while an unanticipated cut in policy rate leads to their increase, an unanticipated hike in policy rate has no impact on them. The impact on inflation is also symmetric. An anticipated policy rate change also has a negative impact on real GDP growth as well as on the components of real aggregate demand, except for real government consumption. However, there are ranges where anticipated policy rate changes become neutral to components of aggregate demand and, thus, on inflation, ranging from 6.25 per cent to 7.0 per cent. |
| Keywords: | Monetary Policy, Asymmetry, Inflation, Policy Rate |
| JEL: | C32 C51 E31 E52 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:53059&r=cba |
| By: | Pablo Pincheira |
| Abstract: | In this paper we explore the role that exchange rate interventions may play in determining inflation expectations in Chile. To that end, we consider a set of nine deciles of inflation expectations coming from the survey of professional forecasters carried out by the Central Bank of Chile. We consider two episodes of preannounced central bank interventions during the sample period 2007–2012. Our results indicate, on the one hand, that the intervention program carried out in 2008 had a significant, but relatively short-lived, impact on the distribution of inflation expectations at long horizons. On the other hand, the intervention carried out in 2011 shows no relevant impact on the distribution of inflation expectations in Chile. A daily analysis using break-even inflation rate as a proxy for inflation expectations is roughly consistent with these results. Our analysis also suggests that the interventions did have an impact on daily exchange rate returns, especially on the day after the announcements of the intervention programs. |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:693&r=cba |
| By: | Andreas Nastansky; Alexander Mehnert; Hans Gerhard Strohe |
| Abstract: | In the paper, the interaction between public debt and inflation including mutual impulse response will be analysed. The European sovereign debt crisis brought once again the focus on the consequences of public debt in combination with an expansive monetary policy for the development of consumer prices. Public deficits can lead to inflation if the money supply is expansive. The high level of national debt, not only in the Euro-crisis countries, and the strong increase in total assets of the European Central Bank, as a result of the unconventional monetary policy, caused fears on inflating national debt. The transmission from public debt to inflation through money supply and long-term interest rate will be shown in the paper. Based on these theoretical thoughts, the variables public debt, consumer price index, money supply m3 and long-term interest rate will be analysed within a vector error correction model estimated by Johansen approach. In the empirical part of the article, quarterly data for Germany from 1991 by 2010 are to be examined. |
| Keywords: | Beveridge-Nelson Decomposition, Public Debt, Inflation, Money Supply, Vector Error Correction Model |
| JEL: | C32 E31 E51 H63 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:pot:statdp:51&r=cba |
| By: | Kaufmann, Daniel; Bäurle, Gregor |
| Abstract: | In this paper, we analyse nominal exchange rate and price dynamics after risk shocks with short-term interest rates constrained by the zero lower bound (ZLB). We show with a stylized theoretical model that temporary risk shocks may lead to permanent shifts of the exchange rate and the price level if a central bank anchors long-run inflation expectations. In line with this theoretical prediction, we find empirical evidence for Switzerland, that the responses of the exchange rate and the price level to a temporary risk shock are permanent. Our theoretical discussion shows that adopting a credible long-run price level target rather than a long-run inflation target avoids these permanent shifts of the exchange rate and the price level. -- |
| JEL: | C32 E31 E52 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79872&r=cba |
| By: | Joseph E. Gagnon (Peterson Institute for International Economics); Brian Sack (D. E. Shaw Group) |
| Abstract: | The amount of assets held by the Federal Reserve has dramatically increased since 2009. It recently crossed $4 trillion and will likely peak at about $4.5 trillion. This increase is the result of the Fed's large-scale asset purchase programs, which were intended to support economic growth. However, these purchases have created unprecedented amounts of liquidity in the financial system. Gagnon and Sack doubt that the Fed can smoothly conduct monetary policy along the lines of the previous operating framework in this environment of high liquidity. Instead of reducing bank reserves to achieve a target level for the federal funds rate, they propose a new operating framework that would allow the Fed to maintain an elevated balance sheet along with abundant liquidity in the financial system. They argue that the Fed should set the rate at which it will offer overnight reverse repurchase agreements as its policy instrument, with the interest rate paid on bank reserves set at the same level. The federal funds rate would become just one of the various overnight interest rates determined by the market in the normal transmission of monetary policy. |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:iie:pbrief:pb14-4&r=cba |
| By: | Xavier Gabaix; Matteo Maggiori |
| Abstract: | We provide a theory of the determination of exchange rates based on capital flows in imperfect financial markets. Capital flows drive exchange rates by altering the balance sheets of financiers that bear the risks resulting from international imbalances in the demand for financial assets. Such alterations to their balance sheets cause financiers to change their required compensation for holding currency risk, thus impacting both the level and volatility of exchange rates. Our theory of exchange rate determination in imperfect financial markets not only rationalizes the empirical disconnect between exchange rates and traditional macroeconomic fundamentals, but also has real consequences for output and risk sharing. Exchange rates are sensitive to imbalances in financial markets and seldom perform the shock absorption role that is central to traditional theoretical macroeconomic analysis. We derive conditions under which heterodox government financial policies, such as currency interventions and taxation of capital flows, can be welfare improving. Our framework is flexible; it accommodates a number of important modeling features within an imperfect financial market model, such as non-tradables, production, money, sticky prices or wages, various forms of international pricing-to-market, and unemployment. |
| JEL: | E2 E42 E44 F31 F32 F41 F42 G11 G15 G20 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19854&r=cba |
| By: | Jung, Alexander; El-Shagi, Makram; Giesen, Sebastian |
| Abstract: | This paper assesses the relative performance of central bank staff forecasts and of private forecasters for inflation and output. We show that the Federal Reserve (Fed), and less so the European Central Bank (ECB), has a significant information advantage concerning inflation and output forecasts. Using recently developed tests for conditional predictive ability and forecast stability for the US, we find that the driving forces behind the narrowing of the information advantage of Greenbook forecasts have coincided with the Great Moderation. -- |
| JEL: | C53 E37 E52 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79925&r=cba |
| By: | Michel Bordo; John Lando-Lane |
| Abstract: | In this paper we investigate the relationship between loose monetary policy, low inflation, and easy bank credit with asset price booms. Using a panel of up to 18 OECD countries from 1920 to 2011 we estimate the impact that loose monetary policy, low inflation, and bank credit has on house, stock and commodity prices. We review the historical narratives on asset price booms and use a deterministic procedure to identify asset price booms for the countries in our sample. We show that “loose” monetary policy – that is having an interest rate below the target rate or having a growth rate of money above the target growth rate – does positively impact asset prices and this correspondence is heightened during periods when asset prices grew quickly and then subsequently suffered a significant correction. This result was robust across multiple asset prices and different specifications and was present even when we controlled for other alternative explanations such as low inflation or “easy” credit. |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:710&r=cba |
| By: | Hubrich, Kirstin; Philipp, Hartmann; Kirstin, Hubrich; Manfred, Kremer; Tetlow, Robert J. |
| Abstract: | We integrate systemic financial instability in an empirical macroeconomic model for the euro area. We find that at times of widespread financial instability the macroeconomy functions fundamentally differently from tranquil times. We employ a richly specified Markov-Switching Vectorautoregression model to capture the dynamic relationships between a set of core macroeconomic variables and a novel indicator of systemic financial stress. Both the parameters that capture the transmission of shocks through the economy and the variances of the shocks change at times of high stress in the financial system. In particular, the negative output effects of sizeable increases in financial stress are much larger after such a regime change than during tranquil times. Macroprudential and monetary policy makers are well advised to take these nonlinearities into account. -- |
| JEL: | E44 C11 C32 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:80487&r=cba |
| By: | Scheubel, Beatrice; Körding, Julia |
| Abstract: | As reliance on excessively short-term wholesale funding has been one of the major causes for the 2007-2009 financial crisis, recent advances in global liquidity regulation try to curb the excessive reliance on short-term wholesale funding without being clear on how such an approach will affect the overall equilibrium on money markets. In particular, liquidity regulation may interfere with the central bank's influence on short-term money market rates. This paper tries to fill the gap in understanding the interaction between the money market, the central bank, and the regulator. Importantly, it shows that the existence of a central bank can be welfare-improving when the market equilibrium is driven by collateral constraints and asymmetric information. Regulation can be welfare-improving in the presence of an externality and also in case of collateral constraints, but reduces activity on the unsecured market. This implies that in case of collateral constraints the regulator can lead to a complete crowding out of the unsecured market which leads to an increased central bank intermediation need. -- |
| JEL: | E42 H12 L51 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79754&r=cba |
| By: | Wollmershäuser, Timo; Hristov, Nikolay; Hülsewig, Oliver |
| Abstract: | This paper uses panel vector autoregressive models and simulations of an estimated DSGE model to explore the reaction of Euro area banks to the global financial crisis. We focus on their interest rate setting behavior in response to standard macroeconomic shocks. Our main empirical finding is that the pass through from changes in the money market rate to retail bank rates became significantly less complete during the crisis. Model simulations show that this result can be well explained by a significant increase in the frictions that the banks business is subject to. -- |
| JEL: | E40 E43 E52 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79976&r=cba |
| By: | von Thadden, Leopold; Lipinska, Anna |
| Abstract: | This paper explores the fiscal devaluation hypothesis in a model of a monetary union characterised by national fiscal and supranational monetary policy. We show that a unilateral tax shift towards indirect taxes in one of the countries produces small but non-negligible long-run effects on output and consumption within and between the two countries only when international financial markets are perfectly integrated. In contrast to the existing literature, we find that short-run effects are not always amplified by nominal wage rigidities. We document also how short-run effects of the tax shift depend on the choice of the inflation index stabilised by the central bank and on whether the tax shift is anticipated. -- |
| JEL: | E61 E63 F42 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:80038&r=cba |
| By: | Schnabl, Gunther; Wollmershäuser, Timo |
| Abstract: | Since the breakdown of the Bretton Woods System diverging current account positions in Europe have prevailed. While the Southern and Western European countries have tended to run current account deficits, the current accounts of the Central and Northern European countries, in particular Germany, have tended to be in surplus. The paper scrutinizes the role of diverging fiscal policy stances for current account imbalances in Europe since the early 1970s under alternative institutional monetary arrangements (floating exchange rates, European Monetary System, and European Monetary Union). It sheds light on the interaction of fiscal and monetary policies with respect to their impact on the current account and analyses the role of exchange rate changes and credit facilities as adjustment mechanisms for current account imbalances. Panel regressions reveal a robust impact of fiscal policy divergence on current account imbalances, which to a large extent is independent from the exchange rate regime, but which turns out to be contingent on the monetary policy stance. -- |
| JEL: | E62 E52 F32 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79899&r=cba |
| By: | Lemke, Wolfgang; Strohsal, Till |
| Abstract: | We assess whether euro area inflation expectations, as measured by break-even inflation rates (BEIRs), have remained anchored during the financial crisis. Since autumn 2008, the volatility of BEIRs has increased considerably. We treat observed BEIRs as a sum of `genuine BEIRs' and additional `noise' components, the latter picking up influences related to market illiquidity or demand-supply imbalances, but not reflecting genuine inflation expectations and inflation risk premia. We estimate a bivariate VAR with short-term and long-term BEIRs, allowing for measurement noise in both. Anchoring of inflation expectations is analyzed by means of the pass-through of shocks from shorter to longer-term expectations. We find that, according to the pass-through results, inflation expectations remained well-anchored during the crisis period. Moreover, measurement noise accounts for up to 30% of the increase in volatility of BEIRs. -- |
| JEL: | E31 E52 C32 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79794&r=cba |
| By: | Aleksander Berentsen; Samuel Huber; Alessandro Marchesiani |
| Abstract: | In the 1990s, the empirical relation between money demand and interest rates began to fall apart. We analyze to what extent improved access to money markets can explain this break-down. For this purpose, we construct a microfounded monetary model with a money market, which provides insurance against liquidity shocks by offering short-term loans and by paying interest on money market deposits. We calibrate the model to U.S. data and find that improved access to money markets can explain the behavior of money demand very well. Furthermore, we show that, by allocating money more efficiently, better access to money markets decrease the welfare cost of inflation substantially. |
| Keywords: | Monetary economics |
| JEL: | E52 E58 E59 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:136&r=cba |
| By: | Bucher, Monika; Dietrich, Diemo; Hauck, Achim |
| Abstract: | Business cycles imply liquidity risks for banks. This paper explores how these risks influence bank lending over the cycle. With forward-looking banks, lending cycles, credit booms and busts, or suppressed and highly fragile bank systems can emerge, depending on the magnitude of liquidity risks. In this context, regulatory stability-enhancing measures have some unpleasant effects on bank lending. Imposing countercyclical capital adequacy ratio may amplify procyclicality or result in disintermediation, when liquidity risks are only moderate and financial stability is barely a threat. Adopting a regulatory margin call eliminates failures but stops lending for larger liquidity risks whereas a liquidity ratio might be a way to reduce risk-taking without fully hampering credit intermediation. -- |
| JEL: | G28 G21 E32 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79792&r=cba |
| By: | Arellano, Cristina (Federal Reserve Bank of Minneapolis); Bai, Yan (University of Rochester) |
| Abstract: | This paper studies an optimal renegotiation protocol designed by a benevolent planner when two countries renegotiate with the same lender. The solution calls for recoveries that induce each country to default or repay, trading off the deadweight costs and the redistribution benefits of default independently of the other country. This outcome contrasts with a decentralized bargaining solution where default in one country increases the likelihood of default in the second country because recoveries are lower when both countries renegotiate. The paper suggests that policies geared at designing renegotiation processes that treat countries in isolation can prevent contagion of debt crises. |
| Keywords: | Renegotiation policy; Contagion; Sovereign default |
| JEL: | F30 G01 |
| Date: | 2014–01–10 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:495&r=cba |
| By: | Luis F. Céspedes; Javier García-Cicco; Diego Saravia |
| Abstract: | In this paper we analyze the effects of the Term Liquidity Program (FLAP) implemented by the Central Bank of Chile in response to the financial crisis of 2008-9. We find that the announcement related to this policy significantly reduced nominal yields in the policy horizon of two years. These results suggest that the credibility goal of this unconventional policy (i.e. to convey the message that the monetary policy rate was to remain at its lower bound for a prolonged period of time) was achieved. We also analyze how the usage of that facility by banks affected the credit they supply. We find that banks that borrowed from this facility increase commercial and consumer loans, relative to those that did not, but mortgage credit was not significantly affected. In other words, this additional source of short-term borrowing was used mainly to finance short-term lending. |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:712&r=cba |
| By: | Neck, Reinhard; Blüschke, Dmitri |
| Abstract: | We use a dynamic game model of a two-country monetary union to study the impacts of an exogenous fall in aggregate demand, the resulting increase in public debt, and the consequences of a sovereign debt haircut for a member country or bloc of the union. In this union, the governments of participating countries pursue national goals when deciding on fiscal policies, while the common central bank s monetary policy aims at union-wide objective variables. The union considered is asymmetric, consisting of a core with lower initial public debt, and a periphery with higher initial public debt. The periphery may experience a debt relief ( haircut ) due to an evolving high sovereign debt. Calibrating the model to the Euro Area, we calculate numerical solutions of the dynamic game between the governments and the central bank using the OPTGAME algorithm. We show that a haircut as modeled in our study is disadvantageous for both the core and the periphery of the monetary union. Moreover, the cooperative solution is preferable to the noncooperative equilibrium solution (both without and with a haircut ), providing an argument for coordinated fiscal policies in a monetary union. -- |
| JEL: | E61 E62 E58 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79887&r=cba |
| By: | Pausch, Thilo |
| Abstract: | The industrial organization approach to banking is extended to analyze the effects of interbank market activity and regulatory liquidity requirements on bank behavior. A multi-stage decision situation allows for considering the interaction between credit risk and liquidity risk of banks. This interaction is found to make a risk neutral bank behave as if it were risk averse in an environment where there is no interbank market and liquidity regulation. Introducing a buoyant interbank money market destroys endogenous risk aversion and allows banks to manage credit risk and liquidity risk independently. The paper shows that a liquidity regulation just like the one proposed in BCBS (2010) is not generally able to offset the separating effect of interbank money markets and recreate endogenous risk aversion of banks. -- |
| JEL: | G21 G28 G32 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79702&r=cba |
| By: | Uhde, Andre; Farruggio, Christian; Michalak, Tobias C. |
| Abstract: | This paper empirically investigates the impact of the first announcement of TARP, the announcement of revised TARP, respective capital infusions under TARP-CPP and capital repayments on changes in shareholder value and the risk exposure of supported U.S. banks. Our analysis reveals a light and a dark side of TARP. While announcements as well as capital repayments may provoke positive wealth effects and a decrease in bank risk, equity capital injections to banks are observed to be a severe impediment to restore market confidence and financial stability. Furthermore, while TARP announcements and capital injections may increase systemic risk, no significant effect on systemic risk is found for capital repayments. -- |
| JEL: | G14 G21 G28 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:80004&r=cba |
| By: | Martin Plödt; Claire Reicher |
| Abstract: | We project the path of the public debt and primary surpluses for a number of countries in the euro area under a fiscal rule based on a set of estimated fiscal policy reaction functions. Our fiscal rule represents a fiscal analogue to a well-known monetary policy rule, and it is calibrated using country-specific as well as euro area-wide parameter estimates. We then forecast the dynamics of the fiscal aggregates under different convergence, growth, and interest rate scenarios and investigate the implications of these scenarios in projecting the future path of fiscal aggregates. We argue that our forecasting methodology may be used to deliver insights into the medium-run effects of different fiscal policy rules and to provide some early warning of future fiscal pressures |
| Keywords: | fiscal rules, fiscal policy, euro area, forecasting |
| JEL: | H62 H63 H68 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1900&r=cba |
| By: | El-Shagi, Makram; Kelly, Logan; Kelly, Logan |
| Abstract: | While there has been some debate over the usefulness of monetary aggregates, there has been surprisingly little discussion of the actual implications for liquidity. In this paper, we provide an approximation of the liquidity development in six Euro area countries from 2003 to 2012. We show that properly measured monetary aggregates contain significant information about liquidity risk. -- |
| JEL: | C43 E40 G01 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79935&r=cba |
| By: | Lamla, Michael; Dräger, Lena |
| Abstract: | We investigate the updating behavior of individual consumers regarding their short- and long-run inflation expectations. Utilizing the University of Michigan Survey of Consumer's rotating panel microstructure, we can identify whether individuals adjust their inflation expectations over a period of six months. We find evidence that the updating frequency has been underestimated. Furthermore, looking at the possible determinants of an update we find support for imperfect information models. Moreover, individual expectations are found to be more accurate after an update and forecast accuracy is affected by inflation volatility measures and news regarding inflation. Finally, the updating frequency is found to significantly move spreads in bond markets. -- |
| JEL: | D84 E31 E50 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79908&r=cba |
| By: | Leo Krippner |
| Abstract: | This article introduces an idea for summarizing of the stance of monetary policy with quantities derived from a class of yield curve models that respect the zero lower bound constraint for interest rates. The “economic stimulus measure” aggregates the current and estimated expected path of interest rates relative to the neutral interest rate from the yield curve model. Unlike shadow short rates, economic stimulus measures are consistent and comparable across conventional and unconventional monetary policy environments, and are less subject to variation with modelling choices, as I demonstrate with two and three factor models estimated with different data sets. Full empirical testing of the inter-relationships between ES measures and macroeconomic data remains a topic for future work. |
| Keywords: | Unconventional monetary policy; zero lower bound; shadow short rate; term structure model |
| JEL: | E43 E52 G12 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2014-06&r=cba |
| By: | Hakenes, Hendrik; Schnabel, Isabel |
| Abstract: | One explanation for the poor performance of regulation in the recent financial crisis is that regulators had been captured by the financial sector. We present a micro-founded model with rational agents in which banks may capture regulators due to their high degree of sophistication. Banks can search for arguments of differing complexity against regulation. Finding such arguments is more difficult for a bad bank, which the regulator wants to regulate more strictly. However, the more sophisticated a bank is, the more easily it can produce an argument that a regulator may not understand. Career concerns prevent the regulator from admitting this, hence he rubber-stamps even bad banks, which leads to inefficiently low levels of regulation. Bank sophistication leads to capture, and thus to worse regulatory decisions. -- |
| JEL: | G21 G28 L51 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79991&r=cba |
| By: | Maier, Ulf; Haufler, Andreas |
| Abstract: | This paper studies regulatory competition in the banking sector in a model where banks are heterogeneous and taxpayers come up for the losses of failing banks. Capital requirements force the weakest banks to exit the market. This gives rise to a signalling effect of capital standards, as borrowing firms anticipate the higher average quality of banks in a more strictly regulated country. In this model, regulatory competition in capital standards may lead to a `race to the top' for two different reasons. First, if the signalling effect is sufficiently strong, the overall demand for loans from the high-quality banks of the regulating country rises, even though the number of active banks in this country is reduced. Second, if governments are heavily concerned about the tax revenue losses arising from bank failures, strict capital requirements are imposed to improve the pool quality of the domestic banking sector and reduce the risk to taxpayers. -- |
| JEL: | G21 G18 H73 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79769&r=cba |
| By: | Schüler, Yves S.; Fink, Fabian |
| Abstract: | We provide empirical evidence that US financial stress shocks (US-FSSs) are an important driver for economic dynamics and fluctuations in emerging market economies (EMEs). Applying a structural vector autoregression, we analyze the international transmission of US-FSSs to eight EMEs using monthly data from 1999 to 2012. US-FSSs are identified as unexpected changes in the financial conditions index of the Federal Reserve Bank of Chicago. Findings indicate that a typical EME experiences similar negative effects as the US economy in response to US-FSSs. Our results emphasize that the transmission through international financial interconnections is dominant, while contagion through trade is inessential. Further, with regard to fluctuations in real economic activity, US-FSSs are as important as all other external factors jointly. In general, US-FSSs represent a crucial driver for volatility in the emerging world; also at business cycle frequencies. -- |
| JEL: | E44 F30 G10 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79692&r=cba |
| By: | Ahmed, Waqas; Khan, Sajawal; Rehman, Muhammad |
| Abstract: | We analyze, in this paper, the optimality of pro-cyclical monetary policy in the presence of informal sector. Our findings suggest that monetary tightening only in case of severe shock with high leverage ratio and that conventional monetary policy favors both the formal and informal sectors irrespective of the severity of the shocks and hence the whole economy if the size of informal sector is significantly large. Furthermore, fixing exchange rate is better policy option if objective is to defend the employment or domestic consumption from falling when negative shock hits the economy. We can not found any disproportionate impact of policies on informal sector. This may be due to static nature of the model and it might be possible that dynamics of responses of the two sectors to shocks differ significantly. |
| Keywords: | Informal Sector, Credit Constraints, Exchange Rate, Monetary Policy |
| JEL: | E52 F0 F4 O17 O23 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:53169&r=cba |
| By: | Kakkar, Vikas (BOFIT); Yan, Isabel (BOFIT) |
| Abstract: | The large and persistent deviations of nominal exchange rates from their purchasing power parities comprise a key stylized fact in international economics. This paper sheds light on these persistent deviations by combining two disparate strands of empirical work. The first strand focuses on real economic shocks such as sectoral technology shocks suggested by the celebrated Balassa-Samuelson model, whereas the second strand emphasizes monetary shocks which create persistent effects on both the real interest rate and the real exchange rate. We also hypothesize a third factor which may affect real exchange rates – shocks to the global financial system, which we proxy by the real price of gold. Although each factor in isolation has limited explanatory power, we find that these three factors in conjunction can successfully explain the medium to long run move-ments in 14 bilateral U.S. dollar real exchange rates from 1970 to 2006. The three factors are sectoral total factor productivity differentials, real interest rate differentials, and the real price of gold, representing real shocks, monetary shocks, and shocks to the global financial system, respectively. We document evidence suggesting that bilateral U.S. dollar real ex-change rates are cointegrated with these three factors. |
| Keywords: | purchasing power parity; Balassa-Samuelson model; cointegration |
| JEL: | F31 F41 |
| Date: | 2014–01–08 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2014_001&r=cba |
| By: | Rülke, Jan-Christoph; Frenkel, Michael; Lis, Eliza |
| Abstract: | This is the first study that analyzes whether budget balance expectations are anchored and whether budget balance rules effectively anchor expectations. To this end, we use a unique data set which covers budget balance expectations in 17 countries that implemented a budget balance rules. While our results are mixed concerning the general impact of budget balance rules on anchoring expectations, we do find that specific features of budget balance rules are important to successfully anchor budget balance expectations. -- |
| JEL: | H62 H68 H11 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:80050&r=cba |
| By: | Eichengreen, Barry; Gupta, Poonam |
| Abstract: | In May 2013, Federal Reserve officials first began to talk of the possibility of tapering their security purchases. This tapering talk had a sharp negative impact on emerging markets. Different countries, however, were affected very differently. This paper uses data on exchange rates, foreign reserves and equity prices between April and August 2013 to analyze who was hit and why. It finds that emerging markets that allowed the real exchange rate to appreciate and the current account deficit to widen during the prior period of quantitative easing saw the sharpest impact. Better fundamentals (the budget deficit, the public debt, the level of reserves, or the rate of economic growth) did not provide insulation. A more important determinant of the differential impact was the size of the country's financial market: countries with larger markets experienced more pressure on the exchange rate, foreign reserves, and equity prices. This is interpreted as showing that investors are better able to rebalance their portfolios when the target country has a relatively large and liquid financial market. |
| Keywords: | Debt Markets,Currencies and Exchange Rates,Emerging Markets,Economic Theory&Research,Macroeconomic Management |
| Date: | 2014–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6754&r=cba |
| By: | Kriwoluzky, Alexander; Kliem, Martin; Sarferaz, Samad |
| Abstract: | We estimate the low-frequency relationship between fiscal deficits and inflation and pay special attention to its potential time variation by estimating a time-varying VAR model for U.S. data from 1900 to 2011. We find the strongest relationship neither in times of crisis nor in times of high public deficits, but from the mid-1960s up to 1980. Our results suggest that the low-frequency relationship between fiscal deficits and inflation is strongly related to the conduct of monetary policy and its interaction with fiscal policy after World War II. -- |
| JEL: | E42 E58 E61 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:80000&r=cba |
| By: | Kyuil Chung (The Bank of Korea) |
| Abstract: | High exchange rate volatility threatens international trade and exacerbates the currency mismatch problem, hence generating economic instability. However, low exchange rate volatility may cause another problem. Low volatility induces speculative capital inflows as speculative investors, who are usually concerned both with the interest rate differential and exchange rate risk, become concerned with the interest rate differential only. In this paper we use several techniques to identify the relationship between exchange rate volatility and capital inflows in Korea. First, estimation of a Markov switching model shows that all kind of capital inflows increase under low volatility regimes, while capital inflows with the exception of FDI all decrease under high volatility regimes. Second, estimation of a multivariate GARCH-in-Mean Model and the impulse response function derived from it provide evidence that lower exchange rate volatility tends to increase most types of capital inflows other than FDI. These results imply that a medium level of exchange rate volatility is most beneficial for economic stability |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:890&r=cba |
| By: | Manoel Bittencourt, Renee van Eyden and Monaheng Seleteng |
| Abstract: | In this paper we investigate the role of inflation rates in determining economic growth in fifteen sub-Saharan African countries, which are all members of the Southern African Development Community (SADC), between 1980 and 2009. The results, based on panel time-series data and analysis, suggest that in‡ation has had a detrimental effect to growth in the region. All in all, we highlight not only the fact that inflation has offset the prospective Mundell-Tobin effect and consequently reduced, the much needed, economic activity in the region, but also the importance of an institutional framework conducive to a stable macroeconomic environment as a precondition for development and prosperity in the community. |
| Keywords: | Inflation, Growth, SADC |
| JEL: | E31 O11 O42 O55 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:405&r=cba |
| By: | König, Philipp; Anand, Kartik; Heinemann, Frank |
| Abstract: | Bank liability guarantee schemes have traditionally been viewed as costless measures to shore up investor confidence and stave off bank runs. However, as the experience of some European countries, most notably Ireland, has demonstrated, the credibility and effectiveness of these guarantees is crucially intertwined with the sovereign's funding risks. Employing methods from the literature on global games, we develop a simple model to explore the functional co-dependence between the rollover risks of a bank and a government, which are connected through the government's guarantee of bank liabilities. We show the existence and uniqueness of the joint equilibrium and derive its comparative static properties. In solving for the optimal guarantee, we further show that its credibility may be improved through policies that promote balance sheet transparency. -- |
| JEL: | G01 D89 G28 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79747&r=cba |
| By: | Christophe Starzec (Centre d'Economie de la Sorbonne - Paris School of Economics); François Gardes (Centre d'Economie de la Sorbonne - Paris School of Economics) |
| Abstract: | The presence of rationing or more generally of the situations of constrained demand can make the traditional methods of measuring inflation questionable and give an erroneous image of the reality. In this paper, we use the virtual price approach (Neary, Roberts, 1980) to estimate the real inflation level in a centrally planned economy (CPE) with administrated prices. In the first part of the paper, we discuss various methods used in CPE's to evaluate the real level of inflation by the market disequilibrium indicators or proxies which take into account rationing and incomplete information. In the second part of the paper, we apply the virtual price approach to compute the real inflationist gap between demand and supply under rationing in Poland's centrally planned economy with administrated prices in 1965-1980 period. We estimate for this period the model of consumer behaviour under rationing and recover the virtual prices reflecting the real cost of purchasing rationed goods following Neary, Roberts' (1980) and Barten's (1994) methodology. The results show a very large difference between official and virtual price of food considered as the most rationed good (up to 500%). The natural experiment of shift from the centrally planned economy to the market economy (or from rationing to market equilibrium) observed in Poland during the “shock therapy” (1990) confirms the scale of estimated by the model gap between the official (administrated) and market prices. |
| Keywords: | Consumer demand, rationing, inflation, virtual prices. |
| JEL: | D12 D45 E31 P36 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:14001&r=cba |
| By: | Anna Lipinska (Federal Reserve Board); Bianca De Paoli (Federal Reserve Bank of New York) |
| Abstract: | Countries' concerns with the value of their currency have been extensively studied and documented in the literature. Capital controls can be (and often are) used as a tool to manage exchange rate áuctuations. This paper investigates whether countries can benefit from using such tool. We develop a welfare based analysis of whether (or, in fact, how) countries should tax international borrowing. Our results suggest that restricting international capital flows with the use of these taxes can be beneficial for individual countries although it would limit cross-border pooling of risk. This is because while consumption risk-pooling is important, individual countries also care about domestic output áuctuations. Moreover, the results show that countries decide to restrict the international flow of capital exactly when this flow is crucial to ensure cross-border risk-sharing. Our findings point to the possibility of costly "capital control wars" and, thus, significant gains from international policy coordination. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:861&r=cba |