Record ID

397     [ Page 29 of 68, No. 1 ]

Date

2013-07

Author

Ricardo Reis

Affiliation

National Bureau of Economic Research

Title

Central Bank Design

Summary /
Abstract

What set of institutions can support the activity of a central bank? Designing a central bank requires specifying its objective function, including the bank's mandate at different horizons and the choice of banker(s), specifying the resource constraint that limits the resources that the central bank generates, the assets it holds, or the payments on its liabilities, and finally specifying how the central bank will communicate with private agents to affect the way they respond to policy choices. This paper summarizes the relevant economic literature that bears on these choices, leading to twelve principles on central bank design.

Keywords

Central bank design

URL

http://www.nber.org/papers/w19187.pdf

Remarks

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Record ID

396     [ Page 29 of 68, No. 2 ]

Date

2013-08

Author

Li L. Ong and Ceyla Pazarbasioglu

Affiliation

Monetary and Capital Markets Department, IMF

Title

Credibility and Crisis Stress Testing

Summary /
Abstract

Credibility is the bedrock of any crisis stress test. The use of stress tests to manage systemic risk was introduced by the U.S. authorities in 2009 in the form of the Supervisory Capital Assessment Program. Since then, supervisory authorities in other jurisdictions have also conducted similar exercises. In some of those cases, the design and implementation of certainelements of the framework have been criticized for their lack of credibility. This paper proposes a set of guidelines for constructing an effective crisis stress test. It combines financial markets impact studies of previous exercises with relevant case study information gleaned from those experiences to identify the key elements and to formulate their appropriate design. Pertinent concepts, issues and nuances particular to crisis stress testing are also discussed. The findings may be useful for country authorities seeking to include stress tests in their crisis management arsenal, as well as for the design of crisis programs.

Keywords

Asset quality review, crisis, disclosure, financial backstop, hurdle rates, liquidity risk, restructuring, solvency, transpar ency, CCAR, CEBS, EBA, PCAR, SCAP

URL

http://www.imf.org/external/pubs/ft/wp/2013/wp13178.pdf

Record ID

395     [ Page 29 of 68, No. 3 ]

Date

2013-08

Author

Li L. Ong, Phakawa Jeasakul and Sarah Kwoh

Affiliation

Monetary and Capital Markets Department, IMF

Title

HEAT! A Bank Health Assessment Tool

Summary /
Abstract

Developments during the global financial crisis have highlighted the importance of differentiating across financial systems and institutions. Assessments of financial stability have increasingly considered the characteristics of individual banks within a financial system, as well as those with significant international reach, to identify vulnerabilities and inform policy decisions. This paper proposes a simple measure of bank soundness, the Bank Health Index (BHI), to facilitate preliminary analyses of individual financial institutions relative to their peers. The evidence suggests that the BHI is useful for a first-pass identification of bank soundness conditions. Automated spreadsheet templates of the bank Health Assessment Tool (HEAT!) are provided for users with access to the BankScope, Bloomberg and/or SNL database(s).

Keywords

Asset quality, Bank Health Index, bank soundness, capital adequacy, earnings, HEAT!, heatm ap, leverage, liquidity.

URL

http://www.imf.org/external/pubs/ft/wp/2013/wp13177.pdf

Record ID

394     [ Page 29 of 68, No. 4 ]

Date

2013-07

Author

Tobias Hagen

Affiliation

Frankfurt University of Applied Sciences, Department of Business and Law, Nibelungenplatz 1, 60318 Frankfurt am Main, Germany

Title

The Impact of National Financial Regulation on Macroeconomic and Fiscal Performance after the 2007 Financial Shock – Econometric Analyses Based on Cross-Country Data

Summary /
Abstract

Using cross-country data, this paper estimates the impact of the 2007 financial shock on countries’ macroeconomic developments conditional on national financial regulations before the crisis. For this purpose, the “financial reform index” developed by Abiad et al. (A New Database of Financial Reforms, 2008a) is used. The econometric analyses indicate that countries with more deregulated financial markets experienced deeper recessions, stronger employment losses, and larger government budget deficits. Against the background of the ongoing global crisis and the results of other studies, the usefulness of liberalized financial markets for macroeconomic stability and economic development should be rigorously reconsidered.

Keywords

Financial crisis; financial regulation; Great Recession; robust regression; semiparametric regression

URL

http://dx.doi.org/10.5018/economics-ejournal.ja.2013-33

Record ID

393     [ Page 29 of 68, No. 5 ]

Date

2012-12

Author

Committee on Global Financial Stability Working Group

Affiliation

Bank for International Settlements

Title

Operationalising the selection and application of macroprudential instruments

Summary /
Abstract

This report - prepared by a Working Group chaired by José-Manuel González-Páramo, formerly European Central Bank - aims to help policymakers in operationalising macroprudential policies. Specifically, it draws out three high-level criteria that are key in determining the selection and application of macroprudential instruments: (1) the ability to determine the appropriate timing for the activation or deactivation of the instrument; (2) the effectiveness of the instrument in achieving the stated policy objective; and (3) the efficiency of the instrument in terms of a cost-benefit assessment. In trying to operationalise these criteria, this report proposes a number of practical tools. First, to help determine the appropriate timing for the activation and deactivation of instruments, it lays out stylised scenarios. Their identification is facilitated by two alternative approaches that seek to link systemic risk analysis and instrument selection. Second, to support the evaluation of the effectiveness and efficiency of macroprudential tools for a range of macroprudential instruments, the report proposes "transmission maps" - stylised presentations of how changes in individual instruments are expected to contribute to the objectives of macroprudential policy.

Keywords

Global financial stability, macroprudential instruments

URL

https://www.bis.org/publ/cgfs48.pdf

Record ID

392     [ Page 29 of 68, No. 6 ]

Date

2012-06

Author

Gianni De Nicolò, Giovanni Favara and Lev Ratnovski

Affiliation

Research Department, IMF

Title

EXTERNALITIES AND MACROPRUDENTIAL POLICY

Summary /
Abstract

The recent financial crisis has led to a reexamination of policies for macroeconomic and financial stability. Part of the current debate involves the adoption of a macroprudential approach to financial regulation, with an aim toward mitigating boom-bust patterns and systemic risks in financial markets. The fundamental rationale behind macroprudential policies, however, is not always clearly articulated. The contribution of this paper is to lay out the key sources of market failures that can justify macroprudential regulation. It explains how externalities associated with the activity of financial intermediaries can lead to systemic risk, and thus require specific policies to mitigate such risk. The paper classifies externalities that can lead to systemic risk as: (1) Externalities related to strategic complementarities , that arise from the strategic interaction of banks (and other financial institutions) and cause the build-up of vulnerabilities during the expansionary phase of a financial cycle; (2) Externalities related to fire sales, that arise from a generalized sell-off of financial assets causing a decline in a sset prices and a deterioration of the balance sheets of intermediaries, especially during the contractionary phase of a financial cycle; and (3) Externalities related to interconnectedness , caused by the propagation of shocks from systemic institutions or through financial networks. The correction of these externalities can be seen as intermediate targets for macroprudential policy, since policies that control externalities mitigate market failures that create systemic risk. This paper discusses how the main proposed macroprudential policy tools—capital requirements, liquidity requirements, restrictions on activities, and taxes—address the identified externalities. It is argued that each externality can be corrected by different tools that can complement each other. Capital surcharges, however, are likely to play an important role in the design of macroprudential regulation. This paper’s analysis of macroprudential policy complements the more traditional one that builds on the distinction between time-series and cross-sectional dimensions of systemic risk.

Keywords

Externalities, systemic risk, macroprudential policy

URL

http://www.imf.org/external/pubs/ft/sdn/2012/sdn1205.pdf

Record ID

391     [ Page 29 of 68, No. 7 ]

Date

2013-07

Author

Juan Carlos Hatchondo and Leonardo Martinez

Affiliation

IMF Institute for Capacity Development

Title

Sudden stops, time inconsistency, and the duration of sovereign debt

Summary /
Abstract

We study the sovereign debt duration chosen by the government in the context of a standard model of sovereign default. The government balances off increasing the duration of its debt to mitigate rollover risk and lowering duration to mitigate the debt dilution problem. We present two main results. First, when the government decides the debt duration on a sequential basis, sudden stop risk increases the average duration by 1 year. Second, we illustrate the time inconsistency problem in the choice of sovereign debt duration: governments would like to commit to a duration that is 1.7 years shorter than the one they choose when decisions are made sequentially.

Keywords

Sovereign debt, default, sudden stops, debt dilution, time inconsistency, debt maturity

URL

http://www.imf.org/external/pubs/ft/wp/2013/wp13174.pdf

Record ID

390     [ Page 29 of 68, No. 8 ]

Date

2011-04

Author

Jonathan D. Ostry, Atish R. Ghosh, Karl Habermeier, Luc Laeven, Marcos Chamon, Mahvash S. Qureshi, and Annamaria Kokenyne

Affiliation

Research Department, IMF

Title

Managing Capital Inflows: What Tools to Use?

Summary /
Abstract

Emerging market economies are facing increasing challenges in managing the current wave of capital inflows. In an earlier note (Ostry et al., 2010), we laid out a set of circumstances under which capital controls could usefully form part of the policy response to inflow surges. For countries whose currencies were on the strong side, where reserves were adequate, where overheating concerns precluded easier monetary policy, and where the fiscal balance was consistent with macroeconomic and public debt considerations, capital controls were a useful part of the policy toolkit to address inflow surges. Beyond macroeconomic considerations, capital controls could also help to address financial-stability concerns when prudential tools were insufficient or could not be made effective in a timely manner. We also stressed that the use of capital controls needs to take account of multilateral considerations, as well as their costs and the mixed evidence on their effectiveness in restraining aggregate flows. This note elaborates on how the macro and financial-stability rationales for capital controls fit together; how prudential and capital control measures should be deployed against various risks that inflow surges may bring; and specifically, how capital controls should be designed to best meet the goals of efficiency and effectiveness. Four broad conclusions emerge. First, capital controls may be useful in addressing both macroeconomic and financial-stability concerns in the face of inflow surges , but before imposing capital controls, countries need first to exhaust their macroeconomic-cum-exchange-rate policy options. The macropolicy response needs to have primacy both because of its importance in helping to abate the inflow surge, and because it ensures that countries act in a multilaterally-consistent manner and do not impose controls merely to avoid necessary external and macro-policy adjustment. Second, while prudential regulations and capital controls can help reduce the buildup of vulnerabilities on domestic balance sheets, they both inevitably create distortions—reducing some “good” financial flows alongside “bad” on es—and may be circumvented. Thus, there is no unambiguous welfare ranking of policy instruments (though non-discriminatory prudential measures are always appropriate), and a pragmatic approach taking account of the economy’s most pertinent risks and distortions needs to be adopted. Third, measures need to be targeted to the risks at hand. When inflows are intermediated through the regulated financial system, prudential regulation will be the main instrument. When inflows bypass regulated markets and institutions, capital controls may be the best option if the perimeter of regulation cannot be widened sufficiently quick ly or effectively. Fourth, the design of capital controls needs to be tailored to country circumstances. Where inflows raise macro concerns, controls will need to be broad, usually price-based, and temporary (though institutional arrangements to implement controls could be maintained). To address financial-stability concerns, controls could be targeted on the riskiest flows, might include administrative measures, and could be used even against more persistent inflows.

Keywords

Capital inflows, capital controls, prudential tools

URL

http://www.imf.org/external/pubs/ft/sdn/2011/sdn1106.pdf

Record ID

389     [ Page 29 of 68, No. 9 ]

Date

2013-05

Author

James A. Clouse

Affiliation

Federal Reserve Board, Washington, D.C.

Title

Monetary policy and financial stability risks: an example

Summary /
Abstract

The financial crisis and its aftermath have raised numerous questions about the appropriate role of financial stability considerations in the conduct of monetary policy. This paper develops a simple example of the possible connections between financial stability and monetary policy. We find that even without an explicit financial stability goal for monetary policy, financial stability considerations arise naturally in the context of standard models of optimal monetary policy if the potential magnitude of financial stability shocks is affected by the stance of policy. In this case, similar to the classic analysis of Brainard (1967), policymakers may seek to reduce the variance of output by scaling back the level of policy accommodation provided today in response to an aggregate demand shock relative to the level that would otherwise be provided. However, the policy implications of this possible connection between monetary policy and financial stability are complex even in the simple example considered here. In particular, financial stability considerations may also increase the relative benefits of following a commitment policy relative to a discretionary strategy.

Keywords

Monetary policy

URL

http://www.federalreserve.gov/pubs/feds/2013/201341/201341pap.pdf

Record ID

388     [ Page 29 of 68, No. 10 ]

Date

2013-07

Author

Roberto Leon-Gonzalez and Thanabalasingam Vinayagathasan

Affiliation

National Graduate Institute for Policy Studies, Tokyo, Japan

Title

Robust Determinants of Growth in Asian Developing Economies: A Bayesian Panel Data Model Averaging Approach

Summary /
Abstract

This paper investigates the determinants of growth in the Asian developing economies. We use Bayesian model averaging (BMA) in the context of a dynamic panel data growth regression to overcome the uncertainty over the choice of control variables. In addition, we use a Bayesian algorithm to analyze a large number of competing models. Among the explanatory variables, we include a non-linear function of inflation that allows for threshold effects. We use an unbalanced panel data set of 27 Asian developing countries over the period 1980–2009. Our empirical evidence on the determinants of growth suggests that an economy’s investment ratio and trade openness are positively correlated to growth, whereas government consumption expenditure is negatively correlated. Further, our empirical results indicate a substantial probability that inflation impedes economic growth when it exceeds 5.43%. We also find no evidence of conditional convergence or divergence.

Keywords

Determinants of Growth, Bayesian Model Averaging, Panel Data Model, Inflation Threshold

URL

http://r-center.grips.ac.jp/gallery/docs/13-12.pdf

Remarks

This empirical study finds that "the investment ratio of an economy is positively associated with its growth rate whereas government consumption expenditure is negatively correlated. Evidence also indicates that trade openness stimulates economic growth. Further, substantial evidence shows that inflation hurts economic growth when it is beyond the threshold value of 5.43% but does not have any significant effect on growth below that level." Thus, the BSP inflation target through 2016 seems appropriate, as far as the implications of this excellent empirical study are concerned.