Selected Reference and Reading Materials compiled by Dan Villanueva


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Record ID

689     [ Page 1 of 7, No. 1 ]

Date

2017-04

Author

Francis Vitek

Affiliation

Money and Capital Markets Department, IMF

Title

Policy, Risk and Spillover Analysis in the World Economy: A Panel Dynamic Stochastic General Equilibrium Approach

Summary /
Abstract

This paper develops a structural macroeconometric model of the world economy, disaggregated into forty national economies, to facilitate multilaterally consistent macrofinancial policy, risk and spillover analysis. This panel dynamic stochastic general equilibrium model features a range of nominal and real rigidities, extensive macrofinancial linkages, and diverse spillover transmission channels. These macrofinancial linkages encompass bank and capital market based financial intermediation, with financial accelerator mechanisms linked to the values of the housing and physical capital stocks. A variety of monetary policy analysis, fiscal policy analysis, macroprudential policy analysis, spillover analysis, and forecasting applications of the estimated model are demonstrated. These include quantifying the monetary, fiscal and macroprudential transmission mechanisms, accounting for business cycle fluctuations, and generating relatively accurate forecasts of inflation and output growth.

Keywords

Monetary policy analysis; Fiscal policy analysis; Macroprudential policy analysis; Spillover analysis; Forecasting; World economy; Bayesian econometrics

URL

http://www.imf.org/~/media/Files/Publications/WP/2017/wp1789.ashx



Record ID

688     [ Page 1 of 7, No. 2 ]

Date

2017-02

Author

Andersson, Fredrik N. G., and Jonung, Lars

Affiliation

Both of the Department of Economics, Lund University

Title

How Tolerant Should Inflation-Targeting Central Banks Be? Selecting the Proper Tolerance Band - Lessons from Sweden

Summary /
Abstract

Should an inflation-targeting central bank have an explicit tolerance band around its inflation target? This paper provides an answer derived from the Swedish experience. The Riksbank is exceptional in the sense that it first adopted and later abolished an explicit band and is currently considering bringing it back. We conclude that the band should be explicit for several reasons. Most important, an inflation-targeting central bank should be open and transparent to the public regarding its actual ability to control inflation. We discuss how a numerical measure of the proper width of the band can be constructed to foster communication and credibility.

Keywords

Inflation targeting; tolerance band; tolerance interval; monetary policy; the Riksbank; Sweden

URL

http://project.nek.lu.se/publications/workpap/papers/wp17_2.pdf



Record ID

687     [ Page 1 of 7, No. 3 ]

Date

2016-11

Author

Kishor, N. Kundan and Koenig, Evan F.

Affiliation

University of Wisconsin and Federal Reserve Bank of Dallas

Title

The roles of inflation expectations, core inflation, and slack in real-time inflation forecasting

Summary /
Abstract

Using state-space modeling, we extract information from surveys of long-term inflation expectations and multiple quarterly inflation series to undertake a real-time decomposition of quarterly headline PCE and GDP-deflator inflation rates into a common long-term trend, common cyclical component, and high-frequency noise components. We then explore alternative approaches to real-time forecasting of headline PCE inflation. We find that performance is enhanced if forecasting equations are estimated using inflation data that have been stripped of high-frequency noise. Performance can be further improved by including an unemployment-based measure of slack in the equations. The improvement is statistically significant relative to benchmark autoregressive models and also relative to professional forecasters at all but the shortest horizons. In contrast, introducing slack into models estimated using headline PCE inflation data or conventional core inflation data causes forecast performance to deteriorate. Finally, we demonstrate that forecasting models estimated using the Kishor-Koenig (2012) methodology-which mandates that each forecasting VAR be augmented with a flexible state-space model of data revisions-consistently outperform the corresponding conventionally estimated forecasting models.

Keywords

Inflation; real-time forecasting; unobserved component model; slack

URL

http://d.repec.org/n?u=RePEc:fip:feddwp:1613&r=cba



Record ID

686     [ Page 1 of 7, No. 4 ]

Date

2017-01

Author

International Monetary Fund

Title

Finland: Financial sector Assessment Program; Technical Note-Macroprudential Policy Framework

Summary /
Abstract

The macroprudential policy framework in Finland has experienced major changes recently and the mandate has become shared with the ECB. First, a domestic framework was formalized in 2014. The Board of the Financial Supervisory Authority (FIN-FSA) was designated as the authority to implement a set of macroprudential instruments in Finland, and a coordination mechanism among domestic authorities for macroprudential policy, including the Bank of Finland (BoF), was established. Second, with the start of the European Single Supervisory Mechanism (SSM) in 2014, the European Central Bank (ECB) was designated as a macroprudential authority for the euro area, with the European Systemic Risk Board (ESRB) continuing to play an advisory role for all European Union (EU) countries. As a result, macroprudential policy has become a shared responsibility among the national authorities, and the European Union and euro-area level authorities.

Keywords

Financial Sector Assessment Program;Macroprudential Policy;Housing;Housing prices;Financial sector;Banks;Credit expansion;Financial risk;Financial stability;Finland

URL

http://www.imf.org/external/pubs/ft/scr/2017/cr1705.pdf



Record ID

685     [ Page 1 of 7, No. 5 ]

Date

2017-01

Author

Razin, Assaf

Title

Israel's Triumph over Inflation: The Long and Winding Road

Summary /
Abstract

The paper gives an economic-history perspective of the long struggle with Inflation. It covers the early acceleration to three-digit levels, lasting 8 years; The stabilization program, based on political backing triggered sharp fall in inflationary expectation, and consequently to sharp inflation reduction to two- digit levels; The convergence to the advanced countries' levels during the "great Moderation", And Israel's resistance to the deflation-depression forces that the 2008 crisis created. The emphasis is on the forces of globalization and the building of institutions, political, regulatory, financial, budget design, and monetary, which helped stabilize prices and output.

Keywords

Deflation-Depression forces; Hyperinflation; Stabilization

URL

http://cepr.org/active/publications/discussion_papers/dp.php?dpno=11787



Record ID

684     [ Page 1 of 7, No. 6 ]

Date

2016-12

Author

Darvas, Zsolt; Schoenmaker, Dirk; and Véron, Nicolas

Affiliation

Asian Development Bank Institute

Title

Reforms to the European Union Financial Supervisory and Regulatory Architecture and Their Implications for Asia

Summary /
Abstract

European Union (EU) countries offer a unique experience of financial regulatory and supervisory integration, complementing various other European integration efforts following the Second World War. Financial regulatory and supervisory integration was a very slow process before 2008, despite significant cross-border integration, especially of wholesale financial markets. However, the policy framework proved inadequate in the context of the major financial crisis in the EU starting in 2007, and especially in the euro area after 2010. That crisis triggered major changes to European financial regulation and to the financial supervisory architecture, most prominently with the creation of three new European supervisory authorities in 2011 and the gradual establishment of European banking union starting in 2012. The banking union is a major structural institutional change for the EU, arguably the most significant since the introduction of the euro. Even in its current highly incomplete form, and with no prospects for rapid completion, the banking union has improved financial supervision in the euro area and increased the euro area’s resilience. Asian financial integration lags well behind Europe, and there is no comparable political and legal integration. Nevertheless, Asia can draw useful lessons from European experiences in multiple areas that include the harmonization of the microprudential framework, proper macroprudential structures, and participation in global financial authorities.

Keywords

Financial regulation; banking union; european union; banking crisis

URL

https://www.adb.org/sites/default/files/publication/212176/adbi-wp615.pdf



Record ID

683     [ Page 1 of 7, No. 7 ]

Date

2017-01

Author

Svensson, Lars E O

Affiliation

Centre for Economic Policy Research

Title

Cost-Benefit Analysis of Leaning Against the Wind: Are Costs Larger Also with Less Effective Macroprudential Policy?

Summary /
Abstract

"Leaning against the wind" (of asset prices and credit booms) (LAW), that is, a somewhat tighter monetary policy and a higher policy interest rate, has costs in terms of a weaker economy with higher unemployment and lower inflation. It has been justified by possible benefits in terms of a lower probability or magnitude of a future financial crisis. A worse macro outcome in the near future is then considered to be an acceptable cost to be traded off against a better expected macro outcome further into the future. But a crisis can come any time, and the cost of a crisis is higher if initially the economy is weaker due to previous LAW. LAW thus has an additional cost in the form of a higher cost of a crisis when a crisis occurs. With this additional cost, for existing empirical estimates, the costs of LAW exceed by a substantial margin the possible benefits from a lower probability of a crisis. Furthermore, empirically a lower probability of a crisis is associated with lower real debt growth. But if monetary policy is neutral in the long run, it cannot affect real debt in the long run. Then, if a higher policy rate would result in lower debt growth and a lower probability of a crisis for a few years, this is followed by higher debt growth and a higher probability of a crisis in the future. This implies that the cumulated benefits over time of LAW are close to zero. But even if monetary policy is assumed to be non-neutral and permanently affect real debt, empirically the benefits are still less than the costs. Finally, somewhat surprisingly, less effective macroprudential policy, and generally a credit boom, with resulting higher probability, magnitude, or duration of a crisis, increase costs of LAW more than benefits, thus making costs exceed benefits by an even larger margin.

Keywords

Financial stability; macroprudential policy; monetary policy

URL

http://cepr.org/active/publications/discussion_papers/dp.php?dpno=11739



Record ID

682     [ Page 1 of 7, No. 8 ]

Date

2016-12

Author

Andrew Filardo and Phurichai Rungcharoenkitkul

Affiliation

Monetary and Economic Department, Bank for International Settlements

Title

A quantitative case for leaning against the wind

Summary /
Abstract

Should a monetary authority lean against the build-up of financial imbalances? We study this policy question in an environment in which there are recurring cycles of financial imbalances that develop over time and eventually collapse in a costly manner. The optimal policy reflects the trade-off between the short-run macroeconomic costs of leaning against the wind and the longer-run benefits of stabilising the financial cycle. We model the financial cycle as a nonlinear Markov regime-switching process, calibrate the model to US data and characterise the optimal monetary policy. Leaning systematically over the whole financial cycle is found to outperform policies of "benign neglect" and "late-in-the-cycle" discretionary interventions. This conclusion is robust to a wide range of alternative assumptions and supports an orientation shift in monetary policy frameworks away from narrow price stability to a joint consideration of price and financial stability.

Keywords

Monetary policy, financial stability, leaning against the wind, financial cycle, time-varying transition probability Markov regime-switching model

URL

http://www.bis.org/publ/work594.pdf



Record ID

681     [ Page 1 of 7, No. 9 ]

Date

2017-01

Author

Esteban Gómez, Angélica Lizarazo, Juan Carlos Mendoza, and Andrés Murcia

Affiliation

Banco de la República de Colombia

Title

Evaluating the Impact of Macro-prudential Policies in Colombia's Credit Growth

Summary /
Abstract

Macro-prudential tools have been used around the world as a mechanism to control potential risks and imbalances in the financial sector. Colombia is a good example of a country that has employed different regulatory measures to manage systemic risks in the economy. The purpose of this paper is to evaluate the effectiveness of two policies employed in said country to increase the resilience of the system and to moderate exuberance in credit supply. The first measure, the counter-cyclical reserve requirement, was implemented in 2007 to control excessive credit growth. The second tool corresponds to the dynamic provisioning scheme for commercial loans, whose objective was to consolidate a counter-cyclical buffer through loan loss provision requirements. To perform this analysis a rich data set based on loan-by-loan information for Colombian banks during the period between 2006 and 2009 is used. A fixed effects panel model is estimated using debtors', banks' and macroeconomic characteristics as control variables. In addition, a difference in differences estimation is performed to evaluate the impact of the aforementioned policies. Findings suggest that dynamic provisions and the countercyclical reserve requirement had a negative effect on credit growth, and that said effect differs conditioned on bank-specific characteristics. Results also suggest that the aggregate macro-prudential policy stance in Colombia has worked as an effective stabilizer of credit cycles, with some preliminary evidence also pointing towards significant effects in reducing bank risk-taking. Moreover, evidence is found that macro-prudential policies have worked as a complement of monetary policy, accompanying the stabilizing effects of changes in interest rates on credit growth.

Keywords

Macroprudential policies, Reserve requirements, Credit growth, Dynamic provisioning, Credit registry data

URL

http://www.banrep.gov.co/sites/default/files/publicaciones/archivos/be_980.pdf



Record ID

680     [ Page 1 of 7, No. 10 ]

Date

2017-01

Author

Svensson, Lars E O

Affiliation

Centre for Economic Policy Research

Title

Cost-Benefit Analysis of Leaning Against the Wind: Are Costs Larger Also with Less Effective Macroprudential Policy?

Summary /
Abstract

"Leaning against the wind" (of asset prices and credit booms) (LAW), that is, a somewhat tighter monetary policy and a higher policy interest rate, has costs in terms of a weaker economy with higher unemployment and lower inflation. It has been justified by possible benefits in terms of a lower probability or magnitude of a future financial crisis. A worse macro outcome in the near future is then considered to be an acceptable cost to be traded off against a better expected macro outcome further into the future. But a crisis can come any time, and the cost of a crisis is higher if initially the economy is weaker due to previous LAW. LAW thus has an additional cost in the form of a higher cost of a crisis when a crisis occurs. With this additional cost, for existing empirical estimates, the costs of LAW exceed by a substantial margin the possible benefits from a lower probability of a crisis. Furthermore, empirically a lower probability of a crisis is associated with lower real debt growth. But if monetary policy is neutral in the long run, it cannot affect real debt in the long run. Then, if a higher policy rate would result in lower debt growth and a lower probability of a crisis for a few years, this is followed by higher debt growth and a higher probability of a crisis in the future. This implies that the cumulated benefits over time of LAW are close to zero. But even if monetary policy is assumed to be non-neutral and permanently affect real debt, empirically the benefits are still less than the costs. Finally, somewhat surprisingly, less effective macroprudential policy, and generally a credit boom, with resulting higher probability, magnitude, or duration of a crisis, increase costs of LAW more than benefits, thus making costs exceed benefits by an even larger margin.

Keywords

Financial stability; macroprudential policy; monetary policy

URL

http://cepr.org/active/publications/discussion_papers/dp.php?dpno=11739



Record ID

679     [ Page 1 of 7, No. 11 ]

Date

2016-12

Author

Adrian, Tobias and Duarte, Fernando M.

Affiliation

Federal Reserve Bank of New York

Title

Financial vulnerability and monetary policy

Summary /
Abstract

We present a parsimonious New Keynesian model that features financial vulnerabilities. The vulnerabilities generate time varying downside risk of GDP growth by driving the dynamics of risk premia. Monetary policy impacts the output gap directly via the IS curve, and indirectly via its impact on financial vulnerabilities. The optimal monetary policy rule always depends on financial vulnerabilities in addition to output, inflation, and the real rate. We show that a classic Taylor rule exacerbates downside risk of GDP growth relative to an optimal Taylor rule, thus generating welfare losses associated with negative skewness of GDP growth.

Keywords

Monetary policy; macro-finance; financial stability

URL

https://www.newyorkfed.org/research/staff_reports/sr804.html



Record ID

678     [ Page 1 of 7, No. 12 ]

Date

2016-10

Author

Alyssa G. Anderson and John Kandrac

Affiliation

Finance and Economics Discussion Series Divisions of Research & Statistics and Monetary Affairs Federal Reserve Board, Washington, D.C.

Title

Monetary Policy Implementation and Private Repo Displacement : Evidence from the Overnight Reverse Repurchase Facility

Summary /
Abstract

In recent years, the scale and scope of major central banks' intervention in financial markets has expanded in unprecedented ways. In this paper, we demonstrate how monetary policy implementation that relies on such intervention in financial markets can displace private transactions. Specifically, we examine the experience with the Federal Reserve's newest policy tool, known as the overnight reverse repurchase (ONRRP) facility, to understand its effects on the repo market. Using exogenous variation in the parameters of the ONRRP facility, we show that participation in the ONRRP comes from substitution out of private repo. However, we also demonstrate that cash lenders, when investing in the ONRRP, do not cease trading with any of their dealer counterparties, highlighting the importance of lending relationships in the repo market. Lastly, using a confidential data set of repo transactions, we find that the presence of the Fed as a borrower in the repo market increases the bargaining power of cash lenders, who are able to command higher rates in their remaining private repo transactions.

Keywords

Repo ; Money market mutual funds ; Monetary policy ; Federal Reserve

URL

https://www.federalreserve.gov/econresdata/feds/2016/files/2016096pap.pdf



Record ID

677     [ Page 1 of 7, No. 13 ]

Date

2016-12

Author

Francesco Grigoli, Gabriel Di Bella, and Evelio Paredes

Affiliation

Western Hemisphere Department, IMF

Title

Inequality and Growth : A Heterogeneous Approach

Summary /
Abstract

The combination of stagnant growth and high levels of income inequality renewed the debate about whether a more even distribution of income can spur economic activity. This paper tests for crosscountry convergence in income inequality and estimates its impact on economic growth with a heterogeneous panel structural vector autoregression model, which addresses some empirical challenges plaguing the literature. We find that income inequality is converging across countries, and that its impact on economic growth is heterogeneous. In particular, while the median response of real per capita GDP growth to shocks in income inequality is negative and significant, the dispersion around the estimates is large, with at least one fourth of the countries in the sample presenting a positive effect. The results suggest that the negative effect is mainly driven by the Middle East and Central Asia and the Western Hemisphere across regions, and emerging markets across income levels. Finally, we find evidence that improved institutional frameworks can reduce the negative effect of income inequality on growth.

Keywords

Heterogeneity, Gini, income distribution, income inequality, income levels, growth, regions

URL

http://www.imf.org/external/pubs/ft/wp/2016/wp16244.pdf



Record ID

676     [ Page 1 of 7, No. 14 ]

Date

2016-12

Author

Sophia Chen and Romain Ranciere

Affiliation

Research Department, IMF

Title

Financial Information and Macroeconomic Forecasts

Summary /
Abstract

We study the forecasting power of financial variables for macroeconomic variables for 62 countries between 1980 and 2013. We find that financial variables such as credit growth, stock prices and house prices have considerable predictive power for macroeconomic variables at one to four quarters horizons. A forecasting model with financial variables outperforms the World Economic Outlook (WEO) forecasts in up to 85 percent of our sample countries at the four quarters horizon. We also find that cross-country panel models produce more accurate out-of-sample forecasts than individual country models.

Keywords

Macroeconomic Forecasting, Financial Markets and the Macroeconomy, Credit Growth, Stock Price, House Price

URL

http://www.imf.org/external/pubs/ft/wp/2016/wp16251.pdf



Record ID

675     [ Page 1 of 7, No. 15 ]

Date

2016-11

Author

Joseph E. Stiglitz

Affiliation

National Bureau of Economic Research

Title

The Theory of Credit and Macro-economic Stability

Summary /
Abstract

In the aftermath of the Great Recession, there is a growing consensus, even among central bank officials, concerning the limitations of monetary policy. This paper provides an explanation for the ineffectiveness of monetary policy, and in doing so provides a new framework for thinking about monetary policy and macro-economic activity. What matters is not so much the money supply or the T-bill interest rate, but the availability of credit, and the terms at which credit is made available. The latter variables may not move in tandem with the former. In particular, the spread between the T bill rate and the lending rate may increase, so even as the T bill rate decreases, the lending rate increases. An increase in credit availability may not lead to more spending on produced goods, but increased prices for land or other fixed assets; it can go to increased margins associated with increases in speculative activity; or it may go to spending abroad rather than at home. The paper explains the inadequacy of theories based on the zero low bound, and argues that the ineffectiveness of monetary policy is more related to the multiple alternative uses—beyond the purchase of domestically produced goods—of additional liquidity and to its adverse distributional consequences. The paper shows that while monetary policy is less effective than has been widely presumed, it is also more distortionary, identifying several distinct distortions.

Keywords

Credit, Macroeconomic Stability

URL

http://www.nber.org/papers/w22837.pdf



Record ID

674     [ Page 1 of 7, No. 16 ]

Date

2016-11

Author

Bianchi, Javier; Hatchondo, Juan Carlos; and Martinez, Leonardo

Affiliation

Federal Reserve Bank of Minneapolis; Indiana University; and International Monetary Fund

Title

International Reserves and Rollover Risk

Summary /
Abstract

We study the optimal accumulation of international reserves in a quantitative model of sovereign default with long-term debt and a risk-free asset. Keeping higher levels of reserves provides a hedge against rollover risk, but this is costly because using reserves to pay down debt allows the government to reduce sovereign spreads. Our model, parameterized to mimic salient features of a typical emerging economy, can account for a significant fraction of the holdings of international reserves, and the larger accumulation of both debt and reserves in periods of low spreads and high income. We also show that income windfalls, improved policy frameworks, larger contingent liabilities, and an increase in the importance of rollover risk imply increases in the optimal holdings of reserves that are consistent with the upward trend in reserves in emerging economies. It is essential for our results that debt maturity exceeds one period.

Keywords

Sovereign default; international reserves; rollover risk; safe assets

URL

https://www.minneapolisfed.org/research/wp/wp735.pdf



Record ID

673     [ Page 1 of 7, No. 17 ]

Date

2016-11

Author

Ingo Fender and Ulf Lewrick

Affiliation

Bank for International Settlements

Title

Adding it all up: the macroeconomic impact of Basel II and outstanding reform issues

Summary /
Abstract

As the Basel III package nears completion, the emphasis is shifting to monitoring its implementation and assessing the impact of the reforms. This paper presents a simple conceptual framework to assess the macroeconomic impact of the core Basel III reforms, including the leverage ratio surcharge that is being considered for global systemically important banks (G-SIBs). We use historical data for a large sample of major banks to generate a conservative approximation of the additional amount of capital that banks would need to raise to meet the new regulatory requirements, taking the potential impact of current efforts to enhance G-SIBs' total loss-absorbing capacity into account. To provide a high-level proxy for the effect of changes in capital allocation and bank business models on the estimated net benefits of regulatory reform, we simulate the effect of banks converging towards the "critical" average risk weights (or "density ratios") implied by the combined risk-weighted and leverage ratio-based capital requirements. While keeping in mind that quantifying the regulatory impact remains subject to caveats, the results suggest that Basel III can be expected to generate sizeable macroeconomic net benefits even after the implied changes to bank business models have been taken into account.

Keywords

Basel III, density ratio, global systemically important banks, leverage ratio, macroeconomic impact, risk-shifting

URL

http://www.bis.org/publ/work591.pdf



Record ID

672     [ Page 1 of 7, No. 18 ]

Date

2016-11

Author

Cociuba, Simona; Shukayev, Malik; and Ueberfeldt, Alexander

Affiliation

University of Western Ontario; University of Alberta; and Bank of Canada

Title

Managing Risk Taking with Interest Rate Policy and Macroprudential Regulations

Summary /
Abstract

We develop a model in which a financial intermediarys investment in risky assets risk taking is excessive due to limited liability and deposit insurance, and characterize the policy tools that implement efficient risk taking. In the calibrated model, coordinating interest rate policy with state-contingent macroprudential regulations either capital or leverage regulation, and a tax on pro ts achieves efficiency. Interest rate policy mitigates excessive risk taking, by altering the return and the supply of collateralizable safe assets. In contrast to commonly-used capital regulation, leverage regulation has stronger effects on risk taking and calls for higher interest rates.

Keywords

Financial intermediation; risk taking; interest rate policy; macroprudential regulations; capital requirements; leverage ratio

URL

https://sites.ualberta.ca/~econwps/2016/wp2016-17.pdf



Record ID

671     [ Page 1 of 7, No. 19 ]

Date

2016-10

Author

Oriol Carreras, E Philip Davis, and Rebecca Piggott

Affiliation

National Institute of Economic and Social Research

Title

Macroprudential tools, Transmission and Modelling

Summary /
Abstract

The purpose of this paper is twofold. First, we review the theoretical and empirical literature on macroprudential policies and tools. Second, we test empirically the effectiveness of several macroprudential policies and tools using three datasets from the IMF and BIS that cover up to 19 OECD countries during 2000-2014, thus giving wide coverage of instruments. In addition, our focus on OECD countries gives us access to a wider range of control variables whose omission may lead to excessively favourable results on the impact of macroprudential policies. We find evidence that macroprudential polices are effective at curbing house price and credit growth, albeit some tools are more effective than others. These include, in particular, taxes on financial institutions and strict loan-to-value and debt-to-income ratio limits.

Keywords

Macroprudential Policies, Transmission, and Policy Effectiveness

URL

http://www.niesr.ac.uk/sites/default/files/publications/DP470.pdf



Record ID

670     [ Page 1 of 7, No. 20 ]

Date

2016-11

Author

Bhattarai, Saroj; and Neely, Christopher J.

Affiliation

University of Texas at Austin and Federal Reserve Bank of St. Louis

Title

A Survey of the Empirical Literature on U.S. Unconventional Monetary Policy

Summary /
Abstract

This paper reviews and critically evaluates the empirical literature on the effects of U.S. unconventional monetary policy on both financial markets and the real economy. In order to understand how such policies could work, we also briefly review the literature on the theory of such policies. We show that event studies provide very strong evidence that U.S. unconventional policy announcements have strongly influenced international bond yields, exchange rates, and equity prices in the desired manner. In addition, such studies indicate that such policies curtailed market perceptions of extreme events. Calibrated modeling and vector autoregressive (VAR) exercises strongly suggest that these policies significantly improved macroeconomic outcomes, raising U.S. GDP and CPI, through these changes in asset prices. Both event studies and VARs imply positive international spillovers of such policies.

Keywords

Quantitative easing; event study; unconventional monetary policy; zero lower bound

URL

https://research.stlouisfed.org/wp/2016/2016-021.pdf



Record ID

669     [ Page 1 of 7, No. 21 ]

Date

2016-09

Author

Maurice Obstfeld, Kevin Clinton, Ondra Kamenik, Douglas Laxton, Yulia Ustyugova, and Hou Wang

Affiliation

Research and Western Hemisphere Departments, IMF

Title

How to Improve Inflation Targeting in Canada

Summary /
Abstract

Routine publication of the forecast path for the policy interest rate (i.e. “conventional forward guidance†) would improve the transparency of monetary policy. It would also improve policy effectiveness through its influence on expectations, particularly when there is a risk of low inflation, and the policy rate is constrained by the effective lower bound. Model simulations indicate that a potent macroeconomic strategy, for returning the Canadian economy to potential, combines conventional forward guidance with a fiscal stimulus. As a response to the effective lower bound constraint, and the decline in the world equilibrium real interest rate, this strategy is preferable to raising the inflation target.

Keywords

Canada; inflation targeting; monetary policy; fiscal policy

URL

http://www.imf.org/external/pubs/ft/wp/2016/wp16192.pdf



Record ID

668     [ Page 1 of 7, No. 22 ]

Date

2016-10

Author

Philip Turner

Affiliation

Bank for International Settlements

Title

Macroprudential policies, the long-term interest rate and the exchange rate

Summary /
Abstract

The Bernanke-Blinder closed economy model suggests that macroprudential policies aimed at bank lending will affect the domestic long-term interest rate. In an open economy, domestic shocks to long-term rates are likely to influence capital flows and the exchange rate. Currency movements feed back into domestic credit through several channels, which will be influenced by balance sheet positions and not only by income flows. Macroprudential policies aimed at domestic credit and at foreign currency borrowing may be the best option open to small countries facing very low global interest rates and risky domestic credit expansion.

Keywords

Bernanke-Blinder model, capital flows, interest rate policy, macroprudential policy

URL

http://www.bis.org/publ/work588.pdf



Record ID

667     [ Page 1 of 7, No. 23 ]

Date

2016-10

Author

Pierluigi Bologna and Anatoli Segura

Affiliation

Bank of Italy

Title

Integrating stress tests within the Basel III capital framework: a macroprudentially coherent approach

Summary /
Abstract

In the post-crisis era banks’ capital adequacy is established by the Basel III capital standards and, in many jurisdictions, also by supervisory stress tests. In this paper we first describe the ways in which supervisory stress tests can supplement the risk-based capital framework of Basel III and how this could be codified with a stress test buffer. We then argue that in order to ensure coherence with the macroprudential objectives of Basel III, the severity of supervisory stress tests should be procyclical. In addition, to increase the transparency and predictability of the overall capital framework, severity choices should follow a constrained discretion approach based on a simple rule. Finally, we analyze supervisory stress testing practices across some jurisdictions and find that while the United States and the UK frameworks are in line with some of the elements of our proposal, including most notably the need for procyclical severity, this is not the case in the euro area.

Keywords

Stress test, capital regulation, macroprudential policy

URL

http://www.bancaditalia.it/pubblicazioni/qef/2016-0360/QEF_360_16.pdf



Record ID

666     [ Page 1 of 7, No. 24 ]

Date

2016-09

Author

Leonardo Gambacorta and Sudipto Karmakar

Affiliation

Monetary and Economic Department, BIS

Title

Leverage and Risk Weighted Capital Requirements

Summary /
Abstract

The global financial crisis has highlighted the limitations of risk-sensitive bank capital ratios. To tackle this problem, the Basel III regulatory framework has introduced a minimum leverage ratio, defined as a banks Tier 1 capital over an exposure measure, which is independent of risk assessment. Using a medium sized DSGE model that features a banking sector, financial frictions and various economic agents with differing degrees of creditworthiness, we seek to answer three questions: 1) How does the leverage ratio behave over the cycle compared with the risk-weighted asset ratio? 2) What are the costs and the benefits of introducing a leverage ratio, in terms of the levels and volatilities of some key macro variables of interest? 3) What can we learn about the interaction of the two regulatory ratios in the long run? The main answers are the following: 1) The leverage ratio acts as a backstop to the risk-sensitive capital requirement: it is a tight constraint during a boom and a soft constraint in a bust; 2) the net benefits of introducing the leverage ratio could be substantial; 3) the steady state value of the regulatory minima for the two ratios strongly depends on the riskiness and the composition of bank lending portfolios.

Keywords

Bank capital buffers, regulation, risk-weighted assets, leverage

URL

http://www.bis.org/publ/work586.pdf



Record ID

665     [ Page 1 of 7, No. 25 ]

Date

2015-12

Author

Jiaqian Chen and Francesco Columba

Affiliation

IMF and Bank of Italy

Title

Macroprudential and Monetary Policies Interactions in a DSGE Model for Sweden

Summary /
Abstract

We analyse the effects and the interactions of macroprudential and monetary policies with an estimated dynamic stochastic general equilibrium (DSGE) model tailored to Sweden. Households are constrained by a loan-to-value ratio and mortgages are amortized. Government grants mortgage interest payment deductions. Lending rates are affected by mortgage risk weights. We find that to curb the household debt-to-income ratio demand-side macroprudential measures are more effective and less costly in terms of foregone consumption than monetary policy. A tighter macroprudential stance is also welfare improving, by promoting lower consumption volatility in response to shock, especially when combining different instruments, whose sequence of implementation is key.

Keywords

Macroprudential Policies, Monetary Policy, Collateral Constraints

URL

https://economicdynamics.org/meetpapers/2016/paper_913.pdf



Record ID

664     [ Page 1 of 7, No. 26 ]

Date

2016-10

Author

Joshua Aizenman, Menzie D. Chinn, and Hiro Ito

Affiliation

National Bureau of Economic Research

Title

Balance Sheet Effects on Monetary and Financial Spillovers: The East Asian Crisis Plus 20

Summary /
Abstract

We study how the financial conditions in the Center Economies [the U.S., Japan, and the Euro area] impact other countries over the period 1986 through 2015. Our methodology relies upon a two-step approach. We focus on five possible linkages between the center economies (CEs) and the non-Center economics, or peripheral economies (PHs), and investigate the strength of these linkages. For each of the five linkages, we first regress a financial variable of the PHs on financial variables of the CEs while controlling for global factors. Next, we examine the determinants of sensitivity to the CEs as a function of country-specific macroeconomic conditions and policies, including the exchange rate regime, currency weights, monetary, trade and financial linkages with the CEs, the levels of institutional development, and international reserves. Extending our previous work (Aizenman et al. (2016)), we devote special attention to the impact of currency weights in the implicit currency basket, balance sheet exposure, and currency composition of external debt. We find that for both policy interest rates and the real exchange rate (REER), the link with the CEs has been pervasive for developing and emerging market economies in the last two decades, although the movements of policy interest rates are found to be more sensitive to global financial shocks around the time of the emerging markets’ crises in the late 1990s and early 2000s, and since 2008. When we estimate the determinants of the extent of connectivity, we find evidence that the weights of major currencies, external debt, and currency compositions of debt are significant factors. More specifically, having a higher weight on the dollar (or the euro) makes the response of a financial variable such as the REER and exchange market pressure in the PHs more sensitive to a change in key variables in the U.S. (or the euro area) such as policy interest rates and the REER. While having more exposure to external debt would have similar impacts on the financial linkages between the CEs and the PHs, the currency composition of international debt securities does matter. Economies more reliant on dollar-denominated debt issuance tend to be more vulnerable to shocks emanating from the U.S.

Keywords

East Asian Crisis Plus 20, Monetary and Financial Spillovers

URL

http://www.nber.org/papers/w22737.pdf



Record ID

663     [ Page 1 of 7, No. 27 ]

Date

2016-10

Author

Alan S. Blinder, Michael Ehrmann, Jakob de Haan, and David-Jan Jansen

Affiliation

National Bureau of Economic Research

Title

Necessity as the Mother of Invention: Monetary Policy after the Crisis

Summary /
Abstract

We ask whether recent changes in monetary policy due to the financial crisis will be temporary or permanent. We present evidence from two surveys—one of central bank governors, the other of academic specialists. We find that central banks in crisis countries are more likely to have resorted to new policies, to have had discussions about mandates, and to have communicated more. But the thinking has changed more broadly—for instance, central banks in non-crisis countries also report having implemented macro-prudential measures. Overall, we expect central banks in the future to have broader mandates, use macro-prudential tools more widely, and communicate more actively than before the crisis. While there is no consensus yet about the usefulness of unconventional monetary policies, we expect most of them will remain in central banks’ tool-kits, as governors who gain experience with a particular tool are more likely to assess that tool positively. Finally, the relationship between central banks and their governments might well have changed, with central banks “crossing the line” more often than in the past.

Keywords

Global financial crisis, monetary policy, unconventional monetary tools, macro-prudential tools, crisis vs. non-crisis countries

URL

http://www.nber.org/papers/w22735.pdf



Record ID

662     [ Page 1 of 7, No. 28 ]

Date

2016-09

Author

Simona Malovana and Jan Frait

Affiliation

Czech National Bank

Title

Monetary Policy and Macro-Prudential Policy: Rivals or Teammates?

Summary /
Abstract

This paper sheds some light on situations in which monetary and macro-prudential policies may interact (and potentially get into conflict) and contributes to the discussion about the coordination of those policies. Using data for the Czech Republic and five euro area countries we show that monetary tightening has a negative impact on the credit-to-GDP ratio and the non-risk-weighted bank capital ratio (i.e. a positive impact on bank leverage), while these effects have strengthened considerably since mid-2011. This supports the view that accommodative monetary policy contributes to a build-up of financial vulnerabilities, i.e. it boosts the credit cycle. On the other hand, the effect of the higher bank capital ratio is associated with some degree of uncertainty. For these and other reasons, coordination of the two policies is necessary to avoid an undesirable policy mix preventing effective achievement of the main objectives in the two policy areas.

Keywords

Bayesian estimation, financial stability, macroprudential policy, monetary policy, time-varying panel VAR model

URL

http://www.cnb.cz/miranda2/export/sites/www.cnb.cz/en/research/research_publications/cnb_wp/download/cnbwp_2016_06.pdf



Record ID

661     [ Page 1 of 7, No. 29 ]

Date

2016-08

Author

Janet L. Yellen

Affiliation

Chair Board of Governors of the Federal Reserve System

Title

The Federal Reserve’s Monetary Policy Toolkit: Past, Present, and Future

Summary /
Abstract

Remarks at “Designing Resilient Monetary Policy Frameworks for the Future”, a symposium sponsored by the Federal Reserve Bank of Kansas City Jackson Hole, Wyoming, August 26, 2016.

Keywords

Monetary policy toolkit, Federal Reserve

URL

http://d.repec.org/n?u=RePEc:fip:fedgsq:906&r=mon



Record ID

660     [ Page 1 of 7, No. 30 ]

Date

2016-08

Author

Carlos Garriga, Finn E. Kydland, and Roman Šustek

Affiliation

Federal Reserve Bank of St. Louis, University of California-Santa Barbara and NBER, and Queen Mary University of London, Centre for Macroeconomics, and CERGE-EI

Title

Nominal Rigidities in Debt and Product Markets

Summary /
Abstract

Standard models used for monetary policy analysis rely on sticky prices. Recently, the literature started to explore also nominal debt contracts. Focusing on mortgages, this paper compares the two channels of transmission within a common framework. The sticky price channel is dominant when shocks to the policy interest rate are temporary, the mortgage channel is important when the shocks are persistent. The first channel has significant aggregate effects but small redistributive effects. The opposite holds for the second channel. Using yield curve data decomposed into temporary and persistent components, the redistributive and aggregate consequences are found to be quantitatively comparable.

Keywords

Mortgage contracts, Sticky prices, Monetary policy, Yield curve, Redistributive vs. aggregate effects.

URL

http://econpapers.repec.org/scripts/redir.pf?u=https%3A%2F%2Fresearch.stlouisfed.org%2Fwp%2F2016%2F2016-017.pdf;h=repec:fip:fedlwp:2016-017



Record ID

659     [ Page 1 of 7, No. 31 ]

Date

2016-08

Author

Mikael Juselius, Claudio Borio, Piti Disyatat, and Mathias Drehmann

Affiliation

Bank of Finland, Bank for International Settlements, Bank of Thailand, and Bank for International Settlements

Title

Monetary policy, The Financial Cycle and Ultralow Interest Rates

Summary /
Abstract

Do the prevailing unusually and persistently low real interest rates reflect a decline in the natural rate of interest as commonly thought? We argue that this is only part of the story. The critical role of financial factors in influencing medium-term economic fluctuations must also be taken into account. Doing so for the United States yields estimates of the natural rate that are higher and, at least since 2000, decline by less. As a result, policy rates have been persistently and systematically below this measure. Moreover, we find that monetary policy, through the financial cycle, has a long-lasting impact on output and, by implication, on real interest rates. Therefore, a narrative that attributes the decline in real rates primarily to an exogenous fall in the natural rate is incomplete. The influence of monetary and financial factors should not be ignored. Exploiting these results, an illustrative counterfactual experiment suggests that a monetary policy rule that takes financial developments systematically into account during both good and bad times could help dampen the financial cycle, leading to higher output even in the long run.

Keywords

Natural interest rate, financial cycle, monetary policy, credit, business cycle

URL

http://d.repec.org/n?u=RePEc:bof:bofrdp:2016_024&r=fdg



Record ID

658     [ Page 1 of 7, No. 32 ]

Date

2016-08

Author

Vladimir Klyuev and To-Nhu Dao

Affiliation

Asia and Pacific Department, IMF

Title

Evolution of Exchange Rate Behavior in the ASEAN-5 Countries

Summary /
Abstract

This paper examines exchange rate behavior in the ASEAN-5 countries (Indonesia, Malaysia, the Philippines, Singapore, and Thailand). It finds that for the last 10 years there is no evidence that their central banks target particular exchange rate levels against any currency or basket. Thus, contrary to some assertions, they do not belong to a U.S. dollar club, a Japanese yen club, a Chinese renminbi club, or an ASEAN club. At the same time, they clearly try to smooth short-term volatility, particularly vis-à-vis the U.S. dollar. The degree of smoothing declined noticeably after the Asian Financial Crisis and less obviously after the Global Financial Crisis, with heterogeneity across countries. Short-term smoothing without level targeting does not interfere with monetary policies aimed at price stability.

Keywords

Exchange rate regimes; exchange rate volatility; fear of floating; currency blocks; ASEAN

URL

http://www.imf.org/external/pubs/ft/wp/2016/wp16165.pdf



Record ID

657     [ Page 1 of 7, No. 33 ]

Date

2016-06

Author

Özer Karagedikli and John McDermott

Affiliation

Reserve Bank of New Zealand

Title

Inflation expectations and low inflation in New Zealand

Summary /
Abstract

This paper finds that the changing behaviour of inflation expectations can explain much of the unusually low inflation in New Zealand. Across several empirical specifications of the Phillips curve, we observe that inflation expectations have become more backward-looking. We also find that the speed of adjustment in inflation expectations, proxied by the spread between short- and longer-term inflation expectations, can explain the unusually low inflation.

Keywords

Inflation expectations, low stable inflation, Phillips curve

URL

http://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Discussion%20papers/2016/dp16-09.pdf



Record ID

656     [ Page 1 of 7, No. 34 ]

Date

2016-06

Author

Guglielmo Maria Caporale ; Abdurrahman Nazif Catik ; Mohamad Husam Helmi ; Faek Menla Ali ; and Coskun Akdeniz

Affiliation

Department of Economics and Finance, Brunel University London, UK; Department of Economics, Ege University, Turkey

Title

Monetary Policy Rules in Emerging Countries: Is There an Augmented Nonlinear Taylor Rule?

Summary /
Abstract

This paper examines the Taylor rule in five emerging economies, namely Indonesia, Israel, South Korea, Thailand, and Turkey. In particular, it investigates whether monetary policy in these countries can be more accurately described by (i) an augmented rule including the exchange rate, as well as (ii) a nonlinear threshold specification (estimated using GMM), instead of a baseline linear rule. The results suggest that the reaction of monetary authorities to deviations from target of either the inflation or the output gap varies in terms of magnitude and/or statistical significance across the high and low inflation regimes in all countries. In particular, the exchange rate has an impact in the former but not in the latter regime. Overall, an augmented nonlinear Taylor rule appears to capture more accurately the behaviour of monetary authorities in these countries.

Keywords

Taylor rule, nonlinearities, emerging countries

URL

http://www.diw.de/documents/publikationen/73/diw_01.c.536363.de/dp1588.pdf



Record ID

655     [ Page 1 of 7, No. 35 ]

Date

2016-05

Author

William R. Cline

Affiliation

Peterson Institute for International Economics

Title

Estimates of Fundamental Equilibrium Exchange Rates, May 2016

Summary /
Abstract

The US dollar is overvalued by about 7 percent, approximately the same amount as estimated last year (May and November 2015). Divergent phases of monetary policy in the United States, on one hand, and the euro area and Japan, on the other, and a collapse in commodity prices drove the stronger dollar. After rising about 5 percent from October 2015 (the base of the November 2015 assessment) to January 2016, the real effective exchange rate of the dollar fell slightly below its October level by April 2016 (the base of the current estimates). This semiannual evaluation also finds the yen is slightly undervalued (by 3 percent) despite its recent strengthening, but there is no misalignment of the other two leading currencies, the euro and Chinese renminbi.

Keywords

Fundamental Equilibrium Exchange Rates, May 2016

URL

https://piie.com/system/files/documents/pb16-6.pdf



Record ID

654     [ Page 1 of 7, No. 36 ]

Date

2015-02

Author

Christophe Blot, Jérôme Creel, Paul Hubert, Fabien Labondance, and Francesco Saraceno

Affiliation

OFCE

Title

Assessing the link between price and financial stability

Summary /
Abstract

This paper aims at investigating first, the (possibly time-varying) empirical relationship between price and financial stability, and second, the effects of some macro and policy variables on this relationship in the United States and the Eurozone. Three empirical methods are used to examine the relevance of A.J. Schwartz's “conventional wisdom” that price stability would yield financial stability. Using simple correlations and VAR and Dynamic Conditional Correlations, we reject the hypotheses that price stability is positively correlated with financial stability and that the correlation is stable over time. The latter result and the analysis of the determinants of the link between price stability and financial stability cast some doubt on the appropriateness of the “leaning against the wind” monetary policy approach.

Keywords

Price stability; Financial stability; DCC-GARCH; VAR.

URL

http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/114p6m6s0395gqm0es4g7kgv3u&r=mon



Record ID

653     [ Page 1 of 7, No. 37 ]

Date

2016-05

Author

Ambrogio Cesa-Bianchi and Alessandro Rebucci

Affiliation

NBER

Title

Does Easing Monetary Policy Increase Financial Instability?

Summary /
Abstract

This paper develops a model featuring both a macroeconomic and a financial friction that speaks to the interaction between monetary and macro-prudential policy and to the role of U.S. monetary and regulatory policy in the run up to the Great Recession. There are two main results. First, real interest rate rigidities in a monopolistic banking system increase the probability of a financial crisis (relative to the case of flexible interest rate) in response to contractionary shocks to the economy, while they act as automatic macro-prudential stabilizers in response to expansionary shocks. Second, when the interest rate is the only available policy instrument, a monetary authority subject to the same constraints as private agents cannot always achieve a (constrained) efficient allocation and faces a trade-off between macroeconomic and financial stability in response to contractionary shocks. An implication of our analysis is that the weak link in the U.S. policy framework in the run up to the Global Recession was not excessively lax monetary policy after 2002, but rather the absence of an effective second policy instrument aimed at preserving financial stability.

Keywords

Monetary Policy, Financial Instability

URL

http://www.nber.org/papers/w22283.pdf



Record ID

652     [ Page 1 of 7, No. 38 ]

Date

2016-05

Author

Woodford, Michael

Affiliation

CEPR

Title

Quantitative Easing and Financial Stability

Summary /
Abstract

This paper compares three alternative dimensions of central-bank policy --- conventional interest-rate policy, quantitative easing, and macroprudential policy --- showing in the context of a simple intertemporal general-equilibrium model why they are logically independent dimensions of policy, and how they jointly determine financial conditions, aggregate demand, and the severity of risks to financial stability. Quantitative easing policies increase financial stability risk less than either of the other two policies, relative to the magnitude of aggregate demand stimulus; and a combination of expansion of the cental bank's balance sheet with a suitable tightening of macroprudential policy can have a net expansionary effect on aggregate demand with no increased risk to financial stability. This suggests that quantitative easing policies may be useful as an approach to aggregate demand management not only when the zero lower bound precludes further use of conventional interest-rate policy, but also when it is not desirable to further reduce interest rates because of financial stability concerns.

Keywords

Macroprudential policy; money premium; zero lower bound

URL

http://d.repec.org/n?u=RePEc:cpr:ceprdp:11287&r=mon



Record ID

651     [ Page 1 of 7, No. 39 ]

Date

2016-05

Author

Joshua Aizenman and Hiro Ito

Affiliation

National Bureau of Economic Research

Title

East Asian Economies and Financial Globalization In the Post-Crisis World

Summary /
Abstract

This paper assesses the East Asian Economies’ openness to cross-border capital flows and exchange rate arrangements in the past decades, with the main focus on emerging market economies. Using Mundell’s trilemma indexes, we note that the convergence of the three policy goals in East Asia toward a “middle ground” pre-dates the convergence of these indices in other regions. Another more recent development involves the high level of international reserve (IR) holdings–a feature that is known as the most distinct characteristic of Asian EMEs. Financial globalization made asset prices and interest rates in Asian EMEs more vulnerable to global movements of capital, and to the monetary policy of the center country, the United-States. The U.S. presence in trade ties with Asian economies has been declining over the last two decades, whereas China’s has been on a rising trend. Yet, the share of trade among Asian economies with the dollar zone economies has been quite stable. China has been recently making efforts to “internationalize” its currency, the yuan (RMB). Hence, if China succeeds in its internationalization efforts and creates the RMB zone, the dynamics between the U.S. and Asia will most likely change. Recently, Chinese authorities have become more interventionist because of the slowdown of the economy and financial markets. For now, the Asian region’s international finance continues to be dollar-centric.

Keywords

East Asian Economies, Financial Globalization, Capital Flows, Exchange Rate Arrangements Mundell's Trilemma

URL

http://www.nber.org/papers/w22268.pdf



Record ID

650     [ Page 1 of 7, No. 40 ]

Date

2016-05

Author

Lindé, Jesper; Smets, Frank; and Wouters, Rafael

Affiliation

Central Bank of Sweden; ECB, KU Leuven and CEPR; and National Bank of Belgium and CEPR

Title

Challenges for Central Banks' Macro Models

Summary /
Abstract

In this paper we discuss a number of challenges for structural macroeconomic models in the light of the Great Recession and its aftermath. It shows that a benchmark DSGE model that shares many features with models currently used by central banks and large international institutions has difficulty explaining both the depth and the slow recovery of the Great Recession. In order to better account for these observations, the paper analyses three extensions of the benchmark model. First, we estimate the model allowing explicitly for the zero lower bound constraint on nominal interest rates. Second, we introduce time-variation in the volatility of the exogenous disturbances to account for the non-Gaussian nature of some of the shocks. Third and finally, we extend the model with a financial accelerator and allow for time-variation in the endogenous propagation of financial shocks. All three extensions require that we go beyond the linear Gaussian assumptions that are standard in most policy models. We conclude that these extensions go some way in accounting for features of the Great Recession and its aftermath, but they do not suffice to address some of the major policy challenges associated with the use of non-standard monetary policy and macroprudential policies.

Keywords

Monetary policy; DSGE; and VAR models; Regime-Switching; Zero Lower Bound; Financial Frictions; Great Recession; Macroprudential policy; Open economy

URL

http://www.riksbank.se/Documents/Rapporter/Working_papers/2016/rap_wp323_160512.pdf



Record ID

649     [ Page 1 of 7, No. 41 ]

Date

2016-07

Author

Michelle Lewis and John McDermott

Affiliation

Reserve Bank of New Zealand

Title

New Zealand's experience with changing its inflation target and the impact on inflation expectations

Summary /
Abstract

We document the experience of the Reserve Bank of New Zealand in changing its inflation target, particularly the effects on inflation expectations. Firstly, the Reserve Bank of New Zealand's DSGE model is used to highlight expectation-formation in the transmission following a change in the inflation target. Secondly, a Nelson-Siegel model is used to combine a number of inflation expectation surveys into a continuous curve where expectations can be plotted as a function of the forecast horizon. Using estimates of long-run inflation expectations derived from the Nelson-Siegel model, we find that numerical changes in the inflation target result in an immediate change in inflation expectations.

Keywords

Inflation target, inflation expectations

URL

http://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Discussion%20papers/2016/dp16-07.pdf



Record ID

648     [ Page 1 of 7, No. 42 ]

Date

2016-05

Author

Nicoletta Batini, Giovanni Melina, and Stefania Villa

Affiliation

European Department, IMF, Research Department, IMF, and University of Foggia & KU Leuven

Title

Fiscal Buffers, Private Debt, and Stagnation: The Good, the Bad and the Ugly

Summary /
Abstract

We revisit the empirical relationship between private/public debt and output, and build a model that reproduces it. In the model, the government provides financial assistance to credit-constrained agents to mitigate deleveraging. As we observe in the data, surges in private debt are potentially more damaging for the economy than surges in public debt. The model suggests two policy implications. First, capping leverage leads to milder recessions, but also implies more muted expansions. Second, with fiscal buffers, financial assistance to credit-constrained agents helps avoid stagnation. The growth returns from intervention decline as the government approaches the fiscal limit.

Keywords

Private debt, public debt, borrowing constraints, fiscal limits, DSGE

URL

http://www.imf.org/external/pubs/ft/wp/2016/wp16104.pdf



Record ID

647     [ Page 1 of 7, No. 43 ]

Date

2016-03

Author

Iversen, Jens; Laséen, Stefan; Lundvall, Henrik; and Söderström, Ulf

Affiliation

Monetary Policy Department, Central Bank of Sweden; International Monetary Fund; National Institute of Economic Research; Monetary Policy Department, Central Bank of Sweden

Title

Real-Time Forecasting for Monetary Policy Analysis: The Case of Sveriges Riksbank

Summary /
Abstract

We evaluate forecasts made in real time to support monetary policy decisions at Sveriges Riksbank (the central bank of Sweden) from 2007 to 2013. We compare forecasts made with a DSGE model and a BVAR model with judgmental forecasts published by the Riksbank, and we evaluate the usefulness of conditioning information for the model-based forecasts. We also study the perceived usefulness of model forecasts for central bank policymakers when producing the judgmental forecasts.

Keywords

Real-time forecasting; Forecast evaluation; Monetary policy; Inflation targeting

URL

http://www.riksbank.se/Documents/Rapporter/Working_papers/2016/rap_wp318_160323.pdf



Record ID

646     [ Page 1 of 7, No. 44 ]

Date

2016-04

Author

Boyarchenko, Nina; Haddad, Valentin; and Plosser, Matthew

Affiliation

Federal Reserve Bank of New York; Princeton University; and Federal Reserve Bank of New York

Title

The Federal Reserve and market confidence

Summary /
Abstract

We discover a novel monetary policy shock that has a widespread impact on aggregate financial conditions. Our shock can be summarized by the response of long-horizon yields to Federal Open Market Committee (FOMC) announcements; not only is it orthogonal to changes in the near-term path of policy rates, but it also explains more than half of the abnormal variation in the yield curve on announcement days. We find that our long-rate shock is positively related to changes in real interest rates and market volatility, and negatively related to market returns and mortgage demand, consistent with policy announcements affecting market confidence. Our results demonstrate that Federal Reserve pronouncements influence markets independent of changes in the stance of conventional monetary policy.

Keywords

Policy announcement; risk premium; uncertainty; financial conditions

URL

https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr773.pdf?la=en



Record ID

645     [ Page 1 of 7, No. 45 ]

Date

2016-03

Author

Kashiwabara, Chie

Affiliation

Institute of Developing Economies, Japan

Title

Asset composition of the Philippines' universal and commercial banks : monetary policy or self-discipline?

Summary /
Abstract

The central bank of the Philippines (Bangko Sentral ng Pilipinas, BSP) has improved its monetary policy measures since the 2000s. After rationalizing the country's banking sector since late-1990s, its monetary policy and the uniiversal/commercial banks' (UCBs) behavior in allocating their assets has changed since mid-2000s. Though further and more detailed studies are nesessary, based on the results of simple correlation analyses conducted in this paper suggest a possible mixture of the country's monetary policy and their own decision-making in asset allocations, instead of a "follow-through" attitude.

Keywords

Monetary policy, Banks, Monetary policy measure, Universal and commercial banks, The Philippines

URL

http://ir.ide.go.jp/dspace/bitstream/2344/1540/1/ARRIDE_Discussion_No.586_kashiwabara.pdf



Record ID

644     [ Page 1 of 7, No. 46 ]

Date

2016-01

Author

Lars E. O. Svensson

Affiliation

Research Department, International Monetary Fund

Title

Cost-Benefit Analysis of Leaning Against the Wind : Are Costs Larger Also with Less Effective Macroprudential Policy?

Summary /
Abstract

“Leaning against the wind” (LAW) with a higher monetary policy interest rate may have benefits in terms of lower real debt growth and associated lower probability of a financial crisis but has costs in terms of higher unemployment and lower inflation, importantly including a higher cost of a crisis when the economy is weaker. For existing empirical estimates, costs exceed benefits by a substantial margin, even if monetary policy is non-neutral and permanently affects real debt. Somewhat surprisingly, less effective macro-prudential policy and generally a credit boom, with resulting higher probability, severity, or duration of a crisis, increases costs of LAW more than benefits, thus further strengthening the strong case against LAW.

Keywords

Monetary policy, financial stability, macroprudential policy

URL

http://www.imf.org/external/pubs/ft/wp/2016/wp1603.pdf



Record ID

643     [ Page 1 of 7, No. 47 ]

Date

2015-12

Author

Zeyyad Mandalinci

Affiliation

Queen Mary University of London

Title

Forecasting Inflation in Emerging Markets: An Evaluation of Alternative Models

Summary /
Abstract

This paper carries out a comprehensive forecasting exercise to assess out-of-sample forecasting performance of various econometric models for inflation across three dimensions; time, emerging market countries and models. The competing forecasting models include univariate and multivariate, fixed and time varying parameter, constant and stochastic volatility, small and large dataset, with and without bayesian variable selection models. Results indicate that the forecasting performance of different models change notably both across time and countries. Similar to some of the recent findings of the literature that focus on developed countries, models that account for stochastic volatility and time-varying parameters provide more accurate forecasts for inflation than alternatives in emerging markets.

Keywords

Forecasting, Bayesian Analysis, Emerging Markets, Forecast Comparison

URL

http://d.repec.org/n?u=RePEc:qmm:wpaper:3&r=mon



Record ID

642     [ Page 1 of 7, No. 48 ]

Date

2012-12

Author

Bullard, James B.

Affiliation

President and CEO, Federal Reserve Bank of St. Louis

Title

A Hat Trick for the FOMC

Summary /
Abstract

At Ball State University in Muncie, Ind., St. Louis Fed President James Bullard assessed the Federal Open Market Committee's forecasts running up to 2015 and discussed implications for monetary policy. He said that the forecasts look to have missed on all three key variables—real GDP growth, unemployment and inflation—and that the misses are such that they continue to pull the committee in different directions on monetary policy.

Keywords

Forecasting growth, unemployment, and inflation; monetary policy

URL

https://www.stlouisfed.org/~/media/Files/PDFs/Bullard/remarks/Bullard-Muncie-IN-7Dec2015.pdf



Record ID

641     [ Page 1 of 7, No. 49 ]

Date

2015-12

Author

Michael Woodford and Vasco Curdia

Affiliation

CEPR and Columbia University

Title

Credit Frictions and Optimal Monetary Policy

Summary /
Abstract

We extend the basic (representative-household) New Keynesian [NK] model of the monetary transmission mechanism to allow for a spread between the interest rate available to savers and borrowers, that can vary for either exogenous or endogenous reasons. We find that the mere existence of a positive average spread makes little quantitative difference for the predicted effects of particular policies. Variation in spreads over time is of greater significance, with consequences both for the equilibrium relation between the policy rate and aggregate expenditure and for the relation between real activity and inflation. Nonetheless, we find that the target criterion—a linear relation that should be maintained between the inflation rate and changes in the output gap—that characterizes optimal policy in the basic NK model continues to provide a good approximation to optimal policy, even in the presence of variations in credit spreads. Such a flexible inflation target" can be implemented by a central-bank reaction function that is similar to a forward-looking Taylor rule, but adjusted for changes in current and expected future credit spreads.

Keywords

Credit spreads; flexibllation targeting; policy rules; quadratic loss function; target criterion

URL

http://d.repec.org/n?u=RePEc:cpr:ceprdp:11016&r=cba



Record ID

640     [ Page 1 of 7, No. 50 ]

Date

2015-10

Author

Claude Lopez, Donald Markwardt, and Keith Savard

Affiliation

Milken Institute

Title

Macroprudential Policy: What Does It Really Mean

Summary /
Abstract

As many central banks contemplate the normalization of monetary policy, their focus is turning to the promise of macroprudential policy as a tool to manage possible future systemic risk in financial markets. Janet Yellen and Mario Draghi, among others, are pinning much of their hopes for managing financial stability in the context of Basel III on macroprudentialism. Despite central banks’ clear intention that this policy will play a significant role in developed economies, few policymakers or financial players know what macroprudential policy is, much less how to assess its efficacy or necessity. The paper is a shorter version of a report on the same subject. It aims to clarify the concept of macroprudential policy for a broader audience, cultivating a better understanding of these tools and their implications for broader monetary policy going forward.

Keywords

Macroprudential, Systemic Risk

URL

https://mpra.ub.uni-muenchen.de/68157/1/MPRA_paper_68157.pdf



Record ID

639     [ Page 1 of 7, No. 51 ]

Date

2015-12

Author

Ambrogio Cesa-Bianchi and Alessandro Rebucci

Affiliation

Bank of England and Johns Hopkins University

Title

Does easing monetary policy increase financial instability?

Summary /
Abstract

This paper develops a model featuring both a macroeconomic and a financial friction that speaks to the interaction between monetary and macroprudential policy and to the role of US monetary and regulatory policy in the run up to the Great Recession. There are two main results. First, real interest rate rigidities in a monopolistic banking system increase the probability of a financial crisis (relative to the case of flexible interest rate) in response to contractionary shocks to the economy, while they act as automatic macroprudential stabilizers in response to expansionary shocks. Second, when the interest rate is the only available policy instrument, a monetary authority subject to the same constraints as private agents cannot always achieve a (constrained) efficient allocation and faces a trade-off between macroeconomic and financial stability in response to contractionary shocks. An implication of our analysis is that the weak link in the US policy framework in the run up to the Global Recession was not excessively lax monetary policy after 2002, but rather the absence of an effective second policy instrument aimed at preserving financial stability.

Keywords

Macroprudential policies; monetary policy; financial crises; frictions; interest rate rigidities.

URL

http://www.bankofengland.co.uk/research/Documents/workingpapers/2015/swp570.pdf



Record ID

638     [ Page 1 of 7, No. 52 ]

Date

2015-12

Author

Ali Alichi, Olivier Bizimana, Silvia Domit, Emilio Fernandez Corugedo, Douglas Laxton, Kadir Tanyeri, Hou Wang, and Fan Zhang

Affiliation

Research Department, IMF

Title

Multivariate Filter Estimation of Potential Output for the Euro Area and the United States

Summary /
Abstract

Estimates of potential output are an important component of a structured forecasting and policy analysis system. Using information on consensus forecasts, this paper extends the multivariate filter developed by Laxton and Tetlow (1992) and modified by Benes and others (2010) and Blagrave and others (2015). We show that, although still fairly uncertain, the real time estimates from this approach are more accurate relative to those of naïve univariate statistical filters. The paper presents estimates for the euro area and the United States and discusses how the filtered estimates at the end of the sample period can be improved with additional information.

Keywords

Macroeconomic Modeling, Potential Output

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp15253.pdf



Record ID

637     [ Page 1 of 7, No. 53 ]

Date

2015-11

Author

Kaplan, Robert Steven

Affiliation

President and CEO, Federal Reserve Bank of Dallas Remarks before the University of Houston, November 18, 2015.

Title

A discussion of economic conditions and Federal Reserve policy

Summary /
Abstract

The Fed has a dual mandate given to it by Congress -- fostering full employment and price stability. Further, the Fed has set 2 percent as its longer run target rate for inflation. At this stage, it appears that we are well on our way to meeting our full - employment objective, although there is still some question as to the rate of unemployment that constitutes full employment in a more global world. As I mentioned earlier, a critical question I am focusing on is: What is the unemployment rate at which we have depleted excess capacity in the labor force? This rate may be lower than we would have previously thought. Inflation continues to run below our 2 percent long-run target. However, as the labor market tightens and certain transitory factors ultimately pass through the data, our economic team in Dallas still expects to see inflation gradually rising to 2 percent over the medium term. Our economic team is continuing to consider how overcapacity, demographic trends, high degrees of leverage in some sectors and other secular issues in countries outside the U.S. (particularly China) might adversely affect GDP, unemployment and inflation within the U.S. In light of all these factors, it will likely be appropriate that U.S. monetary policy remain accommodative for some time. Moreover, a lower-than-usual federal funds rate may well be needed to achieve any given desired level of accommodation. Accordingly, it is probable that the return to “normal” interest rates will be gradual. As a business manager or as an investor, I think these are key messages I would be taking from our FOMC statements. However, accommodative policy does not necessarily mean a zero fed funds rate. There are various costs to maintaining a zero fed funds rate for too long particularly in terms of potential distortions in investment and business decisions. These distortions can create imbalances in investments, inventory and hiring decisions that may later need to be (painfully) unwound when policy normalizes. My experience is that these imbalances are sometimes tough to see in real time but often relatively easier to recognize in hindsight. In thinking about these potential imbalances, we are sensitive to the fact that monetary policy affects the economy with a lag. These are all issues that will have to be assessed and reassessed as the economic outlook unfolds. In my view, the FOMC in the previous two meetings has been prudent in waiting for more data before taking policy action.

Keywords

Full employment, price stability, Federal funds rate, liftoff

URL

http://www.dallasfed.org/assets/documents/news/speeches/kaplan/2015/rsk151118.pdf



Record ID

636     [ Page 1 of 7, No. 54 ]

Date

2015-11

Author

Olivier J. Blanchard, Eugenio Cerutti and Lawrence Summers

Affiliation

Research Department, International Monetary Fund

Title

Inflation and Activity – Two Explorations and their Monetary Policy Implications

Summary /
Abstract

We explore two issues triggered by the crisis. First, in most advanced countries, output remains far below the pre-recession trend, suggesting hysteresis. Second, while inflation has decreased, it has decreased less than anticipated, suggesting a breakdown of the relation between inflation and activity. To examine the first, we look at 122 recessions over the past 50 years in 23 countries. We find that a high proportion of them have been followed by lower output or even lower growth. To examine the second, we estimate a Phillips curve relation over the past 50 years for 20 countries. We find that the effect of unemployment on inflation, for given expected inflation, decreased until the early 1990s, but has remained roughly stable since then. We draw implications of our findings for monetary policy.

Keywords

Recessions; Hysteresis; Phillips Curve; Monetary Policy

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp15230.pdf



Record ID

635     [ Page 1 of 7, No. 55 ]

Date

2014-09

Author

Scott Davis and Ignacio Presno

Affiliation

Federal Reserve Bank of Dallas and Universidad de Montevideo

Title

Capital Controls as an Instrument of Monetary Policy

Summary /
Abstract

Large swings in capital flows into and out of emerging markets can potentially lead to excessive volatility in asset prices and credit supply. In order to lessen the impact of capital flows on financial instability, a number of researchers and policy makers have recently proposed the use of capital controls. This paper considers the benefit of adding capital controls as a potential instrument of monetary policy in a small open economy. In a DSGE framework, we find that when domestic agents are subject to collateral constraints and the value of collateral is subject to fluctuations driven by foreign capital inflows and outflows, the adoption of temporary capital controls can lead to a significant welfare improvement. The benefits of capital controls are present even when monetary policy is determined optimally, implying that there may be a role for capital controls to exist side-by-side with conventional monetary tools as an instrument of monetary policy.

Keywords

Capital controls; credit constraints; small open economy

URL

https://www.economicdynamics.org/meetpapers/2015/paper_1167.pdf



Record ID

634     [ Page 1 of 7, No. 56 ]

Date

2015-10

Author

Anton Korinek and Damiano Sandri

Affiliation

Research Department, IMF

Title

Capital Controls or Macroprudential Regulation?

Summary /
Abstract

International capital flows can create significant financial instability in emerging economies because of pecuniary externalities associated with exchange rate movements. Does this make it optimal to impose capital controls or should policymakers rely on domestic macroprudential regulation? This paper presents a tractable model to show that it is desirable to employ both types of instruments: Macroprudential regulation reduces overborrowing, while capital controls increase the aggregate net worth of the economy as a whole by also stimulating savings. The two policy measures should be set higher the greater an economy's debt burden and the higher domestic inequality. In our baseline calibration based on the East Asian crisis countries, we find optimal capital controls and macroprudential regulation in the magnitude of 2 percent. In advanced countries where the risk of sharp exchange rate depreciations is more limited, the role for capital controls subsides. However, macroprudential regulation remains essential to mitigate booms and busts in asset prices.

Keywords

Financial stability, pecuniary externalities, capital controls, macroprudential regulation, inequality

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp15218.pdf



Record ID

633     [ Page 1 of 7, No. 57 ]

Date

2015-09

Author

C. A. E. Goodhart and Miguel A. Segoviano

Affiliation

Money and Capital Markets Department, IMF

Title

Optimal Bank Recovery

Summary /
Abstract

Banks’ living wills involve both recovery and resolution. Since it may not always be clear when recovery plans or actions should be triggered, there is a role for an objective metric to trigger recovery. We outline how such a metric could be constructed meeting criteria of (i) adequate loss absorption; (ii) distinguishing between weak and sound banks; (iii) little susceptibility to manipulation; (iv) timeliness; (v) scalable from the individual bank to the system. We show how this would have worked in the U.K., during 2007–11. This approach has the added advantage that it could be extended to encompass a whole ladder of sanctions of increasing severity as capital erodes.

Keywords

Bank Recovery, Bank Resolution, Metrics for Triggers, Loss Absorption, Probability of Distress, Loan Default

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp15217.pdf



Record ID

632     [ Page 1 of 7, No. 58 ]

Date

2015-09

Author

Julian T. S. Chow

Affiliation

Money and Capital Markets Department, IMF

Title

Stress Testing Corporate Balance Sheets in Emerging Economies

Summary /
Abstract

In recent years, firms in emerging market countries have increased borrowing, particularly in foreign currency, owing to easy access to global capital markets, prolonged low interest rates and good investment opportunities. This paper discusses the trends in emerging market corporate debt and leverage, and illustrates how those firms are vulnerable to interest rate, exchange rate and earnings shocks. The results of a stress test show that while corporate sector risk remains moderate in most emerging economies, a combination of macroeconomic and financial shocks could significantly erode firms’ ability to service debt and lead to higher debt at risk, especially in countries with high shares of foreign currency debt and low natural hedges.

Keywords

Emerging market corporate debt, leverage, debt at risk

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp15216.pdf



Record ID

631     [ Page 1 of 7, No. 59 ]

Date

2015-09

Author

Carolina Osorio Buitron and Esteban Vesperoni

Affiliation

Research Department, IMF

Title

Big Players Out of Synch: Spillovers Implications of US and Euro Area Shocks

Summary /
Abstract

Given the prospects of asynchronous monetary conditions in the United States and the euro area, this paper analyzes spillovers among these two economies, as well as the implications of asynchronicity for spillovers to other advanced economies and emerging markets. Through a structural vector autoregression analysis, country-specific shocks to economic activity and monetary conditions since the early 1990s are identified, and are used to draw implications about spillovers. The empirical findings suggest that real and monetary conditions in the United States and the euro area have oftentimes been asynchronous. The results also point to significant spillovers among them, in particular since early 2014—with spillovers from the euro area to the United States being particularly large. Against the backdrop of asynchronous conditions in these two economies, spillovers from real and money shocks to emerging markets and non-systemic advanced economies could be dampened.

Keywords

Spillovers, Monetary Policy, Economic News, Emerging Economies

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp15215.pdf



Record ID

630     [ Page 1 of 7, No. 60 ]

Date

2015-06

Author

Orphanides, Athanasios

Affiliation

MIT Sloan School of Management

Title

Fear of liftoff: Uncertainty, rules and discreation in monetary policy normalization

Summary /
Abstract

The Federal Reserve's muddled mandate to attain simultaneously the incompatible goals of maximum employment and price stability invites short-term-oriented discretionary policymaking inconsistent with the systematic approach needed for monetary policy to contribute best to the economy over time. Fear of liftoff-the reluctance to start the process of policy normalization after the end of a recession-serves as an example. Causes of the problem are discussed, drawing on public choice and cognitive psychology perspectives. The Federal Reserve could adopt a framework that relies on a simple policy rule subject to periodic reviews and adaptation. Replacing meeting-by-meeting discretion with a simple policy rule would eschew discretion in favor of systematic policy. Periodic review of the rule would allow the Federal Reserve the flexibility to account for and occasionally adapt to the evolving understanding of the economy. Congressional legislation could guide the Federal Reserve in this direction. However the Federal Reserve may be best placed to select the simple rule and could embrace this improvement on its own, within its current mandate, with the publication of a simple rule along the lines of its statement of longer-run goals.

Keywords

Federal Reserve, liftoff, discretion, policy rules, policy normalization

URL

http://econstor.eu/bitstream/10419/118612/1/834807947.pdf

Remarks

This article is based on the author’s Homer Jones lecture at the Federal Reserve Bank of St Louis on June 3, 2015.



Record ID

629     [ Page 1 of 7, No. 61 ]

Date

2015-01

Author

Charles Evans, Jonas Fisher, Francois Gourio, and Spencer Krane

Affiliation

Federal Reserve Bank of Chicago

Title

Risk Management for Monetary Policy at the Zero Lower Bound

Summary /
Abstract

As labor markets improve and projections have inflation heading back toward target, the Fed has begun to contemplate lifting the federal funds rate from its zero lower bound (ZLB). Under what conditions should the Fed start raising rates? We lay out an argument that calls for caution. It is founded on a risk management principle that says policy should be formulated taking into account the dispersion of outcomes around the mean forecast. On the one hand, raising rates early increases the likelihood of adverse shocks driving a fragile economy back to the ZLB. On the other hand, delaying lift-off when the economy turns out to be resilient could lead to an unwelcome bout of inflation. Since the tools available to counter the first scenario are hard to implement and may be less effective than the traditional tool of raising rates to counter the second scenario, the costs of premature lift-o exceed those of delay. This article shows in a canonical framework that uncertainty about being constrained by the ZLB in the future implies an optimal policy of delayed lift-o. We present evidence that such a risk manage- ment policy is consistent with past Fed actions and that unconventional tools will be hard to implement if the economy were to be constrained by the ZLB after a hasty exit.

Keywords

Monetary policy, risk management, zero lower bound

URL

https://www.economicdynamics.org/meetpapers/2015/paper_665.pdf



Record ID

628     [ Page 1 of 7, No. 62 ]

Date

2015-07

Author

Olivier Blanchard, Gustavo Adler and Irineu de Carvalho Filho

Affiliation

Research Department, International Monetary Fund

Title

Can Foreign Exchange Intervention Stem Exchange Rate Pressures from Global Capital Flow Shocks?

Summary /
Abstract

Many emerging market economies have relied on foreign exchange intervention (FXI) in response to gross capital inflows. In this paper, we study whether FXI has been an effective tool to dampen the effects of these inflows on the exchange rate. To deal with endogeneity issues, we look at the response of different countries to plausibly exogenous gross inflows, and explore the cross country variation of FXI and exchange rate responses. Consistent with the portfolio balance channel, we find that larger FXI leads to less exchange rate appreciation in response to gross inflows.

Keywords

Foreign exchange intervention, exchange rate, capital flows, gross capital flows

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp15159.pdf



Record ID

627     [ Page 1 of 7, No. 63 ]

Date

2015-06

Author

Ali Alichi, Kevin Clinton, Charles Freedman, Ondra Kamenik, Michel Juillard, Douglas Laxton, Jarkko Turunen, and Hou Wang

Affiliation

Research Department, International Monetary Fund

Title

Avoiding Dark Corners: A Robust Monetary Policy Framework for the United States

Summary /
Abstract

The Fed has taken several steps towards strengthening its monetary framework over the past several years. Those steps have supported the Fed's efforts to stimulate the economy through forward guidance despite being constrained by having policy rates at zero. We show that an optimal control approach to monetary policy, which includes the publication of a baseline forecast and a description of the uncertainties around that outlook, combined with an improvement in the Fed's communications toolkit, could further enhance the effectiveness of Fed policy. In the current conjuncture, such a risk management approach to monetary policy would result in both a later liftoff of policy rates and a modest, but planned, overshooting of inflation.

Keywords

Inflation Targeting, Monetary Policy, Optimal Control

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp15134.pdf



Record ID

626     [ Page 1 of 7, No. 64 ]

Date

2015-06

Author

Stefan Laseen, Andrea Pescatori, and Jarkko Turunen

Affiliation

WHD, International Monetary Fund

Title

Systemic Risk : A New Trade-off for Monetary Policy?

Summary /
Abstract

We introduce time-varying systemic risk in an otherwise standard New-Keynesian model to study whether a simple leaning-against-the-wind policy can reduce systemic risk and improve welfare. We find that an unexpected increase in policy rates reduces output, inflation, and asset prices without fundamentally mitigating financial risks. We also find that while a systematic monetary policy reaction can improve welfare, it is too simplistic: (1) it is highly sensitive to parameters of the model and (2) is detrimental in the presence of falling asset prices. Macroprudential policy, similar to a countercyclical capital requirement, is more robust and leads to higher welfare gains.

Keywords

Monetary Policy, Endogenous Financial Risk, DSGE models, Non-Linear Dynamics, Policy Evaluation

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp15142.pdf



Record ID

625     [ Page 1 of 7, No. 65 ]

Date

2015-07

Author

Troy Davig and Refet S. Gurkaynak

Affiliation

Federal Reserve Bank of Kansas City and Bilkent University

Title

Is optimal monetary policy always optimal?

Summary /
Abstract

No. And not only for the reason you think. In a world with multiple inefficiencies the single policy tool the central bank has control over will not undo all inefficiencies; this is well understood. We argue that the world is better characterized by multiple inefficiencies and multiple policy makers with various objectives. Asking the policy question only in terms of optimal monetary policy effectively turns the central bank into the residual claimant of all policy and gives the other policymakers a free hand in pursuing their own goals. This further worsens the tradeoffs faced by the central bank. The optimal monetary policy literature and the optimal simple rules often labeled flexible inflation targeting assign all of the cyclical policymaking duties to central banks. This distorts the policy discussion and narrows the policy choices to a suboptimal set. We highlight this issue and call for a broader thinking of optimal policies.

Keywords

Monetary policy, optimality, social welfare, fiscal policy, time consistency, inflation targeting, tax policy, inefficiencies

URL

https://www.kansascityfed.org/~/media/files/publicat/reswkpap/pdf/rwp15-05.pdf



Record ID

624     [ Page 1 of 7, No. 66 ]

Date

2014-09

Author

Javier Bianchi and Enrique Mendoza

Affiliation

University of Wisconsin & NBER, and University of Pennsylvania & NBER

Title

Optimal Time-Consistent Macroprudential Policy

Summary /
Abstract

Collateral constraints widely used in models of financial crises feature a pecuniary externality, because agents do not internalize how collateral prices respond to collective borrowing decisions, particularly when binding collateral constraints trigger a crisis. We study a production economy in which physical assets serve as collateral for debt and working capital loans, and show that agents in a competitive equilibrium borrow ``too much" during credit expansions compared with a financial regulator who internalizes this externality. Under commitment, however, this regulator faces a time inconsistency problem: It promises low future consumption to prop up current asset prices when collateral constraints bind, but this is not optimal ex post. Instead, we examine the optimal, time-consistent policy of a regulator who cannot commit to future policies. Quantitative analysis shows that this policy reduces the incidence and magnitude of crises, removes fat tails from the distribution of returns and reduces risk premia. A key element of this policy is a state-contingent macro-prudential debt tax (i.e. a tax imposed in normal times when a financial crisis has positive probability next period) of about 1 percent on average. Constant debt taxes also reduce the frequency of crises but are less effective at reducing their severity and reduce welfare when credit constraints bind.

Keywords

Financial crises, macroprudential policy, systemic risk, collateral constraints

URL

https://www.economicdynamics.org/meetpapers/2015/paper_289.pdf



Record ID

623     [ Page 1 of 7, No. 67 ]

Date

2015-07

Author

Leeper, Eric M.; and Nason, James M.

Affiliation

Indiana University and NBER; and North Carolina State University and CAMA

Title

Bringing Financial Stability into Monetary Policy (SVERIGES RIKSBANK Working Paper Series)

Summary /
Abstract

This paper arms central bank policy makers with ways to think about interactions between financial stability and monetary policy. We frame the issue of whether to integrate financial stability into monetary policy operating rules by appealing to the observation that in actual economies financial markets are incomplete. Incomplete markets create financial market frictions that prevent economic agents from perfectly sharing risk; in the absence of frictions, financial (in)stability would be of no concern. Overcoming these frictions to improve risk sharing across economic agents is, in our view, the intent of policies geared toward ensuring financial stability. There are many definitions of financial stability. Although the definitions share the notion that financial stability becomes an issue for policy makers when a breakdown in risk-sharing arrangements in financial markets has a negative effect on real economic activity, we give several examples that show this notion is too general for thinking about the role monetary policy might have in smoothing shocks to financial stability. Examples include statistical models that seek to separate “good” from “bad” changes in private-sector debt aggregates, new Keynesian policy prescriptions grounded in neo-Wicksellian natural rate rules, and a historical episode involving the 1920s Federal Reserve. These examples raise a cautionary flag for policy attempts to control the growth and the composition of debt that financial markets produce. We conclude with some advice for revising central banks’ Monetary Policy Reports.

Keywords

Financial frictions; incomplete markets; crises; new Keynesian; natural rate; monetary transmission mechanism

URL

http://www.riksbank.se/Documents/Rapporter/Working_papers/2015/rap_wp305_150714.pdf



Record ID

622     [ Page 1 of 7, No. 68 ]

Date

2015-07

Author

Carlos Góes

Affiliation

Western Hemisphere Department, IMF

Title

Institutions and Growth : a GMM/IV Panel VAR Approach

Summary /
Abstract

Both sides of the institutions and growth debate have resorted largely to microeconometric techniques in testing hypotheses. In this paper, I build a panel structural vector autoregression (SVAR) model for a short panel of 119 countries over 10 years and find support for the institutions hypothesis. Controlling for individual fixed effects, I find that exogenous shocks to a proxy for institutional quality have a positive and statistically significant effect on GDP per capita. On average, a 1 percent shock in institutional quality leads to a peak 1.7 percent increase in GDP per capita after six years. Results are robust to using a different proxy for institutional quality. There are different dynamics for advanced economies and developing countries. This suggests diminishing returns to institutional quality improvements.

Keywords

Institutions, Panel VAR, Economic Development

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp15174.pdf



Record ID

621     [ Page 1 of 7, No. 69 ]

Date

2015-07

Author

Tamim Bayoumi

Affiliation

Strategy, Policy, and Review Department, IMF

Title

The Dog That Didn’t Bark : The Strange Case of Domestic Policy Cooperation in the “New Normal”

Summary /
Abstract

This paper examines domestic policy cooperation, a curiously neglected issue. Both international and domestic cooperation were live issues in the 1970s when the IS/LM model predicted very different external outcomes from monetary and fiscal policies. Interest in domestic policy cooperation has since fallen on hard intellectual times—with knock-ons to international cooperation—as macroeconomic policy roles became highly compartmentalized. I first discuss the intellectual and policy making undercurrents behind this neglect, and explain why they are less relevant after the global crisis. This is followed by a discussion of: macroeconomic policy cooperation in a world of more fiscal activism; coordination across financial agencies and with macroeconomic policies; and how structural policies fit into this. The paper concludes with a proposal for a “grand bargain” across principle players to create a “new domestic cooperation.”

Keywords

Domestic Policy Cooperation, Ce ntral Bank Independence, Macroprudential Policy

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp15156.pdf



Record ID

620     [ Page 1 of 7, No. 70 ]

Date

2015-06

Author

Stergios Skaperdas

Affiliation

University of California, Irvine

Title

Myths and Self-Deceptions about the Greek Debt Crisis

Summary /
Abstract

The long-running Greek public debt crisis has been accompanied by an information war that has obscured what has occurred. The misconceptions, self-deceptions, and myths associated with the crisis have been at least partly responsible for the obviously inadequate response to the crisis and for the damage to the economies and societies of primarily Greece but also of other Eurozone countries. I argue against seven such myths about the effects of default, the primary cause of the crisis, the likely effects of an exit from the Eurozone, the bargaining power of the Greek government in its negotiations with the EU/ECB/IMF troika, and others. I also discuss the context of the wider slippage of democracy in the European Union and future prospects.

Keywords

Eurozone, Greece, debt, default.

URL

http://www.economics.uci.edu/files/docs/workingpapers/2014-15/14-15-11.pdf



Record ID

619     [ Page 1 of 7, No. 71 ]

Date

2015-07

Author

Michal Andrle ; Michael Kumhof ; Douglas Laxton ; Dirk Muir

Affiliation

Research Department, IMF

Title

Banks in The Global Integrated Monetary and Fiscal Model

Summary /
Abstract

The Global Integrated Monetary and Fiscal model (GIMF) is a multi-region DSGE model developed by the Economic Modeling Division of the IMF for policy and scenario analysis. This paper compares two versions of GIMF, GIMF with a conventional financial accelerator, where bank balance sheets do not play a prominent role, and GIMF with both a financial accelerator and a fully specified banking sector that can make lending losses, and that is regulated according to Basel-III. We illustrate the comparative macroeconomic properties of both models by presenting their responses to a wide range of fiscal, demand, supply and financial shocks.

Keywords

Multi-Region DSGE Models, Financial Accelerator, Macro-Financial Linkages, Macroprudential Policy

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp15150.pdf



Record ID

618     [ Page 1 of 7, No. 72 ]

Date

2015-07

Author

Elsie Addo Awadzi

Affiliation

Legal Department, IMF

Title

Designing Legal Frameworks for Public Debt Management

Summary /
Abstract

Sustainable public debt has gained renewed attention as countries implement fiscal consolidation measures in the aftermath of the global financial crisis. Sound public debt policies and debt management practices require robust legal underpinnings. Complex legal issues however arise in the design of the legal framework, and tradeoffs are required in many instances. This paper analyzes key features of modern public debt management legal frameworks, drawing from examples in advanced, emerging, and frontier markets. It aims to provide guidance for countries that seek to review and strengthen their public debt management legal frameworks.

Keywords

National Debt; Government loans and guarantees; Sovereign Debt ; Debt management, Legal framework for Public Debt Management

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp15147.pdf



Record ID

617     [ Page 1 of 7, No. 73 ]

Date

2015-04

Author

Prepared by staff from the Fiscal Affairs Department supervised by Sanjeev Gupta, comprising a team led by Bernardin Akitoby and Abdelhak Senhadji, and including Eva Jenkner, Rossen Rozenov, Mark De Broeck, Todd Mattina, Santiago Acosta - Ormaechea, David Amaglobeli, Mai Anh Bui, Serhan Cevik, Carolina Correa, Valerio Crispolti, Jeff Danforth, Salvatore De ll’Erba, Andrew Hodge, Takuji Komatsuzaki, Jimmy McHugh, Jeta Menkulasi, Florian Misch, Tigran Poghosyan, Ivohasina Razafimahefa, John Ricco, Nancy Tinoza, Andreas Tudyka. Production assistance was provided by Juliana Peña, Patricia Quiros, Macarena Torres Girao, and Maria Tramuttola

Affiliation

Fiscal Affairs Department, IMF

Title

IMF Policy Paper: Fiscal Policy and Long-Term Growth

Summary /
Abstract

This paper explores how fiscal policy can affect medium- to long-term growth. It identifies the main channels through which fiscal policy can influence growth and distills practical lessons for policymakers. The particular mix of policy measures, however, will depend on country-specific conditions, capacities, and preferences. The paper draws on the Fund’s extensive technical assistance on fiscal reforms as well as several analytical studies, including a novel approach for country studies, a statistical analysis of growth accelerations following fiscal reforms, and simulations of an endogenous growth model.

Keywords

Fiscal Policy, Long-Term Growth

URL

http://www.imf.org/external/np/pp/eng/2015/042015.pdf



Record ID

616     [ Page 1 of 7, No. 74 ]

Date

2015-06

Author

Dimitri G. Demekas

Affiliation

Money and Capital Markets Department, IMF

Title

Designing Effective Macroprudential Stress Tests: Progress So Far and the Way Forward

Summary /
Abstract

Giving stress tests a macroprudential perspective requires (i) incorporating general equilibrium dimensions, so that the outcome of the test depends not only on the size of the shock and the buffers of individual institutions but also on their behavioral responses and their interactions with each other and with other economic agents; and (ii) focusing on the resilience of the system as a whole. Progress has been made toward the first goal: several models are now available that attempt to integrate solvency, liquidity, and other sources of risk and to capture some behavioral responses and feedback effects. But building models that measure correctly systemic risk and the contribution of individual institutions to it while, at the same time, relating the results to the established regulatory framework has proved more difficult. Looking forward, making macroprudential stress tests more effective would entail using a variety of analytical approaches and scenarios, integrating non-bank financial entities, and exploring the use of agent-based models. As well, macroprudential stress tests should not be used in isolation but be treated as complements to other tools and—crucially—be combined with microprudential perspectives.

Keywords

Banks, financial stability , contagion, stress tests, systemic risk, solvency, liquidity

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp15146.pdf



Record ID

615     [ Page 1 of 7, No. 75 ]

Date

2015-05

Author

Roberto Cardarelli and Lusine Lusinyan

Affiliation

Western Hemisphere Department, IMF

Title

U.S. Total Factor Productivity Slowdown: Evidence from the U.S. States

Summary /
Abstract

Working Paper No. 15/116: Author/Editor: Summary: Total factor productivity (TFP) growth began slowing in the United States in the mid-2000s, before the Great Recession. To many, the main culprit is the fading positive impact of the information technology (IT) revolution that took place in the 1990s. But our estimates of TFP growth across the U.S. states reveal that the slowdown in TFP was quite widespread and not particularly stronger in IT-producing states or in those with a relatively more intensive usage of IT. An alternative explanation offered in this paper is that the slowdown in U.S. TFP growth reflects a loss of efficiency or market dynamism over the last two decades. Indeed, there are large differences in production efficiency across U.S. states, with the states having better educational attainment and greater investment in R&D being closer to the production “frontier.”

Keywords

Productivity, growth, stochast ic frontier analys is, U.S. states

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp15116.pdf



Record ID

614     [ Page 1 of 7, No. 76 ]

Date

2015-05

Author

Wojciech Maliszewski and Longmei Zhang

Affiliation

Asia and Pacific Department, IMF

Title

China’s Growth: Can Goldilocks Outgrow Bears?

Summary /
Abstract

The paper analyzes the recent growth dynamics in China, evaluating both cyclical positions and long-term growth prospects. The analysis shows that financial cycles play a more important role than traditional inflation-based cycles in shaping the dynamics of growth. Currently, the ‘finance-neutral’ gap—our measure of the financial cycle—is large and positive, reflecting imbalances accumulated in the economy since the Global Financial Crisis. A period of slower growth is therefore both likely and needed in the near term to restore the economy to equilibrium. In the medium term, growth will slow as China moves closer to the technology frontier, but a steadfast implementation of reforms can ensure that China follows the path of the “Asia Tigers” and achieves successful convergence to high-income status.

Keywords

China, potential growth, total factor productivity, output gap

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp15113.pdf



Record ID

613     [ Page 1 of 7, No. 77 ]

Date

2015-05

Author

Estelle X. Liu, Todd Mattina, and Tigran Poghosyan

Affiliation

Fiscal Affairs Department, IMF

Title

Correcting “Beyond the Cycle:” Accounting for Asset Prices in Structural Fiscal Balances

Summary /
Abstract

This paper outlines an operational approach for incorporating the impact of asset price cycles in the calculation of structural fiscal balances (SFBs). The global financial crisis demonstrated that movements in asset prices can have an important fiscal impact. Failing to account for the fiscal impact of asset price cycles can encourage a pro-cyclical policy stance if temporarily high revenues are passed through into expenditures. In addition, over-estimating the SFB may lead to inadequate fiscal buffers when cyclical revenues eventually dissipate. The paper proposes an empirical approach to correct for asset prices and provides illustrative country results for selected OECD countries. We find that asset price cycles are imperfectly synchronized with the business cycle and are quantitatively significant with an average pre-crisis fiscal impact ranging from about ½ to 2 percent of GDP in the sample. For a number of countries, the pre-crisis fiscal impact of high asset prices was larger at about 4 percent of GDP.

Keywords

Structural fiscal balance, financial crisis, asset price, equity market, housing market, panel data econometrics

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp15109.pdf



Record ID

612     [ Page 1 of 7, No. 78 ]

Date

2015-01

Author

Tarullo, Daniel K.

Affiliation

Member, Board of Governors of the Federal Reserve System

Title

Advancing Macroprudential Policy Objectives : a speech At the Office of Financial Research and Financial Stability Oversight Council's 4th Annual Conference on Evaluating Macroprudential Tools: Complementarities and Conflicts, Arlington, Virginia, January 30, 2015

Summary /
Abstract

Good afternoon. I would like to start by thanking Charlie Steindel and the Forecasters Club of New York for their invitation to speak today. It is a particular pleasure for me to address your group: first, because I have known Charlie for many years – we both grew up as economists in the Federal Reserve System – but also because I know I won’t have to explain to you what a difficult task economic forecasting can be, even in the best of times. Still, forecasting is something economists and policymakers must do, so today I will discuss my outlook for the economy and monetary policy. As always, the views I’ll present are my own and not necessarily those of the Federal Reserve System or my colleagues on the Federal Open Market Committee.

Keywords

Macroprudential Policy Objectives

URL

http://www.federalreserve.gov/newsevents/speech/tarullo20150130a.pdf



Record ID

611     [ Page 1 of 7, No. 79 ]

Date

2015-02

Author

Stanley Fischer

Affiliation

Vice Chairman, Board of Governors, Federal Reserve System

Title

Conducting Monetary Policy with a Large Balance Sheet

Summary /
Abstract

A speech at the 2015 U.S. Monetary Policy Forum, Sponsored by the University of Chicago Booth School of Business, New York, New York, February 27, 2015.

Keywords

Monetary Policy, Large Balance Sheet

URL

http://www.federalreserve.gov/newsevents/speech/fischer20150227a.pdf



Record ID

610     [ Page 1 of 7, No. 80 ]

Date

2015-03

Author

Stanley Fischer

Affiliation

Vice Chairman, Board of Governors of the Federal Reserve System

Title

Nonbank Financial Intermediation, Financial Stability, and the Road Forward

Summary /
Abstract

A speech at the "Central Banking in the Shadows: Monetary Policy and Financial Stability Post-Crisis," 20th Annual Financial Markets Conference sponsored by the Federal Reserve Bank of Atlanta, Stone Mountain, Georgia, March 30, 2015.

Keywords

Nonbank financial intermediation, Financial Stability, Post-Crisis, Shadow Banking

URL

http://www.federalreserve.gov/newsevents/speech/fischer20150330a.pdf



Record ID

609     [ Page 1 of 7, No. 81 ]

Date

2015-03

Author

Janet L. Yellen

Affiliation

Chair, Board of Governors of the Federal Reserve System

Title

Normalizing Monetary Policy: Prospects and Perspectives

Summary /
Abstract

“The New Normal Monetary Policy,” A research conference sponsored by the Federal Reserve Bank of San Francisco, San Francisco, CA.

Keywords

Monetary Policy Normalization, Prospects, Perspectives

URL

http://www.federalreserve.gov/newsevents/speech/yellen20150327a.pdf



Record ID

608     [ Page 1 of 7, No. 82 ]

Date

2015-04

Author

Robert M. Heath

Affiliation

Statistics Department, IMF

Title

What has Capital Liberalization Meant for Economic and Financial Statistics?

Summary /
Abstract

The liberalization of capital flows both in the domestic economy and cross-border has been among the most important policies adopted by IMF member countries over recent decades. The impact has been wide-ranging. This paper looks at the impact on the field of economic and financial statistics in the past two decades, as statisticians have responded to the changing policy needs. The paper considers the historical context of changes that have occurred, draws out the key trends, and asks where these trends might lead statisticians in the foreseeable future. The paper considers that there has been nothing short of a revolution in the field of economic and financial statistics over the past two decades led by a need for greater transparency; greater standardization; new data sets to support understanding of financial interconnections and financial sector risks; and the strengthening of the governance of the statistical function through greater independence of statistical agencies.

Keywords

Capital account liberalization, transparency, data dissemination standards, Group of Twenty, financial sector, financial interconnections

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp1588.pdf



Record ID

607     [ Page 1 of 7, No. 83 ]

Date

2015-04

Author

Cem Karayalcin and Mihaela Pintea

Affiliation

Research Department and Strategy and Policy Review Department, IMF

Title

The Role of Productivity, Transportation Costs, and Barriers to Intersectoral Mobility in Structural Transformation

Summary /
Abstract

The process of economic development is characterized by substantial re-allocations of resources across sectors. In this paper, we construct a multi-sector model in which there are barriers to the movement of labor from low-productivity traditional agriculture to modern sectors. With the barrier in place, we show that improvements in productivity in modern sectors (including agriculture) or reductions in transportation costs may lead to a rise in agricultural employment and through terms-of-trade effects may harm subsistence farmers if the traditional subsistence sector is larger than a critical level. This suggests that policy advice based on the earlier literature needs to be revised. Reducing barriers to mobility (through reductions in the cost of skill acquisition and institutional changes) and improving the productivity of subsistence farmers needs to precede policies designed to increase the productivity of , modern sectors or decrease transportation costs.

Keywords

Structural transformation, subsistence agriculture, multi-sector models, economic development, transportation costs

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp1591.pdf



Record ID

606     [ Page 1 of 7, No. 84 ]

Date

2005-05

Author

Sohrab Rafiq

Affiliation

Asia and Pacific Department, IMF

Title

How Important are Debt and Growth Expectations for Interest Rates?

Summary /
Abstract

This paper uses a dataset on private-sector risk aversion as well as expectations of long-run growth and debt to explain trends in implied forward rates on government bonds in the G-7 countries. The results show, consistent with the literature, that a one-percent rise in the long-run projected debt-to-GDP ratio causes an increase in bond yields of a relatively modest 1-to-6 basis points. Shocks to growth expectations and risk aversion have been comparatively more successful in explaining the behavior of long-term rates. The findings imply that growth policies rather than long-run projections of fiscal outcomes may be more important in helping influence long-term borrowing costs.

Keywords

Public debt, economic growth, expectations, time-variation

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp1594.pdf



Record ID

605     [ Page 1 of 7, No. 85 ]

Date

2015-04

Author

William C. Dudley

Affiliation

President and Chief Executive Officer, Federal Reserve Bank of New York

Title

The U.S. Monetary Policy Outlook and its Global Implications Remarks at the Bloomberg Americas Monetary Summit, New York City April 20, 2015

Summary /
Abstract

U.S. Economic Outlook for 2015 and beyond
Monetary Policy (Timing and Magnitude)
Global Implications of U.S. Monetary Policy Normalization

Keywords

Economic outlook, monetary policy normalization, global consequences

URL

http://www.newyorkfed.org/newsevents/speeches/2015/dud150420.html



Record ID

604     [ Page 1 of 7, No. 86 ]

Date

2015-04

Author

Prepared by an interdepartmental staff team from the Asia & Pacific; Legal; Monetary and Capital Markets; Research; and Strategy, Policy and Review departments, comprising V. Arora, K. Kochhar, J. Ostry, K. Habermeier, M. Goodman, N. Rendak, V. Chensavasdijai, A. Kokenyne-Ivanics, K. Kwak, and S. Sanya.

Affiliation

IMF

Title

IMF Policy Paper: Group of Twenty - Measures Which are Both Macroprudential and Capital Flow Management Measures: IMF Approach

Summary /
Abstract

The global financial crisis underscored the costs of systemic instability at both the national and global levels and highlighted the importance of dedicated macroprudential and capital flow management policies. The IMF has been assisting its members with policy advice as well as developing and making operational their policy frameworks. Multilateral aspects of both policies need to be fully considered, including the interaction with other domestic and international legal frameworks. To the extent that capital flows are the source of systemic financial sector risks, the tools used to address those risks can be seen as both capital flow management measures (CFMs) and macroprudential measures (MPMs).

Keywords

Financial stability, macroprudential measures, capital flow management measures, financial sector risks.

URL

http://www.imf.org/external/np/pp/eng/2015/041015.pdf



Record ID

603     [ Page 1 of 7, No. 87 ]

Date

2015-04

Author

Qianying Chen, Andrew Filardo, Dong He, and Feng Zhu

Affiliation

European Department, IMF

Title

Financial Crisis, US Unconventional Monetary Policy and International Spillovers

Summary /
Abstract

Working Paper No. 15/85: Summary: We study the impact of the US quantitative easing (QE) on both the emerging and advanced economies, estimating a global vector error-correction model (GVECM) and conducting counterfactual analyses. We focus on the effects of reductions in the US term and corporate spreads. First, US QE measures reducing the US corporate spread appear to be more important than lowering the US term spread. Second, US QE measures might have prevented episodes of prolonged recession and deflation in the advanced economies. Third, the estimated effects on the emerging economies have been diverse but often larger than those recorded in the US and other advanced economies. The heterogeneous effects from US QE measures indicate unevenly distributed benefits and costs.

Keywords

Emerging economies; financial crisis; global VAR; in ternational monetary policy spillovers; quantitative easing; unconventional monetary policy

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp1585.pdf



Record ID

602     [ Page 1 of 7, No. 88 ]

Date

2015-01

Author

Emmanuel Farhi and Ivan Werning

Affiliation

Harvard University and MIT

Title

A Theory of Macroprudential Policies in the Presence of Nominal Rigidities

Summary /
Abstract

We provide a unifying foundation for monetary policy and macroprudential policies in financial markets for economies with nominal rigidities in goods and labor markets and constraints on monetary policy such as the zero lower bound or fixed exchange rates. Macroprudential interventions in financial markets are beneficial because of an aggregate demand externality. Ex post, the distribution of wealth across agents affects aggregate demand and output through Keynesian channels. However, ex ante, these effects are not privately internalized in the financial decisions agents make. We obtain a simple formula that characterizes the size and direction for optimal financial market interventions as a function of a small number of empirically measurable sufficient statistics. We also characterize optimal monetary policy. We then show how to extend our framework to also incorporate financial markets frictions giving rise to pecuniary externalities. Finally, we provide a number of relevant concrete applications of our general theory.

Keywords

Monetary policy, macroprudential policy, nominal rigidities, externalities

URL

http://scholar.harvard.edu/files/farhi/files/generic_inefficiency_macroprudential_2.pdf



Record ID

601     [ Page 1 of 7, No. 89 ]

Date

2015-02

Author

Frost, Joshua; Logan, Lorie; Martin, Antoine; McCabe, Patrick E.; Natalucci, Fabio M.; Remache, Julie

Affiliation

Federal Reserve Bank of New York and Board of Governors of the Federal Reserve System

Title

Overnight RRP Operations as a Monetary Policy Tool: Some Design Considerations

Summary /
Abstract

We review recent changes in monetary policy that have led to development and testing of an overnight reverse repurchase agreement (ON RRP) facility, an innovative tool for implementing monetary policy during the normalization process. Making ON RRPs available to a broad set of investors, including nonbank institutions that are significant lenders in money markets, could complement the use of the interest on excess reserves (IOER) and help control short-term interest rates. We examine some potentially important secondary effects of an ON RRP facility, both positive and negative, including impacts on the structure of short-term funding markets and financial stability. We also investigate design features of an ON RRP facility that could mitigate secondary effects deemed undesirable. Finally, we discuss tradeoffs that policymakers may face in designing an ON RRP facility, as they seek to balance the objectives of setting an effective floor on money market rates during t he normalization process and limiting any adverse secondary effects.

Keywords

Federal Reserve Board and Federal Reserve System; monetary policy; interest on excess reserves; money market funds; overnight RRP; repo; reverse repo

URL

http://www.federalreserve.gov/econresdata/feds/2015/files/2015010pap.pdf



Record ID

600     [ Page 1 of 7, No. 90 ]

Date

2015-04

Author

Potter, Simon M.

Affiliation

Executive Vice President, Federal Reserve Bank of New York

Title

Money markets and monetary policy normalization

Summary /
Abstract

My comments today will focus on the Federal Reserve's readiness to implement policy firming when directed to do so by the FOMC. In this context, I will discuss the Federal Reserve's ongoing refinement of its approach to policy normalization, with a focus on initial steps to leave the zero lower bound and some of the considerations that have directed the Committee away from a fixed-rate, full-allotment ON RRP facility. I will then review results of our testing, which inform our confidence in that approach. I will also discuss the Federal Reserve's flexibility to adapt its operational and analytical tools to the dynamic nature of the markets in which we operate.

Keywords

Policy normalization: System Open Market Account (SOMA); Open Market Trading Desk; overnight reverse repurchase agreement (ON RRP); interest on excess reserve balances (IOER); desk; flexibility; investment capacity; testing; data collection; liftoff

URL

http://www.newyorkfed.org/newsevents/speeches/2015/pot150415.html



Record ID

599     [ Page 1 of 7, No. 91 ]

Date

2015-03

Author

James Bullard

Affiliation

President and CEO, FRB, St. Louis

Title

U.S. Monetary Policy Normalization

Summary /
Abstract

I considered five factors weighing on the decision to begin normalizing monetary policy:

Labor markets are likely to continue to improve.

Real GDP growth will likely continue apace despite a first-quarter slowdown.

Current low inflation in the U.S. is likely temporary.

A standard Taylor-type rule suggests liftoff should already have occurred.

The risks of remaining at zero too long may be substantial.

Keywords

Normalization of U.S. monetary policy

URL

https://www.stlouisfed.org/~/media/Files/PDFs/Bullard/remarks/Bullard-OMFIF-City-Lecture-Frankfurt-26-March-2015.pdf



Record ID

598     [ Page 1 of 7, No. 92 ]

Date

2015-04

Author

Andrés Fernández, Michael W. Klein, Alessandro Rebucci, Martin Schindler, and Martin Uribe

Affiliation

Institute for Capacity Development, IMF

Title

Capital Control Measures: A New Dataset

Summary /
Abstract

This paper presents a new dataset of capital control restrictions on both inflows and outflows of 10 categories of assets for 100 countries over the period 1995 to 2013. Building on the data in Schindler (2009) and other datasets based on the analysis of the IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER), this dataset includes additional asset categories, more countries, and a longer time period. The paper discusses in detail the construction of the dataset and characterizes the data with respect to the prevalence and correlation of controls across asset categories and between controls on inflows and controls on outflows, the aggregation of the separate categories into broader indicators, and the comparison of this dataset with other indicators of capital controls.

Keywords

Capital control measures, capital flows; international financial integration

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp1580.pdf



Record ID

597     [ Page 1 of 7, No. 93 ]

Date

2014-10

Author

John C. Williams

Affiliation

Federal Reserve Bank of San Francisco

Title

Inflation targeting and the global financial crisis: successes and challenges

Summary /
Abstract

Inflation targeting has become the predominant monetary approach across the globe. In a very real sense, “we are all inflation targeters now.” Before, during, and after the financial crisis, nearly all central banks following an inflation-targeting approach—whether explicit or implicit—have been highly successful at achieving price stability and anchoring inflation expectations. Recent events, however, highlighted two critical issues for inflation targeting going forward: the constraint of the zero lower bound on nominal interest rates and the appropriate role of monetary policy in supporting financial stability. This has led to the development of alternative approaches to inflation targeting that offer, in theory, potential advantages with respect to the zero lower bound and financial stability.

Keywords

Inflation targeting, global financial crisis, zero lower bound on nominal interest rates, financial stability

URL

http://www.frbsf.org/our-district/press/presidents-speeches/williams-speeches/2014/october/inflation-targeting-global-financial-crisis/SARB-2014-Williams_Web_PDF-final.pdf



Record ID

596     [ Page 1 of 7, No. 94 ]

Date

2015-04

Author

Ravi Balakrishnan, Mai Dao, Juan Sole, and Jeremy Zook

Affiliation

Western Hemisphere Department, IMF

Title

Recent U.S. Labor Force Dynamics: Reversible or not?

Summary /
Abstract

The U.S. labor force participation rate (LFPR) fell dramatically following the Great Recession and has yet to start recovering. A key question is how much of the post-2007 decline is reversible, something which is central to the policy debate. The key finding of this paper is that while around ¼–? of the post-2007 decline is reversible, the LFPR will continue to decline given population aging. This paper’s measure of the “employment gap” also suggests that labor market slack remains and will only decline gradually, pointing to a still important role for stimulative macro-economic policies to help reach full employment. In addition, given the continued downward pressure on the LFPR, labor supply measures will be an essential component of the strategy to boost potential growth. Finally, stimulative macroeconomic and labor supply policies should also help reduce the scope for further hysteresis effects to develop (e.g., loss of skills, discouragement).

Keywords

Labor force participation; unemployment; employment gap; macro-economic policy

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp1576.pdf



Record ID

595     [ Page 1 of 7, No. 95 ]

Date

2015-03

Author

Serhan Cevik and Carolina Correa-Caro

Affiliation

Fiscal Affairs Department, IMF

Title

Growing (Un)equal: Fiscal Policy and Income Inequality in China and BRIC+

Summary /
Abstract

This paper investigates the empirical characteristics of income inequality in China and a panel of BRIC+ countries over the period 1980–2013, with a focus on the redistributive contribution of fiscal policy. Using instrumental variable techniques to deal with potential endogeneity, we find evidence supporting the hypothesis of the existence of a Kuznets curve—an inverted Ushaped relationship between income inequality and economic development—in China and the panel of BRIC+ countries. In the case of China, the empirical results indicate that government spending and taxation have opposing effects on income inequality. While government spending appears to have a worsening impact, taxation improves income distribution. Even though the redistributive effect of fiscal policy in China appears to be stronger than what we identify in the BRIC+ panel, it is not large enough to compensate for the adverse impact of other influential factors.

Keywords

Income distribution, income inequality, fiscal policy

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp1568.pdf



Record ID

594     [ Page 1 of 7, No. 96 ]

Date

2014-05

Author

Sinclair, Peter and Sun, Lixn

Affiliation

University of Birmingham and Shandong University

Title

A DSGE Model for China’s Monetary and Macroprudential Policies

Summary /
Abstract

This paper develops a calibrated DSGE model for simulating China’s monetary policy and macroprudential policy. The empirical results show, first, that the interest rate is a better instrument for China’s monetary policy than the required reserve ratio when the central bank is solely concerned by the price stability; second, that the loan-to-value (LTV) ratio is a very useful macroprudential tool for China’s financial stability, and the required reserve ratio could be used as an instrument for both objectives. Whether macroprudential policy complements or conflicts with monetary policy depends upon the instruments choices of two policies. Our policy experiments suggest three combination choices of instruments for China’s monetary and macroprudential policies.

Keywords

DSGE Model, Monetary Policy, Macroprudental Policy, China’s Economy

URL

http://mpra.ub.uni-muenchen.de/62580/1/MPRA_paper_62580.pdf



Record ID

593     [ Page 1 of 7, No. 97 ]

Date

2015-03

Author

Michal Andrle, Patrick Blagrave, Keiko Honjo, Ben Hunt, Mika Kortelainen, René Lalonde, Douglas Laxton, Dirk Muir, Susanna Mursula, and Stephen Snudden

Affiliation

Research Department, IMF

Title

The Flexible System of Global Models – FSGM

Summary /
Abstract

The Flexible System of Global Models (FSGM) is a group of models developed by the Economic Modeling Division of the IMF for policy analysis. A typical module of FSGM is a multi-region, forward-looking semi-structural global model consisting of 24 regions. Using the three core modules focused on the G-20, the euro area, and emerging market economies, this paper outlines the theory under-pinning the model, and illustrates its macroeconomic properties by presenting its responses under a wide range of experiments, including monetary, financial, demand, supply, fiscal and international shocks.

Keywords

Monetary policy; fiscal policy; dynamic stochastic general equilibrium models; macroeconomic interdependence

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp1564.pdf



Record ID

592     [ Page 1 of 7, No. 98 ]

Date

2015-03

Author

Policy Development and Review Department

Affiliation

International Monetary Fund

Title

IMF Review Weighs How to Harness Trade for Growth

Summary /
Abstract

This review follows the Board-endorsed recommendation by the Independent Evaluation Office (IEO) in 2009 to have an assessment of the Fund’s work on trade every five years. In addition to reviewing past work, this paper discusses key issues going forward towards a future trade agenda for the next five years. This reflects the need to operationalize the implications of the changing trade landscape, including the changing drivers of trade — such as global value chains (GVCs) — and the movement of the fulcrum of trade policy from multilateral rounds to regional and plurilateral deals.

Keywords

Trade, global, regional, plurilateral, multilateral.

URL

http://www.imf.org/external/np/pp/eng/2015/020215.pdf



Record ID

591     [ Page 1 of 7, No. 99 ]

Date

2014-02

Author

Hürtgen, Patrick and Cloyne, James

Affiliation

Bank of England

Title

The macroeconomic effects of monetary policy: A new measure for the United Kingdom

Summary /
Abstract

This paper estimates the effects of monetary policy on the UK economy based on a new, extensive real-time forecast data set. Employing the Romer Romer identification approach we first construct a new measure of monetary policy innovations for the UK economy. We find that a one percentage point increase in the policy rate reduces output by up to 0.6 per cent and inflation by up to 1.0 percentage point after two to three years. Our approach resolves the price puzzle for the UK and we show that forecasts are crucial for this result. Finally, we show that the response of policy after the initial innovation is crucial for interpreting estimates of the effect of monetary policy. We can then reconcile differences across empirical specifications, with the wider VAR literature and between our UK results and the larger narrative estimates for the US.

Keywords

Monetary policy, narrative identification, real-time forecasts, business cycles

URL

http://econstor.eu/bitstream/10419/100304/1/VfS_2014_pid_401.pdf



Record ID

590     [ Page 1 of 7, No. 100 ]

Date

2015-01

Author

Mauricio Villamizar-Villegas and David Perez-Reyna

Affiliation

Banco de la Republica Colombia

Title

A Survey on the Effects of Sterilized Foreign Exchange Intervention

Summary /
Abstract

In this paper we survey prominent theories that have shaped the literature on sterilized foreign exchange interventions. We identify three main strands of literature: 1) that which advocates the use of sterilized interventions; 2) that which deems sterilized interventions futile; and 3) that which requires some market friction in order for sterilized interventions to be effective. We contribute to the literature in three important ways. First, by reviewing new theoretical models that have surfaced within the last decade. Second, by further penetrating into the theory of interventions in order to analyze the key features that make each model distinct. And third, by only focusing on sterilized operations, which allows us to sidestep the effects induced by changes in the stock of money supply. Additionally, the models that we present comprise both a macro and micro-structure approach so as to provide a comprehensive view of the theory behind exchange rate intervention.

Keywords

Sterilized foreign exchange intervention, impossible trinity, portfolio balance channel, signaling channel, uncovered interest rate parity.

URL

http://www.banrep.gov.co/sites/default/files/publicaciones/archivos/be_862.pdf



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