Jahr: 2012

Andreas Hoffmann; Holger Zemanek

Abstract

Rising debt levels have caused a revival of financial repression in the euro area and the USA. The Federal Reserve directly represses US bond yields and assists in financing the state budget, resulting in an overall liquidation effect from falling bond yields of about three per cent of total government revenues and one per cent of GDP in 2011. In the euro area, the ongoing actions to contain the European debt crisis have also repressed interest rates, easing debt-servicing costs in all European countries and reducing the interest rate payments for the German government by about one to two per cent of total government revenues. This article argues that a slight rise in infl ation could even liquidate German debt.

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Uwe Vollmer

Abstract

The paper describes the course of the European sovereign debt crisis and the policy reactions of the European Central Bank and European governments until summer 2012. We focus on policy trade-offs and conflicts of interests faced by authorities which made it difficult to coordinate a common policy reaction. In particular, we stress conflicting interests between member states of the Eurozone and nonmember countries. We also consider diverging interests between fiscal and monetary policy, between donating and receiving countries, and between legislative and executive powers within countries.

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Gunther Schnabl

Abstract

Japan hat nicht nur 15 Jahre vor Europa einen Boom-und-Krisen-Zyklus durchschritten, sondern auch wichtige Erfahrungen mit Krisentherapien in Form von monetärer Lockerung, expansiver Finanzpolitik und Rekapitalisierung von Finanzinstituten gemacht. Japan hat die Nullzinsgrenze bereits 1999 erreicht und eine Staatsverschuldung in Rekordhöhe angehäuft. Das Papier vergleicht die Boom-und-Krisen-Zyklen in Japan und Europa hinsichtlich der Ursachen, des Krisenverlaufs, der Krisentherapien und der Wirkung der Krisentherapien. Als Folgen einer auf expansiver Geld- und Finanzpolitik basierenden Krisentherapie werden die Hysterese der Niedrigzins- und Hochverschuldungsfalle, das Aussetzen der Allokations- und Signalfunktion des Zinses, die graduelle Verstaatlichung des Finanzsektors und der gesamtwirtschaftlichen Nachfrage sowie graduelle reale Einkommensverluste abgeleitet. Die wirtschaftspolitische Implikation für Europa und Japan ist der konsequente Ausstieg aus der expansiven Geld- und Finanzpolitik trotz hoher Anpassungskosten.

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Achim Hauck; Uwe Vollmer

Abstract

This paper analyzes a government's incentives to provide financial assistance to a public bank which is hit by a liquidity shock. We show that discretionary decisions about emergency liquidity assistance result in either excessively small or excessively large liquidity injections in a wide variety of circumstances. Also, adding a lender of last resort does not generally ensure a socially optimal policy. However, optimal rules exist that align the government's preferences with social preferences by either subsidizing or taxing liquidity aid.

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Uwe Vollmer; Ralf Bebenroth

Abstract

This paper describes the transmission of the recent financial crisis to Japan and compares the monetary policy reactions by the Bank of Japan (BoJ) with those during the 1990s, and with reactions by other major central banks. The paper first reviews the recent literature on the origins and transmission mechanisms of financial crises. We then consider how the financial crisis was transmitted to Japan and describe the responses by BoJ. The paper then proceeds and analyses the lessons that have been learnt by the BoJ and other central banks from the financial crisis of the 1990s.

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Jose Abad; Axel Loeffler; Gunther Schnabl; Holger Zemanek

Abstract

The paper scrutinizes the reasons for the European debt crisis, the implications for TARGET2 imbalances and options for surplus liquidity absorption within an asymmetric EMU. It is argued that starting from the turn of the millennium diverging fiscal policy paths and diverging unit labor costs were the driving force of rising intra-European current account imbalances within the euro area. This was facilitated by post-2001 low interest rate policies and changing financing conditions for the German banking sector. The paper shows how since the outbreak of the crisis the adjustment of intra-EMU current account imbalances is postponed by a rising divergence of TARGET2 balances, as the repatriation of private international credit and deposit flight from the crisis economies is substituted by central bank credit. Given that this process has brought Deutsche Bundesbank into a debtor position to the domestic financial system, we discuss options for liquidity absorption by Deutsche Bundesbank to forestall asset price bubbles in Germany. We argue that economic recovery in periphery countries is key for a reduction of TARGET2 imbalances and therefore surplus liquidity in Germany.

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Axel Loeffler; Gunther Schnabl; Franziska Schobert

Abstract

Due to buoyant capital inflows East Asian central banks with exchange rate targets accumulate foreign reserves and thereby increase surplus liquidity. East Asian central banks with more flexible exchange rate regimes also face surplus liquidity that mainly emanates from past accumulation of foreign reserves. We show based on an augmented Barro-Gordon-type central bank loss function that in both cases surplus liquidity limits monetary policy autonomy. In case of fixed exchange rates East Asian central banks can escape from the impossible trinity and gain monetary policy autonomy by using non-market–based sterilization which leads to financial sector distortions. In a flexible exchange rate regime monetary policy autonomy can be gained without financial sector distortions by using market-based sterilization. As central banks face substantial sterilization costs as well as revaluation losses on foreign reserves, however, monetary policy autonomy is eroded.

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Gunther Schnabl; Mathilde Maurel

Abstract

The 2010 European debt crisis has revived the discussion concerning the optimum adjustment strategy in the face of asymmetric shocks. Whereas Mundell’s (1961) seminal theory on optimum currency areas suggests depreciation in the face of crisis, the most recent emergence of competitive depreciations, competitive interest rate cuts or currency wars questions the exchange rate as an adjustment tool to asymmetric economic development. This paper approaches the question from a theoretical perspective by confronting exchange rate based adjustment with crisis adjustment via price and wage cuts. Econometric estimations yield a negative impact of exchange rate flexibility/volatility on growth, which is found to be particularly strong for countries with asymmetric business cycles and during recessions. Based on these findings we support a further enlargement of the European Monetary Union and recommend more exchange rate stability for the rest of the world.

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Gunther Schnabl

Abstract

The paper identifies based on the monetary over investment theories by Wicksell (1898), Mises (1912) and Hayek (1929) monetary policy mistakes in large industrial countries issuing international currencies. It its argued that a neglect towards monetary policy reform in a world dominated by financial markets has led to the erosion of the allocation and signaling function of the interest rate, which has triggered an excessive rise of the government debt and structural distortions in the world economy. The backlash of high government debt levels on monetary policy making is argued to have led to a hysteresis of the liquidity trap. In this context, monetary reform is discussed with respect to the exit from low interest rate and high debt policies, an adaption of monetary policy rules to financial market dominated economic development, and the displacement of the prevalent world monetary system. Enhanced competition between dollar and euro as international currencies moderated by East Asia is proposed to constitute a more stable international monetary system.

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Andreas Hoffmann

Abstract

This paper studies the monetary policy of the Federal Reserve (Fed) and the Bundesbank / European Central Bank (ECB) with respect to stock or/and foreign exchange markets from 1979 to 2009. I find that Fed policy changed over time, dependent on the chairman of the Fed. During the Greenspan era stock markets mattered for the Fed. In this period, the Fed lowered interest rates when stock prices fell, but did not raise interest rates in the boom. This asymmetry potentially put a downward pressure on interest rates. For the ECB, the exchange rate to the dollar played a role in monetary policy decisions until 2006. While I do not find evidence of asymmetric monetary policy with respect to the stock market, the ECB may be argued to indirectly have followed asymmetric US monetary policy via the exchange rate channel.

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