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on Central Banking |
| By: | Angel Ubide (Peterson Institute for International Economics) |
| Abstract: | Inflation in the euro area is too low, and the European Central Bank (ECB) is at risk of missing its price stability mandate. With the market forecasting average inflation in the euro area over the next five years in the 1.25 to 1.5 percent range, the ECB must prepare to act forcefully to push inflation higher. The ECB should (1) update the definition of price stability as inflation at 2 percent over 2 to 3 years to eliminate the ambiguity over the inflation objective; (2) reduce risk premia in the yield curve via a program of quantitative easing, making clear that this is a monetary policy operation—and thus legal under the Maastricht Treaty; and (3) ease the quantitative credit shortages to small and medium enterprises (SMEs) via a well-designed lending program, offering long-term funds at the policy rate to banks who lend to SMEs. These actions would restore price stability and encourage sustainable growth. |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:iie:pbrief:pb14-5&r=cba |
| By: | Mauro Napoletano (OFCE); Andrea Roventini (Department of economics); Giovanni Dosi (Laboratory of Economics and Management); Giorgio Fagiolo (Laboratory of Economics and Management (LEM)); Tania Treibich |
| Abstract: | In this paper we explore the effects of alternative combinations of fiscal and monetary policies under different income distribution regimes. In particular, we aim at evaluating fiscal rules in economies subject to banking crises and deep recessions. We do so using an agent-based model populated by heterogeneous capital- and consumption-good forms, heterogeneous banks, workers/consumers, a Central Bank and a Government. We show that the model is able to reproduce a wide array of macro and micro empirical regularities, including stylised facts concerning financial dynamics and banking crises. Simulation results suggest that the most appropriate policy mix to stabilise the economy requires unconstrained counter-cyclical fiscal policies, where automatic stabilisers are free to dampen business cycles fluctuations, and a monetary policy targeting also employment. Instead, discipline-guided" fiscal rules such as the Stability and Growth Pact or the Fiscal Compact in the Eurozone always depress the economy, without improving public finances, even when escape clauses in case of recessions are considered. Consequently, austerity policies appear to be in general self-defeating. Furthermore, we show that the negative effects of austere fiscal rules are magnified by conservative monetary policies focused on ination stabilisation only. Finally, the effects of monetary and fiscal policies become sharper as the level of income inequality increases. |
| Keywords: | Agent based model; fiscal policy; monetary policy; banking crises; income inequality; austerity policies; disequilibrium dynamics |
| JEL: | C63 E32 E6 E52 G21 O4 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/f6h8764enu2lskk9p6go0e900&r=cba |
| By: | Zied Ftiti; Walid Hichri |
| Abstract: | This paper analyzes the relevance of the inflation targeting (IT) policy in achieving its primary goal of medium-term price stability. Contrary to previous studies, we propose, in this work, a new approach; an intermediate approach that consists in conducting a time-series analysis (employed in the literature under unilateral cases-absolute approach-) with a comparison of inflation performance of IT countries and those of non-IT countries (comparison made in literature under the relative approach). Empirically, we employ a frequency analysis based on evolutionary spectral theory of Priestley (1965-1996) in order to distinguish between different inflation horizons; short-run and the medium-run inflation rate. To check the stability of spectral density functions for inflation series for each country under studied frequencies, we apply a Bai and Perron (2003a, b) test. Our results show that after IT framework implementation, there is no break point in inflation series in short and medium terms. This result is not verified for non-IT countries. Therefore, IT is more relevant in achieving price stability and consequently more effective on inflation expectation anchoring than other monetary policies. |
| Keywords: | Inflation Targeting, Inflation Stability, Structural Change, Evolutionary Spectral Analysis, intermediate approach, pre-requisite. |
| JEL: | C40 E52 E63 |
| Date: | 2014–02–25 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-099&r=cba |
| By: | Junye Li (ESSEC Business School); Gabriele Zinna (Bank of Italy) |
| Abstract: | We develop a multivariate credit risk model that accounts for joint defaults of banks and al-lows us to disentangle how much of banks' credit risk is systemic. We find that the US and UK dif-fer not only in the evolution of systemic risk, but in particular in their banks' systemic exposures. In both countries, however, systemic credit risk varies substantially, represents about half of total bank credit risk on average, and induces high risk premia. Further, the results suggest that sovereign and bank systemic risk are particularly interlinked in the UK. |
| Keywords: | systemic bank credit Risk, credit default swaps, distress risk premia, Bayesian estimation |
| JEL: | F34 G12 G15 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_951_14&r=cba |
| By: | Nicolas Barbaroux (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France, Université Jean Monnet, Saint-Etienne, F-42000, France); Patrizia Michel Bellet (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France, Université Jean Monnet, Saint-Etienne, F-42000, France) |
| Abstract: | Myrdal’s works are usually analysed with a dual and separated point of view : on the one hand the methodological papers concerning the value problem and based on a strong non neutrality thesis ; on the other part the theoretical analysis concerning monetary theory and policy, with a Wicksellian filiation. In fact both the dimensions are strongly connected by a common way : the application of the Hägerström’s Swedish guillotine between is and ought, but also the construction of a bridge between economic science and political views on social engineering and economic policy. Myrdal wants to address this problem : how economic science can become politically relevant ? This paper analyses two stages of that unique project : the proposition of a "technology of economics" (1930), and the selection process for a "norm for monetary policy" (1939). It shows that Myrdal distorts an initial end and means scheme by proposing some intermediary concepts between positive and normative fields. From a theoretical and statistical framework and an explicit value judgment these concepts enable to elaborate an iterative tree of selection of a speci-c monetary policy. If the Myrdal’s project encounters difficulties in conciliating a non-cognitivist thesis with economic prescriptions and in proposing a tractable method, it remains an important benchmark for the analysis of the links between positive and normative views concerning monetary policy. |
| Keywords: | value judgment, monetary policy, positive analysis, normative analysis |
| JEL: | B20 E52 B40 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:1408&r=cba |
| By: | Detzer, Daniel; Herr, Hansjörg |
| Abstract: | This paper analyses financial crises from a theoretical point of view. For this it reviews what different schools of economic thought have to say about financial crises. It examines first the approaches that regard financial crises as a disturbing factor of a generally stable real economy (Wicksell, Hayek, Schumpeter, Fisher, and the early Keynes). Thereafter, approaches, where the dichotomy between the monetary and the real sphere is lifted, are reviewed. Here in particular the later works of Keynes and the contributions of Minsky are of importance. Lastly, it is looked at the behavioural finance approaches. After having reviewed the different approaches, it is examined where those approaches have similarities and where they can be combined fruitfully. Based on this, we develop an own theoretical framework methodologically based on a Wicksellian cumulative process, however, overcoming the neoclassical dichotomy. The paper ends with some policy recommendations based on the developed theoretical framework. -- |
| Keywords: | financial crisis,crisis theory,behavioral finance,Hayek,Keynes,Minsky,Schumpeter,Wicksell |
| JEL: | E12 E13 G01 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ipewps:322014&r=cba |
| By: | Jagoda Anna Kaszowska; Tomás Mancha Navarro; Juan Luis Santos |
| Abstract: | In this paper we analyze the most likely and the most desirable developments in financial markets and in a broader sense, the most desirable regulation of the financial sector. The purpose of the essay is in fact to analyze the most important issues of financial regulation and to highlight that finding the most desirable solutions are particularly difficult. These difficulties come from purely technical reasons, the multi-dimensionality of the analyzed problems, but also some aspects of the methodology and philosophy under the current methodological approach for financial regulation. |
| Keywords: | financial regulation, financial crisis, Eurozone |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:uae:wpaper:0214&r=cba |
| By: | Dodig, Nina; Herr, Hansjörg |
| Abstract: | This paper analyses several severe financial crises observed in the history of capitalism which led to a longer period of stagnation or low growth. Comparative case studies of the Great Depression, the Latin American debt crisis of the 1980s and the Japanese crisis of the 1990s and 2000s are presented. The following questions are asked: What triggered big financial crises? Which factors intensified financial crises? And most importantly, which factors prevented the return of prosperity for a long time? The main conclusion is that stagnation after big financial crises becomes likely when the balance sheets of economic units are not quickly cleaned, when the nominal wage anchor breaks, and when there is no big and longer growth stimulus by the state. Some tentative conclusions for the subprime financial crisis and the Great Recession are drawn. -- |
| Keywords: | financial crises,stagnation,deflation,lost decade,Great Depression,Latin American debt crisis,Japanese crisis,Great Recession |
| JEL: | E65 G01 N12 N15 N16 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ipewps:332014&r=cba |
| By: | Eric Eisenstat; Rodney W. Strachan |
| Abstract: | This paper discusses estimation of US inflation volatility using time varying parameter models, in particular whether it should be modelled as a stationary or random walk stochastic process. Specifying inflation volatility as an unbounded process, as implied by the random walk, conflicts with priors beliefs, yet a stationary process cannot capture the low frequency behaviour commonly observed in estimates of volatility. We therefore propose an alternative model with a change-point process in the volatility that allows for switches between stationary models to capture changes in the level and dynamics over the past forty years. To accommodate the stationarity restriction, we develop a new representation that is equivalent to our model but is computationally more efficient. All models produce effectively identical estimates of volatility, but the change-point model provides more information on the level and persistence of volatility and the probabilities of changes. For example, we find a few well defined switches in the volatility process and, interestingly, these switches line up well with economic slowdowns or changes of the Federal Reserve Chair. |
| Keywords: | Inflation volatility, monetary policy, time varying parameter model, Bayesian estimation, Change-point model |
| JEL: | C11 C32 E52 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2014-21&r=cba |
| By: | Zied Ftiti; Duc Khuong Nguyen; Khaled Guesmi; Frédéric Teulon |
| Abstract: | The main objective of this paper consists to study what we learned about the dynamic of Tunisian inflation rate in the last two decades. This question is overriding concern to monetary policy analysis because it gives us information’s on inflation forecasting. In other words, before given monetary policy recommendations to Tunisian policy makers, after the actual downward of economic indicators and the disarmed of monetary policy consequently of Arabic spring, it is consistent to learn and to know the main characteristics of inflation history in this country. In this work, we suggest studying the specifics of Tunisian inflation dynamic’s on two dimensions. Firstly, we think that is useful to learn the different Tunisian inflation experiences regimes. Then, we try to analysis the nature of Tunisian inflation rate response to shocks; we try to analysis the inflation persistence in order to determine the nature of economy response’s to different chocks. This is the first paper proposing this methodology to analyse monetary policy and there is the first one proposing a measure of inflation persistence. In this work, we contribute to empirical literature of inflation persistence by it proposing a new measure based on the theory of evolutionary co-spectral analysis proposed by Priestley and Tong (1973). The mains findings of this paper show a stable inflation regime around 5.5% in the last ten years. We prove that the Tunisia inflation had a higher degree of inertia which traduce it’s gradually response on shocks. Consequently, we suggest to policy makers to make institutional reforms to reduce inflation. |
| Keywords: | Inflation, Strcutural Break, Spectral Analysis, auto-spectral analysis, Bai Berron test, inflation persistence. |
| JEL: | C16 E52 E63 |
| Date: | 2014–02–25 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-124&r=cba |
| By: | Dominique Guegan (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris 1 - Panthéon-Sorbonne); Bertrand Hassani (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris 1 - Panthéon-Sorbonne) |
| Abstract: | Stress testing is used to determine the stability or the resilience of a given financial institution by deliberately submitting. In this paper, we focus on what may lead a bank to fail and how its resilience can be measured. Two families of triggers are analysed: the first stands in the stands in the impact of external (and / or extreme) events, the second one stands on the impacts of the choice of inadequate models for predictions or risks measurement; more precisely on models becoming inadequate with time because of not being sufficiently flexible to adapt themselves to dynamical changes. |
| Keywords: | Stress test; risk; VaR |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00951593&r=cba |
| By: | Rajmund Mirdala |
| Abstract: | Responsiveness of exchange rates to external price shocks as well as their ability to serve as a traditional vehicle for a transmission of these shocks to domestic prices is affected by exchange rate arrangement adopted by monetary authorities. As a result, exchange rate volatility determines the overall dynamics of pass-through effects and associated absorption capability of exchange rate. Ability of exchange rates to transmit external (price) shocks to the national economy represents one of the most discussed areas relating to the current stage of the monetary integration in the European single market. The problem is even more crucial when examining crisis related redistributive effects. In the paper we analyze exchange rate pass-through to domestic prices in the European transition economies. We estimate VAR model to investigate (1) responsiveness of exchange rate to the exogenous price shock to examine the dynamics (volatility) in the exchange rate leading path followed by the unexpected oil price shock and (2) effect of the unexpected exchange rate shift to domestic price indexes to examine its distribution along the internal pricing chain. To provide more rigorous insight into the problem of exchange rate pass-through to the domestic prices in countries with different exchange rate arrangements we estimate models for two subsequent periods 2000-2007 and 2000-2012. Our results suggest that there are different patterns of exchange rate pass-through to domestic prices according to the baseline period as well as the exchange rate regime diversity. |
| Keywords: | exchange rate pass-through, inflation, VAR, Cholesky decomposition, impulse-response function |
| JEL: | C32 E31 F41 |
| Date: | 2014–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2014-1070&r=cba |
| By: | Stolbov, Mikhail |
| Abstract: | The article examines causal relationships between sovereign credit default swaps (CDS) prices for the BRICS and most important EU economies (Germany, France, the UK, Italy, Spain) during the European debt crisis. The cross-correlation function (CCF) approach used in the research distinguishes between causality-in-mean and causality-in-variance. In both causality dimensions, the BRICS CDS prices tend to Granger cause those of the EU counterparts with the exception of Germany. Italy and Spain exhibit the highest dependence on the BRICS, whereas only India has a negative balance of outgoing and incoming causal linkages among the BRICS. Thus, the paper underscores the signs of decoupling effects in the sovereign CDS market and also supports the view that the European debt crisis has so far had a limited non-EU impact in this market. -- |
| Keywords: | sovereign credit default swaps (CDS),causality-in-mean,causality-in-variance,European debt crisis,BRICS,decoupling |
| JEL: | C50 G10 G15 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:20149&r=cba |