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on Central Banking |
| By: | Tatiana Damjanovic (Exeter); Šar?nas Gird?nas (Exeter) |
| Abstract: | We study monetary optimal policy in a New Keynesian model at the zero bound interest rate where households use cash alongside house equity borrowing to conduct transactions. The amount of borrowing is limited by a collateral constraint. When either the loan to value ratio declines or house prices fall, we observe a decrease in the money multiplier. We argue that the central bank should respond to the fall in the money multiplier and therefore to the reduction in house prices or the loan to collateral value ratio. We also find that optimal monetary policy generates a large and persistent fall in the money multiplier in response to the drop in the loan to collateral value ratio. |
| Keywords: | optimal monetary policy, zero lower bound, quantitative easing, money multiplier, loan to value ratio, collateral constraint, house prices |
| JEL: | E44 E51 E52 E58 |
| Date: | 2014–05–17 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:1405&r=cba |
| By: | Anil K Kashyap; Dimitrios P. Tsomocos; Alexandros P. Vardoulakis |
| Abstract: | We analyze a variant of the Diamond-Dybvig (1983) model of banking in which savers can use a bank to invest in a risky project operated by an entrepreneur. The savers can buy equity in the bank and save via deposits. The bank chooses to invest in a safe asset or to fund the entrepreneur. The bank and the entrepreneur face limited liability and there is a probability of a run which is governed by the bank’s leverage and its mix of safe and risky assets. The possibility of the run reduces the incentive to lend and take risk, while limited liability pushes for excessive lending and risk-taking. We explore how capital regulation, liquidity regulation, deposit insurance, loan to value limits, and dividend taxes interact to offset these frictions. We compare agents welfare in the decentralized equilibrium absent regulation with welfare in equilibria that prevail with various regulations that are optimally chosen. In general, regulation can lead to Pareto improvements but fully correcting both distortions requires more than one regulation. |
| JEL: | E44 G01 G21 G28 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20165&r=cba |
| By: | Williams, John C. (Federal Reserve Bank of San Francisco) |
| Abstract: | Presentation to the Association of Trade and Forfaiting in the Americas, San Francisco, May 22, 2014 |
| Keywords: | Economic recovery; |
| Date: | 2014–05–22 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfsp:130&r=cba |
| By: | Rudebusch, Glenn D. (Federal Reserve Bank of San Francisco); Williams, John C. (Federal Reserve Bank of San Francisco) |
| Abstract: | In standard macroeconomic models, the two objectives in the Federal Reserve’s dual mandate—full employment and price stability—are closely intertwined. We motivate and estimate an alternative model in which long-term unemployment varies endogenously over the business cycle but does not affect price inflation. In this new model, an increase in long-term unemployment as a share of total unemployment creates short-term tradeoffs for optimal monetary policy and a wedge in the dual mandate. In particular, faced with high long-term unemployment following the Great Recession, optimal monetary policy would allow inflation to overshoot its target more than in standard models. |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2014-14&r=cba |
| By: | Marc Flandreau; Stefano Ugolini (IHEID, The Graduate Institute of International and Development Studies, Geneva) |
| Abstract: | The collapse of Overend Gurney and the ensuing Crisis of 1866 was a turning point in British financial history. The achievement of relative stability was due to the Bank of England’s willingness to offer generous assistance to the market in a crisis, combined with an elaborate system for maintaining the quality of bills in the market. We suggest that the Bank bolstered the resilience of the money market by monitoring leverage-building by money market participants and threatening exclusion from the discount window. When the Bank refused to bailout Overend Gurney in 1866 there was panic in the market. The Bank responded by lending freely and raising the Bank rate to very high levels. The new policy was crucial in allowing for the establishment of sterling as an international currency. |
| Keywords: | Bagehot, Bank of England, Lending of last resort, Supervision, Moral hazard, Discount, Overend Gurney Panic, Baring. |
| JEL: | E58 G01 N13 |
| Date: | 2014–05–26 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heidwp10-2014&r=cba |
| By: | Farid Mkouar; Jean-Luc Prigent |
| Abstract: | We examine the long term investment problem, under stochastic interest and inflation rates and incompleteness. Four basic financial assets are available on the financial market: a money market account (the cash), a real consumption good, a financial stock index and a bond with constant maturity. This one corresponds to a nominal bond. In this incomplete framework, we provide the general solution of the expected utility maximization. This intertemporal optimization problem is solved by using the convex duality method, introduced by Cvitanic and Karatzas (1992). We determine also the optimal portfolio weights by using the method of dynamic programming based on the Hamilton-Jacobi-Bellmann approach. We compute the monetary loss from not having access to an indexed-inflation bond, in order to be hedged against the inflation risk, in particular for the logarithmic case. |
| Keywords: | portfolio optimization, stochastic interest rate, stochastic inflation, incom- pleteness, compensating variation.. |
| JEL: | C61 G11 G12 |
| Date: | 2014–06–02 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-301&r=cba |
| By: | Siegert, Caspar |
| Abstract: | We analyze the incentives for information disclosure in financial markets. We show that borrowers may have incentives to voluntarily withhold information and that doing so is most attractive for claims that are inherently hard to value, such as portfolios of subprime mortgages. Interestingly, opacity may be optimal even though it increases informational asymmetries between contracting parties. Finally, in our setting a government can intervene in ways that ensure the liquidity of financial markets and that resemble the initial plans for TARP. Even if such interventions are ex-post optimal, they affect incentives for information disclosure and have ambiguous ex-ante effects. |
| Keywords: | Information Acquisition; Adverse Selection; Allocative Efficiency; Opacity |
| JEL: | D82 G21 G32 |
| Date: | 2014–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:20937&r=cba |
| By: | Stephen McKnight (Centro de Estudios Económicos, El Colegio de México); Alexander Mihailov (Department of Economics, University of Reading); Kerry Patterson (Department of Economics, University of Reading); Fabio Rumler (Oesterreichische Nationalbank, Economic Analysis Division) |
| Abstract: | Does theory aid inflation forecasting? To date, the evidence suggests that there is no systematic advantage of theory-based models of inflation dynamics over their astructural counterparts. This study reconsiders the issue by developing a “semi-structural” forecasting procedure comprised of two key ingredients. First, a prediction for the cyclical component of inflation is obtained employing the concept of “fundamental inflation”. The latter is computed from a canonical two-country monetary model, either via estimation of the reduced-form parameters of the New Keynesian Phillips Curve by the generalized methods of moments, or via calibration of its structural parameters. The computation of fundamental inflation requires multistep forecasts for the model-implied cyclical inflation drivers, which we generate via respective auxiliary vector autoregressions. Second, a driftless random walk prediction is employed for the trend component of inflation, on which theory has little to say. Using quarterly data for both the United States and the Euro Area for the period 1970-2010, and rolling window re-estimation to accommodate gradual structural change, we find that such semi-structural inflation forecasts outperform conventional univariate forecasts at all examined horizons. Our results thus suggest that theory can indeed play an important role in forecasting inflation, when appropriately combined with relevant data-driven features. |
| Keywords: | fundamental inflation, New Keynesian Phillips Curve, inflation dynamics, predictive accuracy, money in the open economy, semi-structural forecasting |
| JEL: | C52 C53 E31 E37 F41 F47 |
| Date: | 2014–05–29 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:emxxdp:em-dp2014-03&r=cba |