Selected Reference and Reading Materials compiled by Dan Villanueva


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Record ID

346     [ Page 34 of 68, No. 1 ]

Date

2013-05

Author

Michael U. Krause and Stéphane Moyen

Affiliation

Deutsche Bundesbank

Title

Public debt and changing inflation targets

Summary /
Abstract

What are the effects of a higher central bank inflation target on the burden of real public debt? Several recent proposals have suggested that even a moderate increase in the inflation target can have a pronounced effect on real public debt. We consider this question in a New Keynesian model with a maturity structure of public debt and an imperfectly observed inflation target. We find that moderate changes in the inflation target only have significant effects on real public debt if they are essentially
permanent. Moreover, the additional benefits of not communicating a change in the inflation target are minor.

Keywords

Public debt, learning, inflation target, callable perpetuity, debt maturity

URL

http://econstor.eu/bitstream/10419/71902/1/742499790.pdf



Record ID

345     [ Page 34 of 68, No. 2 ]

Date

2013-04

Author

Viral V. Acharya, Robert Engle, and Diane Pierret

Affiliation

National Bureau of Economic Research

Title

Testing Macroprudential Stress Tests: The Risk of Regulatory Risk Weights

Summary /
Abstract

Macroprudential stress tests have been employed by regulators in the United States and Europe to assess and address the solvency condition of financial firms in adverse macroeconomic scenarios. We provide a test of these stress tests by comparing their risk assessments and outcomes to those from a simple methodology that relies on publicly available market data and forecasts the capital shortfall of financial firms in severe market-wide downturns. We find that: (i) The losses projected on financial firm balance-sheets compare well between actual stress tests and the market-data based assessments, and both relate well to actual realized losses in case of future stress to the economy; (ii) In striking contrast, the required capitalization of financial firms in stress tests is found to be rather low, and inadequate ex post, compared to that implied by market data; (iii) This discrepancy arises due to the reliance on regulatory risk weights in determining required levels of capital once stress-test losses are taken into account. In particular, the continued reliance on regulatory risk weights in stress tests appears to have left financial sectors under-capitalized, especially during the European sovereign debt crisis, and likely also provided perverse incentives to build up exposures to low risk-weight assets.

Keywords

Macroprudential Stress Testing, Regulatory Risk Weights

URL

http://www.nber.org/papers/w18968.pdf

Remarks

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Record ID

344     [ Page 34 of 68, No. 3 ]

Date

2013-05

Author

Knüppel, Malte and Schultefrankenfeld, Guido

Affiliation

Deutsche Bundesbank

Title

The empirical (ir)relevance of the interest rate assumption for central bank forecasts

Summary /
Abstract

The interest rate assumptions for macroeconomic forecasts differ considerably among central banks. Common approaches are given by the assumption of constant interest rates, interest rates expected by market participants, or the central bank's own interest rate expectations. From a theoretical point of view, the latter should yield the highest forecast accuracy. The lowest accuracy can be expected from forecasts conditioned on constant interest rates. However, when investigating the predictive accuracy of the forecasts for interest rates, inflation and output growth made by the Bank of England and the Banco do Brasil, we hardly find any significant differences between the forecasts based on different interest assumptions. We conclude that the choice of the interest rate assumption, while being a major concern from a theoretical point of view, appears to be at best of minor relevance empirically.

Keywords

Forecast Accuracy, Density Forecasts, Projections

URL

http://econstor.eu/bitstream/10419/71907/1/742526879.pdf



Record ID

343     [ Page 34 of 68, No. 4 ]

Date

2013-04

Author

Simone Meier

Affiliation

Swiss National Bank

Title

Financial Globalization and Monetary Transmission

Summary /
Abstract

This paper analyzes the way in which international financial integration affects the transmission of monetary policy in a New Keynesian open economy framework. It extends Woodford's (2010) analysis to a model with a richer financial markets structure, allowing for international trading in multiple assets and subject to financial intermediation costs. Two different forms of financial integration are considered, in particular an increase in the level of gross foreign asset holdings and a decrease in the costs of international asset trading. The simulations in the calibrated model show that none of the analyzed forms of financial integration undermine the effectiveness of monetary policy in influencing domestic output and inflation. Under realistic parameterizations, monetary policy is more, rather than less, effective as the positive impact of strengthened exchange rate and wealth channels more than offsets the negative impact of weakened interest rate channels. The paper also analyzes the interaction of financial integration with trade integration, varying both the importance of trade linkages and the degree of exchange rate pass-through. These interactions show that the positive effects of financial integration are amplified by trade integration. Overall, monetary policy is most effective in parameterizations with the highest degree of both financial and real integration.

Keywords

Monetary policy transmission, International financial integration

URL

http://www.snb.ch/n/mmr/reference/working_paper_2013_03/source/working_paper_2013_03.n.pdf



Record ID

342     [ Page 34 of 68, No. 5 ]

Date

2012-12

Author

Stephen M. Miller, WenShwo Fang, and Ozkan Eren

Affiliation

University of Nevada, Las Vegas, Feng Chia University, Taiwan, and University of Nevada, Las Vegas

Title

Inflation Targeting: Does It Improve Economic Performance?

Summary /
Abstract

The last two decades witnessed a dramatic transformation of how central banks operate. An increasing number of central banks now use inflation targeting as their monetary policy control mechanism. A series of papers attempt to measure the effectiveness of inflation targeting on economic performance. The basic challenge in such tests is that inflation targeting appeared during a time when inflation trended downward across nearly all countries – those that did and did not adopt inflation targeting. This paper reviews the existing methods used to test for the effectiveness of inflation targeting and compares the findings of these different methods for both developed and developing countries. In general, inflation targeting does not affect economic performance in developed countries but does exert a positive effect on economic performance in developing countries. We conclude that the effectiveness of inflation targeting policy garners little, or only transitory, support based on evidence from developed countries. Much more support exists for developing countries.

Keywords

Inflation targeting, difference in differences, fixed and random effects, treatment effects, developed and developing countries

URL

http://web.unlv.edu/projects/RePEc/pdf/1207.pdf



Record ID

341     [ Page 34 of 68, No. 6 ]

Date

2012-05

Author

Kapan, Tümer and Minoiu, Camelia

Affiliation

Research Department, IMF

Title

Balance Sheet Strength and Bank Lending During the Global Financial Crisis

Summary /
Abstract

We examine the role of bank balance sheet strength in the transmission of financial sector shocks to the real economy. Using data from the syndicated loan market, we exploit variation in banks’ reliance on wholesale funding and their structural liquidity positions in 2007Q2 to estimate the impact of exposure to market freezes during 2007–08 on the supply of bank credit. We find that banks with strong balance sheets were better able to maintain lending during the crisis. In particular, banks that were ex-ante more dependent on market funding and had lower structural liquidity reduced the supply of credit more than other banks. However, higher and better-quality capital mitigated this effect. Our results suggest that strong bank balance sheets are key for the recovery of credit following crises, and provide support for regulatory proposals under the Basel III framework.

Keywords

Bank lending channel, wholesale funding, capital, net stable funding ratio, Basel II

URL

http://www.imf.org/external/pubs/ft/wp/2013/wp13102.pdf



Record ID

340     [ Page 34 of 68, No. 7 ]

Date

2013-04

Author

Akcelik, Yasin; Aysan, Ahmet Faruk; and Oduncu, Arif

Affiliation

Central Bank of the Republic of Turkey

Title

Central Banking in Making during the Post-crisis World and the Policy-Mix of the Central Bank of the Republic of Turkey

Summary /
Abstract

After the global crisis, one of the most important lessons learned for the Central Banks has appeared to be the vital importance of financial stability along with the price stability. Hence, finding solutions to how to incorporate the financial stability objective in the implementation of the monetary policy without diluting the price-stability objective has started to be heavily discussed by the academics and policy makers. Accordingly, it has started to be debated that using only short-term interest rates as the main policy tool may not be enough to maintain the price stability and the financial stability at the same time. Interest rates that provide price stability and financial stability can be different and this necessitates the central banks to use multiple policy tools. In view of this, the Central Bank of the Republic of Turkey adopted a new monetary policy framework called the new policy mix in which multiple tools are employed to achieve multiple objectives. In this framework, required reserves ratios, weekly repo rates, interest rate corridor, funding strategy and other macro prudential tools are jointly used as complementary tools for the credit, interest rate and liquidity policies to achieve the price and the financial stability objectives concurrently. This new monetary policy adopted in Turkey also provides an interesting case study to assess how a country came up with novel policies to account for its country specific characteristics.

Keywords

Central banking, Policy-mix, Global financial crisis, Financial Stability

URL

http://mpra.ub.uni-muenchen.de/46612/1/MPRA_paper_46612.pdf



Record ID

339     [ Page 34 of 68, No. 8 ]

Date

2013-05

Author

Donal McGettigan, Kenji Moriyama, J. Noah Ndela Ntsama, Francois Painchaud, Haonan Qu, and Chad Steinberg

Affiliation

Strategy, Policy and Review Department, IMF

Title

Monetary Policy in Emerging Markets: Taming the Cycle

Summary /
Abstract

In contrast to advanced markets (AMs), procyclical monetary policy has been a problem for emerging markets (EMs), with macroeconomic policies amplifying economic upswings and deepening downturns. The stark difference in policy has not been subject to extensive study and this paper attempts to address the gap. Key findings, using a large sample of EMs over the past 50 years, are: (i) EMs have adopted increasingly countercyclical monetary policy over time, although large differences remain among EMs and policies became more procyclical during the recent crisis. (ii) Inflation targeting and better institutions have been key factors behind the move to countercyclicality. (iii) Only deep financial markets allow EMs with flexible exchange rate regimes turn countercyclical. (iv) More countercyclical policy is associated with far less volatile output. The economically meaningful impact of IT on monetary policy countercyclicality and output variability is another reason in its favor, over and above better inflation outcomes.

Keywords

Monetary Policy, Countercyclical Policy, Emerging Markets

URL

http://www.imf.org/external/pubs/ft/wp/2013/wp1396.pdf



Record ID

338     [ Page 34 of 68, No. 9 ]

Date

2013-04

Author

Laurence Ball

Affiliation

Johns Hopkins University

Title

The Case for Four Percent Inflation

Summary /
Abstract

Many central banks target an inflation rate near two percent. This essay argues that policymakers would do better to target four percent inflation. A four percent target would ease the constraints on monetary policy arising from the zero bound on interest rates, with the result that economic downturns would be less severe. This benefit would come at minimal cost, because four percent inflation does not harm an economy significantly.

Keywords

Inflation targeting, cost of inflation, unemployment

URL

http://econ.jhu.edu/wp-content/uploads/pdf/papers/wp607_ball.pdf



Record ID

337     [ Page 34 of 68, No. 10 ]

Date

2013-04

Author

Franz Alonso Hamann Salcedo, Rafael Hernández, Luisa Fernanda Silva EScobar and Fernando Tenjo Galarza

Affiliation

Banco de la Republica de Colombia

Title

Credit Pro-cyclicality and Bank Balance Sheet in Colombia

Summary /
Abstract

The recent financial crisis has renewed the interest of economists, both at the theoretical and empirical level, in developing a better understanding of credit and its mechanisms. A rapidly growing strand of the literature views banks as facing funding restrictions that condition their borrowing to a risk-based capital constraint which, in turn, affects bank lending. This work explores the way banks in Colombia manage their balance sheet and sheds light into the dynamics of credit and leverage during the business cycle. Using a sample of monthly bank balance sheets for the period 1994-2012, we find not only that the Colombian banking sector is predominantly pro-cyclical, but also that the composition of bank liabilities provides important information to policy makers regarding the phase of the cycle of the economy. Shifts from low non-core liability ratios to higher ones during the upward phase of the leverage cycle could play the role of an early warning indicator of financial vulnerability. In addition, we find that bank heterogeneity matters and thus, an aggregate measure of bank leverage can mask successfully a fragile financial sector.

Keywords

Banks, credit, leverage, non-core liabilities, balance sheet, business cycle, Colombia.

URL

http://www.banrep.gov.co/docum/ftp/be_762.pdf



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