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on Central Banking |
| By: | Arthur Grimes (Motu Economic and Public Policy Research and the University of Auckland) |
| Abstract: | These four lectures on central banking topics were presented in London between September and December 2013. The lectures were delivered as part of Arthur Grimes’ NZ-UK Link Foundation Visiting Professorship, based at the University of London’s School of Advanced Study. They followed his stepping down as Chair of the Reserve Bank of New Zealand in September 2013 after ten years in that role. The four lecture topics (and the institution at which they were delivered) are: Inflation Targeting: 25 Years’ Experience of the Pioneer (Bank of England); A Floating Exchange Rate is the Worst Exchange Rate Regime (except for all the others that have been tried) (University College London); How Prudent are Macroprudential Policies? (London School of Economics); Responsibility and Accountability in the Financial Sector (Institute of Advanced Legal Studies). A key theme across all four lectures is the importance of ensuring that central bank policies and actions are time consistent. Time consistency requires that a central bank can commit to implementing the policies that it says it will implement. For instance, if a central bank commits to delivering low inflation, it will not use its powers to deliver other goals at the expense of low inflation. Similarly, if it commits not to bail out banks in the event of failure, then it (and other official bodies) will not bail out a failed bank. |
| Keywords: | Central banking; inflation targeting; exchange rate systems; macroprudential policy; microprudential policy |
| JEL: | E52 E58 H81 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:mtu:wpaper:14_02&r=cba |
| By: | Bridges, Jonathan (Bank of England); Gregory, David (Bank of England); Nielsen, Mette (Bank of England); Pezzini, Silvia (Bank of England); Radia, Amar (Bank of England); Spaltro, Marco (Morgan Stanley) |
| Abstract: | We estimate the effect of changes in microprudential regulatory capital requirements on bank capital ratios and bank lending. We do so by running panel regressions using a rich new data set, exploiting variation in individual bank capital requirements in the United Kingdom from 1990-2011. There are two key results. First, regulatory capital requirements affect the capital ratios held by banks – following an increase in capital requirements, banks gradually rebuild the buffers that they initially held over the regulatory minimum. Second, capital requirements affect lending with heterogeneous responses in different sectors of the economy – in the year following an increase in capital requirements, banks, on average, cut (in descending order based on point estimates) loan growth for commercial real estate, other corporates and household secured lending. The response of unsecured household lending is smaller and insignificant over the first year as a whole. Loan growth mostly recovers within three years. While estimated over a different policy regime and at the individual bank level, these results may contain some insights into how changing capital requirements might affect lending in a macroprudential regime. However, during the transition to higher global regulatory standards, the effects of changes in capital requirements may be different. For example, increasing capital requirements might augment rather than reduce lending for initially undercapitalised banks. |
| Keywords: | Bank capital; bank lending; regulatory capital requirements; capital buffer; macroprudential policy |
| JEL: | G21 G28 |
| Date: | 2014–01–31 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0486&r=cba |
| By: | Aiyar, Shekhar (International Monetary Fund); Calomiris , Charles (Columbia Business School, International Monetary Fund and NBER); Wieladek, Tomasz (Bank of England) |
| Abstract: | What kinds of credit substitution, if any, occur when changes to banks’ minimum capital requirements induce banks to change their supply of credit? The question is central to the new ‘macroprudential’ policy regimes that have been constructed in the wake of the global financial crisis, under which minimum capital ratio requirements for banks will be employed to control the supply of bank credit. Regulatory efforts to influence the aggregate supply of credit may be thwarted to some degree by ‘leakages’, as other credit suppliers substitute for the variation induced in the supply of credit by regulated banks. Credit substitution could occur through foreign banks operating domestic branches that are not subject to capital regulation by the domestic supervisor, or through bond and stock markets. The UK experience for the period 1998-2007 is ideally suited to address these questions, given its unique regulatory history (UK bank regulators imposed bank-specific and time-varying capital requirements on regulated banks), the substantial presence of both domestically regulated and foreign regulated banks, and the United Kingdom’s deep capital markets. We show that leakage by foreign branches can occur either as a result of competition between branches and regulated banks that are parts of separate banking groups, or because a foreign banking group shifts loans from its UK-regulated subsidiary to its affiliated branch. The responsiveness of affiliated branches is nearly twice as strong. We do not find any evidence for leakages through capital markets. These findings reinforce the need for the type of international co-ordination, specifically reciprocity in capital requirement regulation, which is embedded in Basel III and the European CRD IV directive, which will be gradually phased in starting January 2014. |
| Keywords: | Macroprudential regulation; credit substitution; leakages |
| JEL: | G21 G28 |
| Date: | 2014–01–31 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0485&r=cba |
| By: | Bang Nam Jeon (Drexel University and Hong Kong Institute for Monetary Research); Ji Wu (Southwestern University of Finance and Economics) |
| Abstract: | Since the 1997-8 Asian financial crisis, the level of foreign bank penetration has increased steadily in Asian banking markets. This paper examines the impact of foreign banks on the monetary policy transmission mechanism in emerging Asian economies during the period from 2000 to 2009, with a specific focus on the global financial crisis of 2008-9. We present consistent evidence that, on the whole, an increase in foreign bank penetration weakened the effectiveness of the monetary policy transmission mechanism in the host emerging Asian countries during crisis periods. We also investigate various conditions and environments, including the type of monetary policy shocks, the severity of shocks upon parent banks in global crisis, the dependence of parent banks on the wholesale funding market, the country of origin of foreign banks, and entry modes, under which the effectiveness of monetary policy transmission is reduced more severely due to the increasing presence of foreign banks in the emerging Asian banking markets. |
| Keywords: | Foreign Bank Penetration, Monetary Policy Transmission, Asian Banking |
| JEL: | E44 F43 G21 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:012014&r=cba |
| By: | Oxana Babecka Kucharcukova; Michal Franta; Dana Hajkova; Petr Kral; Ivana Kubicova; Anca Podpiera; Branislav Saxa |
| Abstract: | This paper concentrates on describing the available empirical findings on monetary policy transmission in the Czech Republic. Besides the overall impact of monetary policy on inflation and output, it is useful to study its individual channels, in particular the interest rate channel, the exchange rate channel, and the wealth channel. The results confirm that the transmission of monetary impulses to the real economy works in an intuitive direction and to an intuitive extent. Our analyses show, however, that the global financial and economic crisis might have somewhat slowed and weakened the transmission. We found an indication of such a change in the functioning of the interest rate channel, where elevated risk premiums played a major role. |
| Keywords: | Bayesian, monetary policy transmission, time-varying parameters, VAR model. |
| JEL: | C11 C32 E44 E52 E58 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:rpnrpn:2013/01&r=cba |
| By: | Peter N. Ireland (Boston College) |
| Abstract: | This paper develops an affine model of the term structure of interest rates in which bond yields are driven by observable and unobservable macroeconomic factors. It imposes restrictions to identify the effects of monetary policy and other structural disturbances on output, inflation, and interest rates and to decompose movements in long-term rates into terms attributable to changing expected future short rates versus risk premia. The estimated model highlights a broad range of channels through which monetary policy affects risk premia and the economy, risk premia affect monetary policy and the economy, and the economy affects monetary policy and risk premia. |
| Keywords: | term structure, risk premia, monetary policy, macroeconomic performance |
| JEL: | E32 E43 E44 E52 G12 |
| Date: | 2014–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:852&r=cba |
| By: | Mohanty, Biswajit (Department of Business Economics, Delhi University); Bhanumurthy, N.R. (National Institute of Public Finance and Policy) |
| Abstract: | Exchange rate stability is crucial for inflation management as a stable rate is expected to reduce domestic inflation pressures through a `policy discipline effect'- restricting money supply growth, and a `credibility effect'- inducing higher money demand and reduced velocity of money. Alternatively, the impossibility trillema predicts that in the presence of an open capital account, a stable exchange rate may lead to lack of control on monetary policy and, hence, higher inflation. Using a monetary model of Inflation, this paper investigates the impact of the de facto stable exchange rate regime on inflation in India during different episodes of exchange rate stability. The results show that the impact of exchange rate regime on inflation is not visible in Indian case, which could be because of the offsetting sterilization policy undertaken by Reserve Bank of India (RBI) during expansionary money supply growth resulting from its large scale intervention to even out exchange rate volatility. |
| Keywords: | Exchange rate regime ; Inflation ; Money Supply ; ARDL Model ; India |
| JEL: | E52 F33 F41 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:npf:wpaper:14/130&r=cba |
| By: | Richhild Moessner; Jakob de Haan; David-Jan Jansen |
| Abstract: | We study whether the sensitivity of Swedish interest rates to economic news was affected by the zero lower bound and the Riksbank.s monetary policies. Our results suggest that the sensitivity of interest rate swaps to Swedish macroeconomic news was reduced at the effective zero lower bound at short maturities but not at longer maturities. We also find that the sensitivity of interest rate swaps to this news was not significantly affected at any maturity by forward guidance. Finally, we conclude that the sensitivity of interest rate swaps to news was not significantly affected at any maturity by unconventional monetary policy. |
| Keywords: | Unconventional monetary policy; central bank communication; forward guidance; zero lower bound; interest rate swaps |
| JEL: | E52 E58 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:413&r=cba |
| By: | Dominique Lacoue-Labarthe (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - Université Montesquieu - Bordeaux IV : EA2954) |
| Abstract: | Some bank reforms of the 1930s in the United States may have been overvalued. The Glass-Steagall Act of 1933 actually created new endogenous risks involving potential systemic effects. Deposit insurance failed to address the main cause of banking panics, and rather strengthened inefficient unit banks, while the prohibition of interstate bank branching continued to hinder banks to diversify idiosyncratic risks. The separation of commercial and investment banking put an end to certain conflicts of interest but it created an opportunity cost by preventing universal banking from developing effectively. Finally, an untimely intervention in a duopolistic conflict made the regulator a captive figure. By contrast, major innovations covering bailout processes and prudential regulation appear to have been underestimated. The Reconstruction Finance Corporation of 1932 established the foundations of an investor of last resort, giving the Treasury the authority to recapitalize insolvent financial institutions deemed too big to fail. The newly established banking regulator, the Federal Deposit Insurance Corporation of 1933, was given a special bank-closure rule, separate from the usual bankruptcy proceedings, which opened a way towards orderly resolution of failing banks in order to protect the economy from the spread of systemic risk. |
| Keywords: | bank reform, United States, Regulation, Economic history |
| Date: | 2014–01–15 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00937533&r=cba |
| By: | Durham, J. Benson (Federal Reserve Bank of New York) |
| Abstract: | The consensus suggests that subdued nominal U.S. Treasury yields on balance since the onset of the global financial crisis primarily reflect exceptionally low, if not occasionally negative, term premiums as opposed to low anticipated short rates. Depressed term premiums plausibly owe to unconventional Federal Reserve policy as well as to net flight-to-quality flows after 2007. However, two strands of evidence raise questions about this story. First, a purely survey-based expected forward term premium measure, as opposed to an approximate spot estimate, has increased rather than decreased in recent years. Second, with respect to the time-series dynamics of factors underlying affine term structure models, simple econometrics of recent data produce not only a more persistent level of the term structure but also a depressed long-run mean, which in turn implies an implausibly low expected short rate path. Strong caveats aside, an implication for central bankers is that unconventional monetary policy measures may have worked in more conventional ways, and an inference for investors is that longer-dated yields embed meaningful compensation for bearing duration risk. |
| Keywords: | Treasury term premium; monetary policy |
| JEL: | E52 G10 |
| Date: | 2013–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:658&r=cba |
| By: | Wojciech Charemza; Carlos Diaz; Svetlana Makarova |
| Abstract: | Empirical evaluation of macroeconomic uncertainties and their use for probabilistic forecasting are investigated. A new weighted skew normal distribution which parameters are interpretable in relation to monetary policy outcomes and actions is proposed. This distribution is fitted to recursively obtained forecast errors of monthly and annual inflation for 38 countries. It is found that this distribution fits inflation forecasts errors better than the two-piece normal distribution, which is often used for inflation forecasting. The new type of ‘fan charts’ net of the epistemic (potentially predictable) element is proposed and applied for UK and Poland. |
| Keywords: | macroeconomic forecasting, inflation, uncertainty, monetary policy, non-normality, density forecasting |
| JEL: | C54 E37 E52 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:lec:leecon:14/01&r=cba |
| By: | Ueno, Yuko; Namba, Ryoichi |
| Abstract: | This study examines the formation of the inflation expectations of Japanese households using a micro-level dataset of forecast errors of expected inflation rates. The Japanese have recently come to be interested in policies that intend to positively influence the inflation expectations of households and firms. The effectiveness of these policies depends on the mechanism of expectation formation. Thus, whether expectations are formed adaptively or rationally, or whether expectations are homogeneous or heterogeneous, are important factors influencing policy effectiveness. In this study, we carefully examine the formation of inflation expectations of Japanese households by using a micro-level dataset of the “Consumer Confidence Survey” of the Japanese government. We observe that inflation expectations are stably biased upwards and are distributed in a dispersed way. We find that the “asymmetric loss function model,” in which households incur asymmetric loss from either over estimation or underestimation of the future inflation rate, can explain the observed bias to a certain extent. Further, the relationships between expectations and age show a stable asymmetric inverted-U shape notwithstanding the survey period. The a symmetric loss function can also explain this shape, indicating that mid-aged consumers tend to show strong asymmetries in error aversion. |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:hit:cisdps:614&r=cba |
| By: | Marta Gómez-Puig (Faculty of Economics, University of Barcelona); Simón Sosvilla-Rivero (Department of Quantitative Economics, Universidad Complutense de Madrid) |
| Abstract: | This paper contributes to the literature by applying the Grangercausality approach and endogenous breakpoint test to offer an operational definition of contagion to examine European Economic and Monetary Union (EMU) countries public debt behaviour. A database of yields on 10-year government bonds issued by 11 EMU countries covering fourteen years of monetary union is used. The main results suggest that the 41 new causality patterns, which appeared for the first time in the crisis period, and the intensification of causality recorded in 70% of the cases, provide clear evidence of contagion in the aftermath of the current euro debt crisis. |
| Keywords: | Sovereign bond yields, Granger-Causality, Contagion, Euro area. JEL classification: E44, F36, G15, C52 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:ira:wpaper:201403&r=cba |
| By: | Yoshiyasu Ono |
| Abstract: | This paper presents a two-country two-commodity dynamic model with free international asset trade in which one country achieves full employment and the other suffers long-run unemployment. Own and spill-over effects of changes in policy, technological and preference parameters that emerge through exchange-rate adjustment are examined. Parameter changes that worsen the stagnant countryfs current account depreciate the home currency, expand home employment and improve the foreign terms of trade, making both countries better off. The stagnant countryfs foreign aid to the fully employed country also yields the same beneficial effects. |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:0893&r=cba |
| By: | Sebastian Poledna; Stefan Thurner |
| Abstract: | Financial markets are exposed to systemic risk (SR), the risk that a major fraction of the system ceases to function and collapses. Since recently it is possible to quantify SR in terms of underlying financial networks where nodes represent financial institutions, and links capture the size and maturity of assets (loans), liabilities, and other obligations such as derivatives. In particular it is possible to quantify the share of SR that individual nodes contribute to the overall SR in the financial system. We extend the notion of node-specific SR to individual liabilities in a financial network (liability-specific SR). We use historical, empirical data of interbank liabilities to show that a few liabilities in a nation-wide interbank network contribute to the major fraction of the overall SR. We propose a tax on individual transactions that is proportional to their contribution to overall SR. If a transaction does not increase SR it is tax free. We use a macroeconomic agent based model (CRISIS macro-financial model) with a financial economy to demonstrate that the proposed Systemic Risk Tax (SRT) leads to a self-organized re-structuring of financial networks, that are practically free of SR. This is because risk-increasing transactions will be systematically avoided when a SRT is in place. Systemic stability under a SRT emerges due to a de facto elimination of system-wide cascading failure. ABM predictions agree remarkably well with the empirical data and can be used to understand the relation of credit risk and systemic risk. |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1401.8026&r=cba |