Record ID

486     [ Page 21 of 68, No. 1 ]

Date

2014-03

Author

Michal Skorepa and Jakub Seidler

Affiliation

Czech National Bank

Title

Capital Buffers Based on Banks' Domestic Systemic Importance: Selected Issues

Summary /
Abstract

Regulators in many countries are currently considering ways to impose domestic systemic importance-based capital requirements on banks. Aiming to assist these considerations, this article discusses a number of issues concerning the calculation of a bank's systemic importance to the domestic banking sector, such as the choice of indicators used and the pros and cons of focusing on an individual or consolidated level. Also, the 'equal expected impact' procedure for determining adequate additional capital requirements is presented in detail and some of its properties are discussed. As an illustrative example of the practical use of the procedures presented, systemic importance scores and implied capital buffers are calculated for banks in the Czech Republic. The article also stresses the crucial role of public communication of the motivation for the buffers: regulators should make every effort to explain that the imposition of a non-zero systemic importance-based capital buffer on a bank is not to be interpreted by the markets as a signal that the bank is too big to fail and would therefore be guaranteed a public bail-out if it got into difficulties.

Keywords

Bank failure, Basel III, capital adequacy, consolidation, systemic importance, public support

URL

http://www.cnb.cz/miranda2/export/sites/www.cnb.cz/en/research/research_publications/irpn/download/rpn_1_2014.pdf

Record ID

485     [ Page 21 of 68, No. 2 ]

Date

2014-04

Author

Tayler, William and Zilberman, Roy

Affiliation

Lancaster University Management School, Department of Economics, United Kingdom

Title

Macroprudential Regulation and the Role of Monetary Policy

Summary /
Abstract

This paper examines the macro-prudential roles of bank capital regulation and monetary policy in a Dynamic Stochastic General Equilibrium model with endogenous financial frictions and a borrowing cost channel. We identify various transmission channels through which credit risk, commercial bank losses, monetary policy and bank capital requirements affect the real economy. These mechanisms generate significant financial accelerator effects, thus providing a rationale for a macro-prudential toolkit. Following credit shocks, counter-cyclical bank capital regulation is more effective than monetary policy in promoting financial, price and overall macroeconomic stability. For supply shocks, macro-prudential regulation combined with a strong response to inflation in the central bank policy rule yield the lowest welfare losses. The findings emphasize the importance of the Basel III regulatory accords and cast doubt on the desirability of conventional Taylor rules during periods of financial distress.

Keywords

Bank Capital Regulation; Macroprudential Policy; Basel III; Monetary Policy; Borrowing Cost Channel

URL

http://www.dynare.org/wp-repo/dynarewp037.pdf

Record ID

484     [ Page 21 of 68, No. 3 ]

Date

2014-04

Author

Fabio Comelli

Affiliation

Institute for Capacity Development, IMF

Title

Comparing the Performance of Logit and Probit Early Warning Systems for Currency Crises in Emerging Market Economies

Summary /
Abstract

We compare how logit (fixed effects) and probit early warning systems (EWS) predict insample and out-of-sample currency crises in emerging markets (EMs). We look at episodes of currency crises that took place in 29 EMs between January 1995 and December 2012. Stronger real GDP growth rates and higher net foreign assets significantly reduce the probability of experiencing a currency crisis, while high levels of credit to the private sector increase it. We find that the logit and probit EWS out-of-sample performances are broadly similar, and that the EWS performance can be very sensitive both to the size of the estimation sample, and to the crisis definition employed. For macroeconomic policy purposes, we conclude that a currency crisis definition identifying more rather than less crisis episodes should be used, even if this may lead to the risk of issuing false alarms.

Keywords

Early warning systems, currency crises, out-of-sample performance

URL

http://www.imf.org/external/pubs/ft/wp/2014/wp1465.pdf

Record ID

483     [ Page 21 of 68, No. 4 ]

Date

2014-04

Author

Rahul Anand, Volodymyr Tulin, and Naresh Kumar

Affiliation

Asia and Pacific Department, IMF

Title

India: Defining and Explaining Inclusive Growth and Poverty Reduction

Summary /
Abstract

We document the evolution of poverty and inequality across Indian states during the recent period of rapid growth (2004-09), and examine the role of growth and distribution in reducing poverty. Robust economic growth has been a major driver of poverty reduction and inclusiveness in India. We explore the role of economic policies and macro-financial conditions in explaining inclusive growth and its components, using a new measure of inclusive growth. Social expenditures, spending on education, and educational attainment rates are important for fostering inclusive growth. Macro-financial stability, with particular attention to inflation risks, is also critical for promoting inclusive growth.

Keywords

India, state le vel growth, poverty, inequa lity, inclusive growth

URL

http://www.imf.org/external/pubs/ft/wp/2014/wp1463.pdf

Record ID

482     [ Page 21 of 68, No. 5 ]

Date

2014-04

Author

Jaromir Benes, Michael Kumhof, and Douglas Laxton

Affiliation

Research Department, IMF

Title

Financial Crises in DSGE Models: A Prototype Model

Summary /
Abstract

This paper, together with a technical companion paper, presents MAPMOD, a new IMF model designed to study vulnerabilities associated with excessive credit expansions, and to support macroprudential policy analysis. In MAPMOD, bank loans create purchasing power that facilitates adjustments in the real economy. But excessively large and risky loans can impair balance sheets and sow the seeds of a financial crisis. Banks respond to losses through higher spreads and rapid credit cutbacks, with adverse effects for the real economy. These features allow the model to capture the basic facts of both the pre-crisis and crisis phases of financial cycles.

Keywords

Lending boom, credit crunch, financial crisis, financialy cycle, asset price bubble, macroprudential policy

URL

http://www.imf.org/external/pubs/ft/wp/2014/wp1457.pdf

Record ID

481     [ Page 21 of 68, No. 6 ]

Date

2014-03

Author

IMF Policy Paper

Affiliation

International Monetary Fund

Title

Conditionality in Evolving Monetary Policy Regimes

Summary /
Abstract

With single-digit inflation and substantial financial deepening, developing countries are adopting more flexible and forward-looking monetary policy frameworks and ascribing a greater role to policy interest rates and inflation objectives. While some countries have adopted formal inflation targeting regimes, others have developed frameworks with greater target flexibility to accommodate changing money demand, use of policy rates to signal the monetary policy stance, and implicit inflation targets.

Keywords

Conditionality, Monetary Policy Regimes

URL

http://www.imf.org/external/np/pp/eng/2014/030514b.pdf

Record ID

480     [ Page 21 of 68, No. 7 ]

Date

2014-02

Author

Seitz, Franz and Schmidt, Markus A.

Affiliation

Weiden Technical University of Applied Sciences and Deutsche Bundesbank

Title

Money in modern macro models: A review of the argument

Summary /
Abstract

This paper provides an overview of the role of money in modern macro models. In particular, we are focusing on New Keynesian and New Monetarist models to investigate their main findings and most significant shortcomings in considering money properly. As a further step, we ask about the role of financial intermediaries in this respect. In dealing with these issues, we distinguish between narrow and broad monetary aggregates. We conclude that for theoretical as well as practical reasons a periodic review of the definition of monetary aggregates is advisable. Despite the criticism brought forward by the recent New Keynesian literature, we argue that keeping an eye on money is important to monetary policy decision-makers in order to safeguard price stability as well as, as a side-benefit, ensure financial market stability. In a nutshell: money still matters.

Keywords

Money, New Keynesian model, New Monetarist model, financial intermediaries

URL

http://econstor.eu/bitstream/10419/94190/1/779971914.pdf

Record ID

479     [ Page 21 of 68, No. 8 ]

Date

2014-03

Author

Federico Ravenna

Affiliation

HEC Montréal, Institute of Applied Economics and CIRPÉE

Title

How Central Banks Learn the True Model of the Economy

Summary /
Abstract

Policy decisions affect economic outcomes, and the likelihood of observing a given state of the world. We investigate how policy choices affect learning of the true model of the economy when the policymaker’s model is mis-specified. We ask under what conditions can the central bank learn the correct specification of the model describing the economy, and what is the impact of exogenous shocks and of adopting an optimal monetary policy on the speed of learning. Slow learning can occur simply because identifying the correct model at standard confidence levels requires a long data sample. We show that neither real-time learning by the policymaker or the private sector, nor the adoption of an optimal policy, affect the speed of detection of model misspecification. Detection speed depends instead on the relative volatility of supply and demand shocks.

Keywords

Learning, Optimal policy, Model misspecification

URL

http://www.cirpee.org/fileadmin/documents/Cahiers_2014/CIRPEE14-09.pdf

Record ID

478     [ Page 21 of 68, No. 9 ]

Date

2014-03

Author

Bernd Hayo and Britta Niehof

Affiliation

University of Marburg

Title

Analysis of Monetary Policy Responses After Financial Market Crises in a Continuous Time New Keynesian Model

Summary /
Abstract

We develop a dynamic stochastic full equilibrium New Keynesian model of two open economies based on stochastic differential equations to analyse the interdependence between monetary policy and financial markets in the context of the recent Financial crisis. The effect of bubbles on stock and housing markets and their transmission to the domestic real economy and the contagious effects on foreign markets are studied. We simulate adjustment paths for the economies under two monetary policy rules: an open-economy Taylor rule and a modified Taylor rule, which takes into account stabilisation of financial markets as a monetary policy objective. We find that for the price of a strong hike in inflation a severe economic recession can be avoided under the modified rule. Using Bayesian estimation techniques, we calibrate the model to the case of the United States and Canada and find that the resulting economic adjustment paths are similar to those of the theoretical model.

Keywords

New Keynesian Model, Financial Crisis, Stochastic Differential Equation, Monetary Policy, Taylor Rule

URL

http://www.uni-marburg.de/fb02/makro/forschung/magkspapers/21-2014_hayo.pdf

Record ID

477     [ Page 21 of 68, No. 10 ]

Date

2014-02

Author

Ahmet Faruk Aysan, Salih Fendoglu, and Mustafa Kilinc

Affiliation

Central Bank of Turkey

Title

Macroprudential Policies as Buffer Against Volatile Cross-border Capital Flows

Summary /
Abstract

This paper investigates the effectiveness of macroprudential policies introduced by Turkey in late 2010. The unprecedented quantitative easing policies of advanced countries after the global financial crisis have presented serious financial stability concerns for most emerging countries including Turkey. To cope with these challenges, Turkey has devised new policy tools such as asymmetric interest rate corridor and reserve option mechanism. From the perspective of capital flows, the interest rate corridor works mainly through stabilizing supply of foreign funds, and the reserve option mechanism through decreasing the sensitivity of equilibrium exchange rate to shifts in the demand for foreign funds. Using a large panel of 46 countries and employing Bruno and Shin (2013a,b)’s methodology, we investigate whether the new policy framework in Turkey has been successful in cushioning the economy from volatile cross-border capital flows from a comparative perspective. The results show that, after controlling for a set of domestic and external variables and relative to a group of advanced and emerging countries, cross-border capital flows to Turkey have been less sensitive to global factors after the implementation of macroprudential policies.

Keywords

Capital Flows, Macroprudential Policies

URL

http://www.tcmb.gov.tr/research/discus/2014/WP1404.pdf