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Nirei M.,Hitotsubashi University | Sushko V.,Bank for International Settlements | Caballero J.,Inter American Development Bank
Computational Economics | Year: 2016

Loan syndication increases bank interconnectedness through co-lending relationships. We study the financial stability implications of such dependency on syndicate partners in the presence of shocks to banks’ capital. Model simulations in a network setting show that such shocks can produce rare events in this market when banks have shared loan exposures while also relying on a common risk management tool such as value-at-risk (VaR). This is because a withdrawal of a bank from a syndicate can cause ripple effects through the market, as the loan arranger scrambles to commit more of its own funds by also pulling back from other syndicates or has to dissolve the syndicate it had arranged. However, simulations also show that the core-periphery structure observed in the empirical network may reduce the probability of such contagion. In addition, simulations with tighter VaR constraints show banks taking on less risk ex-ante. © 2015, Springer Science+Business Media New York. Source

Cook D.,Hong Kong University of Science and Technology | Yetman J.,Bank for International Settlements
Pacific Economic Review | Year: 2014

In a fixed exchange rate system, any expectation that the peg may be abandoned will normally be reflected in an interest rate differential between instruments denominated in domestic and anchor currencies: the possibility of a revaluation will drive domestic interest rates below those in the anchor currency, for example. However, when interest rates are close to the zero lower bound, there is limited scope for exchange rate expectations to be reflected in interest rate differentials. Here we introduce a new mechanism, based on the central bank balance sheet, which works to bring about equilibrium in currency markets even when interest rates are zero. An expectation of exchange rate appreciation will cause foreign exchange reserves to swell, increasing the cost to policy-makers of allowing an appreciation and, therefore, lowering the likelihood of the fixed exchange rate being abandoned. Under normal circumstances, this channel reinforces the equilibrating effect of interest rate differentials. When interest rates cannot adjust only this channel operates, implying that much larger changes in reserves are required to equilibrate currency markets. We develop a simple model to illustrate these arguments and find support for the predictions of the model using data for Hong Kong, the world's largest economy with a currency board. © 2014 Wiley Publishing Asia Pty Ltd. Source

Borio C.,Bank for International Settlements | Disyatat P.,Monetary Policy Group
Asian Economic Policy Review | Year: 2010

Global current account imbalances have recently been singled out by many as a key factor contributing to the global financial crisis. Current account surpluses in several emerging market economies are said to have put significant downward pressure on world interest rates, thereby fueling a credit boom and risk taking in major advanced economies with current account deficits (the "excess saving" view). We argue that this perspective on global imbalances bears reconsideration. We highlight two conceptual problems: (i) explaining market interest rates through the saving-investment framework; and (ii) drawing inferences about a country's cross-border financing activity based on observations of net capital flows. We trace the shortcomings of this perspective to a failure to consider the distinguishing characteristics of a monetary (credit) economy. We conjecture that the main macroeconomic cause of the financial crisis was not "excess saving" but the "excess elasticity" of the international monetary and financial system. © 2010 The Authors. Asian Economic Policy Review © 2010 Japan Center for Economic Research. Source

Avalos F.,Bank for International Settlements
Journal of International Money and Finance | Year: 2014

It is frequently argued that biofuel (and ethanol) promotion policies in the United States have created a link between oil and corn prices that has accentuated the recent rally in the price of that crop and its substitutes (especially soybeans). Even though it is intuitively appealing, one problem with this hypothesis is that ethanol policies have been in place in the US for more than 35 years, whereas the run up in food prices dates back only to 2006. However, a significant change in US biofuel policy during that year provides an adequate framework to test for the existence of a structural break in the stochastic properties of the corn and soybean price processes. The results show that structural stability is rejected, and the transmission of oil price innovations to corn prices has become stronger after 2006 (no changes with respect to soybeans). There is also a significant transmission of corn price innovations to oil and soybean prices. Moreover, the data show evidence of a previously non-existent cointegration relationship between oil and corn prices. © 2013 Elsevier Ltd. Source

Chadha J.S.,University of Kent | Turner P.,Bank for International Settlements | Zampolli F.,Bank for International Settlements
Oxford Review of Economic Policy | Year: 2013

The financial crisis and subsequent economic recession led to a rapid increase in the issuance of public debt. But large-scale purchases of bonds by the Federal Reserve, and other major central banks, have significantly reduced the scale and maturity of public debt that would otherwise have been held by the private sector. We present new evidence that tilting the maturity structure of privatesector holdings significantly influences term premia, even outside crisis times. Our framework helps explain both the bond yield conundrum and the effectiveness of quantitative easing. We suggest that these findings raise two important policy questions. One is: should a central bank, contrary to recent orthodoxy, use its balance sheet as an additional complementary instrument of monetary policy to influence, as part of the monetary transmission mechanism, the long-term interest rate? The second is: how should central banks and governments ensure that debt management properly takes account of the implications for both monetary and financial stability?. © The Authors 2013. Published by Oxford University Press. Source

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