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Interest Rate Smoothing And Financial Stability
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Book Synopsis Interest Rate Smoothing and Financial Stability by : R. Todd Smith
Download or read book Interest Rate Smoothing and Financial Stability written by R. Todd Smith and published by . This book was released on 2004 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt: Central banks smooth fluctuations in interest rates based on a belief that this policy promotes financial stability. This belief is based on a presumption that the direct effect of less interest rate volatility on a bank's likelihood of insolvency is the predominant effect of this policy. The main point of this paper is that these policies also give rise to indirect effects that lower financial stability. These indirect effects occur because the policy itself alters bank behavior. In effect, if the central bank provides (liquidity) insurance (at zero premia), it may introduce a classic moral hazard problem that encourages risk-taking by banks. As a result, to maintain a given degree of financial stability, a bank regulator may, in fact, need to impose a higher prudential capital requirement when an interest rate smoothing policy is in place. The paper concludes that the link between interest rate smoothing policy and financial stability may be more complicated than is generally recognized.
Book Synopsis Financial Stability, Interest-rate Smoothing and Equilibrium Determinacy by :
Download or read book Financial Stability, Interest-rate Smoothing and Equilibrium Determinacy written by and published by . This book was released on 2009 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines the interaction between monetary policy and financial stability and provides an assessment of the implications of banks' risk management practices for monetary policy. By considering the desire of the central bank to stabilize different types of the "basis" risk as a contribution to financial stability, we derive a set of plausible interest-rate rules characterized by either backward or forward interest-rate smoothing. The paper investigates the determinacy conditions of the rational expectations equilibria obtained under such rules. Contrary to what previously found in the literature, we find that the practice of smoothing interest rates backward does not in general alleviate problems of equilibrium indeterminacy. Moreover, basis risk stabilization may lead to policy rules embedding "forward" interest-rate smoothing, where a new kind of indeterminacy may arise following excessive concern for financial stability.
Book Synopsis The Role of Financial Stability and Optimal Seigniorage in Explaining Nominal Interest Rate Smoothing by the Federal Reserve by : Jeffrey L. Johnson
Download or read book The Role of Financial Stability and Optimal Seigniorage in Explaining Nominal Interest Rate Smoothing by the Federal Reserve written by Jeffrey L. Johnson and published by . This book was released on 1997 with total page 224 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Monetary Policy Rules and Financial Stability by : Bennett T. McCallum
Download or read book Monetary Policy Rules and Financial Stability written by Bennett T. McCallum and published by . This book was released on 1994 with total page 68 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper investigates empirically the possibility that a central bank could adhere to a macro-oriented monetary policy rule while also providing lender-of-last-resort services to the financial system. The method considered involves smoothing week-to-week movements of an interest rate instrument so as to achieve quarterly- average intermediate targets for the monetary base, with these specified so as to keep aggregate nominal spending growing steadily at a noninflationary rate. Simulations utilizing weekly U.S. data are conducted with a system consisting of a policy rule for the federal funds rate--one designed to hit monetary base targets obtained from a quarterly macroeconomic rule--and an empirically-based model of the response of base growth to funds rate movements. Results for the periods 1974-1979 (Sept.) and 1988-1991 suggest that such a procedure could succeed in reconciling macroeconomic goals with the provision of lender-of-last-resort services.
Book Synopsis Backward-looking Interest-rate Rules, Interest-rate Smoothing, and Macroeconomic Instability by : Jess Benhabib
Download or read book Backward-looking Interest-rate Rules, Interest-rate Smoothing, and Macroeconomic Instability written by Jess Benhabib and published by . This book was released on 2003 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt: The existing literature on the stabilizing properties of interest-rate feedback rules has stressed the perils of linking interest rates to forecasts of future inflation. Such rules have been found to give rise to aggregate fluctuations due to self-fulfilling expectations. In response to this concern literature has focused on the stabilizing properties of interest-rate rules whereby the central bank responds to a measure of past inflation. The consensus view that has emerged is that backward-looking rules contribute to protecting the economy from embarking on expectations-driven fluctuations. A common characteristic of the existing studies that arrive at this conclusion is their focus on local analysis. The contribution of this paper is to conduct a more global analysis. We find that backward-looking interest-rate feedback rules do not guarantee uniqueness of equilibrium. We present examples in which for plausible parameterizations attracting equilibrium cycles exist. The paper also contributes to the quest for policy rules that guarantee macroeconomic stability globally. Our analysis indicates that policy rules whereby the interest rate is set as a function of the past interest rate and current inflation are likely to ensure global stability provided that the coefficient on lagged interest rates is greater than unity
Book Synopsis Interest-rate Smoothing and Optimal Monetary Policy by : Brian Sack
Download or read book Interest-rate Smoothing and Optimal Monetary Policy written by Brian Sack and published by . This book was released on 1999 with total page 54 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Monetary Policy and Financial Stability by : John Driffill
Download or read book Monetary Policy and Financial Stability written by John Driffill and published by . This book was released on 2005 with total page 33 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines interactions between monetary policy and financial stability. There is a general view that Central Banks smooth interest rate changes to enhance the stability of financial markets. But might this induce a moral hazard problem, and induce financial institutions to maintain riskier portfolios, the presence of which would further inhibit active monetary policy? Hedging activities of financial institutions, such as the use of interest rate futures and swap markets to reduce risk, should further protect markets against consequences of unforeseen interest rate changes. Thus smoothing may be both unnecessary and undesirable. The paper shows by a theoretical argument that smoothing interest rates may lead to indeterminacy of the economy's rational expectations equilibrium. Nevertheless our empirical analysis supports the view that the Federal Reserve smoothes interest rates and reacts to interest rate futures. We add new evidence on the importance for policy of alternative indicators of financial markets stress.
Book Synopsis Financial Stability Monitoring by : Tobias Adrian
Download or read book Financial Stability Monitoring written by Tobias Adrian and published by . This book was released on 2020 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: In a recently released New York Fed staff report, we present a forward-looking monitoring program to identify and track time-varying sources of systemic risk.
Book Synopsis Leaning Against Windy Bank Lending by : Mr.Giovanni Melina
Download or read book Leaning Against Windy Bank Lending written by Mr.Giovanni Melina and published by International Monetary Fund. This book was released on 2017-08-07 with total page 68 pages. Available in PDF, EPUB and Kindle. Book excerpt: Using an estimated dynamic stochastic general equilibrium model with banking, this paper first provides evidence that monetary policy reacted to bank loan growth in the US during the Great Moderation. It then shows that the optimized simple interest-rate rule features no response to the growth of bank credit. However, the welfare loss associated to the empirical responsiveness is small. The sources of business cycle fluctuations are crucial in determining whether a “leaning-against-the-wind” policy is optimal or not. In fact, the predominant role of supply shocks in the model gives rise to a trade-off between inflation and financial stabilization.
Book Synopsis Responsibility of Central Banks for Stability in Financial Markets by : Mr.Garry J. Schinasi
Download or read book Responsibility of Central Banks for Stability in Financial Markets written by Mr.Garry J. Schinasi and published by International Monetary Fund. This book was released on 2003-06-01 with total page 19 pages. Available in PDF, EPUB and Kindle. Book excerpt: What is the role of central banks in ensuring financial stability? This paper addresses this controversial subject, in part by drawing on the experiences in Europe, Japan, and the United States, and by examining four questions. What is meant by financial stability? Do central banks have a natural role in ensuring financial stability? What does a central bank need to execute this role effectively? How far have central banks actually gone in safeguarding financial stability? The experience drawn on in the paper suggest that central banks: have a natural role to play; at times may require supervisory information to execute this natural role; and have incurred risks to their balance sheets to ensure financial stability.
Book Synopsis Incorporating Financial Stability in Inflation Targeting Frameworks by : Burcu Aydin
Download or read book Incorporating Financial Stability in Inflation Targeting Frameworks written by Burcu Aydin and published by International Monetary Fund. This book was released on 2011-09-01 with total page 47 pages. Available in PDF, EPUB and Kindle. Book excerpt: The global financial crisis has exposed the limitations of a conventional inflation targeting (IT) framework in insulating an economy from shocks, and demonstrated that its rigid application may aggravate the effect of shocks on output and inflation. Accordingly, we investigate possible refinements to the IT framework by incorporating financial stability considerations. We propose a small open economy DSGE model, calibrated for Korea during the period of 2003 - 07, with real and financial frictions. The findings indicate that incorporating financial stability considerations can help smooth business cycle fluctuations more effectively than a conventional IT framework.
Book Synopsis The Federal Reserve System Purposes and Functions by : Board of Governors of the Federal Reserve System
Download or read book The Federal Reserve System Purposes and Functions written by Board of Governors of the Federal Reserve System and published by . This book was released on 2002 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Provides an in-depth overview of the Federal Reserve System, including information about monetary policy and the economy, the Federal Reserve in the international sphere, supervision and regulation, consumer and community affairs and services offered by Reserve Banks. Contains several appendixes, including a brief explanation of Federal Reserve regulations, a glossary of terms, and a list of additional publications.
Book Synopsis Backward-locking Interest-rate Rules, Interest-rate Smoothing. and Macroeconomic Instability by : Jess Banhabib
Download or read book Backward-locking Interest-rate Rules, Interest-rate Smoothing. and Macroeconomic Instability written by Jess Banhabib and published by . This book was released on 2003 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Equilibrium Implications of Interest Rate Smoothing by : Diogo Duarte
Download or read book Equilibrium Implications of Interest Rate Smoothing written by Diogo Duarte and published by . This book was released on 2018 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: We introduce a macro-finance model in which monetary authorities adjust the money supply by targeting not only output and inflation but also the slope of the yield curve. We study the impact of McCallum-type rules on capital growth, the volatility of interest rates, the spread between long- and short-term rates, the persistence of monetary shocks and equity volatility. Our model supports the Federal Reserve's choice to incorporate financial data in their policy decisions and expand the monetary base to decrease the nominal interest rate spread at the cost of lower expected long-term growth.
Book Synopsis Negative Interest Rate Policy (NIRP) by : Andreas Jobst
Download or read book Negative Interest Rate Policy (NIRP) written by Andreas Jobst and published by International Monetary Fund. This book was released on 2016-08-10 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: More than two years ago the European Central Bank (ECB) adopted a negative interest rate policy (NIRP) to achieve its price stability objective. Negative interest rates have so far supported easier financial conditions and contributed to a modest expansion in credit, demonstrating that the zero lower bound is less binding than previously thought. However, interest rate cuts also weigh on bank profitability. Substantial rate cuts may at some point outweigh the benefits from higher asset values and stronger aggregate demand. Further monetary accommodation may need to rely more on credit easing and an expansion of the ECB’s balance sheet rather than substantial additional reductions in the policy rate.
Book Synopsis Comments on Backward-looking Interest-rate Rules, Interest-rate Smoothing, and Macroeconomic Instability by : Charles T. Carlstrom
Download or read book Comments on Backward-looking Interest-rate Rules, Interest-rate Smoothing, and Macroeconomic Instability written by Charles T. Carlstrom and published by . This book was released on 2003 with total page 18 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Interest-rate Smoothing by : Robert J. Barro
Download or read book Interest-rate Smoothing written by Robert J. Barro and published by . This book was released on 1988 with total page 51 pages. Available in PDF, EPUB and Kindle. Book excerpt: The paper develops a model in which targeting of the nominal interest rate is a reasonable guide for monetary policy. Expected real interest rates and output are exogenous with respect to monetary variables, and the central bank ends up influencing nominal interest rates by altering expected inflation. In this model the monetary authority can come arbitrarily close in each period to its (time-varying) target for the nominal interest rate, even while holding down the forecast variance of the price level. The latter objective pins down the extent of monetary accommodation to shifts in the demand for money and other shocks, and thereby makes determinate the levels of money and prices at each date. Empirical evidence for the United States in the post-World War II period suggests that the model's predictions accord reasonably well with observed behavior for nominal interest rates, growth rates of the monetary base, and rates of inflation. Earlier periods, especially before World War I, provide an interesting contrast because interest-rate smoothing did not apply. The behavior of the monetary base and the price level at these times differed from the post-World War I1 experience in ways predicted by the theory
