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on Central Banking |
| By: | Brownlees, Christian (Universitat Pompeu Fabra); Chabot, Benjamin (Federal Reserve Bank of Chicago); Ghysels, Eric (University of North Carolina); Kurz, Christopher J. (Board of the Governors of the Federal Reserve System) |
| Abstract: | The measurement of systemic risk is at the forefront of economists and policymakers concerns in the wake of the 2008 financial crisis. What exactly are we measuring and do any of the proposed measures perform well outside the context of the recent financial crisis? One way to address these questions is to take backtesting seriously and evaluate how useful the recently proposed measures are when applied to historical crises. Ideally, one would like to look at the pre-FDIC era for a broad enough sample of financial panics to confidently assess the robustness of systemic risk measures but pre-FDIC era balance sheet and bank stock price data were heretofore unavailable. We rectify this data shortcoming by employing a recently collected financial dataset spanning the 60 years before the introduction of deposit insurance. Our data includes many of the most severe financial panics in U.S. history. Overall we find CoVaR and SRisk to be remarkably useful in alerting regulators of systemically risky financial institutions. |
| Keywords: | Financial crisis; Systemic risk; Stress testing; credit risk; High-frequency data |
| JEL: | C13 G14 G21 G28 |
| Date: | 2015–07–02 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-2015-09&r=cba |
| By: | D'Amico, Stefania (Federal Reserve Bank of Chicago); King, Thomas B. (Federal Reserve Bank of Chicago) |
| Abstract: | Forward rate guidance, which has been used with increasing regularity by monetary policymakers, relies on the manipulation of expectations of future short-term interest rates. We identify shocks to these expectations at short and long horizons since the early 1980s and examine their effects on contemporaneous macroeconomic outcomes. Our identification uses sign restrictions on survey forecasts incorporated in a structural VAR model to isolate expected deviations from the monetary policy rule. We find that expectations of future policy easing that materialize over the subsequent four quarters — similar to those generated by credible forward guidance — have immediate and persistent stimulative effects on output, inflation and employment. The effects are larger than those produced by an identical shift in the policy path that is not anticipated. Our results are broadly consistent with the mechanism underlying forward guidance in New Keynesian models, but they suggest that those models overstate the persistence of the inflation response. Further, we find that changes in short-rate expectations farther in the future have weaker macroeconomic effects, the opposite of what most New Keynesian models predict. |
| Keywords: | Monetary policy; Keynesian models; |
| JEL: | E12 E5 |
| Date: | 2015–11–10 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-2015-10&r=cba |
| By: | Elena Afanasyeva; Jochen Guntner |
| Abstract: | This paper investigates the risk channel of monetary policy on the asset side of banks’ balance sheets. We use a factor-augmented vector autoregression (FAVAR) model to show that aggregate lending standards of U.S. banks, such as their collateral requirements for firms, are significantly loosened in response to an unexpected decrease in the Federal Funds rate. Motivated by this evidence, we reformulate the costly state verification (CSV) contract to allow for an active financial intermediary, embed the partial equilibrium contract in a New Keynesian DSGE model, and show that – consistent with our empirical findings – an expansionary monetary policy shock implies a temporary increase in bank lending relative to borrower collateral. In the model, this is accompanied by a higher default rate of borrowers. |
| JEL: | D53 E44 E52 |
| Date: | 2015–12–08 |
| URL: | http://d.repec.org/n?u=RePEc:hoo:wpaper:15115&r=cba |
| By: | Saroj Bhattarai; Arpita Chatterjee; Woong Yong Park |
| Abstract: | We estimate international spillover effects of US Quantitative Easing (QE) on emerging market economies. Using a Bayesian VAR on monthly US macroeconomic and financial data, we first identify the US QE shock with non-recursive identifying restrictions. We estimate strong and robust macroeconomic and financial impacts of the US QE shock on US output, consumer prices, long-term yields, and asset prices. The identified US QE shock is then used in a monthly Bayesian panel VAR for emerging market economies to infer the spillover effects on these countries. We find that an expansionary US QE shock has significant effects on financial variables in emerging market economies. It leads to an exchange rate appreciation, a reduction in long-term bond yields, a stock market boom, and an increase in capital inflows to these countries. These effects on financial variables are stronger for the “Fragile Five” countries compared to other emerging market economies. We however do not find significant effects of the US QE shock on output and consumer prices of emerging markets. |
| Keywords: | US Quantitative Easing, Spillovers, Emerging Market Economies, Bayesian VAR, Panel VAR, Non-recursive Identification, Fragile Five Countries |
| JEL: | C31 E44 E52 E58 F32 F41 F42 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2015-47&r=cba |
| By: | Glick, Reuven (Federal Reserve Bank of San Francisco); Leduc, Sylvain (Federal Reserve Bank of San Francisco) |
| Abstract: | We examine the effects of unconventional monetary policy surprises on the value of the dollar using high-frequency intraday data and contrast them with the effects of conventional policy tools. Identifying monetary policy surprises from changes in interest rate future prices in narrow windows around policy announcements, we find that monetary policy surprises since the Federal Reserve lowered its policy rate to the effective lower bound have had larger effects on the value of the dollar. In particular, we document that the impact on the dollar has been roughly three times that following conventional policy changes prior to the 2007-08 financial crisis. |
| JEL: | E43 E5 F31 |
| Date: | 2015–11–29 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2015-18&r=cba |
| By: | Vari, Miklos |
| Abstract: | This paper shows how interbank market fragmentation disrupts monetary policy implementation. Fragmentation is defined as the situation where some banks are cut from the interbank loan market. The paper introduces fragmentation into an otherwise standard theoretical model of monetary policy implementation, where profit maximizing banks, subject to reserve requirements, borrow and deposit funds at the central bank. In the presence of fragmentation, excess liquidity arises endogenously and the interbank rate declines below the central bank main rate. The interbank rate is then unstable. Using data on cross-border financial flows and monetary policy operations, this paper shows that this mechanism has been at work in the euro area since 2008. The model is suitable to analyze conventional and unconventional monetary policy measures in the euro area as well as in other currency areas. |
| Keywords: | Fragmentation, Excess liquidity, interbank market, TARGET2 imbalances |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpm:docweb:1516&r=cba |