Central Bank Actions Research Articles

Revealing the Secrets of the Temple: The Value of Publishing Central Bank Interest Rate Projections

The modern view of monetary policy stresses its role in shaping the entire yield curve of interest rates in order to achieve various macroeconomic objectives. A crucial element of this process involves guiding financial market expectations of future central bank actions. Recently, a few central banks have started to explicitly signal their future policy intentions to the public, and two of these banks have even begun publishing their internal interest rate projections. We examine the macroeconomic effects of direct revelation of a central bank's expectations about the future path of the policy rate. We show that, in an economy where private agents have imperfect information about the determination of monetary policy, central bank communication of interest rate projections can help shape financial market expectations and may improve macroeconomic performance.

The invisible hand on banking

The irony is that banking systems without a central bank free banking systems lay down a theoretical blueprint for central bank activities, justifying Reserve Bank of Australia operations since deregulation, writes Trevor Coombes. Copyright 2007 Trevor Coombes. No part of this article may be reproduced by any means without the written consent of the publisher.

The invisible hand on banking

The irony is that banking systems without a central bank free banking systems lay down a theoretical blueprint for central bank activities, justifying Reserve Bank of Australia operations since deregulation, writes Trevor Coombes. Copyright 2007 Trevor Coombes. No part of this article may be reproduced by any means without the written consent of the publisher.

A crise da marcação a mercado em 2002: uma perspectiva histórica

In this paper we analyze, in a historical perspective, the background and implications of the implementation of the mark-to-market rule on investment funds on May 31, 2002. In the preceding months, LFTs (Treasury Bills) were being traded with increasing spreads, negatively affecting fund industry results and generating a substantial volume of fund withdrawals by the public. We also discuss Central Bank actions during the crisis, the behavior of asset managers and investors, and the consequences of the event for public debt dynamics.

Revealing the Secrets of the Temple: The Value of Publishing Central Bank Interest Rate Projections

The modern view of monetary policy stresses its role in shaping the entire yield curve of interest rates in order to achieve various macroeconomic objectives. A crucial element of this process involves guiding financial market expectations of future central bank actions. Recently, a few central banks have started to explicitly signal their future policy intentions to the public, and two of these banks have even begun publishing their internal interest rate projections. We examine the macroeconomic effects of direct revelation of a central bank's expectations about the future path of the policy rate. We show that, in an economy where private agents have imperfect information about the determination of monetary policy, central bank communication of interest rate projections can help shape financial market expectations and may improve macroeconomic performance.

Revisiting the Delegation Problem in a Sticky Price and Wage Economy

In a stylized economy with price and wage stickiness, this paper argues that delegating a nominal wage target to a central bank operating under discretion generally delivers better social outcomes than delegating price level or in∞ation targets. Although both policies impart inertia into central bank actions, wage targeting dominates price level targeting because the former delivers a more favorable tradeofi between the stabilization goals appearing in the social welfare function, namely, price in∞ation, wage in∞ation, and the output gap. Delegation of a dual policy featuring both price level and nominal wage targets, however, nearly replicates the e‐cient outcome accompanying the precommitment policy from a timeless perspective.

The Papua New Guinea Kina's Fear of Floating

Calvo and Reinhart (2002) demonstrated that there is a pervasive 'fear of floating' to be found in emerging market currencies, and that officially announced currency regimes may diverge from actual central bank practice. The Papua New Guinea kina is officially a floating currency, but there are a number of reasons why this is unlikely to be the case in practice. This analysis uses the Calvo and Reinhart method to show that, like many other emerging market 'floating' currencies, the kina more closely resembles a managed regime.

Price Convergence on World Commodity Markets: Fact or Fiction?

This article examines the degree to which commodity prices have converged on world commodity markets over recent decades. Ideally, increases in communications, central bank activities, and globalization would suggest that commodity prices in spatially dispersed markets should become similar over time. To measure convergence, correlation, regression, cointegration, and vector autoregressive methods are employed. Comparable geographic data were assembled for six commodities: coffee, cotton, wheat, lead, copper, and tin, covering the period 1930 through 1998. Overall, the empirical results do not support the convergence hypothesis but rather a pattern of fluctuating divergences.

Is Foreign Exchange Intervention Effective? Some Micro-Analytical Evidence from the Czech Republic

We estimate a two-equation system on the euro-Czech koruna exchange rate and order flow at hourly frequency within the framework of Evans-Lyons (2001, JME). We use transactions data from the Reuters Spot Matching market in the second half of 2002, during which the Czech National Bank conducted discreet interventions to stem the appreciation of the domestic currency. We find a significant impact of order flow on the exchange rate, equal on average to 7.6 basis points per 10 million Euro, of which 80 percent persists through the day. The news of intervention increases the price impact of order flow by 3.9 basis points per 10 million Euro, consistently with the notion of intervention efficacy. The order flow equation yields inconclusive results. Our findings on the intraday behavior of the exchange rate provide useful insights on the conditions for effective central bank actions in the future, in view of participation in the ERM II.

Interbank market frictions, international banks and growth

In developing countries and countries in transition, a lack of finance is regarded as a major reason for the underperformance of the SME sector. The financial sector does not channel funds efficiently from savers to the most efficient investment. In a general equilibrium endogenous growth model, we explain the underperformance of the SME sector by interbank market frictions. High information costs in the interbank market lead to a high loan/deposit spread and hence to a low growth equilibrium. The solution to this problem is twofold. First, central bank policy could reduce interbank information problems by providing effective bank supervision. Second, if the central bank is expected not to have sufficient monitoring capabilities, reputation and reserves, opening up the interbank market to international banks can substitute for insufficient central bank activities.

Rethinking the role of NCBs in the EMU

Five years after the introduction of unified monetary policy in the EMU, some member countries are wondering whether they have ceded too much of their policy-making powers. The fact that National Central Banks no longer carry out sizable expansionary open market or foreign exchange market operations suggests that they face substantially reduced abilities to set economic policy. This paper demonstrates that, in fact, very little power has been yielded: on the fiscal front, the force of such policy initiatives is enhanced by the fixity of the exchange rate. On the monetary front, we show that there is an observational equivalence between all Central Bank actions under fixed exchange rates. This implies that the authorities retain the same amount of policy flexibility as before. So long as they use an alternative form of policy initiative, carrying out what previously would have been characterized as sterilized foreign exchange market operations, their ability to influence the macro performance of their economy is undiminished.

Applying Efficiency Measurement Techniques to Central Banks

This paper reviews the standard techniques of efficiency measurement, discusses some of the issues that arise in applying these standard techniques to central banks, and reviews some of the literature that has attempted to apply these techniques to central banking. The uniqueness of some of the activities of central banking, the difficulty in measuring some of the central banking outputs, and the complicated and multiple objectives pursued by central banks makes application of the standard techniques problematic. However, certain central bank activities do lend themselves to efficiency measurement, e.g., payment services provision.

Liquidity support to banks during Indonesia's financial crisis

During the 1997–98 financial crisis, Bank Indonesia provided liquidity support to many banks experiencing difficulties. This policy became controversial because of the magnitude of the likely losses to the government, which in the end would have to be borne by the general public. Suspicions of corruption involving bankers and officials of Bank Indonesia fuelled the debate. Surprisingly, however, concerns of this kind have not been raised in relation to the far larger amount of support provided to banks by the government in the form of recapitalisation bonds. The public's lack of understanding of the operations of the banking sector further complicated the debate. This paper attempts to shed some light on the central bank's actions and on the proposed solutions to the problems that arose from them.

Development of Financial Markets and Macroeconomic Policy

This paper provides a general overview of the ways that macroeconomic policies can advance or retard financial development, as well as of how financial development can affect the functioning of macroeconomic policies, with a specific focus on how it can alter the mechanisms through which central bank actions can influence domestic economic activity. Understanding the latter is important, because a failure to appreciate how the effects of monetary policy are likely to change as the financial system evolves could make the process of financial development and innovation itself a source of macroeconomic instability. The key findings are that the relative importance of alternative channels of monetary transmission is likely to vary in a systematic way over the course of financial development and that financial development enhances the premium on transparency and predictability of monetary policy. Copyright 2003, Oxford University Press.

A transaction level study of the effects of central bank intervention on exchange rates

We study the effects of sterilised intervention operations executed on behalf of the Swiss National Bank (SNB) using tick-by-tick transactions data between 1986 and 1995. We extend the preliminary analysis of [Economic Journal 109 (1999) 662] by matching these data with indicative intra-day exchange rate quotes and news-wire reports of central bank activity. Using an event study approach we find that intervention has important short-run effects on exchange rate returns. In particular, among various results, we find that i) intervention has a stronger impact when the SNB moves with- the- market and when its activity is concerted with that of other central banks and ii) exchange rate returns move in the 15 min interval prior to interventions.

The Present and Future of Monetary Policy Rules

To consider the prospects, looking 20-30 years into the future, for monetary policymaking in accordance with policy rules, one must evaluate their present importance. That requires some definition of what constitutes rule-based monetary policy in practice, since no actual central bank will ever be literally bound by any simple formula (or any strict optimal control scheme). Consideration of the rules-versus-discretion literature, plus more recent analysis by Woodford (1999), indicates that rule-based policy is conducted to satisfy relationships specified from a timeless perspective.' Given this conception, it seems reasonably clear that today's prominent regimes (e.g., inflation targeting) do largely represent rule-based policymaking. Whether these will prevail into the future will depend in part on political trends, but their fundamental soundness gives room for hope. Regarding the effects of a gradually diminishing role of money, it would appear that the feasibility and attractiveness of rule-based policymaking will not be seriously impaired so long as a tangible medium of exchange has some importance, even if small. In the complete absence of monetary transactions, there would be no monetary policy of any type, rule-based or discretionary. But it seems highly unlikely that money will disappear in the foreseeable future.(This abstract was borrowed from another version of this item.)

Measuring Central Bank Independence in Selected Transition Countries and the Disinflation Process

The paper measures the degree of legal and actual central bank independence (CBI) in five Central and Eastern European transition economies striving for EU accession, namely the Czech Republic, Hungary, Poland, Slovakia and Slovenia (CEEC-5). The degree of legal CBI is measured by applying the two most widely used indices, the Cukierman and the Grilli-Masciandaro-Tabellini (GMT) indices. Moreover, the turnover rate of central bank governors is used as a proxy to measure actual CBI. The paper gives an interpretation of computed results, comparing the findings with those of other authors and earlier calculations. Furthermore, the indices on legal and actual CBI themselves are critically reviewed, in particular against the background of the Maastricht Treaty requirements, which in practice constitute the driving force for any amendment of central bank laws in the CEEC-5. Moreover, the role of CBI in bringing down inflation in the CEEC-5 at different stages of transition is briefly discussed. The paper concludes that the overall degree of legal CBI is comparatively high in all countries examined, while the measured turnover rates of governors do not seem to fully reflect the degree of actual CBI in the CEEC-5. Looking at the role of CBI in the disinflation process at different stages of transition, the main causes for inflation seem to have been beyond the direct control of the central bank. A high degree of CBI, together with a reasonable mix of fiscal and monetary policies as well as structural reforms, will be necessary for the CEEC-5 to meet all requirements for joining the EU and, in a more distant future, for adopting the euro.

Technical trading rule profitability and foreign exchange intervention

There is reliable evidence that simple rules used by traders have some predictive value over the future movement of foreign exchange prices. This paper will review some of this evidence and discuss the economic magnitude of this predictability. The profitability of these trading rules will then be analyzed in connection with central bank activity using intervention data from the Federal Reserve. The objective is to find out to what extent foreign exchange predictability can be confined to periods of central bank activity in the foreign exchange market. The results indicate that after removing periods in which the Federal Reserve is active, exchange rate predictability is dramatically reduced.

Exchange Rates, Domestic Prices, and Central Bank Actions: Recent U. S. Experience

Central Banks that are primarily concerned with the behavior of prices will use monetary policy to insulate prices from exchange rate changes. Prices then appear unresponsive to the exchange rate. The observed relationships between prices and the exchange rate will reflect Central Bank actions instead of the underlying relationship between exchange rates and prices. This paper explicitly recognizes the role that policy plays in determing the observable relationships between exchange rates and prices, and in so doing, it illustrates how the underlying relationships can be unraveled. Using different empirical approaches, we examine the recent experience of the United States. We find that the prices of various nondurable goods, and even of some services, respond modestly to the exchange rate, and we find that the responses emerge most clearly when the role of monetary policy is explicitly considered. These findings are consistent with the hypothesis that the Federal Reserve acts in a way to mitigate the impact of exchange rate fluctuations on domestic prices.

Exchange Rates, Domestic Prices, and Central Bank Actions: Recent U.S. Experience

Central banks that are primarily concerned with the behavior of prices will use monetary policy to try to insulate prices from exchange rate changes. Prices then appear unresponsive to changes in the exchange rate. The observed relationships between prices and the exchange rate will reflect central bank actions instead of the underlying relationship between exchange rates and prices. This paper explicitly recognizes the role that policy plays in determining the observable relationships between exchange rates and prices, and in so doing, it illustrates how the underlying relationships can be unraveled. Using three different empirical approaches, we examine the recent experience of the United States. We find that the prices of various nondurable goods, and even of some services, respond modestly to the exchange rate, and we find that the responses emerge most clearly when the role of monetary policy is explicitly considered. These findings are consistent with the hypothesis that the Federal Reserve acts to mitigate the effects of exchange rate fluctuations on domestic prices.