Schweizerische Nationalbank · SIX:SNBN
Schweizerische Nationalbank — Czech National Bank — Eight Annual NBP-SNB Joint Seminar (May 2011)
33 slides from Schweizerische Nationalbank's conference presentation, May 2011
Slide 1: Monetary Policy in a Small Economy after Tsunami: A New Consensus on the Horizon?
Monetary Policy in a Small Economy after Tsunami: A New Consensus on the Horizon? Jan Frait, Zlatuse Komarkova and Lubos Komarek Czech National Bank Eight Annual NBP-SNB Joint Seminar May 2011, Zürich
Slide 2: Presentation Outline / Structure of background paper
Presentation Outline / Structure of background paper 1. Introduction 2. The Great Moderation versus the Asset Markets‘ Wilderness 3. The BIS Approach, or the Austrian Business Cycle Revisited 4. Global Liquidity, Asset Prices and Monetary Policy before the Crisis 5. Does the Exchange Rate
Slide 3: Special issue of the Czech Journal of Economics and Finance
Special issue of the Czech Journal of Economics and Finance (impact factor 0.43) • ASSET PRICE BUBBLES • Petr ZEMČÍK • Kamil JANÁČEK Is There a Real Estate Bubble in Asset Price Bubbles (Introduction) the Czech Republic? • Jan Frait, Zlatuše KOMÁRKOVÁ, • Luboš KOMÁREK, Michal Luboš KOMÁREK HLAVÁČEK
Slide 4: 1. Introduction
1. Introduction 2nd half of the 80s ⇒ response of CB´s to two high inflation decades ⇒ price stability was achieved relatively quickly…. but fall in inflation expectation and the efforts to stop currency appreciation ⇒ decline of interest rates to historically low values ⇒ „Great Moderation“ lea
Slide 5: 1. Introduction
1. Introduction Great Moderation Finacial Crisis New Concensus? Stable inflation and solid Lehman PIGS Promise economic growth Brothers „disease“ of better time? 5
Slide 6: 2. The Great Moderation versus the Asset Markets' Wilderness
2. The Great Moderation versus the Asset Markets‘ Wilderness I. „benign neglect view“ - CB cannot an should not try to constrain asset price bubbles on their own; - Direct response to asset price ⇒ few if any gains and bring greater variability of output, interest rates and exchange rate; - MP is
Slide 7: 2. The Great Moderation versus the Asset Markets' Wilderness
2. The Great Moderation versus the Asset Markets‘ Wilderness II. the „predominant view“ (more active MP approach to asset price swings) - CB should „lean against the wind“ cannot an should not try to constrain asset price bubbles on their own; - Inflation targeting CB is likely to succeed by adjus
Slide 8: 2. The Great Moderation versus the Asset Markets' Wilderness
2. The Great Moderation versus the Asset Markets‘ Wilderness Traditional arguments against the „lean against the wind“ strategy; 1. CB cannot reliably identify bubbles in asset prices, since it does not have any information advantage relative to private market participants. 2. Timing of the CB´s r
Slide 9: 2. The Great Moderation versus the Asset Markets' Wilderness
2. The Great Moderation versus the Asset Markets‘ Wilderness Volatility, misalignment, bubble… PRICE OF ASSET BUBBLE BURSTING OF BUBBLE FORMATION OF MISALIGNMENT BUBBLE MARKET VOLATILITY PRICE FUNDAMENTAL VALUE TIME 9
Slide 10: 3. The BIS Approach or the Austrian Business Cycle Revisited
3. The BIS Approach or the Austrian Business Cycle Revisited BIS approach: - Achieving both price and output stability still does not automatically guarantee financial stability - One of the primary causes of financial instability (simultaneously contributed to the stabilization of inflation) is b
Slide 11: 6. Monetary Policy and Financial Stability in the New Consensus
6. Monetary Policy and Financial Stability in the New Consensus • L↑ until the point, when the crisis breaks out ⇒ optimistic phase (temporarily good times) • L↓ (deleveraging) ⇒ pessimistic phase, although remaining high in the initial phase of the crisis • L in the stock sense adjusts to changed e
Slide 12: 6. Monetary Policy and Financial Stability in the New Consensus
6. Monetary Policy and Financial Stability in the New Consensus • The risk of financial instability is strongly discontinuous variable (risk ↑ in good times as L↑ and ↓ when crisis occurs) • Sources of risk of financial instability: (i) availability of cheap credit (ii) overly optimistic expectation
Slide 13: 6. Monetary Policy and Financial Stability in the New Consensus
6. Monetary Policy and Financial Stability in the New Consensus • In good times, when the risk of financial instability ↑ , default rates ↓ , NPL ratio ↓, banks creates fewer provisions and report low credit losses. • In the beginning of bad times the situation is reversed ⇒ CB based on stress test
Slide 14: 6. Monetary Policy and Financial Stability in the New Consensus
6. Monetary Policy and Financial Stability in the New Consensus • When the risk of financial instability is rising ⇒ MP rates should at some point rise sharply above neutral level consistent with „pure“ inflation targeting) • When the crisis breaks out, the central bank should respond with sharp rat
Slide 15: 8. Conclusion
8. Conclusion The financial crisis significantly modified views concerning the relationship among monetary policy, asset prices and financial stability. The financial tsunami effect was observed, i.e. decline of risk premia during tranquil years of the Great Moderation replaced by a destructive
Slide 16: 8. Conclusion
8. Conclusion Following an assessment of what happened during the last decade the approach favoured by the economic profession has begun to shift from benign neglect to leaning against the wind strategy. These lead to the fundamental changes to the existing monetary policy paradigm (via the way
Slide 17: Czech Economy a) inflation
Czech Economy a) inflation Clear disinflation process, from 1998 successful IT framework 21 19 17 15 56.6% 13 11 inflation rate 9 7 5 3 1 -1 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 17
Slide 18: Czech Economy a) inflation
Czech Economy a) inflation Few mistakes in implementing the IT framework at beginning ….. 7 6 5 4 target band for headline inflation 3 point target for headline inflation 2 targets for net inflation 1 0 18 12/97 12/98 12/99 12/00 12/01 12/02 12/03 12/04 12/05 12/06 12/07 12/08 12/09 12/10 12/11
Slide 19: Czech Economy a) inflation
Czech Economy a) inflation Fulfilment of inflation targets were not always perfect….. 13 11 9 target 1998 6% +/- 0,5p.p. (set in Dec 97) target 2000 7 target 1999 4,5 +/- 1p.p. start of the 4,5 +/- 0,5p.p. (set in Dec 97) target band (set in Nov 98) 3-5% end of the 5 target band target band 2-4% 200
Slide 20: Czech Economy a) inflation
Czech Economy a) inflation May 2011 prediction – we are exactly at the 2% inflation target 8 7 monetary 6 inflation policy 5 horizon 4 3 2 1 monetary-policy 0 relevant inflation -1 I/06 II III IV I/07 II III IV I/08 II III IV I/09 II III IV I/10 II III IV I/11 II III IV I/12 II III IV 20
Slide 21: Czech Economy b) exchange rate
Czech Economy b) exchange rate Exchange rate development of the CZK during last 20 years 20 15 depreciation 10 band +/-7,5% 5 Feb 28.1996 - May 27.1997 the level of ER 0 against the former -5 band +/-0,5% currency basket Sep 27. 1992 - Feb 2.1996 (65% DEM, 35% USD) -10 -15 appreciation -20 -25 -30 t
Slide 22: Czech Economy b) exchange rate
Czech Economy b) exchange rate Exchange rate development of the CZK and FX intervention 40 3560 bil 1200 38 EUR 1050 36 900 34 750 CZK per 1 EUR 32 mil EUR 600 30 450 28 300 26 150 24 0 22 -150 1/98 1/99 1/00 1/01 1/02 1/03 1/04 1/05 1/06 1/07 1/08 1/09 1/10 1/11 intervention sale of forex reserves
Slide 23: Czech Economy c) interest rates
Czech Economy c) interest rates Interest rates stay for last decade very low, sometimes below ECB rates 20 1W repo rate and 18 1W PRIBOR 75%, the Lombard rate 50% 16 in May 1997 14 2W repo 12 in % 10 8 6 1W PRIBOR the Lombard rate 4 2 discount rate 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Slide 24: Thank for your attention!
Thank for your attention! Jan Frait Zlatuše Komárková Luboš Komárek Director, Financial Stability Head of the Systemic Risk Unit, Director, External Economic Department, jan.frait@cnb.cz zlatuse.komarkova@cnb.cz Relations Division, lubos.komarek@cnb.cz
Slide 25: Practical techniques for identifying bubbles
Practical techniques for identifying bubbles A) Trend curves and statistical filters Purpose: An initial idea of the degree of misalignment (but without identifying main factors) Methods: • Standard linear or non-linear fitting methods • Simple univariate filtres (Hodrick-Prescott, Band-Pass fil
Slide 26: Practical techniques for identifying bubbles
Practical techniques for identifying bubbles B) Ratios Purpose: An initial idea of the degree of misalignment (but without identifying main factors) Types of ratios: Price-to-Income, Price-to-Rent, Price-to- Earning Examples: Himmelberg, Mayer and Sinai (2005), Hlaváček and Komárek (2009, 2010
Slide 27: Practical techniques for identifying bubbles
Practical techniques for identifying bubbles C) Empirical Models Purpose: A detailed idea of the degree of misalignment Methods: regressions, cointegration, panel data Examples: Himmelberg, Mayer and Sinai (2005), Hlaváček and Komárek (2009, 2010), Komárek and Kubicová (2011). 27
Slide 28: Practical techniques for identifying bubbles
Practical techniques for identifying bubbles D) Structurally reach theoretical models Purpose: A very detailed idea of the degree of misalignment Methods: simultaneous models Examples: Hlavacek, Komarek and Motl (work in progress). 28
Slide 29: Results of identifying bubbles for housing markets
Results of identifying bubbles for housing markets A) Trend curves and statistical filters 29
Slide 30: Results of identifying bubbles for housing markets
Results of identifying bubbles for housing markets B) Ratios Price-to-income Price-to-rent (absolute index; 2000 = 100) (absolute index; 2000 = 100) 30
Slide 31: Results of identifying bubbles for housing markets
Results of identifying bubbles for housing markets C) Empirical Models 31
Slide 32: Concluding remarks
Concluding remarks To sum up, approximate identification of bubbles is possible ex post, but: (i) continuous asset price monitoring is a necessary condition for this; (ii) we recommend using the entire range of methods and models available, from the simplest (trend curves and filters) to the com
Slide 33: Background papers
Background papers Komárek et. al. (2010): Practical Approaches to the identification of Asset Market Bubbles. Financial Stability Report 2009/10, Box 5, pp 49-52. http://www.cnb.cz/en/financial_stability/fs_reports/fsr_2009-2010/index.html Hlaváček, M. – Komárek, L. (2011): Regional Analysis of
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