Record ID

690     [ Page 1 of 23, No. 1 ]

Date

2021-07-21

Author

Romain Duval, Davide Furceri, and Marina M. Tavares

Affiliation

IMF

Title

Taming market power could (also) help monetary policy

Summary /
Abstract

Some central banks are currently debating whether to tighten monetary policy to fight inflationary pressures, after having eased decisively in response to the COVID-19 shock. In making such decisions, central bankers have to consider how much businesses and consumers will respond. The structure of the financial system and the future expectations of consumers and businesses are key drivers of how effective monetary policy actions will be. Yet there’s another, overlooked, driver: corporate market power.

New IMF staff research has found ever larger and more powerful companies are making monetary policy a less potent tool for managing the economy in advanced economies, all else equal.

Market power has risen in many advanced economies and emerging market countries in recent years, as seen in price markups—the ratio of a good or service’s price to its marginal cost of production, concentration, or profits. For example, recent IMF work finds that global price markups have increased by more than 30 percent, on average, across listed firms in advanced economies since 1980, and twice as fast in digital sectors. In addition, the COVID-19 recession is likely to amplify these trends. Large corporations are expected to gain market share vis-à-vis small businesses, which are at greater risk of insolvency.

Our study finds that firms with greater market power respond less to monetary policy actions, possibly because of their bigger profits. Larger profits make these firms less sensitive to changes in external financing conditions, such as those triggered by central banks’ decisions. For example, as of March 2021, Apple had over $200 billion in cash and investment in marketable securities, while Alphabet had over $150 billion. Firms with such large cash cushions can decide on investment and other projects without having to worry about how easily they could tap other funding sources. In contrast, firms that face greater credit constraints, such as young, low-markup firms, are much more responsive to monetary policy actions than older, larger, higher-markup corporations. It could also be that firms with greater market power rely less on funding sources whose conditions respond swiftly to monetary policy actions, such as bank credit.

Specifically, using data for the United States and a panel of 14 advanced economies, we find that high-markup firms respond a lot less to a monetary policy shock—an unexpected change in the policy rate—than the average firm in the economy. For example, in the US, a 100 basis point increase in the policy rate causes a low-markup firm to cut sales by about 2 percent after four quarters, while a high-markup firm barely reduces its sales. Results for the panel of advanced countries are qualitatively similar.

On top of being generally harmful to business dynamism and growth, excessive market power can also hamper central banks’ ability to stimulate economic activity during recessions, and to cool it down during expansions. In principle, if monetary policy is less powerful, central banks could just use more of it—by easing more aggressively to fight a recession, for example; however, this approach may not be fully successful in advanced economies when so many central banks are constrained by the effective lower bound on interest rates, and also face (actual or perceived) limits to quantitative easing—such as financial stability concerns from very large and persistent asset purchases. Conversely, greater market power implies that, should inflationary pressures become persistent, central banks may need to tighten monetary policy more aggressively than would be the case in a more competitive economy, all else equal. Lower-markup firms and more competitive industries would be hit disproportionately. More broadly, aggressive tightening might put the recovery at risk. One silver lining is that market power may dampen the passthrough from higher input costs to output and inflation in the first place, all else equal—market power can reduce the response of inflation and output to a wide range of macroeconomic shocks beyond just monetary policy shocks.

These considerations further strengthen the case for reforms to increase competition in advanced economies. High on the agenda are enhancements to competition law and policy frameworks. These include, depending on the jurisdictions, tighter merger control—particularly when it comes to dominant firms, stronger enforcement of abuse of dominance, greater reliance on market investigations, and more specific measures to cope with the fast-changing digital economy.

Policymakers will need all available tools to secure a dynamic, sustainable, and inclusive recovery. Curbing corporate market power would not only support the recovery directly by stimulating investment, innovation and wage growth, but also indirectly by making monetary policy more powerful. Encouragingly, improvements in antitrust frameworks are currently under consideration in key jurisdictions.

Keywords

market power

URL

https://blogs.imf.org/2021/07/21/taming-market-power-could-also-help-monetary-policy/

Remarks

Chapter 6 of the book Economic Growth: Theory and Application relies on perfect markets for the effectiveness of monetary policy in influencing economic fluctuations and growth. The above article shows that imperfect markets, i.e., the presence (and increasingly so) of market power reduces monetary policy effectiveness. In this regard, President Biden's appointment of an Assistant AG to head the DoJ AntiTrust Division and the newly appointed head of the Federal Trade Commission strongly suggest the government objective to rein in this corporate market power, particularly, of the high-tech behemoths. These points are relevant to any market economy.

Record ID

689     [ Page 1 of 23, No. 2 ]

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 23, No. 3 ]

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 23, No. 4 ]

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 23, No. 5 ]

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 23, No. 6 ]

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 23, No. 7 ]

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 23, No. 8 ]

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 23, No. 9 ]

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 23, No. 10 ]

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 23, No. 11 ]

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 23, No. 12 ]

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 23, No. 13 ]

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 23, No. 14 ]

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 23, No. 15 ]

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 23, No. 16 ]

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 23, No. 17 ]

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 23, No. 18 ]

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 23, No. 19 ]

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 23, No. 20 ]

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 23, No. 21 ]

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 23, No. 22 ]

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 23, No. 23 ]

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 23, No. 24 ]

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 23, No. 25 ]

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 23, No. 26 ]

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 23, No. 27 ]

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 23, No. 28 ]

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 23, No. 29 ]

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 23, No. 30 ]

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