|
on Central Banking |
| By: | Gary Gorton; Toomas Laarits; Andrew Metrick |
| Abstract: | The Financial Crisis began and accelerated in short-term money markets. One such market is the multi-trillion dollar sale-and-repurchase (“repo”) market, where prices show strong reactions during the crisis. The academic literature and policy community remain unsettled about the role of repo runs, because detailed data on repo quantities is not available. We provide quantity evidence of the run on repo through an examination of the collateral brought to emergency liquidity facilities of the Federal Reserve. We show that the magnitude of repo discounts (“haircuts”) on specific collateral is related to the likelihood of that collateral being brought to Fed facilities. |
| JEL: | E32 E44 E58 G01 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24866&r=cba |
| By: | Bahaj, Saleem (Bank of England); Reis, Ricardo (London School of Economics) |
| Abstract: | Swap lines between advanced-economy central banks are a new important part of the global financial architecture. This paper analyses their monetary policy effects from three perspectives. First, from the perspective of the central banks, it shows that the swap line mimics discount-window credit from the source central bank to the recipient-country banks using the recipient central bank as the bearer of the credit risk. Second, from the perspective of the transmission of monetary policy, it shows that the swap-line rate puts a ceiling on deviations from covered interest parity, and finds evidence for it in the data. Third, from the perspective of the macroeconomic effects of policy, it shows that the swap line ex ante encourages inflows from recipient-country banks into assets denominated in the source-country’s currency by reducing the ex post funding risk. We find support for these predictions using difference-in-difference empirical strategies that exploit the fact that only some currencies saw changes in the terms of their dollar swap line, only some bonds in banks’ investments are exposed to dollar funding risk, only some dollar bonds are significantly traded by foreign banks, and only some banks have a significant US presence. |
| Keywords: | Liquidity facilities; currency basis; bond portfolio flows |
| JEL: | E44 F33 G15 |
| Date: | 2018–07–27 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0741&r=cba |
| By: | Aikman, David (Bank of England); Bridges, Jonathan (Bank of England); Kashyap, Anil (University of Chicargo Booth School of Business); Siergert, Caspar (Bank of England) |
| Abstract: | How well equipped are today’s macroprudential regimes to deal with a re-run of the factors that led to the global financial crisis? We argue that a large proportion of the fall in US GDP associated with the crisis can be explained by two factors: the fragility of financial sector — represented by the increase in leverage and reliance on short-term funding at non-bank financial intermediaries — and the build-up in indebtedness in the household sector. We describe and calibrate the policy interventions a macroprudential regulator would wish to make to address these vulnerabilities. And we compare and contrast how well placed two prominent macroprudential regulators — the US Financial Stability Oversight Council and the UK’s Financial Policy Committee — are to implement these policy actions. |
| Keywords: | Financial crises; macroprudential policy; leverage; short-term wholesale funding; credit crunch; household debt; aggregate demand externality; countercyclical capital buffer; loan to value ratio; loan to income ratio |
| JEL: | G01 G21 G23 G28 |
| Date: | 2018–08–03 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0747&r=cba |
| By: | Kasahara, Hiroyuki; Sawada, Yasuyuki; Suzuki, Michio |
| Abstract: | This article examines the effect of government capital injections into nancially troubled banks on corporate investment during the Japanese banking crisis of the late 1990s. By helping banks meet the capital requirements imposed by Japanese banking regulation, recapitalization enables banks to respond to loan demands, which could help firms increase their investment. To test this mechanism empirically, we combine the balance sheet data of Japanese manufacturing firrms with bank balance sheet data and estimate a linear investment model where the investment rate is a function of not only firm productivity and size but also bank regulatory capital ratios. We find that the coefficient of the interaction between a firm's total factor productivity measure and a bank's capital ratio is positive and significant, implying that the bank's capital ratio affects more productive firms. Counterfactual policy experiments suggest that capital injections made in March 1998 and 1999 had a negligible impact on the average investment rate, although there was a reallocation effect, shifting investments from low- to high-productivity firms. |
| Keywords: | Capital injection, Bank regulation, Banking crisis |
| JEL: | E22 G21 G28 |
| Date: | 2018–03 |
| URL: | http://d.repec.org/n?u=RePEc:hit:rcesrs:dp18-2&r=cba |
| By: | Massimiliano Caporin (University of Padua); Loriana Pelizzon (Goethe University Frankfurt, Goethe University Frankfurt, and Ca Foscari University of Venice); Alberto Plazzi (USI and Swiss Finance Institute) |
| Abstract: | We investigate the impact of monetary announcements of the ECB and the FED on integration in the equity and sovereign CDS markets for a large cross-section of 18 Developed and 21 Emerging countries over 2006 to 2015. The effect of both announcements is negative or muted in the pre-crisis period, while it turns strongly positive during the financial crisis of 2007-2009. ECB interventions lead to more integration in the equity market during 2010 to 2012, but dis-integration in the CDS market in the ECB Quantitative Easing period (2013 to 2015), especially for emerging countries. In contrast, FED announcements are perceived as global factors in the CDS emerging market and are accompanied with an increase in integration both when the FED implements and unwinds its unconventional measures. The relation between the global factor and the U.S. market increases during FED interventions, the same does hold for the European market during ECB announcements. The exposure of emerging markets to outside monetary policy shocks can be explained in terms of their degree of trade and financial openness. |
| Keywords: | unconventional monetary policy, integration, international equity markets, CDS |
| JEL: | E58 G15 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1747&r=cba |
| By: | In Do Hwang (Economic Research Institute, The Bank of Korea) |
| Abstract: | Although there is a well-established theoretical literature that links central bank (CB) reputation with inflation performance following Barro and Gordon, there is little empirical work testing the relationship rigorously. This paper empirically tests the impact of reputation on inflation-unemployment performance using a novel set of data on CB reputation--an annual local business manager survey on central bank policy covering 62 countries during 1995-2016. This paper finds that CB reputation is a significant determinant of inflation: the results of an FE panel and Arellano-Bond difference GMM model show that high-reputation CBs have achieved better inflation performances over the past 20 years with lower levels of inflation than others, holding the output gap and unemployment rate constant. This result remains robust to various control variables including money growth, past inflation levels, exchange rates, and financial crisis dummies. This paper also finds that high CB reputation is associated with a tight anchoring of inflation expectations to inflation targets in inflation-targeting countries. The effects of reputation on the volatility of inflation and unemployment rates are found to be not robust. This paper offers evidence of the opposite-direction causality as well that goes from high inflation to decreased CB reputation. |
| Keywords: | Reputation, Credibility, Monetary policy, Anchoring of inflation expectation |
| JEL: | E31 E52 E58 N10 |
| Date: | 2018–05–29 |
| URL: | http://d.repec.org/n?u=RePEc:bok:wpaper:1814&r=cba |
| By: | Carlos Medel |
| Abstract: | In this article, I conduct certain econometric estimations aiming at analysing to what extent inflation expectations from public agents are anchored to the Central Bank of Chile's inflation target. Expectations anchoring is an important feature for the monetary policy in a small-open economy under inflation targeting with a floating exchange rate. It is understood as another central bank instrument, as it promotes price stability through the ability of authorities to manage inflation expectations. I provide evidence suggesting that agents' expectations, based on survey data, are firmly anchored, because of Central Bank of Chile policy actions. Within the fully-fledged inflation targeting era—starting in 2000—three periods are detected. These are (i) the pre-Global Financial Crisis (GFC) period, (ii) the post-GFC period until mid-2015, and (iii) the low inflation period afterwards. Particularly for the last period, the anchoring effect is clearer and pronounced. |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:825&r=cba |
| By: | Vania Stavrakeva (London Business School) |
| Abstract: | The global financial crisis triggered a new comprehensive approach to regulating the financial sector. On the one hand, regulators revisited old instruments such as minimum bank capital requirements that have been at the core of the Basel regulatory framework since its inception. On the other hand, they introduced new regulations that targeted the amount of safe assets that banks hold. Moreover, considerations were also given to regulating the amount of safe assets held by asset managers. The crisis made it clear that regulators had to focus on the so called macro-prudential rather than micro-prudential approach to bank regulation, which considers the systematic and general equilibrium linkages between various financial institutions. The existing literature often studies commercial banks in isolation from the rest of the financial sector. This paper attempts to fill this gap. It studies the linkages between commercial banks and asset managers, and how they affect the effectiveness of a number of the newly proposed regulatory instruments. Some of the key questions the paper addresses are the following: Is the effectiveness of the minimum bank capital and safe asset requirements, as measured by the increase of social welfare, probability and severity of banking crises, amplified or dampened by the presence of asset managers? How does financial sector regulation affect bank and non-bank equity prices and, through that channel, real output and welfare? What is the optimal joint regulation of asset managers and commercial banks? |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:763&r=cba |
| By: | Michael Lamla (ETH Zurich); Damjan Pfajfar (Federal Reserve Board); Lea Rendell (University of Maryland) |
| Abstract: | In this paper we explore the consequences of losing confidence in the price-stability objective of central banks. We propose a new model that shows that losing confidence can lead to both, an inflation as well as a deflationary bias, depending on the perception of the objective function of the central bank. Both biases emerge as a steady state outcomes and increase the burden of the central bank to achieve its mandate. We validate the predictions of the model using a comprehensive new dataset on 50,000 individual observations across 9 countries and can identify and quantify inflation and the deflationary bias as a consequence of losing confidence in central banks objectives. We can confirm the predictions of our model as we can show that inflation bias exists for expectations above the target and a deflationary bias exist for expectations below. As one would expect both inflationary and deflationary bias are more pronounced for medium-run than short-run inflation expectations. Furthermore, we also test the prediction of the model that conservative or inflation-targeting central banks reduces the the magnitude of inflation and deflationary bias and find supporting evidence in our dataset. Among the Eurozone countries in our sample we can document, despite the same experience with the ECB, significant differences in levels of confidence and responses to it. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:945&r=cba |
| By: | Julia Schmidt; Marianna Caccavaio; Luisa Carpinelli; Giuseppe Marinelli |
| Abstract: | In this paper we provide empirical evidence on the impact of US and UK monetary policy changes on credit supply of banks operating in Italy and France over the period 2000-2015, exploring the existence of an international bank lending channel. Exploiting bank balance sheet heterogeneity, we find that monetary policy tightening abroad leads to a reduction of credit supply at home, in particular for US monetary policy changes. Our results show that USD funding plays an important role in the transmission mechanism, especially for French banks which rely to a larger extent on USD funding. We also show that banks adjust their euro and foreign currency lending differently, thus implying that funding sources in different currencies are not perfect substitutes. This is especially the case when tensions in currency swap markets are high, thus resulting in costly cross-currency funding. |
| Keywords: | Spillovers, Monetary Policy, International Banking |
| JEL: | E52 F42 G21 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:689&r=cba |
| By: | Mauro Napoletano (Observatoire français des conjonctures économiques); Lilit Popoyan (Laboratory of Economics and Management); andrea Roventini, (Observatoire français des conjonctures économiques) |
| Abstract: | We develop an agent-based model to study the macroeconomic impact of alternative macro-prudential regulations and their possible interactions with different monetary policy rules. The aim is to shed light on the most appropriate policy mix to achieve the resilience of the banking sector and foster macroeconomic stability. Simulation results show that a triple-mandate Taylor rule,focused onoutput gap, inflationand credit growth, and a BaselIII prudential regulationis the bestpolicymix to improve the stability ofthe banking sector and smooth output fluctuations. Moreover, we consider the different levers of Basel III and their combinations. We find that minimum capital requirements and counter-cyclical capital buffers allow to achieve results close to the Basel III first-best with a much more simplified regulatory framework. Finally, the components of Basel III are non-additive: the inclusion of an additional lever does not always improve the performance of the macro-prudential regulation. |
| Keywords: | Macro-prudential policy; Basel III regulation; Financial stability; Monetary policy; Agent based computational economics |
| JEL: | C63 E52 E6 G1 G21 G28 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/5hussro0tc951q0jqpu8quliqu&r=cba |
| By: | Tanaka, Misa (Bank of England); Vourdas, John (European Central Bank) |
| Abstract: | This paper develops a model to analyse the optimal ex-ante capital and total loss absorbing capacity (TLAC) requirements, and the ex-post resolution policy of banks. Banks in our model are subject to two types of moral hazard: i) ex-ante, they have the incentive to shirk on project monitoring, thus increasing the risk of failure, and ii) ex-post, poorly capitalised banks have the incentive to engage in asset substitution by ‘gambling for resurrection’. Ex-ante moral hazard can be eliminated by ensuring that banks have sufficient capital and uninsured ‘bail-inable’ debt, while ex-post moral hazard is mitigated by triggering resolution when the minimum capital requirement is breached. We argue that optimal regulation consists of a high TLAC requirement and high capital buffer. Our analysis also suggests that higher system-wide risk would call for a higher capital buffer, but TLAC could be lowered if it does not jeopardise the credibility of bail-in itself. |
| Keywords: | Bank capital; bank capital regulation; total loss absorbing capacity; bank resolution |
| JEL: | G21 G28 G33 G38 |
| Date: | 2018–07–27 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0745&r=cba |
| By: | Wojciech Zurowski (University of Lugano and Swiss Finance Institute) |
| Abstract: | I filter expected inflation, unemployment and log GDP Hodrick-Prescott filtered series in order to extrapolate different frequencies of shocks. These shocks are then regressed on contemporaneous yields to assess the impact of monetary policy ingredients on the current state of the economy. Furthermore, I obtain a single factor which contains information from the Taylor like monetary policy rule about the future state of the economy. This factor can predict between 32% and 74% of the variation of excess bond risk premia in the sample. Additionally, the factor unveils differences between monetary policy in the US and the UK through a variation in predictability across maturities. It also provides further evidence of importance of the macroeconomic variables and their predictive value for the term premia. This factor is highly correlated with other factors from previous studies yet it provides additional information to what is already captured by them. The out of sample results demonstrate that the factor can be a good predictor only if it is constructed under time variability assumption and the central bank's policy is not affected by additional tools such as quantitative easing. |
| Keywords: | bond risk premia, monetary policy, Haar filter |
| JEL: | G12 E44 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1742&r=cba |
| By: | Mariana García-Schmidt; Javier Garcia-Cicco |
| Abstract: | A large literature estimates the exchange rate pass-through to prices (ERPT) using reducedform approaches, whose results are an important input for analyses at Central Banks. We study the usefulness of these empirical measures for actual monetary policy analysis and decision making, emphasizing two main problems that arise naturally from a general equilibrium perspective. First, while the literature describes a single ERPT measure, in a general equilibrium model the evolution of the exchange rate and prices will differ depending on the shock hitting the economy. Accordingly, we distinguish between conditional and unconditional ERPT measures, showing that they can lead to very different interpretations. Second, in a general equilibrium model the ERPT crucially depends on the expected behavior of monetary policy, but the empirical approaches in the literature cannot account for this and thus provide a misleading guide for policy makers. We first use a simple model of a small and open economy to qualitatively show the intuition behind these two critiques. We then highlight the quantitative relevance of these distinctions by means of a DSGE model of a small and open economy with sectoral distinctions, real and nominal rigidities, and a variety of driving forces; estimated using Chilean data. |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:826&r=cba |
| By: | Müller, Carola |
| Abstract: | I develop a theoretical model to investigate the effect of simultaneous regulation with a leverage ratio and a risk-weighted ratio on banks' risk taking and banking market structure. I extend a portfolio choice model by adding heterogeneity in productivity among banks. Regulators face a trade-off between the efficient allocation of resources and financial stability. In an oligopolistic market, risk-weighted requirements incentivise banks with high productivity to lend to low-risk firms. When a leverage ratio is introduced, these banks lose market shares to less productive competitors and react with risk-shifting into high-risk loans. While average productivity in the low-risk market falls, market shares in the high-risk market are dispersed across new entrants with high as well as low productivity. |
| Keywords: | banking regulation,heterogeneous banks,banking competition,capital requirements,leverage ratio,Basel III |
| JEL: | G11 G21 G28 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwhdps:142018&r=cba |
| By: | Isabel Argimón (Banco de España) |
| Abstract: | We analyze how a change in ECB monetary policy affects lending of internationally active banks, depending on whether the currency of the claim is the one of the counterparty country, using Spanish individual bank data. We analyse the transmission from an outward perspective, exploring how banks adjust their foreign lending denominated in local and in foreign currency to changes in monetary policy, both cross-border and also through their affiliates located in other countries. We find that non-bank private claims in local currency respond much less to the ECB monetary policy stance than claims in foreign currency. We also find that the spillover effects on cross-border lending denominated in foreign currency depend on banks’ characteristics. When we broaden the analysis to include claims to the public and the financial sector, the transmission of monetary policy is mainly through foreign currency loans, but bank heterogeneity plays a role in the transmission to local currency loans. In general, a tightening of the ECB monetary policy results in an increase in lending abroad. Exchange rate changes only affect foreign currency-denominated lending. |
| Keywords: | monetary policy, international banking, bank credit, spillovers. |
| JEL: | F34 F42 G15 G21 |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1827&r=cba |
| By: | Eo, Yunjong; Lie, Denny |
| Abstract: | Does raising an inflation target require increasing the nominal interest rate in the short run? We answer this question using a New Keynesian model calibrated to the U.S. economy in which firms explicitly take into account changes in the inflation target in their price setting behavior. We find that the short-run comovement between the nominal rates and inflation conditional on the change in the inflation target is most likely positive. While this so-called Neo-Fisherism is less likely to hold the more backward-looking elements are incorporated into the model, two features play an important role in generating the positive comovement in spite of rich backward-looking elements in our model. First, a Taylor-type rule mitigates the impact of the backward-looking elements on forming inflation expectations compared to strict inflation targeting. Second, the additional forward-looking effect driven by firms' explicit consideration of inflation target adjustment in setting their prices enlarges the region of the parameter space exhibiting Neo-Fisherism. Our results are robust to empirically plausible parameterizations of the model. |
| Keywords: | Neo-Fisherism, inflation expectations, a Taylor-type rule, strict inflation targeting, hybrid NKPC, inflation target adjustment. |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:syd:wpaper:2018-02&r=cba |
| By: | Hannes Draack |
| Abstract: | The target problem considers the central bank's use of optimal tools and targets for purposes of stabilization and welfare optimization. In this study, this question is answered anew in a microfounded approach. By adding imperfect information to the model of [Berentsen and Waller, 2011], a divide between an interest rate policy and a money stock policy emerges. Given this, the usefulness of each policy is analyzed, with the ultimate result being the dominance of a pro-cyclical interest rate-based policy. This finding stands in contrast to the well-known macrofounded answer of [Poole, 1970]. The inconsistency is resolved by an examination of some of the axioms underlying New Keynesian and New Monetarist models. |
| Keywords: | Money, search, stabilization, monetary policy |
| JEL: | E41 E52 |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:296&r=cba |
| By: | Paludkiewicz, Karol |
| Abstract: | Exploiting a granular dataset of banks' security holdings I assess the impact of unconventional monetary policy on bank lending and security holdings. Using a difference-in-differences regression setup and holding the security composition of each bank constant at its level in January 2014, well in advance of an anticipation of the ECB's asset purchase program (APP), this paper provides evidence for the presence of a yield-induced portfolio rebalancing channel: Banks experiencing a higher average yield decline of their securities portfolio - induced by unconventional expansionary monetary policy - increase their real sector lending more strongly relative to other banks. The effect is stronger for banks facing many reinvestment decisions. Moreover, I find that banks with a higher average yield decline reduce their overall investments in securities more intensely, especially in those securities that had larger valuation gains. These novel findings suggest that banks target a specific yield level and shift their investments from the securities to the (higher-yielding) credit portfolio. Making use of data on bank-specific TLTRO uptakes, my results do not seem to be driven by alternative, liquidity-driven transmission channels. |
| Keywords: | Unconventional Monetary Policy,Quantitative Easing,Portfolio Rebalancing |
| JEL: | E44 E51 E52 E58 G21 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:222018&r=cba |
| By: | Andreas Neuhierl; Michael Weber |
| Abstract: | We document a large return drift around monetary policy announcements by the Federal Open Market Committee (FOMC). Stock returns start drifting up 25 days before expansionary monetary policy surprises, whereas they decrease before contractionary surprises. The cumulative return difference across expansionary and contractionary policy decisions amounts to 2.5% until the day of the policy decision and continues to increase to more than 4.5% 15 days after the meeting. Standard returns factors and time-series momentum do not span the return drift around FOMC policy decisions. The return drift is a market-wide phenomenon and holds for all industries and many international equity markets. A simple trading strategy exploiting the drift around FOMC meetings increases Sharpe ratios relative to a buy-and-hold investment by a factor of 4. |
| JEL: | E31 E43 E44 E52 E58 G12 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24748&r=cba |
| By: | Lie, Denny |
| Abstract: | This paper investigates the role of observed offcial inflation-target adjustments in aggregate macroeconomic fluctuations in Indonesia, using an estimated Dynamic Sto- chastic General Equilibrium (DSGE) model. The paper finds that these adjustments or shocks play a non-trivial role in the fluctuations of inflation and nominal interest rate in Indonesia. Output fluctuations, however, are virtually unaffected. A counter- factual exercise shows that a gradual reduction in Bank Indonesia's inflation target may have not been optimal. The paper also provides additional insights on the con- tribution of various shocks in driving aggregate fluctuations in Indonesia. Technology and monetary-policy shocks are found to be the main driving factor for both output and inflation fluctuations. Movements in the nominal interest rate are mostly driven by preference and risk-premium shocks, with inflation-target shocks playing a larger role in the longer run. The inclusion of inflation-target shocks in the model is also shown to improve the model's fit and out-of-sample predictive performance.. |
| Keywords: | Inflation target, inflation-target adjustments or shocks, DSGE model for Indonesia, source of aggregate fluctuations, Bank Indonesia |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:syd:wpaper:2018-01&r=cba |
| By: | Stephen Wright (Birkbeck, University of London); Charmaine Portelli (University of Malta) |
| Abstract: | The balance sheet of the European Central Bank (ECB) represents a very small fraction (onetenth) of the reported balance sheet of the Euro Area system as a whole. This paper presents evidence that the effective size of the ECB’s balance sheet is massively higher than this, and indeed is significantly higher even than the reported balance sheet of the Eurosystem as a whole. We point to strong evidence that most NCBs (especially those of the larger countries) effectively act on autopilot, as branches of a near-monolithic institution which we term the “Mega-ECB”. The lending behaviour of the “Mega-ECB” appears to have been driven primarily by the borrowing needs of the distressed countries of the EU’s southern periphery. |
| Keywords: | central bank balance sheet, capital key, ECB, Eurosystem, national central canks, Target2. |
| JEL: | E52 E58 F36 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:1807&r=cba |
| By: | Geiger, Felix; Schupp, Fabian |
| Abstract: | The estimation of dynamic term structure models (DTSMs) turns out to be challenging in the presence of a small sample. It is exacerbated if the sample is characterized by a prolonged period of low interest rates near a time-varying effective lower bound. These challenges all weigh heavily when estimating a DTSM for the euro area OIS yield curve. Against this background, we propose a shadow-rate term structure model (SRTSM) that includes a time-varying effective lower bound and accounts for the spread between the policy and short-term OIS rate. It also allows for future changes in the effective lower bound and incorporates survey information. The model allows to adequately assess short-term monetary policy rate expectations and it generates far-distant rate expectations that are correlated with an estimated equilibrium nominal short rate derived from a macroeconomic model set-up. Our results also highlight the signaling channel of non-standard monetary policy shocks in the run-up to asset purchases identified based on a non-linear high-frequency external instrument approach. Our model outperforms DTSM specifications without above modeling features from a statistical and economic perspective. We confirm our findings employing a Monte Carlo simulation. |
| Keywords: | term structure modeling,short rate expectations,lower bound,survey information,yield curve decomposition,monetary policy,euro area |
| JEL: | E32 E43 E44 E52 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:272018&r=cba |
| By: | Pfeifer, Lukáš; Hodula, Martin |
| Abstract: | Over the last few years, national macroprudential authorities have developed different strategies for setting the countercyclical capital buffer (CCyB) rate in the banking sector. The existing approaches are based on various indicators used to identify the current phase of the financial cycle. However, to our knowledge, there is no approach that directly takes into consideration banks’ prudential behavior over the financial cycle as well as cyclical risks in the banking sector. In this paper, we propose a new profit-to-provisioning approach that can be used in the macroprudential decision-making process. We construct a new set of indicators that largely capture the risk of cyclicality of profit and loan loss provisions. We argue that banks should conserve a portion of the cyclically overestimated profit (non-materialized expected loss) in their capital during a financial boom. We evaluate the performance of our newly proposed indicators using two econometric exercises. Overall, they exhibit good statistical properties, are relevant to the CCyB decision-making process, and may contribute to a more precise assessment of both systemic risk accumulation and risk materialization. We believe that the relevance of the profit-to-provisioning approach and the related set of newly proposed indicators increases under IFRS 9. JEL Classification: E58, G21, G28 |
| Keywords: | banking prudence indicators, countercyclical capital buffer, financial stability, macroprudential policy, profit-to-provisioning approach |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkwps:201882&r=cba |
| By: | Ramaa Vasudevan (Colorado State University) |
| Abstract: | This paper explores the evolution of monetary policy in the context of the distinct path China and the PBoC have adopted in fostering the international role of the renminbi. Instead of focusing on the PBoC’s negotiation of the impossible trinity of flexible exchange rates, capital mobility and independent monetary policy, the paper highlights the challenges the PBoC faces as it promotes the use renminbi, in international lending in particular, while simultaneously seeking to contain and discipline the inherent instability and potentially disruptive logic of finance. |
| Keywords: | China, monetary policy, internationalization of renminbi, impossible trinity |
| JEL: | F33 F36 G28 |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:new:wpaper:1810&r=cba |
| By: | Junichi Fujimoto (National Graduate Institute for Policy Studies); Ko Munakata (Bank of Japan); Koji Nakamura (Bank of Japan); Yuki Teranishi (Keio University) |
| Abstract: | To reveal a policy mandate for financial stability, we introduce a frictional credit market with a search and matching process into a standard New Keynesian model with nominal rigidities in the goods market, and then investigate optimal policy under financial frictions. We show that a second-order approximation of social welfare includes terms for credit, in addition to terms for inflation and consumption, so that any optimal policy must hold responsibility for financial and price stabilities. We highlight this issue by considering several tools for monetary and macroprudential policy. We find that optimal monetary policy requires keeping the credit market countercyclical against the real economy. Also, optimal macroprudential policy, which poses constraints on supply and demand sides of credit, reduces excessive variations in lending and contributes to both financial and price stabilities. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1200&r=cba |
| By: | Dmitry Matveev |
| Abstract: | This paper studies optimal discretionary monetary and fiscal policy when the lower bound on nominal interest rates is occasionally binding in a model with nominal rigidities and long-term government debt. At the lower bound it is optimal for the government to temporarily reduce debt. This decline stimulates output, which is inefficiently low during liquidity traps, by lowering expected real interest rates following the lift-off of the nominal rate from the lower bound. Away from the lower bound, the long-run level of government debt increases with the risk of reaching the lower bound. The accumulation of debt pushes up inflation expectations so as to offset the opposite effect due to the lower bound risk. |
| Keywords: | Fiscal Policy, Monetary Policy |
| JEL: | E52 E62 E63 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:18-38&r=cba |
| By: | Garth Baughman (Federal Reserve Board); Francesca Carapella (Federal Reserve Board) |
| Abstract: | Trade volumes in the federal funds market have remained low since the recent financial crisis. While some argue that this derives from a flood of money in the system, we propose an alternate explanation based on the distinguishing characteristic of the fed funds market: unlike other markets, whose volumes have recovered, fed funds loans are unsecured. In a model of a money market with unsecured loans subject to endogenous borrowing constraints where the central bank pays interest on reserves (IOR), we show that high levels of IOR reduce trade by tightening credit limits. Friedman's dictum that the central bank should pay a market rate fails to deliver efficiency because IOR decreases the opportunity cost of money holdings relative to credit, so decreases both the profits from lending and the value of borrowing. This results in a tightening of the endogenous borrowing constraint. When IOR exceeds the growth rate of money, credit limits plummet to zero, and no borrowing occurs despite an extant need for funds. Alternate rate schedules besides constant IOR, such as the limited deposit regime employed by Norges Bank in response to dissatisfaction with the functioning of their floor system provide additional incentives to trade which relax credit constraints and improve welfare. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1281&r=cba |
| By: | Samuel Demeulemeester (TRIANGLE - Triangle : action, discours, pensée politique et économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - IEP Lyon - Sciences Po Lyon - Institut d'études politiques de Lyon - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | The literature on the 100% money proposal often reveals some confusion when it comes to its implications for the banking sphere. We argue that this can be partly explained by a failure to have distinguished between two divergent approaches to the proposal: the "Currie–Fisher" (or "transaction") approach, on the one hand, which would preserve banking; and the "Chicago Plan" (or "liquidity") approach, on the other hand, which would abolish banking. This division among 100% money proponents stemmed, in particular, from different definitions of money, and different explanations of monetary instability. The present paper attempts to clarify this divergence of views. |
| Keywords: | Irving Fisher,Chicago Plan,Lauchlin Currie,banking,100% money |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-01830363&r=cba |
| By: | Chadha, J. |
| Abstract: | We consider the role of money as a means of payment, store of value and medium of exchange. I outline a number of quantitative and qualitative experiences of monetary management. Successful regimes have sprung up in a variety of surprising places, and been sustained with state (centralised) interventions. Although the link between state and money, and its standard of identity and account may be clear, particularly in earlier stages of economic development, the extent to which the state is widely felt to hold responsibility for 'sound money' is less clear in modern democracies, where there are many other public responsibilities implying ongoing trade-offs. |
| Keywords: | money, gold standard, paper money, Samuelson |
| JEL: | B22 E02 E31 |
| Date: | 2018–08–02 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:1842&r=cba |