http://www.bis.org/list/wpapers/index.rss BIS Working Papers are written by economists from the Bank for International Settlements (BIS) and, occasionally, from central banks or academic institutions. en http://www.bis.org/publ/work379.htm Abstract of BIS Working Papers No 379 When capital adequacy and interest rate policy are substitutes (and when they are not) 2012-05-07T12:32:00Z Prudential instruments are commonly seen as the tools that can be used to deliver the macroprudential policy goals of reducing the frequency and severity of financial crises. And interest rates are traditionally viewed as the means to deliver the macroeconomic stabilisation goals of low, stable inflation and sustainable, stable growth. But, at the macroeconomic level, these two sets of policy tools have quite a bit in common. We use a simple macroeconomic model to study the extent to which capital adequacy requirements and interest rates might be substitutes in meeting the objective of stabilising the economy. We find that in our model both are substitutes for achieving conventional monetary policy objectives. In addition, we show that, in principle, they can both be used to meet financial stability objectives. This implies a need to coordinate the use of macroprudential and traditional monetary policy tools, a need that has clear implications for the construction of the policy framework designed to deliver the joint objectives of macroeconomic and financial stability. When capital adequacy and interest rate policy are substitutes (and when they are not) 2012-05-07T12:32:00Z BIS monetary policy financial stability policy capital adequacy policy PDF version http://www.bis.org/publ/work379.pdf Stephen G Cecchetti Cecchetti Mr Economic Adviser, Head of Monetary and Economic Department Bank for International Settlements Marion Kohler Kohler Ms Senior Economist Stephen G Cecchetti and Marion Kohler May 2012 Bank for International Settlements: Working Papers 379 E5 G2 http://www.bis.org/publ/work378.htm Abstract of BIS Working Papers No 378 Ensuring price stability in post-crisis Asia: lessons from the recovery 2012-04-19T08:36:00Z Asian central banks have adopted monetary policy frameworks over the past decade that have, by and large, worked well both to ensure price stability during the pre-crisis period and to navigate the shoals during the recent international financial crisis. Inflation concerns in recent years nonetheless raise the possibility that existing monetary policy frameworks in Asia may be contributing to procyclical inflation swings. Three particular aspects of the policy environment are highlighted. They include the approach of monetary policy to commodity price cycles, to the uneven global recovery and to the new financial stability mandates. Ensuring price stability in post-crisis Asia: lessons from the recovery 2012-04-19T08:36:00Z BIS central banking commodity prices monetary policy frameworks in Aisa international financial crisis financial stability and monetary policy PDF version http://www.bis.org/publ/work378.pdf Andrew Filardo Filardo Mr Head of Economics for Asia & the Pacific Bank for International Settlements Andrew Filardo April 2012 Bank for International Settlements: Working Papers 378 E5 E6 E3 F4 http://www.bis.org/publ/work377.htm Abstract of BIS Working Papers No 377 Rapid credit growth and international credit: Challenges for Asia 2012-04-12T14:44:00Z Very low interest rates in major currencies have raised concerns over international credit flows to robustly growing economies in Asia. This paper examines three components of international credit and highlights several of the policy challenges that arise in constraining such credit. Our empirical findings suggest that international credit enables domestic credit booms in emerging markets. Furthermore, we demonstrate that higher levels of international credit on the eve of a crisis are associated with larger subsequent contractions in overall credit and real output. In Asia today, international credit generally is small in relation to overall credit - as was not the case before the Asian crisis. So even though dollar credit is growing very rapidly in some Asian economies, its contribution to overall credit growth has been modest outside the more dollarised economies of Asia. Rapid credit growth and international credit: Challenges for Asia 2012-04-12T14:44:00Z BIS emerging markets international credit credit booms cross-border lending PDF version http://www.bis.org/publ/work377.pdf Stefan Avdjiev Avdjiev Mr Economist Bank for International Settlements Robert N McCauley McCauley Mr Senior Advisor Bank for International Settlements Patrick McGuire McGuire Mr Senior Economist Bank for International Settlements Stefan Avdjiev, Robert N McCauley and Patrick McGuire April 2012 Bank for International Settlements: Working Papers 377 E32 F34 F43 http://www.bis.org/publ/work376.htm Abstract of BIS Working Papers No 376 Systemic risk in global banking: what can available data tell us and what more data are needed? 2012-04-11T07:27:00Z The recent financial crisis has shown how interconnected the financial world has become. Shocks in one location or asset class can have a sizable impact on the stability of institutions and markets around the world. But systemic risk analysis is severely hampered by the lack of consistent data that capture the international dimensions of finance. While currently available data can be used more effectively, supervisors and other agencies need more and better data to construct even rudimentary measures of risks in the international financial system. Similarly, market participants need better information on aggregate positions and linkages to appropriately monitor and price risks. Ongoing initiatives that will help close data gaps include the G20 Data Gaps Initiative, which recommends the collection of consistent banklevel data for joint analyses and enhancements to existing sets of aggregate statistics, and enhancements to the BIS international banking statistics. Systemic risk in global banking: what can available data tell us and what more data are needed? 2012-04-11T07:27:00Z BIS vulnerabilities contagion banking system Systemic risks international PDF version http://www.bis.org/publ/work376.pdf Eugenio Cerutti Cerutti Mr International Monetary Fund Stijn Claessens Claessens Mr International Monetary Fund Patrick McGuire McGuire Mr Senior Economist Bank for International Settlements Eugenio Cerutti, Stijn Claessens and Patrick McGuire April 2012 Bank for International Settlements: Working Papers 376 G15 G18 F21 Y1 F34 http://www.bis.org/publ/work375.htm Abstract of BIS Working Papers No 375 Loan loss provisioning practices of Asian banks 2012-04-05T11:39:00Z In the wake of the Asian financial crisis, many regimes in Asia adopted stricter provisioning requirements, as well as discretionary measures, with the objective of increasing provisioning in good times in response to rising levels of risk. Based on a final sample of 240 banks in 12 Asian economies, the evidence is that countercyclical loan loss provisioning has dominated throughout emerging Asia, most strikingly so in the case of India. Thus, loan loss provisioning did not simply become more conservative at all points in time subsequent to the Asian financial crisis, but actively leaned in a fashion that ameliorated swings in earnings and the macroeconomy. Loan loss provisioning practices of Asian banks 2012-04-05T11:39:00Z BIS macroprudential policy loan loss provisioning financial system procyclicality international accounting standards earnings smoothing PDF version http://www.bis.org/publ/work375.pdf Frank Packer Packer Mr Head of Financial Stability and Markets for Asia & the Pacific Bank for International Settlements Haibin Zhu Zhu Mr Senior Economist Bank for International Settlements Frank Packer and Haibin Zhu April 2012 Bank for International Settlements: Working Papers 375 G21 G28 http://www.bis.org/publ/work374.htm Abstract of BIS Working Papers No 374 A Comprehensive Look at Financial Volatility Prediction by Economic Variables 2012-03-06T15:35:00Z We investigate if asset return volatility is predictable by macroeconomic and financial variables and shed light on the economic drivers of financial volatility. Our approach is distinct due to its comprehensiveness: First, we employ a data-rich forecast methodology to handle a large set of potential predictors in a Bayesian Model Averaging approach, and, second, we take a look at multiple asset classes (equities, foreign exchange, bonds, and commodities) over long time spans. We find that proxies for credit risk and funding (il)liquidity consistently show up as common predictors of volatility across asset classes. Variables capturing time-varying risk premia also perform well as predictors of volatility. While forecasts by macro-finance augmented models also achieve forecasting gains out-of-sample relative to autoregressive benchmarks, the performance varies across asset classes and over time. A Comprehensive Look at Financial Volatility Prediction by Economic Variables 2012-03-06T15:35:00Z BIS realized volatility Forecasting Data-rich modeling Bayesian model averaging Model uncertainty PDF version http://www.bis.org/publ/work374.pdf Charlotte Christiansen Christiansen Ms Maik Schmeling Schmeling Mr Assistant Professor Leibniz Universität Hannover Andreas Schrimpf Schrimpf Mr Economist Bank for International Settlements Charlotte Christiansen, Maik Schmeling and Andreas Schrimpf March 2012 Bank for International Settlements: Working Papers 374 G15 G12 C53 G17 http://www.bis.org/publ/work373.htm Abstract of BIS Working Papers No 373 Collateral requirements for mandatory central clearing of over-the-counter derivatives 2012-03-06T15:34:00Z In this paper we analyse the effects of informal labour markets on the dynamics of inflation and on the transmission of aggregate demand and supply shocks. In doing so, we incorporate the informal sector in a modified New Keynesian model with labour market frictions as in the Diamond-Mortensen-Pissarides model. Our main results show that the informal economy generates a "buffer" effect that diminishes the pressure of demand shocks on inflation. This finding is consistent with the empirical literature on the effects of informal labour markets in business cycle fluctuations. This result implies that, in economies with large informal labour markets, changes in interest rates are more effective in stimulating real output and there is less impact on inflation. Furthermore, the model produces cyclical flows from informal to formal employment, consistent with the data. Collateral requirements for mandatory central clearing of over-the-counter derivatives 2012-03-06T15:34:00Z BIS Central Counterparties clearing Derivatives collateral default funds initial margins variation margins defaul PDF version http://www.bis.org/publ/work373.pdf Daniel Heller Heller Mr Head of Secretariat, CPSS Bank for International Settlements Nicholas Vause Vause Mr Senior Economist Bank for International Settlements Daniel Heller and Nicholas Vause March 2012 Bank for International Settlements: Working Papers 373 G24 G28 http://www.bis.org/publ/work372.htm Abstract of BIS Working Papers No 372 Inflation Dynamics in the Presence of Informal Labour Markets 2012-02-21T13:44:00Z In this paper we analyse the effects of informal labour markets on the dynamics of inflation and on the transmission of aggregate demand and supply shocks. In doing so, we incorporate the informal sector in a modified New Keynesian model with labour market frictions as in the Diamond-Mortensen-Pissarides model. Our main results show that the informal economy generates a "buffer" effect that diminishes the pressure of demand shocks on inflation. This finding is consistent with the empirical literature on the effects of informal labour markets in business cycle fluctuations. This result implies that, in economies with large informal labour markets, changes in interest rates are more effective in stimulating real output and there is less impact on inflation. Furthermore, the model produces cyclical flows from informal to formal employment, consistent with the data. Inflation Dynamics in the Presence of Informal Labour Markets 2012-02-21T13:44:00Z BIS Monetary Policy New Keynesian models Informal Economy Labour Market Frictions PDF version http://www.bis.org/publ/work372.pdf Paul Castillo Castillo Mr Central Reserve Bank of Peru Carlos Montoro Montoro Mr Senior Economist Bank for International Settlements Paul Castillo and Carlos Montoro February 2012 Bank for International Settlements: Working Papers 372 E32 O17 E50 J64 http://www.bis.org/publ/work371.htm Abstract of BIS Working Papers No 371 Stochastic Herding in Financial Markets Evidence from Institutional Investor Equity Portfolios 2012-02-17T13:39:00Z We estimate a structural model of herding behaviour in which feedback arises due to mutual concerns of traders over the unobservable "true" level of market liquidity. In a herding regime, random shocks are exacerbated by endogenous feedback, producing a dampened power-law in the fluctuation of largest sales. The key to the fluctuation is that each trader responds not only to private information, but also to the aggregate behaviour of others. Applying the model to the data on portfolios of institutional investors (fund managers), we find that the empirical distribution is consistent with model predictions. A stock's realised illiquidity propagates herding and raises the probability of observing a sell-off. The distribution function itself has desirable properties for evaluating "tail risk". Stochastic Herding in Financial Markets Evidence from Institutional Investor Equity Portfolios 2012-02-17T13:39:00Z BIS Stochastic Behavior Herding Interacting Agents Fat Tails PDF version http://www.bis.org/publ/work371.pdf Makoto Nirei Nirei Mr Theodoros Stamatiou Stamatiou Mr Vladyslav Sushko Sushko Mr Economist Bank for International Settlements Makoto Nirei, Theodoros Stamatiou and Vladyslav Sushko February 2012 Bank for International Settlements: Working Papers 371 G14 G2 D8 http://www.bis.org/publ/work370.htm Abstract of BIS Working Papers No 370 Credit at times of stress: Latin American lessons from the global financial crisis 2012-02-07T10:13:00Z We critically review the state of the art in macro stress testing, assessing its strengths and weaknesses. We argue that, given current technology, macro stress tests are ill-suited as early warning devices, ie as tools for identifying vulnerabilities during seemingly tranquil times and for triggering remedial action. By contrast, as long as properly designed, stress tests can be quite effective as crisis management and resolution tools. We also see additional side benefits, stemming largely from the way such tests can discipline thinking about financial stability. We suggest possible ways to improve their performance. Credit at times of stress: Latin American lessons from the global financial crisis 2012-02-07T10:13:00Z BIS Latin America currency mismatches emerging markets credit growth global financial crises vulnerability indicators financial resilience PDF version http://www.bis.org/publ/work370.pdf Carlos Montoro Montoro Mr Senior Economist Bank for International Settlements Liliana Rojas-Suarez Rojas-Suarez Ms Carlos Montoro and Liliana Rojas-Suarez February 2012 Bank for International Settlements: Working Papers 370 E65 G2 http://www.bis.org/publ/work369.htm Abstract of BIS Working Papers No 369 Stress-testing macro stress testing: does it live up to expectations? 2012-01-18T11:02:00Z We critically review the state of the art in macro stress testing, assessing its strengths and weaknesses. We argue that, given current technology, macro stress tests are ill-suited as early warning devices, ie as tools for identifying vulnerabilities during seemingly tranquil times and for triggering remedial action. By contrast, as long as properly designed, stress tests can be quite effective as crisis management and resolution tools. We also see additional side benefits, stemming largely from the way such tests can discipline thinking about financial stability. We suggest possible ways to improve their performance. Stress-testing macro stress testing: does it live up to expectations? 2012-01-18T11:02:00Z BIS macroprudential financial instability PDF version http://www.bis.org/publ/work369.pdf Claudio Borio Borio Mr Head of Research & Policy Analysis Bank for International Settlements Mathias Drehmann Drehmann Mr Senior Economist Bank for International Settlements Kostas Tsatsaronis Tsatsaronis Mr Head of Financial Institutions & Infrastructure Bank for International Settlements Claudio Borio, Mathias Drehmann and Kostas Tsatsaronis January 2012 Bank for International Settlements: Working Papers 369 G20 E30 G10 G28 E44 http://www.bis.org/publ/work368.htm Abstract of BIS Working Papers No 368 The sustainability of pension schemes 2012-01-03T08:38:00Z Poor financial market returns and low long-term real interest rates in recent years have created challenges for the sponsors of defined benefit pension schemes. At the same time, lower payroll tax revenues in a period of high unemployment, and rising fiscal deficits in many advanced economies as economic activity has fallen, are also testing the sustainability of pay-as-you-go public pension schemes. Amendments to pension accounting rules that require corporations to regularly report the valuation differences between their defined benefit pension assets and plan liabilities on their balance sheet have made investors more aware of the pension risk exposure for the sponsors of such schemes. This paper sheds light on what effects these developments are having on the design of occupational pension schemes, and also provides some estimates for the post-employment benefits that could be delivered by these schemes under different sets of assumptions. The paper concludes by providing some policy perspectives. The sustainability of pension schemes 2012-01-03T08:38:00Z BIS pension funds contribution rates long-term real interest rates real wages service cost sovereign liabilities mortality rates pay-as-you-go schemes PDF version http://www.bis.org/publ/work368.pdf Srichander Ramaswamy Ramaswamy Mr Senior Economist Bank for International Settlements Srichander Ramaswamy January 2012 Bank for International Settlements: Working Papers 368 G23 J32 H55 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