Index
Acharya, V. 51 Adolfson, M. 154 Ahamed, Liaquat 108 AIG 172 Aikman, D. 161 Aksoy, Y. 150 Allen, F. 35, 40, 48, 49, 59, 74 Anderson, R. G. 10 Andrés, J. 118, 123, 132, 225 arbitrage 45 asset prices 6, 24, 58–9, 226, 229 collapsing asset bubble 115 fire sales 45volatility 44, 45, 59
asset purchase policies 117–20, 141–2, 177–8
Bank of England (BoE) 17, 20, 135, 177, 222, 226, 227, 228, 229, 243, 244 demand shocks and 138–41
Federal Reserve (US) 177, 237 interest rates and 25, 174 model 120–1
equation listing 130–1 financial intermediation 126–8 firms 128–9
government budget constraint 123–6 households 121–3
market clearing 130 monetary policy 129 parameter values 131–3 transmission mechanism 133
asset-backed commercial paper (ABCp) 32, 34, 51, 61
financial crisis and 32 asymmetric information 53 Auerbach, A. J. 21 Baba, N. 13 Bagehot, W. 3, 55
bailouts 28, 54, 58, 85, 237, 238 Bank for International Settlements 6
Bank of England (BoE) 2
asset purchase policy 17, 20, 135, 177, 222, 226, 227, 228, 229, 243, 244 bank reserves at 234
functions 233, 234
interest rates and 72, 222, 235, 242 overfunding policy and 11
quantitative easing and 16, 113, 120, 230–1, 234, 242–54
capital injections 250–1 channels of transmission 225–7 corporate bonds and 247–8 equity markets and 249 estimation of effects 227–30 exchange rates and 248–9 gilt market analysis 247 interest rate forwards and 248 interest rate spreads and 248 monetary analysis 251–4
six-versusfive-day announcements 249
response tofinancial crisis 108 Special Liquidity Scheme (SLS) 176,
177, 242 Bank of Japan 244
asset purchase policy 244 quantitative easing and 11–16,
19, 244
banking sector 89–93, 99–100, 228 bailouts 28, 54, 58, 85, 237, 238 banking collapse without interest rate
cutting 89–91
Bertand competition between banks 100–1
capital 81–3, 85–7 adequacy 83–4 injections 250–1
central banksseecentral banking consumption trap 93–5
bank capital 260 bank reserves 261–3
evolution 85–8 bank capital 85–7
repayments of entrepreneurs and aggregate income 87–8 financial crises and 4, 172, 234, 236 insolvency 237
interest rate policies and stability of banking system 71–4 banking sector in model 76–8 entrepreneurs and depositors in model
74–6
evolution of banking system 85–8 intermediation equilibria 78–81 model 74–85
profits and capital of banks 81–3 regulatory instruments 83–5 narrow banks 23, 61, 62, 63 parallel banking system (PBS) 23, 32,
34, 60
Gordian Knot proposal 60–3 prevention of banking collapse 91–3, 95,
97–8 profits 81–3
quantitative easing and 236 regulation 233
resolving banking crisis 96–8 securitisation and 236 universal banking 60
Basel II regulatory framework 100, 234 Basel III agreement 4, 240
Bean, Charles 108, 115, 145, 150, 269
Bear Stearns 33–4, 50, 52
Bernanke, B. S. 2, 3, 6, 9, 21, 120, 132, 144, 146, 149–51, 245
Bertrand competition between banks 100–1 Billings, R. 71 Blanchard, O. 175 Blinder, Alan 6, 9 BNP Paribas 32, 51 boundary equilibrium 68 Boyd, J. H. 72 Brainard, William C. 118, 126, 128 Brunnermeier, M. K. 224 bubbles 115 Buiter, Willem 54, 56 business cycles 145
banking crises and 71 Cao, J. 55
capital of banking sector 81–3, 85–7 adequacy 83–4 injections 250–1 Carletti, E. 59 central banking 3 balance sheets 4, 34, 55, 109, 176, 177, 187, 192–3
data and descriptive statistics 181–4
empirical framework 179–81 long-term forward rates and 172–6 regression results 184–92 credit facilities and 177–8 intermediation 203, 208
lender of last resort function 55–6, 203, 234
liabilities as monetary policy instrument 7 Chadha, J. S. 241, 258, 270
Chang, Y. 161 Citigroup 60
comparative statics 111–12 competition
Bertrand competition between banks 100–1
consumption trap 93–5
contingent commodity markets 37, 41 Cornett, Marcia 50
Corrado, L. 241, 258, 270 credit facilities 177–8
effect of spreads on monetary and credit variables 215–18
insulation of money and creditflows from impact offinancial crisis 211–15
credit policy,financial intermediation and 166–9
Cúrdia, V. 120, 204 Dale, Spencer 233 debt problems 6, 28, 50, 52 decentralisation 58
optimal liquidity provision and 37–9
default risk 27, 40, 239 Dekle, R. 72
Del Negro, Marco 113, 114 demand shocks 138
dynamic stochastic general equilibrium (DSGE) models 138–41 Demirgüç-Kunt, A. 71 demutualisation 234 derivatives 63 Detragiache, E. 71 Diamond, D. 72, 74, 76 DiCecio, R. 152, 153, 154 disintermediation 227 diversification 236 dollar swap lines 177–8 Dybvig, P. 74
dynamic stochastic general equilibrium (DSGE) models 25, 27, 120–1, 141–2, 238, 240 demand shocks 138–41 equation listing 130–1 financial intermediation in 126–8, 144–6, 169 calibrated parameters 151–2 credit policy 166–9 data 146, 149–51 estimation 151–7 estimation results 158–66 historical decomposition 163–6 impulse response function 158–61 model 146–9
model comparison 161–3 modelfit 154–6
prior and posterior distributions of estimated parameter 152–4 subsample estimates 156–7 firms 128–9
government budget constraint 123–6 households 121–3 market clearing 130 monetary policy 129 parameter values 131–3 quantitative easing in 27, 255–9, 263–4 results 259–63 transmission mechanism 133 asset purchase policy 135–8 interest rate policy 133–5 efficiency 40, 41, 59 Eggertsson, G. B. 20, 223 Ennis, H. 74
European Central Bank (ECB) 197, 219 interest rates and 72
money supply and 199, 200
non-standard monetary policy measures 25, 26, 201–9
macroeconomic implications 209–10 response tofinancial crisis 16–17, 32, 108 exchange rates
quantitative easing and 224, 248–9 expectations 227
inflation 3, 186, 191 management 224 Federal Reserve (USA) 62
asset purchase policy 177, 237 balance sheet 176, 177 Great Depression and 195 interest rates and 16, 72 large-scale asset purchases 120 liquidity provision and 53
quantitative easing and 10–11, 16, 24, 113
response tofinancial crisis 108 Term Auction Facility (TAF) 176 financial crisis 1, 14, 28, 32–5, 172, 195,
201, 222, 231, 234, 238
insulation of money and creditflows from impact of 211–15
interest rate policies and stability of banking system 71–4, 99–100 bank capital 85–7
banking collapse without interest rate cutting 89–91
banking sector in model 76–8 Bertrand competition between banks
100–1
consumption trap 93–5
entrepreneurs and depositors in model 74–6
evolution of banking system 85–8 example 103–5
intermediation equilibria 78–81 model 74–85
prevention of banking collapse 91–3, 95, 97–8
profits and capital of banks 81–3 regulatory instruments 83–5 repayments of entrepreneurs and
aggregate income 87–8 resolving banking crisis 96–8 technical appendix 102–3 liquidity provision in a crisis 51
asset pricing 58–9 example 56–7
liquidity provision or bailout 53–6 models of liquidity freeze 51–3 nominal and real liquidity 59–60 macroeconomics and 2–4 financial innovation 50, 234 financial intermediation 6, 7, 24, 195
central bank intermediation 203, 208 dynamic stochastic general equilibrium
(DSGE) models 126–8 estimated DSGE model for the UK
144–6, 169 calibrated parameters 151–2 credit policy 166–9 data 146, 149–51 estimation 151–7 estimation results 158–66 historical decomposition 163–6 impulse response function 158–61 model 146–9
model comparison 161–3 modelfit 154–6
prior and posterior distributions of estimated parameter 152–4 subsample estimates 156–7 financial regulationseeregulation of
financial markets
Financial Services Authority (UK) 233 fire sales 45 fiscal policy 2 unconventional 233, 236–8 Fostel, A. 52 Gagnon, J. 22, 120 Gale, D. 35, 40, 48, 49, 51, 59, 74 Geanakoplos, J. 43, 49, 52 general equilibrium models 22
DSGE modelsseedynamic stochastic general equilibrium (DSGE) models incomplete markets 41, 63
arbitrage,fire sales, and asset price volatility 44–7
limited market participation 48 market provision of liquidity 42–4 policy lessons 48–51
optimal liquidity provision 35 decentralisation 37–9
incomplete contracts and default 40–1 model primitives 35–7 Gersbach, H. 85 Gertler, M. 25, 120, 144, 150, 169, 215, 225, 241, 257, 268 Giannone, D. 195, 210, 213, 214, 215 Gilchrist, S. 161 Goldman Sachs 113 González-Hermosillo, B. 71 Goodfriend, Marvin 51, 61, 241, 258 Goodhart, C. 49 Gordian Knot 60–3 Gorton, G. 53, 71 government bailouts 28, 54, 58, 85, 237, 238 Great Depression 26, 108, 195, 198, 219 Harrison, R. 152, 153, 238, 241, 256, 266 He Zhigou 34, 52 Heider, F. 201, 204 Hellman, T. 72 Hellwig, M. F. 72 Hoshi, T. 72 Illing, G. 55 incomplete markets 22, 41, 63 limited market participation 48 market provision of liquidity 42–4 inflation 3, 13, 55, 235 expectations 3, 186, 191 targeting 6, 175, 224, 230 tax 21, 59 innovation,financial 50, 234 insurance liquidity insurance 50 interest rates
asset purchase policies and 25, 174 Bank of England (BoE) and 72, 222, 235
central bank balance sheets and long-term forward rates 172–6 concerns, policy implications and
avenues for further research 187, 192–3
data and descriptive statistics 181–4 empirical framework 179–81 regression results 184–92 Federal Reserve (US) and 16, 72 interest rate policies and stability of
banking system 71–4, 99–100 bank capital 85–7
banking collapse without interest rate cutting 89–91
banking sector in model 76–8 Bertrand competition between banks
100–1
consumption trap 93–5
entrepreneurs and depositors in model 74–6
evolution of banking system 85–8 example 103–5
intermediation equilibria 78–81 model 74–85
prevention of banking collapse 91–3, 95, 97–8
profits and capital of banks 81–3 regulatory instruments 83–5 repayments of entrepreneurs and
aggregate income 87–8 resolving banking crisis 96–8 technical appendix 102–3 long term 241
as monetary policy instrument 1, 2, 5 quantitative easing and 26, 224,
229, 248 spreads
monetary and credit variables and 215–18
quantitative easing and 248 transmission of interest rate policy
133–5
zero interest ratefloor 1, 4
zero lower bound (ZLB) 235, 240, 242 interior equilibrium 66–7
intermediationseefinancial intermediation investment 109–11
Japan
asset purchase policy in 244 banks in 71, 72, 74 quantitative easing in 10, 11–16, 19, 21, 244 Joyce, M. 22, 120, 135, 136, 245 JP Morgan Chase 60 Kaminsky, G. L. 71 Karadi, P. 25, 120, 144, 169, 215, 241, 257, 268 Kashyap, A. 72 Keister,T. 74
Keynes, John Maynard 108, 113 Khang, I. 34 King, Mervyn 4, 7, 53, 56 King, Robert 51, 61 Kiyotaki, Nobuhiro 24, 27, 109–11, 112, 113, 115, 144, 225 Kletzer, K. 72 Krishnamurthy, A. 22, 34 Krugman, P. 72 Kuttner, K. N. 132 Laubach, T. 174, 181, 186, 187, 191, 192–3 Lawson, Nigel 11 Lehman Brothers 50, 108, 114, 172, 174, 196, 197, 199, 213, 216, 222, 240, 242
European Central Bank (ECB)’s non-standard monetary policy measures after Lehman Bros collapse 25, 26, 201–9
lender of last resort function 55–6, 203, 234 Lenza, M. 195, 215
Levin, A. 131
limited purposefinancial companies (LPFC) 61
liquidity issues
Bank of England special liquidity scheme 176, 177, 242
financial crisis and 32, 34
handling liquidity shocks 108–9, 115 comparative statics 111–12 Kiyotaki and Moore on liquidity and
investment 109–11, 238 policy 112–15
incomplete markets 41, 63
arbitrage,fire sales, and asset price volatility 44–7
limited market participation 48 market provision of liquidity 42–4 policy lessons 48–51
liquidity constraints 27, 225
liquidity provision in a crisis 51 asset pricing 58–9
example 56–7
liquidity provision or bailout 53–6 models of liquidity freeze 51–3 nominal and real liquidity 59–60 liquidity transformation 203 optimal liquidity provision 35
decentralisation 37–9
incomplete contracts and default 40–1 model primitives 35–7
regulation 23
unconventional monetary policy and liquidity facilities 176–7 loans tofirms 214
long-term refinancing operations (LTROs) 203 López-Salido, D. J. 225 Lown, C. 150 macroeconomic models challenges to assumptions of 1 unconventional 238–9 Madigan, Brian 4
market provision of liquidity 42–4 maturity transformation 203 McCallum, B. T. 241, 258 Meh, C. 161
Meier, A. 22, 117 monetary policy 1
dynamic stochastic general equilibrium (DSGE) models 129
financial crisis and 2–4
New Instruments of Monetary Policy Conference 1
new policies 2, 4
unconventional 28, 174, 176, 233–6, 237, 240–2
caveats 178–9
credit facilities and asset purchases 177–8
DSGE model 257
ECB’s non-standard monetary policy measures after Lehman Bros collapse 25, 26, 201–9
effect of spreads on monetary and credit variables 215–18
insulation of money and creditflows from impact offinancial crisis 211–15 liquidity facilities 176–7
macroeconomic implications 209–10 non-standard monetary policy
measures and monetary developments 195–7, 219–20 see alsoquantitative easing (QE)
money
effect of spreads on monetary and credit variables 215–18
insulation of money and creditflows from impact offinancial crisis 211–15 precautionary demand for 110 supply 5, 6
quantitative easing (QE) and 251–4 textbook models of broad money
supply 197–201
money-market mutual funds (MMF) 32 Moore, John 24, 27, 109–11, 112, 113, 115, 144, 225 moral hazard 60 Moran, K. 161 Morgan Stanley 113 mortgages 236 defaults 234 mortgage-backed securities (MBS) 174, 234 sub-prime mortgage market 32, 222 Murdock, K. 72
narrow banks 23, 61, 62, 63
negative quantitative easing (overfunding) 11, 28
Nelson, E. 152, 153, 154, 225 neutrality of money 5 New Classical economics 223 New Instruments of Monetary Policy
Conference 1
New Keynesian economics 5, 20, 25, 118, 223, 240, 256 nominal liquidity 59–60 Northern Rock 33, 55 no-trade equilibrium 65–6 Obstfeld, M. 21 Oomen, O. 152, 153 optimal contract 64–5 optimal liquidity provision 35
decentralisation 37–9
incomplete contracts and default 40–1 model primitives 35–7
overfunding 11, 28
overlapping generations model (OLG) 23, 72, 74–85, 89–93
banking collapse without interest rate cutting 89–91
banking sector 76–8 consumption trap 93–5
entrepreneurs and depositors 74–6 evolution of banking system 85–8
bank capital 85–7
repayments of entrepreneurs and aggregate income 87–8
intermediation equilibria 78–81 prevention of banking collapse 91–3, 95,
97–8
profits and capital of banks 81–3 regulatory instruments 83–5 resolving banking crisis 96–8 technical appendix 102–3
parallel banking system (PBS) 23, 32, 34, 60 Gordian Knot proposal 60–3
Partridge-Hicks, Stephen 60 Paustian, M. 161 Pedersen, L. H. 224 Phillips curve 25, 118, 256 Polemarchakis, H. 43, 49 Poole, W. 5
portfolio balance effects 111, 117–20, 141–2, 229, 235
demand shocks and 138–41 model 120–1, 259–63, 266–7
equation listing 130–1 financial intermediation 126–8 firms 128–9
government budget constraint 123–6 households 121–3 market clearing 130 monetary policy 129 parameter values 131–3 Prescott, E. C. 72 price stability 1, 6, 59 pricing of illiquidity 63
quantitative easing (QE) 5, 11–20, 26, 28, 108, 206, 222, 223, 233, 235, 240 Bank of England (BoE) and 16, 113, 120,
230–1, 234, 242–54 capital injections 250–1 channels of transmission 225–7 corporate bonds and 247–8 equity markets and 249 estimation of effects 227–30 exchange rates and 248–9 gilt market analysis 247 interest rate forwards and 248 interest rate spreads and 248 monetary analysis 251–4 six-versusfive-day
announcements 249 Bank of Japan and 11–16, 19, 244 channels of transmission 225–7 DSGE model 27, 255–9, 263–4
results 259–63 effectiveness 20–2
estimation of effects 23, 227–30, 231 exchange rates and 224, 248–9
quantitative easing (QE) (cont.) Federal Reserve (US) and 10–11, 16,
24, 113 history 10–11
interest rates and 26, 224, 229, 248 model 7–10, 20–2
negative (overfunding) 11, 28 theoretical foundation 223–5 real liquidity 59–60
regulation offinancial markets 2, 49, 63, 233 Basel II regulatory framework 100, 234 overlapping generations model (OLG)
83–5 Reinhart, C. M. 71 Reinhart, V. R. 2, 245 repurchase agreements 32 risk 26, 238 assessment 236, 237 aversion 174 default risk 27, 40, 239 rollover risk 51, 52, 59 Roosevelt, Franklin 108 Rotemberg, J. J. 128 Sack, B. L. 2, 245 scale economies 60 Schreft, S. L. 72 securitisation 34, 61, 236 Sigma Finance Corporation 60 Smets, F. 153
Smith, B. D. 72 Sossidis, Nicholas 60 spreads
effect on monetary and credit variables 215–18
quantitative easing and 248 Stiglitz, J. 72
sub-prime mortgage market 32, 222 taxation inflation tax 21, 59 Taylor, John B. 132 Tobin, James 110, 118, 126, 128, 224 Ugai, H. 13 Uhlig, H. 72 United Kingdom bank runs in 4 Northern Rock 33, 55
financial intermediation in estimated DSGE model 144–6, 169 calibrated parameters 151–2 credit policy 166–9 data 146, 149–51 estimation 151–7 estimation results 158–66 historical decomposition 163–6 impulse response function 158–61 model 146–9
model comparison 161–3 modelfit 154–6
prior and posterior distributions of estimated parameter 152–4 subsample estimates 156–7 inflation in 235 interest rates in 172 overfunding in 11 price stability in 1 quantitative easing in 5, 16, 17–20, 242–54
unconventional monetary policy in 176, 177
see alsoBank of England (BoE) United States of America
central bank balance sheets and long-term forward rates 181 regression results 184–90 interest rates in 16, 172, 175 monetary policy in 3 mortgages in 236 defaults 234
sub-prime mortgage market 32, 222 quantitative easing in 10–11, 16, 22 reform offinancial regulation 63 stock market collapse (1929) 108 unconventional monetary policy in
176, 177
see alsoFederal Reserve (USA) universal banking 60
Vayanos, D. 224 Vissing-Jorgensen, A. 22 volatility of asset prices 44, 45, 59 Walsh, C. 223 Weill, P.-O. 224 Wenzelburger, J. 85 Wessel, David 108 White, W. 6 Wieland, V. 14 Williamson, S. D. 72 Woodford, M. 20, 120, 204, 223 Wouters, R. 153 Xiong, W. 52 Yorulmazer, T. 51
