Record ID

590     [ Page 11 of 68, No. 1 ]

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

Record ID

589     [ Page 11 of 68, No. 2 ]

Date

2014-12

Author

Mariano Kulish, James Morley, and Tim Robinson

Affiliation

School of Economics, Australian School of Business, the University of New South Wales); School of Economics, Australian School of Business, the University of New South Wales; and Melbourne Institute of Applied Economics and Social Research, University of Melbourne

Title

Estimating DSGE models with forward guidance

Summary /
Abstract

Motivated by the use of forward guidance, we propose a method to estimate DSGE models in which the central bank holds the policy rate fixed for an extended period. Private agents’ beliefs about how long the fixed-rate regime will last influences, among other observable variables, current output, inflation and interest rates of longer maturities. We estimate the shadow policy rate and construct counterfactual scenarios to quantify the severity of the zero lower bound constraint. Using the Smets and Wouters (2007) model, we find that the expected duration of the zero interest rate policy has been around 2 years, that the shadow rate has been around -3 per cent and that the zero lower bound has imposed a significant output loss.

Keywords

Zero lower bound, forward guidance

URL

http://research.economics.unsw.edu.au/RePEc/papers/2014-32.pdf

Record ID

588     [ Page 11 of 68, No. 3 ]

Date

2015-01

Author

Sebastian Edwards

Affiliation

National Bureau of Economic Research

Title

Monetary Policy Independence under Flexible Exchange Rates: An Illusion?

Summary /
Abstract

I analyze whether countries with flexible exchange rates are able to pursue an independent monetary policy, as suggested by traditional theory. I use data for three Latin American countries with flexible exchange rates, inflation targeting, and capital mobility – Chile, Colombia and Mexico – to investigate the extent to which Federal Reserve actions are translated into local central banks’ policy rates. The results indicate that there is significant “policy contagion,” and that these countries tend to “import” Fed policies. The degree of monetary policy independence is lower than what traditional models suggest.

Keywords

Monetary policy independence, flexible exchange rates

URL

http://www.nber.org/papers/w20893.pdf

Remarks

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Record ID

587     [ Page 11 of 68, No. 4 ]

Date

2015-01

Author

Pranjul Bhandari and Jeffrey A. Frankel

Affiliation

National Bureau of Economic Research

Title

Nominal GDP Targeting for Developing Countries

Summary /
Abstract

The revival of interest in nominal GDP (NGDP) targeting has come in the context of large advanced economies. We consider the case for NGDP targeting for mid-sized developing countries, in light of their susceptibility to supply shocks and terms of trade shocks. For India, in particular, one major exogenous supply shock is the monsoon rains. NGDP targeting splits the impact of supply shocks automatically between inflation and real GDP growth. In the case of annual inflation targeting (IT), by contrast, the full impact of an adverse supply shock or terms of trade shock is felt as a loss in real GDP alone. NGDP targeting automatically accommodates supply shocks as most central banks with discretion would do anyway, while retaining the advantage of anchoring expectations as rules are designed to do. We outline a simple theoretical model and derive the condition under which an NGDP targeting regime would dominate other regimes such as annual IT for achieving objectives of output and price stability. We go on to estimate for the case of India the parameters needed to ascertain whether the condition holds, particularly the slope of the aggregate supply curve. Estimates suggest that the condition may indeed hold.

Keywords

Nominal GDP Targeting, developing countries

URL

http://www.nber.org/papers/w20898.pdf

Remarks

Information about Free Papers

You should expect a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

Record ID

586     [ Page 11 of 68, No. 5 ]

Date

2015-01

Author

Francesco Grigoli, Alexander Herman, Andrew Swiston, and Gabriel Di Bella

Affiliation

Western Hemisphere Department, IMF

Title

Output Gap Uncertainty and Real-Time Monetary Policy

Summary /
Abstract

Output gap estimates are subject to a wide range of uncertainty owing to data revisions and the difficulty in distinguishing between cycle and trend in real time. This is important given the central role in monetary policy of assessments of economic activity relative to capacity. We show that country desks tend to overestimate economic slack, especially during recessions, and that uncertainty in initial output gap estimates persists several years. Only a small share of output gap revisions is predictable ex ante based on characteristics like output dynamics, data quality, and policy frameworks. We also show that for a group of Latin American inflation targeters the prescriptions from typical monetary policy rules are subject to large changes due to output gap revisions. These revisions explain a sizable proportion of the deviation of inflation from target, suggesting this information is not accounted for in real-time policy decisions.

Keywords

Output gap; monetary policy; policy rule; data revisions; real-time; uncertainty; Brazil; Chile; Colombia; Mexico; Peru; inflation target; business cycle.

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp1514.pdf

Record ID

585     [ Page 11 of 68, No. 6 ]

Date

2013-12

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 and Centre for Macroeconomics, London School of Economics sustek19@gmail.com.

Title

Mortgages and monetary policy

Summary /
Abstract

Mortgage loans are a striking example of a persistent nominal rigidity. As a result, under incomplete markets, monetary policy affects decisions through the cost of new mortgage borrowing and the value of payments on outstanding debt. Observed debt levels and payment to income ratios suggest the role of such loans in monetary transmission may be important. A general equilibrium model is developed to address this question. The transmission is found to be stronger under adjustable- than fixed-rate contracts. The source of impulse also matters: persistent inflation shocks have larger effects than cyclical fluctuations in inflation and nominal interest rates.

Keywords

Mortgages; debt servicing costs; monetary policy; transmission mechanism; housing investment

URL

http://eprints.lse.ac.uk/58248/1/__lse.ac.uk_storage_LIBRARY_Secondary_libfile_shared_repository_Content_Centre%20For%20Macroeconomics%20discussion%20papers_Mortgages%20monetary%20policy_Garriga_Mortgages%20monetary%20policy_2014.pdf

Record ID

584     [ Page 11 of 68, No. 7 ]

Date

2015-02

Author

Till Cordes, Tidiane Kinda, Priscilla S. Muthoora, and Anke Weber

Affiliation

Fiscal Affairs Department, IMF

Title

Expenditure Rules: Effective Tools for Sound Fiscal Policy?

Summary /
Abstract

This paper provides new evidence on the effectiveness of expenditure rules. The analysis is based on a unique dataset covering all countries with national and supranational fiscal rules, including 33 expenditure rules, between 1985 and 2013. It contributes to the existing literature on fiscal rules in two main ways. First, it is the most comprehensive assessment of compliance with rules and of the potential role of expenditure rules, in particular regarding long-term sustainability. Second, it analyzes whether expenditure rules are associated with changes in public investment and its efficiency.

Keywords

Expenditure rules, Fiscal governance, Fiscal policy, Rules versus discretion, Stabilization

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp1529.pdf

Record ID

583     [ Page 11 of 68, No. 8 ]

Date

2014-12

Author

Eidenberger, Judith, Neudorfer, Benjamin, Sigmund, Michael, and Stein, Ingrid

Affiliation

Deutsche Bundesbank, EuroSystem

Title

What predicts financial (in)stability? A Bayesian approach

Summary /
Abstract

This paper contributes to the literature on early warning indicators by applying a Bayesian model averaging approach. Our analysis, based on Austrian data, is carried out in two steps: First, we construct a quarterly financial stress index (AFSI) quantifying the level of stress in the Austrian financial system. Second, we examine the predictive power of various indicators, as measured by their ability to forecast the AFSI. Our approach allows us to investigate a large number of indicators. The results show that excessive credit growth and high returns of banks' stocks are the best early warning indicators. Unstable funding (as measured by the loan to deposit ratio) also has a high predictive power.

Keywords

Financial crisis, early warning indicators, government policy and regulation, financial stress index

URL

http://econstor.eu/bitstream/10419/106175/1/813252709.pdf

Record ID

582     [ Page 11 of 68, No. 9 ]

Date

2015-01

Author

Gurnain Pasricha, Matteo Falagiarda, Martin Bijsterbosch, and Joshua Aizenman

Affiliation

National Bureau of Economic Research

Title

Domestic and Multilateral Effects of Capital Controls in Emerging Markets

Summary /
Abstract

This paper assesses the effects of capital controls in emerging market economies (EMEs) during 2001-2011, focusing on cross-country spillovers of changes in these controls. We use a novel dataset on weighted changes in capital controls (and currency-based measures) in 18 major EMEs. We first use panel VARs to test for effectiveness of own capital controls which take into account the endogeneity of such controls. Next, using near-VARs, we provide new evidence of multilateral effects of capital controls of the BRICS. Our results suggest a limited domestic impact of capital controls. Outflow easing measures do not have a significant impact on any of the variables in the model. Inflow tightening measures increase monetary policy autonomy (measured by the covered interest differential), but at the cost of a more appreciated exchange rate. These measures are therefore not effective in allowing EMEs to choose a trilemma configuration with a de-facto closed capital account, larger monetary policy autonomy and a weaker exchange rate. We do not find a clear difference between countries with extensive and long-standing capital controls (India and China) and other countries. Capital control actions in BRICS (Brazil, Russia, India, China and South Africa) had significant spillovers to other EMEs during the 2000s in particular via exchange rates. Multilateral effects were more important among the BRICS than between the BRICS and other, smaller EMEs, particularly in the pre-global financial crisis period. They were more significant in the aftermath of the global financial crisis than before the crisis. This change stems in particular from the fact that spillovers from capital flow policies in BRICS countries to non-BRICS became more significant in the post-global financial crisis period. These results are robust to various specifications of our models.

Keywords

Capital controls, emerging markets

URL

http://www.nber.org/papers/w20822.pdf

Remarks

Information about Free Papers

You should expect a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.

Record ID

581     [ Page 11 of 68, No. 10 ]

Date

2015-01

Author

Alvaro Ortiz Vidal-Abarca and Alfonso Ugarte Ruiz

Affiliation

BBVA

Title

Introducing a New Early Warning System Indicator (EWSI) of banking crises

Summary /
Abstract

We introduce a new Early Warning System Indicator (EWSI) of banking crises based on a non-linear (Gomperzt curve) panel data model of credit deepening. The capability of our estimated credit-gap measure relative to alternative credit gaps computed through ad hoc procedures (linear or Hodrick Prescott trends) is tested in the context of alternative univariate and multivariate Early Warning Systems (EWS). Our new EWSI proves to be an outperforming and reliable leading indicator of banking crises while overcoming most of the problems of linear and stochastic procedures. The estimated credit gap outperforms the rest of indicators in both in-sample and out–of-sample forecasting accuracy (e.g. AUROC statistics) in a univariate comparison. Furthermore, we also test the importance of our EWSI in a multivariate framework through a Bayesian Model Average (BMA) technique, confirming our initial positive results. Finally, we estimate an Early Warning System for 68 developed and emerging countries based on our credit gap which can be used to compute Banking Crises Probabilities and to estimate dynamic thresholds for the EWSI indicators.

Keywords

Credit gap, Early warning indicators, Bayesian model averaging, macro-prudential policies

URL

https://www.bbvaresearch.com/wp-content/uploads/2015/01/WP_EWS-SystemVersion-Sep2014_i.pdf