Macroprudential Policy: a Blessing or a Curse?

After the destructive impact of the global financial crisis of 2008, many believe that pre-crisis financial market regulation did not take the “big picture” of the system sufficiently into account and, subsequently, financial supervision mainly “missed the forest for the trees”. As a result, the need for macroprudential aspects of regulation emerged, which has recently become the focal point of many policy debates. This has also led to intense discussion on the contours of monetary policy after the post-crisis “new normal”. Here, I review recent progress in empirical and theoretical research on the effectiveness of macroprudential tools, as well as the current state of the debate, in order to extract common policy conclusions. The work highlights that, despite the achievements in the literature, the current experience and knowledge of how macroprudential instruments work, their calibration, and the mechanisms through which they interact with each other and with monetary policy are rather limited and conflicting. Moreover, I critically survey and note the current challenges faced by macroprudential regulation in creating stable, yet efficient financial systems. At the same time, emphasize the importance of accepting that many risks may remain, requiring that we proceed prudently and develop better plans for future crises

Taking up the climate change challenge: a new perspective on central banking

The awareness about climate-related financial risks is gaining momentum both in the policy and academic debates. The role of countries’ institutional dimension and central bank governance structures in the adoption of green prudential regulation is, however, overlooked in the current discussion. The paper fills this gap by proposing an analysis of the state-of-the-art, challenges and perspectives, of “green” central banking. The study complements existing research that usually points to an “extended” monetary policy mandate, including, for example, sustainability objectives or green growth, as the primary motivation for a central bank to engage in “green” financial policymaking. According to our research, the decision to implement green regulations is not exclusively related to the mandate per se, but on the central bank’s independence and on how the interaction between the monetary and prudential policy is structured. Moreover, the higher exposure to climate-related adverse events also plays a crucial role in the adoption of green prudential regulations. To avoid potential conflicts between monetary policy and green prudential regulation caused by existing intertwined transmission mechanisms, on the one hand, our analysis emphasizes the importance of having a central bank that hosts the green prudential regulation under its governance roof. On the other hand, when the “green” governance models studied in the paper are in place, the Tinbergen principle is safeguarded

Taming macroeconomic instability:Monetary andmacro-prudential policy interactions in an agent-basedmodel

We develop an agent-based model to study the macroeconomic impact of alternative macro-prudential regulations and their possible interactions with different monetary policy rules. The aim is to shed light on the most appropriate policy mix to achieve the resilience of the banking sector and foster macroeconomic stability. Simulation results show that a triple-mandate Taylor rule,focused onoutput gap, inflationand credit growth, and a BaselIII prudential regulationis the bestpolicymix to improve the stability ofthe banking sector and smooth output fluctuations. Moreover, we consider the different levers of Basel III and their combinations. We find that minimum capital requirements and counter-cyclical capital buffers allow to achieve results close to the Basel III first-best with a much more simplified regulatory framework. Finally, the components of Basel III are non-additive: the inclusion of an additional lever does not always improve the performance of the macro-prudential regulation

Real Estate and the Great Crisis: Lessons for Macroprudential Policy

Credit conditions have caused real estate booms and busts, owing to an underpricing of credit risk aided by regulatory arbitrage and shadow financing. Across countries, real estate price and credit bubbles have reflected not only inelastic land supply and thin trading, but also the amplification of shocks via backward-looking price expectations and financing based on distorted prices. Macroprudential lessons from the Great Crisis include preventing excess real estate financing and limiting the amplification and correlation of risks. Nonetheless, the costs and benefits of recent regulations require re-evaluation amid an ongoing need to address correlated risks from shadow financing and securitization

Winter is possibly not coming : mitigating financial instability in an agent-based model with interbank market

We develop a macroeconomic agent-based model to study how financial instability can emerge from the co-evolution of interbank and credit markets and the policy responses to mitigate its impact on the real economy. The model is populated by heterogenous firms, consumers, and banks that locally interact in dfferent markets. In particular, banks provide credit to firms according to a Basel II or III macro-prudential frameworks and manage their liquidity in the interbank market. The Central Bank performs monetary policy according to dfferent types of Taylor rules. We find that the model endogenously generates market freezes in the interbank market which interact with the financial accelerator possibly leading to firm bankruptcies, banking crises and the emergence of deep downturns. This requires the timely intervention of the Central Bank as a liquidity lender of last resort. Moreover, we find that the joint adoption of a three mandate Taylor rule tackling credit growth and the Basel III macro-prudential frame-work is the best policy mix to stabilize financial and real economic dynamics. However, as the Liquidity Coverage Ratio spurs financial instability by increasing the pro-cyclicality of banks’ liquid reserves, a new counter-cyclical liquidity buffer should be added to Basel III to improve its performance further. Finally, we find that the Central Bank can also dampen financial in- stability by employing a new unconventional monetarypolicy tool involving active management of the interest-rate corridor in the interbank market

Macroprudential Policy: a Blessing or a Curse?

After the destructive impact of the global financial crisis of 2008, many believe that pre-crisis financial market regulation did not take the “big picture” of the system sufficiently into account and, subsequently, financial supervision mainly “missed the forest for the trees”. As a result, the need for macroprudential aspects of regulation emerged, which has recently become the focal point of many policy debates. This has also led to intense discussion on the contours of monetary policy after the post-crisis “new normal”. Here, I review recent progress in empirical and theoretical research on the effectiveness of macroprudential tools, as well as the current state of the debate, in order to extract common policy conclusions. The work highlights that, despite the achievements in the literature, the current experience and knowledge of how macroprudential instruments work, their calibration, and the mechanisms through which they interact with each other and with monetary policy are rather limited and conflicting. Moreover, I critically survey and note the current challenges faced by macroprudential regulation in creating stable, yet efficient financial systems. At the same time, I emphasize the importance of accepting that many risks may remain, requiring that we proceed prudently and develop better plans for future crises

THE ALTERNATIVE APPROACH TO MODELING OF DOLLARIZATION IN THE REPUBLIC OF ARMENIA FROM THE VIEWPOINT OF CURRENCY SUBSTITUTION

The currency substitution aspect of dollarization in the Republic of Armenia is investigated. The direction and substance of relations between currency substitution in the Republic of Armenia and influencing factors are analyzed. An econometric model reflecting mutual relationship between currency substitution and its determining factors has been created. The latter overpasses the borders of classic approaches for the estimation and modeling of dollarization and is based on the “Money-in-Utility-Function” approach

Macro-Prudential Policy Under Basel III Requirements: A Blessing or a Curse?

After the destructive impact of the global financial crisis of 2008, many believe that pre-crisis financial market regulation did not take the “big picture” of the system sufficiently into account and, subsequently, financial supervision mainly “missed the forest for the trees”. As a result, the need for macroprudential aspects of regulation emerged, which has recently become the focal point of many policy debates. This has also led to intense discussion on the contours of monetary policy after the post-crisis “new normal”. Here, we review recent progress in empirical and theoretical research on the effectiveness of macroprudential tools, as well as the current state of the debate, in order to extract common policy conclusions. The work highlights that, despite the achievements in the literature, the current experience and knowledge of how macroprudential instruments work, their calibration, and the mechanisms through which they interact with each other and with monetary policy are rather limited and conflicting. Moreover, we critically survey and note the current challenges faced by macroprudential regulation in creating stable, yet efficient financial systems. At the same time, we emphasize the importance of accepting that many risks may remain, requiring that we proceed prudently and develop better plans for future crises. As a support to survey we develop an agent-based model to study the macroeconomic impact of alternative macro-prudential regulations and their possible interactions with different monetary policy rules. The aim is to shed light on the most appropriate policy mix to achieve the resilience of the banking sector and foster macroeconomic stability. Simulation results show that a triple-mandate Taylor rule, focused on output gap, inflation and credit growth, and a Basel III prudential regulation is the best policy mix to improve the stability of the banking sector and smooth output fluctuations. Moreover, we consider the different levers of Basel III and their combinations. We find that minimum capital requirements and counter-cyclical capital buffers allow to achieve results close to the Basel III first-best with a much more simplified regulatory framework. Finally, the components of Basel III are non-additive: the inclusion of an additional lever does not always improve the performance of the macro-prudential regulation

Dollarization and its determining factors

The dynamics of dollarization and its main influencing factors are investigated. The direction and substance of relations between the dollarization process and its influencing are analyzed. An econometric model reflecting the mutual relations between direction and the factors determining the latter is made. As a result of the econometric analysis, the dollarization hysteresis process is investigated in RA