http://www.bis.org/list/wpapers/from_01012011/index.rss BIS Working Papers are written by economists from the Bank for International Settlements (BIS) and, occasionally, from central banks or academic institutions. 2011 en http://www.bis.org/publ/work367.htm Abstract of BIS Working Papers No 367 Is the long-term interest rate a policy victim, a policy variable or a policy lodestar? 2011-12-16T13:17:00Z Few financial variables are more fundamental than the "risk free" real long-term interest rate because it prices the terms of exchange over time. During the past 15 years, it has dropped from a range of 4 to 5% to a range of 0 to 2%. By late 2011, cyclical factors had driven it close to zero. This paper explores why. Possible persistent factors are: the investment of the large savings generated by developing Asia in highly-rated bonds; accounting and valuation rules for institutional investment; and financial sector regulation. The consequences could be far-reaching: cheaper leverage; less pressure to correct fiscal deficits; larger interest rate exposures in the financial industry; and a more cyclical bond market. During the financial crisis, central banks in the advanced countries have made the long-term interest rate a policy variable as Keynes had always advocated. This policy focus will draw more attention to the macroeconomic and financial consequences of government debt management policies. Coordination between central bank balance sheet policies and government debt management is essential. With government debt very high for years to come, bond market volatility could confront central banks with unenviable choices. Is the long-term interest rate a policy victim, a policy variable or a policy lodestar? 2011-12-16T13:17:00Z BIS bond market central banks financial regulation government debt management Long-term interest rate PDF version http://www.bis.org/publ/work367.pdf Philip Turner Turner Mr Director of Policy, Coordination and Administration and Deputy Head of Department Bank for International Settlements Philip Turner December 2011 Bank for International Settlements: Working Papers 367 E12 G18 H63 E58 E43 http://www.bis.org/publ/work366.htm Abstract of BIS Working Papers No 366 Currency Momentum Strategies 2011-12-13T10:44:00Z We provide a broad empirical investigation of momentum strategies in the foreign exchange market. We find a signiffcant cross-sectional spread in excess returns of up to 10% p.a. between past winner and loser currencies. This spread in excess returns is not explained by traditional risk factors, it is partially explained by transaction costs and shows behavior consistent with investor under- and over-reaction. Moreover, crosssectional currency momentum has very different properties from the widely studied carry trade and is not highly correlated with returns of benchmark technical trading rules. However, there seem to be very effective limits to arbitrage which prevent momentum returns from being easily exploitable in currency markets. Currency Momentum Strategies 2011-12-13T10:44:00Z BIS Momentum Returns Limits to Arbitrage Carry Trades Idiosyncratic Volatility PDF version http://www.bis.org/publ/work366.pdf Lukas Menkhoff Menkhoff Professor Professor of Economics Leibniz Universität Hannover Lucio Sarno Sarno Professor Professor of Finance, Head of Faculty Cass Business School Maik Schmeling Schmeling Mr Assistant Professor Leipzig University Andreas Schrimpf Schrimpf Mr Economist Bank for International Settlements Lukas Menkhoff, Lucio Sarno, Maik Schmeling and Andreas Schrimpf December 2011 Bank for International Settlements: Working Papers 366 G15 G12 F31 http://www.bis.org/publ/work365.htm Abstract of BIS Working Papers No 365 Was This Time Different?: Fiscal Policy in Commodity Republics 2011-12-09T14:15:00Z According to standard economic theory, fiscal policy should be countercyclical. In the neoclassical smoothing model of Barro (1979), a government should optimally run surpluses in good times and deficits in bad times. That is the same a government should do, though for different reasons, in the standard Keynesian or neo-Keynesian framework. Yet in practice governments often seem to follow a pro-cyclical fiscal policy. Cuddington (1989), Talvi and Vegh (2005) and Sinnott (2009), among others, document that governments save little or even disave in booms. Procyclicality is most evident in Latin America (Gavin et al (1996), Gavin and Perotti (1997), Stein et al (1999)) but is also present in OECD countries (Talvi and Vegh (2005), Arreaza et al (1999), Lane (2003)). Was This Time Different?: Fiscal Policy in Commodity Republics 2011-12-09T14:15:00Z BIS institutions fiscal behavior commodity prices optimal fiscal policy PDF version http://www.bis.org/publ/work365.pdf Luis Felipe Céspedes Céspedes Mr Universidad Adolfo Ibañez Andrés Velasco Velasco Mr Columbia University Luis Felipe Céspedes and Andrés Velasco December 2011 Bank for International Settlements: Working Papers 365 E6 H3 F4 http://www.bis.org/publ/work364.htm Abstract of BIS Working Papers No 364 Perceptions and misperceptions of fiscal inflation 2011-12-09T14:14:00Z The Great Recession and worldwide financial crisis have exploded fiscal imbalances and brought fiscal policy and inflation to the forefront of policy concerns. Those concerns will only grow as aging populations increase demands on government expenditures in coming decades. It is widely perceived that fiscal policy is inflationary if and only if it leads the central bank to print new currency to monetize deficits. Monetization can be inflationary. But it is a misperception that this is the only channel for fiscal inflations. Nominal bonds, the predominant form of government debt in advanced economies, derive their value from expected future nominal primary surpluses and money creation; changes in the price level can align the market value of debt to its expected real backing. This introduces a fresh channel, not requiring monetization, through which fiscal deficits directly affect inflation. The paper begins by pointing out similarities and differences between the Weimar Republic after World War I and the United States today. It describes various ways in which fiscal policy can directly affect inflation and explains why these fiscal effects are difficult to detect in time series data. Perceptions and misperceptions of fiscal inflation 2011-12-09T14:14:00Z BIS monetary-fiscal interactions monetization fiscal theory PDF version http://www.bis.org/publ/work364.pdf Eric M. Leeper Leeper Mr Indiana University Todd B. Walker Walker Mr Indiana University Eric M. Leeper and Todd B. Walker December 2011 Bank for International Settlements: Working Papers 364 E63 E31 E62 E52 http://www.bis.org/publ/work363.htm Abstract of BIS Working Papers No 363 The Liquidation of Government Debt 2011-12-09T14:13:00Z Historically, periods of high indebtedness have been associated with a rising incidence of default or restructuring of public and private debts. A subtle type of debt restructuring takes the form of "financial repression." Financial repression includes directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and (generally) a tighter connection between government and banks. In the heavily regulated financial markets of the Bretton Woods system, several restrictions facilitated a sharp and rapid reduction in public debt/GDP ratios from the late 1940s to the 1970s. Low nominal interest rates help reduce debt servicing costs while a high incidence of negative real interest rates liquidates or erodes the real value of government debt. Thus, financial repression is most successful in liquidating debts when accompanied by a steady dose of inflation. Inflation need not take market participants entirely by surprise and, in effect, it need not be very high (by historic standards). For the advanced economies in our sample, real interest rates were negative roughly ½ of the time during 1945-1980. For the United States and the United Kingdom our estimates of the annual liquidation of debt via negative real interest rates amounted on average from 2 to 3 percent of GDP a year. We describe some of the regulatory measures and policy actions that characterized the heyday of the financial repression era. The Liquidation of Government Debt 2011-12-09T14:13:00Z BIS inflation interest rates public debt financial repression deleveraging PDF version http://www.bis.org/publ/work363.pdf Carmen M. Reinhart Reinhart Ms Peterson Institute for International Economics M. Belen Sbrancia Sbrancia Ms University of Maryland Carmen M. Reinhart and M. Belen Sbrancia December 2011 Bank for International Settlements: Working Papers 363 N10 E6 E3 F3 H6 F4 E2 http://www.bis.org/publ/work362.htm Abstract of BIS Working Papers No 362 The "Austerity myth": Gain Without Pain? 2011-12-09T14:12:00Z As governments around the world contemplate slashing budget deficits, the "expansionary fiscal consolidation hypothesis" is back in vogue. I argue that, as a statement about the short run, it should be taken with caution. Alesina and Perotti (1995) and Alesina and Ardagna (2010) (AAP) have argued that fiscal consolidations may be expansionary if implemented mainly by cutting government spending. IMF (2010) criticizes the data and methodology used by AAP, and reach opposite conclusions. Some of the methodological critiques are correct. However, the implementation of the IMF methodology has several problems of its own. I then argue that because of the multi-year nature of the large fiscal consolidations, which are precisely the most informative ones, using yearly panels of fiscal policy is limiting. I present four detailed case studies, two - Denmark and Ireland - undertaken under fixed exchange rates (the most relevant case for many Eurozone countries today) and two - Finland and Sweden - after floating the currency. All four fiscal episodes were associated with an expansion; but only in Denmark the driver of growth was internal demand. However, after three years a long slump set in as the economy lost competitiveness. In all the others for a long time the main driver of growth was exports. In Ireland this occurred because the sterling coincidentally appreciated. In Finland and Sweden the currency experienced an extremely large depreciation after floating. The "Austerity myth": Gain Without Pain? 2011-12-09T14:12:00Z BIS expansionary fiscal consolidations PDF version http://www.bis.org/publ/work362.pdf Roberto Perotti Perotti Mr Bocconi University Roberto Perotti December 2011 Bank for International Settlements: Working Papers 362 E65 E62 F32 http://www.bis.org/publ/work361.htm Abstract of BIS Working Papers No 361 Long-term fiscal sustainability in major economies 2011-12-09T14:11:00Z As the world economy slowly recovers from the very deep and widespread recession of recent years, many countries confront very serious fiscal imbalances. How much time they have to deal with these imbalances is a central question, the salience of which can only have been increased by the ongoing fiscal crisis and bailout in Greece and the immediate fiscal adjustments being discussed or already undertaken in several other countries. Long-term fiscal sustainability in major economies 2011-12-09T14:11:00Z BIS fiscal policy deficit fiscal rule fiscal gap fiscal sustainability PDF version http://www.bis.org/publ/work361.pdf Alan J Auerbach Auerbach Mr University of California, Berkeley Alan J Auerbach December 2011 Bank for International Settlements: Working Papers 361 E63 E37 H63 H62 E62 H68 E61 http://www.bis.org/publ/work360.htm Abstract of BIS Working Papers No 360 China's evolving reserve requirements 2011-11-14T16:05:00Z This paper examines the evolving role of reserve requirements as a policy tool in China. Since 2007, the Chinese central bank (PBC) has relied more on this tool to withdraw domestic liquidity surpluses, as a cheaper substitute for open-market operation instruments in this period of rapid FX accumulation. China's reserve requirement system has also become more complex and been used to address a range of other policy objectives, not least being macroeconomic management, financial stability and credit policy. The preference for using reserve requirements reflects the size of China's FX sterilisation task and the associated cost considerations, a quantity-oriented monetary policy framework challenged to reconcile policy dilemmas and tactical considerations. The PBC often finds it easier to reach consensus over reserve requirement decisions than interest rate decisions and enjoys greater discretion in applying this tool. The monetary effects of reserve requirements need to be explored in conjunction with other policy actions and not in isolation. Depending on the policy mix, higher reserve requirements tend to signal a tightening bias, to squeeze excess reserves of banks, to push market interest rates higher, and to help widen net interest spreads, thus tightening domestic monetary conditions. There are, however, costs to using this policy tool, as it imposes a tax burden on Chinese banks that in turn appear to have passed a significant portion of this cost onto their customers, mostly depositors and SMEs. However, the pass-through onto bank customers appears to be partial. China's evolving reserve requirements 2011-11-14T16:05:00Z BIS Monetary Policy reserve requirements Chinese economy tax incidence sterilisation tools net interest margin and spread PDF version http://www.bis.org/publ/work360.pdf Guonan Ma Ma Mr Senior Economist Bank for International Settlements Yan Xiandong Xiandong The People’s Bank of China Liu Xi Xi The People’s Bank of China Guonan Ma, Yan Xiandong and Liu Xi November 2011 Bank for International Settlements: Working Papers 360 E60 E40 E50 E58 H22 E52 http://www.bis.org/publ/work359.htm Abstract of BIS Working Papers No 359 Bank heterogeneity and interest rate setting: What lessons have we learned since Lehman Brothers? 2011-11-14T16:04:00Z A substantial literature has investigated the role of relationship lending in shielding borrowers from idiosyncratic shocks. Much less is known about how lending relationships and bank-specific characteristics affect the functioning of the credit market in an economy-wide crisis, when banks may find it difficult to perform the role of shock absorbers. We investigate how bank-specific characteristics (size, liquidity, capitalization, funding structure) and the bank-firm relationship have influenced interest rate setting since the collapse of Lehman Brothers. Unlike the existing literature, which has focused chiefly on the amount of credit granted during the crisis, we look at its cost. The data on a large sample of loans from Italian banks to non-financial firms suggest that close lending relationships kept firms more insulated from the financial crisis. Further, spreads increased by less for the customers of well-capitalized, liquid banks and those engaged mainly in traditional lending business. Bank heterogeneity and interest rate setting: What lessons have we learned since Lehman Brothers? 2011-11-14T16:04:00Z BIS bank lending channel financial crisis bank interest rate setting lending relationship PDF version http://www.bis.org/publ/work359.pdf Leonardo Gambacorta Gambacorta Dr Head of Monetary Policy Bank for International Settlements Paolo Emilio Mistrulli Mistrulli Mr Bank of Italy Leonardo Gambacorta and Paolo Emilio Mistrulli November 2011 Bank for International Settlements: Working Papers 359 G21 E44 http://www.bis.org/publ/work358.htm Abstract of BIS Working Papers No 358 News driven business cycles and data on asset prices in estimated DSGE models 2011-11-07T16:30:00Z The existing literature on estimated structural News Driven Business Cycle (NDBC) models has focused almost exclusively on macroeconomic data and has largely ignored asset prices. In this paper, we present evidence that including data on asset prices in the estimation of a structural NDBC model dramatically affects inference about the main sources of business cycle fluctuations. Combined with the large body of evidence that asset price movements reflect changes in expectations of future developments in the economy, our results imply that data on asset prices should always be used in the estimation of structural NDBC models because they contain information that cannot be obtained by using solely macroeconomic data. News driven business cycles and data on asset prices in estimated DSGE models 2011-11-07T16:30:00Z BIS asset prices Bayesian MCMC Methods news driven business cycles estimated dsge models PDF version http://www.bis.org/publ/work358.pdf Stefan Avdjiev Avdjiev Mr Economist Bank for International Settlements Stefan Avdjiev November 2011 Bank for International Settlements: Working Papers 358 E32 C11 G10 E44 http://www.bis.org/publ/work357.htm Abstract of BIS Working Papers No 357 Rescue packages and bank lending 2011-11-07T10:45:00Z This paper examines whether the rescue measures adopted during the global financial crisis helped to sustain the supply of bank lending. The analysis proposes a setup that allows testing for structural shifts in the bank lending equation, and employs a novel dataset covering large international banks headquartered in 14 major advanced economies for the period 1995-2010. While stronger capitalisation sustains loan growth in normal times, banks during a crisis can turn additional capital into greater lending only once their capitalisation exceeds a critical threshold. This suggests that recapitalisations may not translate into greater credit supply until bank balance sheets are sufficiently strengthened. Rescue packages and bank lending 2011-11-07T10:45:00Z BIS monetary policy bank lending channel financial crisis rescue packages recapitalisation PDF version http://www.bis.org/publ/work357.pdf Michael Brei Brei Mr Leonardo Gambacorta Gambacorta Dr Head of Monetary Policy Bank for International Settlements Goetz von Peter von Peter Mr Senior Economist Bank for International Settlements Michael Brei, Leonardo Gambacorta and Goetz von Peter November 2011 Bank for International Settlements: Working Papers 357 G01 G21 E44 http://www.bis.org/publ/work356.htm Abstract of BIS Working Papers No 356 The Impact of the International Financial Crisis on Asia and the Pacific: Highlighting Monetary Policy Challenges from a Negative Asset Price Bubble Perspective 2011-11-07T10:27:00Z The international financial crisis of the late 2000s has revived interest in asset price bubble research. For some, the event confirmed the enduring relevance of studying asset price bubbles in our economies. For others, it was a realisation that asset price bubbles are of much greater significance than previously thought. The financial and policy preconditions that foster "frothy" asset prices which characterise bubbles have been the focus of considerable attention. While doubtless important, it is not the only aspect that requires greater understanding. We also need to develop a better understanding of the whole life-cycle of asset price bubbles, from their origins, to their expansion and spread, the inevitable collapse, and the aftermath that has to be cleaned up. It is increasingly recognised that researchers must not treat bubbles as one-off, exogenous events. The challenge is to develop a more holistic approach, and then build into our policy models endogenous bubble behavior. Such behavior may indeed be rare but nonetheless has its origins in a number of avoidable factors, not least being some combination of financial fragility, flawed policy frameworks, and poor risk management decisions. This paper contributes to our understanding of asset price bubbles by looking at assets when they are severely underpriced, ie when there are negative asset price bubbles. Generally, negative asset price bubbles are an underrepresented protagonist in most crisis stories, and this has certainly been the case in the recent international financial crisis. The particular illustration for this paper comes from an examination of the financial market spillovers from the West to Asia and the Pacific. The Impact of the International Financial Crisis on Asia and the Pacific: Highlighting Monetary Policy Challenges from a Negative Asset Price Bubble Perspective 2011-11-07T10:27:00Z BIS monetary policy central banking financial crisis asset price bubble PDF version http://www.bis.org/publ/work356.pdf Andrew Filardo Filardo Mr Head of Economics for Asia & the Pacific Bank for International Settlements Andrew Filardo November 2011 Bank for International Settlements: Working Papers 356 G01 E58 N15 E27 http://www.bis.org/publ/work355.htm Abstract of BIS Working Papers No 355 Anchoring countercyclical capital buffers: the role of credit aggregates 2011-11-07T10:00:00Z We investigate the performance of different variables as anchors for setting the level of the countercyclical regulatory capital buffer requirements for banks. The gap between the ratio of credit-to-GDP and its long-term backward-looking trend performs best as an indicator for the accumulation of capital as this variable captures the build-up of system-wide vulnerabilities that typically lead to banking crises. Other indicators, such as credit spreads, are better in indicating the release phase as they are contemporaneous signals of banking sector distress that can precede a credit crunch. Anchoring countercyclical capital buffers: the role of credit aggregates 2011-11-07T10:00:00Z BIS financial stability procyclicality countercyclical capital buffers PDF version http://www.bis.org/publ/work355.pdf Mathias Drehmann Drehmann Mr Senior Economist Bank for International Settlements Claudio Borio Borio Mr Head of Research & Policy Analysis Bank for International Settlements Kostas Tsatsaronis Tsatsaronis Mr Head of Financial Institutions & Infrastructure Bank for International Settlements Mathias Drehmann, Claudio Borio and Kostas Tsatsaronis November 2011 Bank for International Settlements: Working Papers 355 G21 E61 E44 http://www.bis.org/publ/work354.htm Abstract of BIS Working Papers No 354 Rediscovering the macroeconomic roots of financial stability policy: journey, challenges and a way forward 2011-09-30T13:40:00Z The recent financial crisis has triggered a major rethink of analytical approaches and policy towards financial stability. The crisis has encouraged a sharper focus on systemic risk, the inclusion of a financial sector in macroeconomic models, a shift from a microprudential to a macroprudential orientation in regulation and supervision, and questions about whether price stability is a sufficient criterion to guide monetary policy. In the process, it has led to a rediscovery of the macroeconomic roots of financial instability. This paper argues that this development is welcome but has not gone far enough. To substantiate this conclusion, the paper documents this analytical and policy journey before suggesting a way forward. Rediscovering the macroeconomic roots of financial stability policy: journey, challenges and a way forward 2011-09-30T13:40:00Z BIS monetary policy liquidity systemic risk financial (in)stability capital monetary economy PDF version http://www.bis.org/publ/work354.pdf Claudio Borio Borio Mr Head of Research & Policy Analysis Bank for International Settlements Claudio Borio September 2011 Bank for International Settlements: Working Papers 354 G20 E30 G10 E50 G28 E44 http://www.bis.org/publ/work353.htm Abstract of BIS Working Papers No 353 Central banking post-crisis: What compass for uncharted waters? 2011-09-30T13:30:00Z The global financial crisis has shaken the foundations of the deceptively comfortable pre-crisis central banking world. Central banks face a threefold challenge: economic, intellectual and institutional. This essay puts forward a compass to help central banks sail in the largely uncharted waters ahead. The compass is based on tighter integration of the monetary and financial stability functions, keener awareness of the global dimensions of those tasks, and stronger safeguards for an increasingly vulnerable central bank operational independence. Central banking post-crisis: What compass for uncharted waters? 2011-09-30T13:30:00Z BIS monetary and financial stability macroprudential central banking own-house-in-order doctrine operational independence PDF version http://www.bis.org/publ/work353.pdf Claudio Borio Borio Mr Head of Research & Policy Analysis Bank for International Settlements Claudio Borio September 2011 Bank for International Settlements: Working Papers 353 G20 E30 G10 E50 G28 E44