Record ID
|
337
[ Page 18 of 34, No. 1 ]
|
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
|
Record ID
|
336
[ Page 18 of 34, No. 2 ]
|
Date
|
2012-01 |
Author
|
Tanaka Hiroatsu
|
Affiliation
|
Federal Reserve Board |
Title
|
Monetary Policy Regimes and the Term Structure of Interests Rates with Recursive Utility |
Summary / Abstract
|
I study how two different monetary policy regimes characterized by their difference in degrees of credibility (a 'commitment' regime, in which the central bank can credibly commit to future policy and a 'discretion' regime, in which it cannot) affect the term structure of interest rates and attempt to evaluate which monetary policy regime seems more consistent with the data on macroeconomic variables and term structure dynamics. To this end, I construct a no-arbitrage affine-term structure model based on a New-Keynesian type micro-foundation. The model is augmented with Epstein-Zin (EZ) preferences, real wage rigidity and a simple central bank optimization problem. A shock structure that exhibits stochastic volatility in long-run risk of TFP growth parsimoniously generates time-varying term premia. The estimation of the model suggests that the assumption of a discretion regime performs better than a commitment regime in terms of quantitatively fitting some salient features of the US data on the term structure and the business cycle during the Volcker-Greenspan-Bernanke era. The lack of policy credibility leads to volatile and persistent inflation, which generates volatile expected long-run inflation that is negatively correlated with future continuation values. This is perceived particularly risky by EZ nominal bond holders and results in upward sloping average nominal yields, long-term yield volatility and excess return predictability closer to the magnitude observed in the data while keeping the unconditional volatilities of consumption growth and inflation realistic. |
Keywords
|
Monetary policy regime, commitment, discretion, term structure, recursive utility, Volcker-Greenspan-Bernanke era |
URL
|
http://www.economicdynamics.org/meetpapers/2012/paper_557.pdf
|
Record ID
|
335
[ Page 18 of 34, No. 3 ]
|
Date
|
2013-04 |
Author
|
Carlos De Resende, Ali Dib, René Lalonde and Nikita Perevalov
|
Affiliation
|
Bank of Canada |
Title
|
Countercyclical Bank Capital Requirement and Optimized Monetary Policy Rules |
Summary / Abstract
|
Using BoC-GEM-Fin, a large-scale DSGE model with real, nominal and financial frictions featuring a banking sector, we explore the macroeconomic implications of various types of countercyclical bank capital regulations. Results suggest that countercyclical capital requirements have a significant stabilizing effect on key macroeconomic variables, but mostly after financial shocks. Moreover, the bank capital regulatory policy and monetary policy interact, and this interaction is contingent on the type of shocks that drive the economic cycle. Finally, we analyze loss functions based on macroeconomic and financial variables to arrive at an optimal countercyclical regulatory policy in a class of simple implementable Taylor-type rules. Compared to bank capital regulatory policy, monetary policy is able to stabilize the economy more efficiently after real shocks. On the other hand, financial shocks require the regulator to be more aggressive in loosening/tightening capital requirements for banks, even as monetary policy works to counter the deviations of inflation from the target. |
Keywords
|
Economic models; Financial Institutions; Financial stability; International topics |
URL
|
http://www.bankofcanada.ca/wp-content/uploads/2013/04/wp2013-08.pdf
|
Record ID
|
334
[ Page 18 of 34, No. 4 ]
|
Date
|
2013-03 |
Author
|
Andrew J. Filardo and Pierre L. Siklos
|
Affiliation
|
Bank for International Settlements and Wilfrid Laurier University |
Title
|
Prolonged reserves accumulation, credit booms, asset prices and monetary policy in Asia |
Summary / Abstract
|
This paper examines past evidence of prolonged periods of reserve accumulation in Asian emerging market economies and the direct and indirect implications for monetary stability through the potential impact of such episodes on financial stability. The empirical research focuses on identifying periods of prolonged interventions and correlations with key macrofinancial aggregates. Related changes in central bank balance sheets are also examined, especially in periods when the interventions are linked to strong capital inflows. In particular, we consider whether changes in the central bank's balance sheet from prolonged intervention lead to spillovers to the balance sheet of the private sector. We explore the possible forms of the spillovers and the consequences on asset prices (e.g., housing prices, equity prices, the growth in domestic credit). Policy implications are drawn. Finally, we propose a new indicator of reserves adequacy and excessive foreign exchange reserves accumulation based on a factor model. Two broad conclusions emerge from the stylized facts and the econometric evidence. First, the best protection against costly reserves accumulation is a more flexible exchange rate. Second, the necessity to accumulate reserves as a bulwark against goods price inflation is misplaced. Instead, there is a strong link between asset price movements and the likelihood of accumulating foreign exchange reserves that are costly. |
Keywords
|
Foreign exchange reserves accumulation, monetary and financial stability |
URL
|
http://www.suomenpankki.fi/bofit_en/tutkimus/tutkimusjulkaisut/dp/Documents/2013/dp0513.pdf
|
Record ID
|
333
[ Page 18 of 34, No. 5 ]
|
Date
|
2013-04 |
Author
|
Benjamin M. Friedman
|
Affiliation
|
National Bureau of Economic Research |
Title
|
The Simple Analytics of Monetary Policy: A Post-Crisis Approach |
Summary / Abstract
|
The standard workhorse models of monetary policy now commonly in use, both for teaching macroeconomics to students and for supporting policymaking within many central banks, are incapable of incorporating the most widely accepted accounts of how the 2007-9 financial crisis occurred and incapable too of analyzing the actions that monetary policymakers took in response to it. They also offer no point of entry for the frontier research that many economists have subsequently undertaken, especially research revolving around frictions in financial intermediation. This paper suggests a simple model that bridges this gap by distinguishing the interest rate that the central bank sets from the interest rate that matters for the spending decisions of households and firms. One version of this model adds to the canonical “new Keynesian” model a fourth equation representing the spread between these two interest rates. An alternate version replaces this reduced-form expression for the spread with explicit supply and demand equations for privately issued credit obligations. The discussion illustrates the use of both versions of the model for analyzing the kind of breakdown in financial intermediation that triggered the 2007-9 crisis, as well as “unconventional” central bank actions like large-scale asset purchases and forward guidance on the policy interest rate. |
URL
|
http://www.nber.org/papers/w18960.pdf
|
Remarks
|
Information about Free Papers
You should expect a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy. |
Record ID
|
332
[ Page 18 of 34, No. 6 ]
|
Date
|
2013-03 |
Author
|
Sen Gupta, Abhijit and Sengupta, Rajeswari
|
Affiliation
|
Asian Development Bank, Institute for Financial Management and Research |
Title
|
Management of Capital Flows in India: 1990-2011 |
Summary / Abstract
|
Increased integration with global financial markets has amplified the complexity of macroeconomic management in India. The diverse objectives of a robust growth rate, healthy current account deficit, competitive exchange rate, adequate external capital to finance investment, moderate inflation, targeted monetary and credit growth rate, minimizing financial fragilities and maintaining adequate reserves need to be balanced in an era of volatile capital flows. In this paper we analyze India’s experience in negotiating the trade-offs between these varied objectives. We find that to minimize risks associated with financial fragilities India has adopted a calibrated and gradual approach towards opening of the capital account, prioritizing the liberalization of certain flows. Using empirical methods we find that instead of adopting corner solutions, India has embraced an intermediate approach in managing the conflicting objectives of the well-known Impossible Trinity – monetary autonomy, exchange rate stability and an open capital account. Our results indicate that the intermediate approach has been associated with an asymmetric intervention in the foreign exchange market, with the objective of resisting pressures of appreciation, and resulted in large accumulation of reserves. We also show that sterilization of this intervention has been incomplete at times leading to rapid increase in monetary aggregates and fueling inflation. Finally, we conclude that while the greater flexibility in exchange rate since 2007, has allowed pursuit of a more independent monetary policy and the exchange rate to act as a shock absorber, the hands-off approach has resulted in reserves remaining virtually stagnant since 2007, leading to a significant deterioration in the reserve adequacy measures. |
Keywords
|
Capital controls, Macroeconomic trilemma, Financial integration, Foreign exchange intervention, Sterilization, Exchange market pressure, Reserve adequacy. |
URL
|
http://mpra.ub.uni-muenchen.de/46217/1/MPRA_paper_46217.pdf
|
Record ID
|
331
[ Page 18 of 34, No. 7 ]
|
Date
|
2013-03 |
Author
|
Lanzafame, Matteo and Nogueira, Reginaldo
|
Affiliation
|
Universita degli Studi di Messina, Italy, IBMEC Business School, Brazil |
Title
|
Inflation Targeting and Interest Rates |
Summary / Abstract
|
Inflation Targeting (IT) can be expected to play a role in structurally reducing nominal interest rates, by lowering a country’s inflation expectations and risk premium. Relying on a panel of 52 advanced and emerging economies over the 1975-2009 years, we carry out a formal investigation of this hypothesis. Our econometric strategy adopts a flexible and efficient panel estimation framework, controlling for a number of issues usually neglected in the literature, such as parameter heterogeneity and cross-section dependence. Our findings are supportive of the optimistic view on IT, indicating that adoption of this monetary regime leads to lower nominal interest rates. |
Keywords
|
Inflation targeting; Interest rates; panel data; multifactor modeling |
URL
|
http://mpra.ub.uni-muenchen.de/46153/1/MPRA_paper_46153.pdf
|
Record ID
|
330
[ Page 18 of 34, No. 8 ]
|
Date
|
2013-04 |
Author
|
Chen, Xiaoshan; Kirsanova, Tatiana; and Leith, Campbell
|
Affiliation
|
University of Stirling, University of Glasgow, and University of Glasgow |
Title
|
How Optimal is US Monetary Policy? |
Summary / Abstract
|
Most of the literature estimating DSGE models for monetary policy analysis assume that policy follows a simple rule. In this paper we allow policy to be described by various forms of optimal policy - commitment, discretion and quasi-commitment. We find that, even after allowing for Markov switching in shock variances, the inflation target and/or rule parameters, the data preferred description of policy is that the US Fed operates under discretion with a marked increase in conservatism after the 1970s. Parameter estimates are similar to those obtained under simple rules, except that the degree of habits is significantly lower and the prevalence of cost-push shocks greater. Moreover, we find that the greatest welfare gains from the 'Great Moderation' arose from the reduction in the variances in shocks hitting the economy, rather than increased inflation aversion. However, much of the high inflation of the 1970s could have been avoided had policymakers been able to commit, even without adopting stronger anti-inflation objectives. More recently the Fed appears to have temporarily relaxed policy following the 1987 stock market crash, and has lost, without regaining, its post-Volcker conservatism following the bursting of the dot-com bubble in 2000. |
Keywords
|
Discretion; Commitment; Great Moderation; Optimal Monetary Policy; Interest Rate Rules; Bayesian Estimation |
URL
|
http://www.stir.ac.uk/media/schools/management/documents/SEDP-2013-05-Chen-Kirsanova-Leith.pdf
|
Record ID
|
329
[ Page 18 of 34, No. 9 ]
|
Date
|
2013-03 |
Author
|
Kevin x.d. Huang and J. scott Davis
|
Affiliation
|
Vanderbilt University and Federal Reserve Bank of Dallas |
Title
|
Credit Risks and Monetary Policy Trade-Offs |
Summary / Abstract
|
Financial frictions and financial shocks can affect the trade-off between inflation stabilization and output-gap stabilization faced by a central bank. Financial frictions lead to a greater response in output following any deviation of inflation from target and thus lead to an increase in the sacrifice ratio. As a result, optimal monetary policy in the face of credit frictions is to allow greater output gap instability in return for greater inflation stability. Such a shift in optimal monetary policy can be mimicked in a Taylor-type interest rate feedback rule that shifts weight to inflation and the lagged interest rate and away from output. However, the ability of the conventional Taylor rule to mimic optimal policy gets worse as credit market frictions and shocks intensify. By including a financial variable like the lending spread in the monetary policy rule, the central bank can partially reverse this worsening output-inflation trade-off brought about by financial frictions and partially undo the effects of credit market frictions and shocks. Thus the central bank may want to include lending spreads in the policy rule even when …financial distortions are not explicitly part of the central bank's objective function. |
Keywords
|
Credit friction; Credit shock; Credit spread; Monetary policy trade-offs; Taylor rule |
URL
|
http://www.accessecon.com/pubs/VUECON/VUECON-13-00004.pdf
|
Record ID
|
328
[ Page 18 of 34, No. 10 ]
|
Date
|
2013-03 |
Author
|
P. Manasse, R. Savona and M. Vezzoli
|
Affiliation
|
Economics Department, University of Bologna; Department of Economics and Management, University of Brescia; and Department of Economics and Management, University of Brescia |
Title
|
Rules of Thumb for Banking Crises in Emerging Markets |
Summary / Abstract
|
This paper employs a recent statistical algorithm (CRAGGING) in order to build an early warning model for banking crises in emerging markets. We perturb our data set many times and create “artificial” samples from which we estimated our model, so that, by construction, it is flexible enough to be applied to new data for out-of-sample prediction. We find that, out of a large number (540) of candidate explanatory variables, from macroeconomic to balance sheet indicators of the countries’ financial sector, we can accurately predict banking crises by just a handful of variables. Using data over the period from 1980 to 2010, the model identifies two basic types of banking crises in emerging markets: a “Latin American type”, resulting from the combination of a (past) credit boom, a flight from domestic assets, and high levels of interest rates on deposits; and an “Asian type”, which is characterized by an investment boom financed by banks’ foreign debt. We compare our model to other models obtained using more traditional techniques, a Stepwise Logit, a Classification Tree, and an “Average” model, and we find that our model strongly dominates the others in terms of out-of-sample predictive power. |
Keywords
|
Banking Crises, Early Warnings, Regression and Classification Trees, Stepwise Logit |
URL
|
http://www2.dse.unibo.it/wp/WP872.pdf
|
Record ID
|
327
[ Page 18 of 34, No. 11 ]
|
Date
|
2013-03 |
Author
|
Olivier DARNE, Guy LEVY-RUEFF and Adrian POP
|
Affiliation
|
University of Nantes (LEMNA), Institute of Banking and Finance; Banque de France, Business Conditions and Macroeconomic Forecasting Division; and University of Nantes (LEMNA), Institute of Banking
and Finance |
Title
|
Calibrating Initial Shocks in Bank Stress Test Scenarios: An Outlier Detection Based Approach |
Summary / Abstract
|
We propose a rigorous and flexible methodological framework to select and calibrate initial shocks to be used in bank stress test scenarios based on statistical techniques for detecting outliers in time series of risk factors. Our approach allows us to characterize not only the magnitude, but also the persistence of the initial shock. The stress testing exercises regularly conducted by supervisors distinguish between two types of shocks, transitory and permanent. One of the main advantages of our framework, particularly relevant as regards the calibration of transitory shocks, is that it allows considering various reverting patterns for the stressed variables and informs the choice of the appropriate stress horizon. We illustrate the proposed methodology by implementing outlier detection algorithms to several time series of (macro)economic and financial variables typically used in bank stress testing. |
Keywords
|
Stress testing; Stress scenarios; Financial crises; Macroprudential regulation. |
URL
|
http://www.banque-france.fr/uploads/tx_bdfdocumentstravail/DT-426_01.pdf
|
Record ID
|
326
[ Page 18 of 34, No. 12 ]
|
Date
|
2013-01 |
Author
|
Xisong Jin and Francisco Nadal De Simone
|
Affiliation
|
Luxembourg School of Finance and Banque centrale du Luxembourg
|
Title
|
Banking Systemic Vulnerabilities: A Tail-risk Dynamic CIMDO Approach |
Summary / Abstract
|
This study proposes a novel framework which combines marginal probabilities of default estimated from a structural credit risk model with the consistent information multivariate density optimization (CIMDO) methodology of Segoviano, and the generalized dynamic factor model (GDFM) supplemented by a dynamic t-copula. The framework models banks' default dependence explicitly and captures the time-varying non-linearities and feedback effects typical of financial markets. It measures banking systemic credit risk in three forms: (1) credit risk common to all banks; (2) credit risk in the banking system conditional on distress on a specific bank or combinations of banks and; (3) the buildup of banking system vulnerabilities over time which may unravel disorderly. In addition, the estimates of the common components of the banking sector short-term and conditional forward default measures contain early warning features, and the identification of their drivers is useful for macroprudential policy. Finally, the framework produces robust out-of-sample forecasts of the banking systemic credit risk measures. This paper advances the agenda of making macroprudential policy operational. |
Keywords
|
Financial stability; procyclicality, macroprudential policy; credit risk; early warning indicators; default probability, non-linearities, generalized dynamic factor model; dynamic copulas; GARCH |
URL
|
http://www.bcl.lu/fr/publications/cahiers_etudes/82/BCLWP082.pdf
|
Record ID
|
325
[ Page 18 of 34, No. 13 ]
|
Date
|
2013-04 |
Author
|
Money and Capital Markets Department
|
Affiliation
|
IMF |
Title
|
A NEW LOOK AT THE ROLE OF SOVEREIGN CREDIT DEFAULT SWAPS
(Ch. 2, Global Financial Stability Report, April 2013) |
Summary / Abstract
|
Credit default swaps on government debt are effective tools for investors to hedge risks, and can enhance financial stability, according to a new analysis from the International Monetary Fund.
Credit default swaps are financial instruments investors can use for hedging. In the case of government debt, investors use the swaps to express an opinion about the creditworthiness of a government, and to protect themselves in the event a country defaults or undertakes a debt restructuring.
The growing use of sovereign credit default swaps in advanced economy debt has raised questions about whether their speculative use could have destabilizing effects on the financial system, and how policymakers should respond. The European Union has recently banned the purchase of protection using these contracts if the buyer isn’t hedging, called naked selling of sovereign credit default swaps contracts.
In new research from the Global Financial Stability Report, the IMF said policymakers could improve the market for sovereign credit default swaps in other ways: by requiring more data disclosure, and by implementing the Group of Twenty regulatory reforms that aim to enhance the robustness and functioning of over-the-counter derivatives markets.
“Our study showed that sovereign credit default swaps are receiving a bad rap—they are no more or less effective at representing the credit risk of governments than are the government’s own bonds,” said Laura Kodres chief of the global stability analysis division in the IMF’s Monetary and Capital Markets Department and the head of the team that produced the analysis.
Not just for emerging economies anymore
Financial markets developed credit default swaps on government debt as flexible instruments to hedge and trade sovereign credit risks. Before to the global crisis, the market consisted largely of contracts on emerging market government debt because investors consider their credit risk as higher and more variable.
Although credit default swaps on government debt are only a fraction of countries’ outstanding debt market, their importance has been growing rapidly since 2008, especially in advanced economies where the creditworthiness of some of these countries have come under pressure. With the intensified attention, their usage has come under more scrutiny.
Debunking myths about credit default swaps
The IMF said credit default swap spreads provide indications of sovereign credit risk that reflect the same economic fundamentals and market conditions as the underlying government bonds. There is little indication that they raise sovereign funding costs—in other words, not much evidence that “the tail wags the dog.”
The IMF’s empirical analysis finds that both credit default swaps and government bond spreads exhibit similar and significant dependence on key economic fundamentals, such as government debt-to-GDP ratios and GDP growth prospects. Also, investor appetite for risk and market liquidity similarly influence both swap and bond spreads.
The analysis also shows that credit default swap markets incorporate new information faster than sovereign bond markets during periods of stress, despite wide differences across countries in normal times. Generally, the more liquid the credit default swaps market, the more rapidly it incorporates information relative to bond markets.
By contrast, whether credit default swap markets are more likely to propagate shocks than other markets is unclear. This is because risks embedded in credit default swaps cannot be readily isolated from risks generally found in the financial system, such as those associated with financial firms.
“We found little evidence to support many of the negative perceptions and alleged destabilizing roles of credit default swaps, although there is some evidence of that swap spreads overshoot their predicted level for some euro area countries during periods of stress,” said Kodres.
Don’t shoot the messenger
Initiatives by policymakers, such as the European Union ban on naked selling of credit default swaps, could eventually harm the hedging role of markets as market liquidity and depth deteriorate and result in higher spillovers to other markets.
This could add to financial instability and contagious transmission channels as hedgers migrate their hedges to the next best markets, potentially adding unintended stress and volatility to these markets. In the longer term, such actions could increase sovereign funding costs, to the contrary of the intentions of policymakers.
The IMF said policymakers can improve how the market for sovereign credit default swaps works by focusing their attention on implementing existing measures:
• Require counterparties to post initial margin on bilateral trades or move them to a central counterparty clearing house to lessen counterparty risks and reduce the potential for spillovers from sovereign credit events
• Mandate better data disclosure to mitigate uncertainty about exposures and interconnections of the market participants
• Implement temporary restrictions rather than imposing permanent ones only if necessary due to stress in financial markets, although previous research has found temporary trading bans to be of only limited use. |
Keywords
|
Sovereign credit default swaps, government debt, hedging risks, financial stability |
URL
|
http://www.imf.org/external/pubs/ft/gfsr/2013/01/pdf/c2.pdf
|
Record ID
|
324
[ Page 18 of 34, No. 14 ]
|
Date
|
2013-04 |
Author
|
Money and Capital Markets Department
|
Affiliation
|
IMF |
Title
|
Do Central Bank Policies Since the Crisis Carry Risks to Financial Stability?
(Ch. 3, Global Financial Stability Report, April 2013) |
Summary / Abstract
|
Several years of exceptionally low interest rates and bond buying by some advanced economy central banks have improved some indicators of banks’ health while supporting the economy and financial stability, according to new research from the International Monetary Fund.
In its latest Global Financial Stability Report, the IMF analyzes the effects of central bank policies on banks and financial stability since the global crisis. Central banks have taken bold policy actions that have reduced banking sector vulnerabilities and stabilized some markets, such as the interbank and mortgage securities markets. But the policies may have undesirable side-effects that could put financial stability at risk the longer they are in place.
The IMF said so far these risks are not showing up much in banks, but could be shifting to other parts of the financial sector, such as to so-called “shadow banks.” There is also some concern that the prolonged period of low interest rates is encouraging banks to roll over nonperforming loans rather than repairing their balance sheets.
“So far, so good, but if the time that central banks have provided through their unconventional policies is not used productively by financial institutions and their regulators, at some point we can expect another round of financial distress,” said Laura Kodres, chief of global stability analysis in the IMF’s Monetary and Capital Markets Department and the head of the team that produced the analysis.
Potential risks
Despite the positive short-run effects for banks, there are financial risks associated with these central bank policies, which are likely to increase the longer they are maintained, according to the IMF.
The analysis found some aspects of this unprecedented monetary policy may be delaying balance sheet repair in banks and could raise credit risk over the medium term. This would explain the increase in market perceptions of bank default risk in response to central bank policy announcements, the IMF said.
Risks may also be shifting to other parts of the financial system not examined in the report, such as shadow banks, pension funds and insurance companies—or to other countries. Monitoring these risks requires improved data collection by those responsible for monitoring system-wide risks on nonbank financial institutions, as well as intrusive oversight by financial supervisors.
The report cautions that some risks may materialize when central banks end the measures taken in the wake of the global crisis.
Uncertainty about asset sales by central banks could lead to shifts in market sentiment and rapid price changes that could result in losses for bond holders—especially banks and central banks. The degree to which long-term yields may rise from their currently compressed levels, which would make bond prices drop, heightens this concern.
Losses could hurt weakly capitalized banks in the short run, although the IMF said the net effect of interest rate increases may be positive for banks over the medium term as their lending picks up.
Policymakers should be vigilant and flexible
The report says that central bank policies should continue to support the economy and financial stability until the recovery is well established.
The IMF said policymakers need to be vigilant and assess the emergence of potential and emerging financial stability threats. They also should use targeted policies designed to foster bank balance-sheet repair and reduce their vulnerability to market disruptions. By reducing the risks in the financial sector, micro- and macroprudential policies will allow greater leeway for monetary policy to support the economy.
The report identifies specific measures that could prove helpful to contain credit risk and funding challenges for banks, such as robust capital requirements, improved liquidity requirements, and well-designed dynamic forward-looking provisioning. Because the experience with some macroprudential tools is still relatively limited, the IMF recommends that policymakers closely monitor the effectiveness of their policies and stand ready to adjust them as needed. Coordination with other economic policies, such as monetary and fiscal policy, will also help reduce the reliance on macroprudential tools.
To minimize adverse effects on market sentiment, the IMF points out that it is important that central banks communicate clearly about their strategies to exit from their extraordinary policy measures, ahead of their implementation.
|
Keywords
|
Global financial stability, potential risks of long periods of low interest rates and bond-buying |
URL
|
http://www.imf.org/external/pubs/ft/gfsr/2013/01/pdf/c3.pdf
|
Record ID
|
323
[ Page 18 of 34, No. 15 ]
|
Date
|
2013-04 |
Author
|
Chan-Lau, Jorge
|
Affiliation
|
Money and Capital Markets Department, IMF |
Title
|
Market-Based Structural Top-Down Stress Tests of the Banking System |
Summary / Abstract
|
Despite increased need for top-down stress tests of financial institutions, performing them is challenging owing to the absence of granular information on banks’ trading and loan portfolios. To deal with these data shortcomings, this paper presents a market-based structural top-down stress testing methodology that relies in market-based measures of a bank's probability of default and structural models of default risk to infer the capital losses they could experience in stress scenarios. As an illustration, the methodology is applied to a set of banks in an advanced emerging market economy. |
Keywords
|
Stress tests, banks, default risk, syst emic risk, structural models, market prices |
URL
|
http://www.imf.org/external/pubs/ft/wp/2013/wp1388.pdf
|
Record ID
|
322
[ Page 18 of 34, No. 16 ]
|
Date
|
2013-04 |
Author
|
Ioan Carabenciov, Charles Freedman, Roberto Garcia-Saltos, Douglas Laxton, Ondra Kamenik, and Petar Manchev
|
Affiliation
|
Research Department, IMF |
Title
|
The Global Projection Model with 6 Regions |
Summary / Abstract
|
This is the sixth of a series of papers that are being written as part of a project to estimate a small quarterly Global Projection Model (GPM). The GPM project is designed to improve the toolkit to which economists have access for studying both own-country and cross-country linkages. In this paper, we add three more regions and make a number of other changes to a previously estimated small quarterly projection model of the US, euro area, and Japanese economies. The model is estimated with Bayesian techniques, which provide a very efficient way of imposing restrictions to produce both plausible dynamics and sensible forecasting properties. |
Keywords
|
Macroeconomic Modeling, Bayesian Estimation, Monetary Policy |
URL
|
http://www.imf.org/external/pubs/ft/wp/2013/wp1387.pdf
|
Record ID
|
321
[ Page 18 of 34, No. 17 ]
|
Date
|
2013-02 |
Author
|
Sewon Hur and Illenin O. Kondo
|
Affiliation
|
University of Pittsburgh and Federal Reserve Board |
Title
|
A theory of rollover risk, sudden stops, and foreign reserves |
Summary / Abstract
|
Emerging economies, unlike advanced economies, have accumulated large foreign reserve holdings. We argue that this policy is an optimal response to an increase in foreign debt rollover risk. In our model, reserves play a key role in reducing debt rollover crises ("sudden stops"), akin to the role of bank reserves in preventing bank runs. We find that a small, unexpected, and permanent increase in rollover risk accounts for the outburst of sudden stops in the late 1990s, the subsequent increase in foreign reserves holdings, and the salient resilience of emerging economies to sudden stops ever since. Finally, we show that a policy of pooling reserves can substantially reduce the reserves needed by emerging economies. |
Keywords
|
Rollover risk, reserves, sudden stops |
URL
|
http://www.federalreserve.gov/pubs/ifdp/2013/1073/ifdp1073.pdf
|
Record ID
|
320
[ Page 18 of 34, No. 18 ]
|
Date
|
2010-09 |
Author
|
Strategy, Policy, and Review Department, Monetary and Capital Markets Department, Fiscal Affairs Department, and Research Department
|
Affiliation
|
International Monetary Fund |
Title
|
The IMF-FSB Early Warning Exercise: Design and Methodological Toolkit |
Summary / Abstract
|
One of the G-20's first reactions to the financial crisis that erupted by late 2008 was to task the IMF and the Financial Stability Board (FSB) with establishing a joint Early Warning Exercise (EWE). This Occasional Paper presents an overview of the IMF's contributions to the EWE. Part I sets out the process, analytical framework, outputs, and dissemination of the EWE, as well as the collaboration with the FSB. Part II describes the main analytical tools deployed in the exercise as of September 2010. As new tools are developed (or become available), they are being added to the EWE or substituted for other models. Once the global economy returns to more stable conditions, the EWE is likely to become the more forward-looking exercise it was initially meant to be, focusing primarily on low-probability, high-impact events (e.g., tail risks). Over time, as new sources of systemic risks emerge and new analytical tools become available, the EWE framework will continue to adapt.
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Keywords
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Early Warning Exercise, IMF, FSB |
URL
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http://www.imf.org/external/np/pp/eng/2010/090110.pdf
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Record ID
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319
[ Page 18 of 34, No. 19 ]
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Date
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2013-04 |
Author
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Itai Agur and Maria Demertzis
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Affiliation
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IMF - Singapore Regional Training Institute |
Title
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"Leaning Against the Wind" and the Timing of Monetary Policy |
Summary / Abstract
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If monetary policy is to aim also at financial stability, how would it change? To analyze this question, this paper develops a general-form framework. Financial stability objectives are shown to make monetary policy more aggressive: in reaction to negative shocks, cuts are deeper but shorter-lived than otherwise. By keeping cuts brief, monetary policy tightens as soon as bank risk appetite heats up. Within this shorter time span, cuts must then be deeper than otherwise to also achieve standard objectives. Finally, we analyze how robust this result is to the presence of a bank regulatory tool, and provide a parameterized example. |
Keywords
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Monetary policy, financial stability, bank risk, regulation |
URL
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http://www.imf.org/external/pubs/ft/wp/2013/wp1386.pdf
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Record ID
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318
[ Page 18 of 34, No. 20 ]
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Date
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2013-04 |
Author
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Tobias Hagen
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Affiliation
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Frankfurt University of Applied Sciences, Department of Business and Law |
Title
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Impact of National Financial Regulation on Macroeconomic and Fiscal Performance after the 2007 Financial Shock – Econometric Analyses Based on Cross-Country Data |
Summary / Abstract
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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, 2008) 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
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Financial crisis; financial regulation, Great Recession, robust regression, semiparametric regression |
URL
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http://www.economics-ejournal.org/economics/discussionpapers/2013-26/count
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