Currency unions limit the ability of the central bank to use interest rate policy to accommodate asymmetric shocks. I show that collateral policy can serve to dampen asymmetric shocks in a currency area when these shocks also affect the collateral held by banks and when collateral portfolios of banks differ systematically across countries. In my model banks from 2 countries use collateral to borrow from the money market or a central bank that targets a level of interest rate (or investment) in each economy. The distressed bank may enter a “collateral crunch” regime where it is constrained in its access to funding due to a moral hazard problem. The central bank faces an heterogeneous transmission of its interest rate: a unit change in rate has a smaller effect on the economy rate of the distressed country. The central bank therefore sets a high interest rate which is well transmitted in the booming economy and relaxes the haircut on the collateral owned by the distressed bank.
{"title":"Asymmetric Shocks in a Currency Union: The Role of Central Bank Collateral Policy","authors":"François Koulischer","doi":"10.2139/SSRN.2607944","DOIUrl":"https://doi.org/10.2139/SSRN.2607944","url":null,"abstract":"Currency unions limit the ability of the central bank to use interest rate policy to accommodate asymmetric shocks. I show that collateral policy can serve to dampen asymmetric shocks in a currency area when these shocks also affect the collateral held by banks and when collateral portfolios of banks differ systematically across countries. In my model banks from 2 countries use collateral to borrow from the money market or a central bank that targets a level of interest rate (or investment) in each economy. The distressed bank may enter a “collateral crunch” regime where it is constrained in its access to funding due to a moral hazard problem. The central bank faces an heterogeneous transmission of its interest rate: a unit change in rate has a smaller effect on the economy rate of the distressed country. The central bank therefore sets a high interest rate which is well transmitted in the booming economy and relaxes the haircut on the collateral owned by the distressed bank.","PeriodicalId":436944,"journal":{"name":"PSN: Central Banking & Reserves (Topic)","volume":"47 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131012362","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2014-05-01DOI: 10.5089/9781484387368.001.A001
Andrew J. Swiston, Florencia Frantischek, Przemek Gajdeczka, Alexander Herman
This paper examines the financial strength of central banks in Central America and the Dominican Republic (CADR). Some central banks are working off the effects of intervention in distressed financial institutions during the 1990’s and early 2000’s. Their net income has improved since then owing to lower interest rates, a reduction in interest bearing debt, and recapitalization transfers. Claims on the government have fallen, but remain high and are typically reimbursed at below-market rates, and capital is negative when adjusting for this. Capital is sufficient to back a low inflation target given that the income position is supported by unremunerated reserve requirements. Capital is likely to increase over time, but only gradually, leaving countries vulnerable to macroeconomic risks. The capacity of CADR central banks to engage in macroeconomic stabilization would benefit from increased emphasis on low inflation as the primary objective of monetary policy and a stronger commitment by governments to recapitalization.
{"title":"Central Bank Financial Strength in Central America and the Dominican Republic","authors":"Andrew J. Swiston, Florencia Frantischek, Przemek Gajdeczka, Alexander Herman","doi":"10.5089/9781484387368.001.A001","DOIUrl":"https://doi.org/10.5089/9781484387368.001.A001","url":null,"abstract":"This paper examines the financial strength of central banks in Central America and the Dominican Republic (CADR). Some central banks are working off the effects of intervention in distressed financial institutions during the 1990’s and early 2000’s. Their net income has improved since then owing to lower interest rates, a reduction in interest bearing debt, and recapitalization transfers. Claims on the government have fallen, but remain high and are typically reimbursed at below-market rates, and capital is negative when adjusting for this. Capital is sufficient to back a low inflation target given that the income position is supported by unremunerated reserve requirements. Capital is likely to increase over time, but only gradually, leaving countries vulnerable to macroeconomic risks. The capacity of CADR central banks to engage in macroeconomic stabilization would benefit from increased emphasis on low inflation as the primary objective of monetary policy and a stronger commitment by governments to recapitalization.","PeriodicalId":436944,"journal":{"name":"PSN: Central Banking & Reserves (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130104022","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2014-04-01DOI: 10.5089/9781484362518.001.A001
R. Mohan, Muneesh Kapur
The unconventional monetary policies (UMPs) pursued by the advanced economies (AEs) have posed macroeconomic challenges for the emerging market economies (EMEs) through volatile capital flows and exchange rates. AE central banks need to acknowledge and appreciate the spillovers resulting from such UMPs. Central banks of the AEs, who have set up standing mutual swap facilities, should explore similar arrangements with other significant EMEs with appropriate risk mitigation measures. These initiatives could do much to actually curb volatility in global financial markets and hence in capital flows to EMEs, thus obviating the need for defensive policy actions on the part of EMEs.
{"title":"Monetary Policy Coordination and the Role of Central Banks","authors":"R. Mohan, Muneesh Kapur","doi":"10.5089/9781484362518.001.A001","DOIUrl":"https://doi.org/10.5089/9781484362518.001.A001","url":null,"abstract":"The unconventional monetary policies (UMPs) pursued by the advanced economies (AEs) have posed macroeconomic challenges for the emerging market economies (EMEs) through volatile capital flows and exchange rates. AE central banks need to acknowledge and appreciate the spillovers resulting from such UMPs. Central banks of the AEs, who have set up standing mutual swap facilities, should explore similar arrangements with other significant EMEs with appropriate risk mitigation measures. These initiatives could do much to actually curb volatility in global financial markets and hence in capital flows to EMEs, thus obviating the need for defensive policy actions on the part of EMEs.","PeriodicalId":436944,"journal":{"name":"PSN: Central Banking & Reserves (Topic)","volume":"20 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116631204","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper analyses the potential roles of bank asset fire sales and recourse to central bank credit to ensure banks' funding liquidity and solvency. Both asset liquidity and central bank haircuts are modelled as power functions within the unit interval. Funding stability is captured as strategic bank run game in pure strategies between depositors. Asset liquidity, the central bank collateral framework and regulation determine jointly the ability of the banking system to deliver maturity transformation and financial stability. The model also explains why banks tend to use the least liquid eligible assets as central bank collateral and why a sudden non-anticipated reduction of asset liquidity, or a tightening of the collateral framework, can destabilize short term liabilities of banks. Finally, the model allows discussing how the collateral framework can be understood, beyond its essential aim to protect the central bank, as financial stability and non-conventional monetary policy instrument. JEL Classification: E42, G21
{"title":"Central Bank Collateral, Asset Fire Sales, Regulation and Liquidity","authors":"U. Bindseil","doi":"10.2139/ssrn.2350657","DOIUrl":"https://doi.org/10.2139/ssrn.2350657","url":null,"abstract":"This paper analyses the potential roles of bank asset fire sales and recourse to central bank credit to ensure banks' funding liquidity and solvency. Both asset liquidity and central bank haircuts are modelled as power functions within the unit interval. Funding stability is captured as strategic bank run game in pure strategies between depositors. Asset liquidity, the central bank collateral framework and regulation determine jointly the ability of the banking system to deliver maturity transformation and financial stability. The model also explains why banks tend to use the least liquid eligible assets as central bank collateral and why a sudden non-anticipated reduction of asset liquidity, or a tightening of the collateral framework, can destabilize short term liabilities of banks. Finally, the model allows discussing how the collateral framework can be understood, beyond its essential aim to protect the central bank, as financial stability and non-conventional monetary policy instrument. JEL Classification: E42, G21","PeriodicalId":436944,"journal":{"name":"PSN: Central Banking & Reserves (Topic)","volume":"69 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2013-11-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128664412","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this paper we study dollarization as a commitment device that the Central Bank could use to avoid getting involved in an undesirable banking-sector bailout. We show how a political process could induce an equilibrium outcome that differs from the one that a benevolent Central Bank would want to implement. Dollarization then could be used to restore the economy to the benevolent outcome. In so doing though, political support for dollarization becomes essential. For our benchmark case, dollarization does not have enough support to be actually implemented. But when we study the interaction among dollarization, the introduction of international banks, and the political process, we find that bank internationalization may help to attain the necessary political support that can make dollarization a viable policy.
{"title":"Banking and the Political Support for Dollarization","authors":"Huberto M. Ennis","doi":"10.2139/ssrn.2126779","DOIUrl":"https://doi.org/10.2139/ssrn.2126779","url":null,"abstract":"In this paper we study dollarization as a commitment device that the Central Bank could use to avoid getting involved in an undesirable banking-sector bailout. We show how a political process could induce an equilibrium outcome that differs from the one that a benevolent Central Bank would want to implement. Dollarization then could be used to restore the economy to the benevolent outcome. In so doing though, political support for dollarization becomes essential. For our benchmark case, dollarization does not have enough support to be actually implemented. But when we study the interaction among dollarization, the introduction of international banks, and the political process, we find that bank internationalization may help to attain the necessary political support that can make dollarization a viable policy.","PeriodicalId":436944,"journal":{"name":"PSN: Central Banking & Reserves (Topic)","volume":"36 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2000-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129355309","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper shows that international policy coordination is not counterproductive in a world where the incentive to run beggar-thy-neighbor policies internationally arises from the inefficiency that characterizes, within each country, the interaction between policymakers and private agents. The domestic inefficiency arises from the presence of nominal contracts that give central banks the power to affect real variables. In this setting we show that international cooperation belongs to central banks' dominant strategy. The paper is motivated by a common and misleading interpretation of a paper by Rogoff [1985], namely that international cooperation may be counterproductive in the presence of a domestic inefficiency.
{"title":"Can International Policy Coordination Really Be Counterproductive?","authors":"C. Carraro, F. Giavazzi","doi":"10.3386/W2669","DOIUrl":"https://doi.org/10.3386/W2669","url":null,"abstract":"This paper shows that international policy coordination is not counterproductive in a world where the incentive to run beggar-thy-neighbor policies internationally arises from the inefficiency that characterizes, within each country, the interaction between policymakers and private agents. The domestic inefficiency arises from the presence of nominal contracts that give central banks the power to affect real variables. In this setting we show that international cooperation belongs to central banks' dominant strategy. The paper is motivated by a common and misleading interpretation of a paper by Rogoff [1985], namely that international cooperation may be counterproductive in the presence of a domestic inefficiency.","PeriodicalId":436944,"journal":{"name":"PSN: Central Banking & Reserves (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"1988-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130895093","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Peter Bednarek, Valeriya Dinger, Daniel Marcel te Kaat, Natalja von Westernhagen
This paper examines the relationship between central bank funding and credit risk-taking. Employing comprehensive bank-firm-level data from the German credit registry during 2009:Q1-2014:Q4, we find that borrowing from the central bank is associated with rebalancing of bank portfolios towards ex-ante riskier firms. We further establish that this relationship is associated with the ECB's maturity extensions and that the risk-taking sensitivity of banks borrowing from the ECB is independent of idiosyncratic bank characteristics. Finally, we highlight that these shifts in bank lending might lead to an ex-post deterioration of bank balance sheets, but increase firm-level investment and employment.
{"title":"Central Bank Funding and Credit Risk-Taking","authors":"Peter Bednarek, Valeriya Dinger, Daniel Marcel te Kaat, Natalja von Westernhagen","doi":"10.2139/ssrn.3665127","DOIUrl":"https://doi.org/10.2139/ssrn.3665127","url":null,"abstract":"This paper examines the relationship between central bank funding and credit risk-taking. Employing comprehensive bank-firm-level data from the German credit registry during 2009:Q1-2014:Q4, we find that borrowing from the central bank is associated with rebalancing of bank portfolios towards ex-ante riskier firms. We further establish that this relationship is associated with the ECB's maturity extensions and that the risk-taking sensitivity of banks borrowing from the ECB is independent of idiosyncratic bank characteristics. Finally, we highlight that these shifts in bank lending might lead to an ex-post deterioration of bank balance sheets, but increase firm-level investment and employment.","PeriodicalId":436944,"journal":{"name":"PSN: Central Banking & Reserves (Topic)","volume":"35 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"1900-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126817267","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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