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Banks’ capital surplus and the impact of additional capital requirements
Malovaná, Simona
Banks in the Czech Republic maintain their regulatory capital ratios well above the level required by their regulator. This paper discusses the main reasons for this capital surplus and analyses the impact of additional capital requirements stemming from capital buffers and Pillar 2 add-ons on the capital ratios of banks holding such extra capital. The results provide evidence that banks shrink their capital surplus in response to higher capital requirements. A substantial portion of this adjustment seems to be delivered through changes in average risk weights. For this and other reasons, it is desirable to regularly assess whether the evolution and current level of risk weights give rise to any risk of underestimating the necessary level of capital.
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A BVAR Model for Forecasting of Czech Inflation
Brázdik, František ; Franta, Michal
Bayesian vector autoregressions (BVAR) have turned out to be useful for medium-term macroeconomic forecasting. Several features of the Czech economy strengthen the rationale for using this approach. These include in particular the short time series available and uncertainty about long-run trends. We compare forecasts based on a small-scale mean-adjusted BVAR with the official forecasts published by the Czech National Bank (CNB) over the period 2008q3–2016q4. The comparison demonstrates that the BVAR approach can provide more precise inflation forecasts over the monetary policy horizon. For other macroeconomic variables, the CNB forecasts either outperform or are comparable with the forecasts based on the BVAR model.
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Understanding rating movements in euro area countries
Brůha, Jan ; Karber, Moritz ; Pierluigi, Beatrice ; Setzer, Ralph
This paper investigates the link between sovereign ratings and macroeconomic fundamentals for a group of euro area countries that recorded rating downgrades during the euro area sovereign debt crisis. We apply an elaborated econometric estimation technique, based on a Bayesian ordered probit model, to understand how the decisions of rating agencies can be explained by economic developments. The estimated model reproduces historical ratings by using a small number of economic and institutional variables which seem to effectively summarize the large number of criteria used by Moody’s, Standard and Poor’s and Fitch in their assignment of sovereign ratings. Our results suggest that the size of the downgrades observed since the start of the sovereign crisis has been broadly in line with the deterioration of economic fundamentals for most countries.
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International Spillovers of (Un)Conventional Monetary Policy: The Effect of the ECB and US Fed on Non-Euro EU Countries
Hájek, Jan ; Horváth, Roman
We estimate a global vector autoregression model to examine the effects of euro area and US monetary policy stances, together with the effect of euro area consumer prices, on economic activity and prices in non-euro EU countries using monthly data from 2001-2016. Along with some standard macroeconomic variables, our model contains measures of the shadow monetary policy rate to address the zero lower bound and the implementation of unconventional monetary policy by the European Central Bank and US Federal Reserve. We find that these monetary shocks have the expected qualitative effects but their magnitude differs across countries, with Southeastern EU economies being less affected than their peers in Central Europe. Euro area monetary shocks have greater effects than those that emanate from the US. We also find certain evidence that the effects of unconventional monetary policy measures are weaker than those of conventional measures. The spillovers of euro area price shocks to non-euro EU countries are limited, suggesting that the law of one price materializes slowly.
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Updating the Ultimate Forward Rate over Time: a Possible Approach
Žigraiová, Diana ; Jakubík, Petr
This study proposes a potential methodological approach to be used by regulators when updating the Ultimate Forward Rate (UFR) for the evaluation of insurers’ liabilities beyond the last liquid point observable in the market. Our approach is based on the optimisation of two contradictory aspects – stability and accuracy implied by economic fundamentals. We use U.S. Treasury term structure data over the period 1985-2015 to calibrate an algorithm that dynamically revises the UFR based on the distance between the value implied by the long-term growth of economic fundamentals in a given year and the regulatory value of the UFR valid in the prior year. We employ both the Nelson-Siegel and Svensson models to extrapolate yields over maturities of 21-30 years employing the selected value of the UFR and compare them with the observed yields using the mean square error statistic. Furthermore, we optimise the parameters of the proposed UFR formula by minimising the defined loss function capturing both mentioned factors.
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A DSGE Model with Financial Dollarization: the Case of Serbia
Djukić, Mirko ; Hlédik, Tibor ; Polanský, Jiří ; Trajčev, Ljubica ; Vlček, Jan
We amend a DSGE model of a small open economy by adding financial euroization in order to capture the main channels of the monetary transmission mechanism in match the Serbian data. In contrast to the standard DSGE workhorse, the model encompasses commercial banks and foreign-exchange-denominated deposits and loans. Given these features, the model is well suited to evaluating effects of the nominal exchange rate on the financial wealth and consumption of households. The model structure, including optimization problems and first-order conditions, is provided in the paper. The model properties are tested to match the stylized facts of dollarized economies. Specifically, the model is calibrated to the Serbian data, and a model-consistent multivariate filter is used to identify unobserved trends and gaps.
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System Priors for Econometric Time Series
Andrle, Michal ; Plašil, Miroslav
This paper introduces “system priors” into Bayesian analysis of econometric time series and provides a simple and illustrative application. Unlike priors on individual parameters, system priors offer a simple and efficient way of formulating well-defined and economically meaningful priors about model properties that determine the overall behavior of the model. The generality of system priors is illustrated using an AR(2) process with a prior that its dynamics comes mostly from business-cycle frequencies.
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Nowcasting the Czech Trade Balance
Babecká Kucharčuková, Oxana ; Brůha, Jan
The Working Paper Series of the Czech National Bank (CNB) is intended to disseminate the results of the CNB’s research projects as well as the other research activities of both the staff of the CNB and collaborating outside contributors, including invited speakers. The Series aims to present original research contributions relevant to central banks. It is refereed internationally. The referee process is managed by the CNB Research Department. The working papers are circulated to stimulate discussion. The views expressed are those of the authors and do not necessarily reflect the official views of the CNB.
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Margins of Trade: Czech Firms Before, During and After the Crisis
Galuščák,Kamil ; Sutóris, Ivan
We investigate the extensive and intensive margins of trade of Czech firms in periods before, during and after the crisis of 2008–2009. The intensive margin explains most of the aggregate export growth in 2006–2014, which corroborates previous findings for other countries. The contribution of the extensive margin is smaller, explaining on average 39% of the aggregate export growth in 2006–2007 and around 25% to 30% of that in the post-crisis period. The lower contribution of the extensive margin may signal a lower rate of convergence of the Czech economy. The results indicate that the crisis had a more severe impact on small exporting firms and that exports to countries outside the EU gained more prominence in the post-crisis years. Our results are similar to findings from previous studies on the impact of participation in global value chains on firms’ trade. Specifically, a more negative impact of the crisis was observed for exports with higher import intensity. Overall, our results point to the importance of using disaggregated data in the analysis of countries’ export performance.
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Credit Constraints and Creditless Recoveries: An Unsteady State Approach
Derviz, Alexis
The paper investigates the behavior of credit demand and output arising from differences in productive capital sources in economies recovering from an adverse real shock. Beside physical capital, another form of capital – human capital – is available during the catch-up phase. Since a part of new physical capital must be debt-financed, whereas production is risky due to uncertain future total factor productivity, defaults happen with positive probability. The latter can be reduced by partially substituting physical capital for human, at a disutility cost. We ask whether a shift away from risky borrowed physical capital to human capital is able to generate a reduction in aggregate credit losses without too big a loss in output, thereby warranting a specific prudential policy. This question is addressed by means of a dynamic stochastic model with feedback decision rules, for which we develop a full-distribution numerical solution method. The long-term stationary limit distribution of the solution generalizes the steady state notion of deterministic models. Agents that start from relatively “poor” initial states are found to benefit from limits on unsecured borrowing at a very moderate cost in output terms, whereas for “rich” initial states, such limits prove to be largely redundant.
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