Record ID

257     [ Page 15 of 23, No. 1 ]

Date

2012-08

Author

Fabian Eser, Marta, Stefano Iacobelli, and Marc Rubens

Affiliation

European Central Bank, Banco de España, Banca d’Italia, and National Bank of Belgium

Title

The use of the Eurosystem's monetary policy instruments and operational framework since 2009

Summary /
Abstract

This paper provides a comprehensive overview of the use of the Eurosystem’s monetary policy instruments and the operational framework from the first quarter of 2009 until the second quarter 2012. The paper discusses in detail, from a liquidity management perspective, the standard and non-standard monetary policy measures taken over this period. The paper reviews the evolution of the Eurosystem balance sheet, participation in tender operations, the outright purchase programmes, patterns of reserve fulfilment, recourse to standing facilities as well as the steering of money market interest rates.

Keywords

Monetary policy implementation, central bank operational framework, central bank liquidity management, non-standard monetary policy measures

URL

http://d.repec.org/n?u=RePEc:ecb:ecbops:20120135&r=mon

Record ID

256     [ Page 15 of 23, No. 2 ]

Date

2012-08

Author

Research Department, under the general direction of Olivier Blanchard and Jonathan Ostry

Affiliation

IMF

Title

External Balance Assessment (EBA): Technical Background of the Pilot Methodology

Summary /
Abstract

The IMF's Research Department is developing the External Balance Assessment (EBA) methodology as a successor to the CGER methodology for assessing current accounts and exchange rates. The new methodology brings a greater focus on the role of policies and policy distortions, as well as on global capital market and cyclical influences.* A pilot version of EBA was implemented recently; the Pilot External Sector Report draws in part on the results of that exercise, and includes a general overview of EBA in its Appendix I. This technical background note provides a more extended description of the pilot EBA methodology and is being made available to solicit comments and suggestions for the future development and refinement of EBA.

*The EBA methodology is a project of the IMF’s Research Department, under the general direction of Olivier Blanchard and Jonathan D. Ostry. The EBA Team comprises Steve Phillips (head), Luis Catão (lead on current account analysis), Luca Ricci (lead on real exchange rate analysis), Mitali Das (lead on external sustainability analysis), D. Filiz Unsal, Jungjin Lee, Marola Castillo, John Kowalski, and Mauricio Vargas. The EBA Team gratefully acknowledges comments and suggestions received, on various aspects of the project, from Joshua Aizenman, Menzie Chinn, Martin Evans, Joseph Gagnon, Eduardo Lora, Maurice Obstfeld, Dennis Quinn, and Jay Shambaugh, as well from numerous IMF colleagues.

Keywords

Current account, real exchange rate, external balance assessment

URL

http://www.imf.org/external/np/res/eba/pdf/080312.pdf

Record ID

255     [ Page 15 of 23, No. 3 ]

Date

2012-07

Author

Martin Schmitz

Affiliation

European Central Bank

Title

Financial markets and international risk sharing in emerging market economics

Summary /
Abstract

In light of rapidly increasing foreign equity liability positions of emerging market economies, we test for a necessary condition of international risk sharing, namely for systematic patterns between idiosyncratic output fluctuations and financial market developments. Panel analysis of 22 emerging market economies shows strong evidence for pro-cyclicality of capital gains on domestic stock markets both over short and medium term horizons. This implies that domestic output fluctuations can be hedged through cross-border ownership of financial markets.

Keywords

International risk sharing, capital gains, cross-border investment, financial globalisation, emerging market economies

URL

http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121451&r=cba

Record ID

254     [ Page 15 of 23, No. 4 ]

Date

2012-08

Author

Paolo Guarda, Abdelaziz Rouabah, and John Theal

Affiliation

Banque Centrale du Luxembourg

Title

An MVAR framework to capture extreme events in macro-prudential stress tests

Summary /
Abstract

Severe financial turbulences are driven by high impact and low probability events that are the characteristic hallmarks of systemic financial stress. These unlikely adverse events arise from the extreme tail of a probability distribution and are therefore very poorly captured by traditional econometric models that rely on the assumption of normality. In order to address the problem of extreme tail events, we adopt a mixture vector autoregressive (MVAR) model framework that allows for a multi-modal distribution of the residuals. A comparison between the respective results of a VAR and MVAR approach suggests that the mixture of distributions allows for a better assessment of the effect that adverse shocks have on counterparty credit risk, the real economy and banks’ capital requirements. Consequently, we argue that the MVAR provides a more accurate assessment of risk since it captures the fat tail events often observed in time series of default probabilities.

Keywords

Stress testing, MVAR, tier 1 capital ratio, counterparty risk, Luxembourg banking sector

URL

http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121464&r=cba

Record ID

253     [ Page 15 of 23, No. 5 ]

Date

2012-01

Author

Yener Altunbas, Leonardo Gambacorta and David Marques-Ibanez

Affiliation

Bangor Business School, Bank for International Settlements, and European Central Bank

Title

Does monetary policy affect bank risk?

Summary /
Abstract

We investigate the effect of relatively loose monetary policy on bank risk through a large panel including quarterly information from listed banks operating in the European Union and the United States. We find evidence that relatively low levels of interest rates over an extended period of time contributed to an increase in bank risk. This result holds for a wide range of measures of risk, as well as macroeconomic and institutional controls including the intensity of supervision, securitization activity and bank competition. The results also hold when changes in realized bank risk due to the crisis are accounted for. The results suggest that monetary policy is not neutral from a financial stability perspective.

Keywords

Bank risk, monetary policy, credit crisis

URL

http://d.repec.org/n?u=RePEc:bng:wpaper:12002&r=cba

Record ID

252     [ Page 15 of 23, No. 6 ]

Date

2012-08

Author

Itai Agur and Maria Demertzis

Affiliation

IMF, STI and De Nederlandsche Bank

Title

Excessive bank risk taking and monetary policy

Summary /
Abstract

Why should monetary policy "lean against the wind"? Can’t bank regulation perform its task alone? We model banks that choose both asset volatility and leverage, and identify how monetary policy transmits to bank risk. Subsequently, we introduce a regulator whose tool is a risk-based capital requirement. We derive from welfare that the regulator trades off bank risk and credit supply, and show that monetary policy affects both sides of this trade-off. Hence, regulation cannot neutralize the policy rate’s impact, and monetary policy matters for financial stability. An extension shows how the commonality of bank exposures affects monetary transmission.

Keywords

Macroprudential, leverage, supervision, monetary transmission

URL

http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121457&r=cba

Record ID

251     [ Page 15 of 23, No. 7 ]

Date

2012-08

Author

Luca Gattini, Huw Pill, and Ludger Schuknecht

Affiliation

European Investment Bank, Goldman Sachs, and German Ministry of Finance/European Central Bank

Title

A global perspective on inflation and propagation channels

Summary /
Abstract

This paper revisits the evidence on the monetary policy transmission channels. It extends the existing literature along three lines: i) it takes a global perspective with aggregate series based on a broader set of countries (ca 70% per cent of the global economy) and a longer time (1960-2010) than previous studies. It, thereby, internalises potential international transmission channels (i.e. via global commodity prices); ii) it examines the interaction between monetary variables, asset prices (notably residential property) and inflation; and iii) it looks at the role of public debt for consumer price developments. On the basis of a VAR analysis, the study finds that i) global money demand shocks affect global inflation and also global commodity prices, which in turn impact on inflation; ii) global asset/property price dynamics appear to respond to financing cost shocks, but not to shocks to global money demand. Moreover, positive house price shocks exert a significant influence on inflation. From a global perspective, the study suggests recognition of global externalities of commodities and asset values as well as the close monitoring of real estate price developments.

Keywords

VAR, global inflation, global house prices, global money

URL

http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121462&r=cba

Record ID

250     [ Page 15 of 23, No. 8 ]

Date

2012-08

Author

Tanya Molodtsova and David Papell

Affiliation

National Bureau of Economic Research

Title

Taylor Rule Exchange Rate Forecasting During the Financial Crisis

Summary /
Abstract

This paper evaluates out-of-sample exchange rate predictability of Taylor rule models, where the central bank sets the interest rate in response to inflation and either the output or the unemployment gap, for the euro/dollar exchange rate with real-time data before, during, and after the financial crisis of 2008-2009. While all Taylor rule specifications outperform the random walk with forecasts ending between 2007:Q1 and 2008:Q2, only the specification with both estimated coefficients and the unemployment gap consistently outperforms the random walk from 2007:Q1 through 2012:Q1. Several Taylor rule models that are augmented with credit spreads or financial condition indexes outperform the original Taylor rule models. The performance of the Taylor rule models is superior to the interest rate differentials, monetary, and purchasing power parity models.

Keywords

Taylor Rule, Financial Crisis

URL

http://d.repec.org/n?u=RePEc:nbr:nberwo:18330&r=cba

Record ID

249     [ Page 15 of 23, No. 9 ]

Date

2012-08

Author

Paolo Gelain, Kevin J. Lansing, and Caterina Mendicino

Affiliation

Norges Bank, FRB San Francisco, and Bank of Portugal

Title

House prices, credit growth, and excess volatility: implications for monetary and macroprudential policy

Summary /
Abstract

Progress on the question of whether policymakers should respond directly to financial variables requires a realistic economic model that captures the links between asset prices, credit expansion, and real economic activity. Standard DSGE models with fully-rational expectations have difficulty producing large swings in house prices and household debt that resemble the patterns observed in many developed countries over the past decade. We introduce excess volatility into an otherwise standard DSGE model by allowing a fraction of households to depart from fully-rational expectations. Specifically, we show that the introduction of simple moving-average forecast rules for a subset of households can significantly magnify the volatility and persistence of house prices and household debt relative to otherwise similar model with fully-rational expectations. We evaluate various policy actions that might be used to dampen the resulting excess volatility, including a direct response to house price growth or credit growth in the central bank’s interest rate rule, the imposition of more restrictive loan-to-value ratios, and the use of a modified collateral constraint that takes into account the borrower’s loan-to-income ratio. Of these, we find that a loan-to-income constraint is the most effective tool for dampening overall excess volatility in the model economy. We find that while an interest-rate response to house price growth or credit growth can stabilize some economic variables, it can significantly magnify the volatility of others, particularly inflation.

Keywords

Housing - Prices ; Housing - Econometric models

URL

http://d.repec.org/n?u=RePEc:fip:fedfwp:2012-11&r=mon

Record ID

248     [ Page 15 of 23, No. 10 ]

Date

2012-08

Author

Tanya Molodtsova and David Papell

Affiliation

National Bureau of Economic Research

Title

Taylor Rule Exchange Rate Forecasting During the Financial Crisis

Summary /
Abstract

This paper evaluates out-of-sample exchange rate predictability of Taylor rule models, where the central bank sets the interest rate in response to inflation and either the output or the unemployment gap, for the euro/dollar exchange rate with real-time data before, during, and after the financial crisis of 2008-2009. While all Taylor rule specifications outperform the random walk with forecasts ending between 2007:Q1 and 2008:Q2, only the specification with both estimated coefficients and the unemployment gap consistently outperforms the random walk from 2007:Q1 through 2012:Q1. Several Taylor rule models that are augmented with credit spreads or financial condition indexes outperform the original Taylor rule models. The performance of the Taylor rule models is superior to the interest rate differentials, monetary, and purchasing power parity models.

Keywords

Taylor rule, Exchange rates

URL

http://d.repec.org/n?u=RePEc:nbr:nberwo:18330&r=mon

Record ID

247     [ Page 15 of 23, No. 11 ]

Date

2012-08

Author

Sami Ben Mim and Mohamed Sami Ben Ali

Affiliation

University of Sousse

Title

Through Which Channels Can Remittances Spur Economic Growth in MENA Countries?

Summary /
Abstract

This paper studies the remittances’ effect on economic growth. Using panel data techniques, the authors estimate several specifications to provide support of such relationship for MENA countries over the period 1980–2009. The findings provide new robust evidence on how remittances are used in MENA countries and detect the main channels which may interfere in this process. Estimation outcomes show that the most important part of remittances is consumed and that remittances stimulate growth only when they are invested. Moreover, empirical results suggest that remittances can enhance growth by encouraging human capital accumulation. Human capital is therefore an effective channel through which remittances stimulate growth in MENA countries.

Keywords

Workers’ remittances; economic growth; panel data; MENA zone

URL

http://www.economics-ejournal.org/economics/journalarticles/2012-33/version_1/count

Record ID

246     [ Page 15 of 23, No. 12 ]

Date

2012-08

Author

Andreas Jobst

Affiliation

Money and Capital Markets Department, IMF

Title

Measuring Systemic Risk-Adjusted Liquidity (SRL) - A Model Approach

Summary /
Abstract

Little progress has been made so far in addressing—in a comprehensive way—the externalities caused by impact of the interconnectedness within institutions and markets on funding and market liquidity risk within financial systems. The Systemic Risk-adjusted Liquidity (SRL) model combines option pricing with market information and balance sheet data to generate a probabilistic measure of the frequency and severity of multiple entities experiencing a joint liquidity event. It links a firm’s maturity mismatch between assets and liabilities impacting the stability of its funding with those characteristics of other firms, subject to individual changes in risk profiles and common changes in market conditions. This approach can then be used (i) to quantify an individual institution’s time-varying contribution to system-wide liquidity shortfalls and (ii) to price liquidity risk within a macroprudential framework that, if used to motivate a capital charge or insurance premia, provides incentives for liquidity managers to internalize the systemic risk of their decisions. The model can also accommodate a stress testing approach for institution-specific and/or general funding shocks that generate estimates of systemic liquidity risk (and associated charges) under adverse scenarios.

Keywords

Systemic risk, liquidity risk, Net Stable Funding Ratio (NSFR), extreme value theory, financial contagion, macroprudential regulation.

URL

http://www.imf.org/external/pubs/ft/wp/2012/wp12209.pdf

Record ID

245     [ Page 15 of 23, No. 13 ]

Date

2012-07

Author

Hernando Vargas and Pamela Cardozo

Affiliation

Banco de la Republica Colombia

Title

The Use of Reserve Requirements in an Optimal Monetary Policy Framework

Summary /
Abstract

We analyse three models to determine the conditions under which reserve requirements are used as a part of an optimal monetary policy framework in an inflation targeting regime. In all cases the Central Bank (CB) minimizes an objective function that depends on deviations of inflation from its target, the output gap and deviations of reserve requirements from its optimal long term level. In a closed economy model we find that optimal monetary policy implies setting reserve requirements at their long term level, while adjusting the policy interest rate to face macroeconomic shocks. Reserve requirements are included in an optimal monetary policy response in an open economy model with the same CB objective function and in a closed economy model in which the CB objective function includes financial stability. The relevance, magnitude and direction of the movements of reserve requirements depend on the parameters of the economy and the shocks that affect it.

Keywords

Reserve Requirements, Inflation Targeting, Monetary Policy

URL

http://d.repec.org/n?u=RePEc:bdr:borrec:716i&r=mon

Record ID

244     [ Page 15 of 23, No. 14 ]

Date

2012-06

Author

Legal and Strategy, Policy and Review Departments

Affiliation

IMF

Title

Modernizing the Legal Framework for Surveillance― An Integrated Surveillance Decision

Summary /
Abstract

This paper proposes a draft Integrated Surveillance Decision (ISD) for adoption. As part of broader efforts to strengthen Fund surveillance, the Fund is modernizing its legal framework to better support operations. In April 2012, the Fund’s Executive Board discussed Modernizing the Legal Framework for Surveillance—Building Blocks Toward an Integrated Surveillance Decision. That paper highlighted key weaknesses in the current legal framework for surveillance and provided proposals for addressing them. Most Directors agreed that introducing a new surveillance decision covering both bilateral and multilateral surveillance would help address these weaknesses. In particular, they agreed with the general proposed approach to fill the gaps in bilateral surveillance through multilateral surveillance.

Keywords

IMF Surveillance, Legal Framework, Integrated Surveillance Decision

URL

http://www.imf.org/external/np/pp/eng/2012/062612.pdf

Record ID

243     [ Page 15 of 23, No. 15 ]

Date

2012-06

Author

Carrera, Cesar and Vega, Hugo

Affiliation

Banco Central de Reserva del Perú

Title

Interbank Market and Macroprudential Tools in a DSGE Model

Summary /
Abstract

The interbank market helps regulate liquidity in the banking sector. Banks with outstanding resources usually lend to banks that are in need of liquidity. Regulating the interbank market may actually benefit the policy stance of monetary policy. Introducing an interbank market in a general equilibrium model may allow better identification of the final effects of non-conventional policy tools such as reserve requirements. We introduce an interbank market in which there are two types of private banks and a central bank that has the ability to issue money into a DSGE model. Then, we use the model to analyse the effects of changes to reserve requirements (a macroprudential tool), while the central bank follows a Taylor rule to set the policy interest rate. We find that changes in reserve requirements have similar effects to changes in interest rates and that both monetary policy tools can be used jointly in order to avoid big swings in the policy rate (that could have an undesired effect on private expectations) or a zero bound (i.e. liquidity trap scenarios).

Keywords

Reserve requirements, collateral, banks, interbank market, DSGE

URL

http://www.bcrp.gob.pe/docs/Publicaciones/Documentos-de-Trabajo/2012/documento-de-trabajo-14-2012.pdf

Record ID

242     [ Page 15 of 23, No. 16 ]

Date

2012-03

Author

Dániel Holló, Manfred Kremer, and Marco Lo Duca

Affiliation

Magyar Nemzeti Bank and European Central Bank

Title

CISS - a composite indicator of systemic stress in the financial system

Summary /
Abstract

This paper introduces a new indicator of contemporaneous stress in the financial system named Composite Indicator of Systemic Stress (CISS). Its specific statistical design is shaped according to standard definitions of systemic risk. The main methodological innovation of the CISS is the application of basic portfolio theory to the aggregation of five market-specific subindices created from a total of 15 individual financial stress measures. The aggregation accordingly takes into account the time-varying cross-correlations between the subindices. As a result, the CISS puts relatively more weight on situations in which stress prevails in several market segments at the same time, capturing the idea that financial stress is more systemic and thus more dangerous for the economy as a whole if financial instability spreads more widely across the whole financial system. Applied to euro area data, we determine within a threshold VAR model a systemic crisis-level of the CISS at which financial stress tends to depress real economic activity.

Keywords

Financial system, financial stability, systemic risk, financial stress index, macro-financial linkages.

URL

http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1426.pdf

Record ID

241     [ Page 15 of 23, No. 17 ]

Date

2012-06

Author

Fiscal Affairs Department

Affiliation

International Monetary Fund

Title

Fiscal Policy and Employment in Advanced and Emerging Economies

Summary /
Abstract

This paper discusses tax and expenditure policy reforms to raise employment. Using data for 58 advanced and emerging economies, the paper provides a unified assessment of tax and expenditure measures that have usually been addressed separately. The focus is on incentives to increase labor demand and supply rather than on the impact of fiscal policy on employment through aggregate demand effects. It also discusses policies to improve the matching of labor supply and demand, and the principles which should guide the design of country-specific fiscal reforms to boost employment. A comprehensive set of tables on fiscal policies and labor market outturns for advanced and emerging economies is provided, permitting cross-country comparisons to facilitate the design of reform strategies.

Keywords

Fiscal Policy, Labor Markets, Employment, Emerging Economies

URL

http://www.imf.org/external/np/pp/eng/2012/061512.pdf

Record ID

240     [ Page 15 of 23, No. 18 ]

Date

2012-05

Author

Linghui Han and Il Houng Lee

Affiliation

Asia and Pacific Department, IMF

Title

Optimal Liquidity and Economic Stability

Summary /
Abstract

Monetary aggregates are now much less used as policy instruments as identifying the right measure has become difficult and interest rate transmission has worked well in an increasingly complex financial system. In this process, little attention was paid to the potential spillover of excess liquidity. This paper suggests a notional level of "optimal" liquidity beyond which asset prices will start to rise faster than the GDP deflator, thereby creating a gap between the face value and the real purchasing value of financial assets and widen the wedge in income between those with capital stock and those living on salaries. Such divergence will eventually lead to an abrupt and disorderly adjustment of the asset value, with repercussions on the real sector.

Keywords

Monetary policy; liquidity; dynamic panel

URL

http://www.imf.org/external/pubs/ft/wp/2012/wp12135.pdf

Record ID

239     [ Page 15 of 23, No. 19 ]

Date

2012-06

Author

Fabio Milani and Ashish Rajbhandari

Affiliation

University of California-Irvine

Title

Expectation Formation and Monetary DSGE Models: Beyond the Rational Expectations Paradigm

Summary /
Abstract

Empirical work in macroeconomics almost universally relies on the hypothesis of rational expectations. This paper departs from the literature by considering a variety of alternative expectations formation models. We study the econometric properties of a popular New Keynesian monetary DSGE model under different expectational assumptions: the benchmark case of rational expectations, rational expectations extended to allow for `news' about future shocks, near-rational expectations and learning, and observed subjective expectations from surveys. The results show that the econometric evaluation of the model is extremely sensitive to how expectations are modeled. The posterior distributions for the structural parameters significantly shift when the assumption of rational expectations is modified. Estimates of the structural disturbances under different expectation processes are often dissimilar. The modeling of expectations has important effects on the ability of the model to fit macroeconomic time series. The model achieves its worse fit under rational expectations. The introduction of news improves fit. The best-fitting specifications, however, are those that assume learning. Expectations also have large effects on forecasting. Survey expectations, news, and learning all work to improve the model's one-step-ahead forecasting accuracy. Rational expectations, however, dominate over longer horizons, such as one-year ahead or beyond.

Keywords

Expectation formation; Rational expectations; News shocks; Adaptive learning; Survey expectations; Econometric evaluation of DSGE models; Forecasting

URL

http://www.economics.uci.edu/files/economics/docs/workingpapers/2011-2012/milani-12.pdf

Record ID

238     [ Page 15 of 23, No. 20 ]

Date

2012-02

Author

Chan, Joshua; Koop, Gary; and Potter, Simon

Affiliation

Australian National University, University of Strathclyde, and Federal Reserve Bank of New York

Title

A New Model Of Trend Inflation

Summary /
Abstract

This paper introduces a new model of trend (or underlying) inflation. In contrast to many earlier approaches, which allow for trend inflation to evolve according to a random walk, ours is a bounded model which ensures that trend inflation is constrained to lie in an interval. The bounds of this interval can either be fixed or estimated from the data. Our model also allows for a time-varying degree of persistence in the transitory component of inflation. The bounds placed on trend inflation mean that standard econometric methods for estimating linear Gaussian state space models cannot be used and we develop a posterior simulation algorithm for estimating the bounded trend inflation model. In an empirical exercise with CPI inflation we find the model to work well, yielding more sensible measures of trend inflation and forecasting better than popular alternatives such as the unobserved components stochastic volatility model.

Keywords

Constrained inflation, non-linear state space model, underlying inflation, inflation targeting, inflation forecasting, Bayesian

URL

http://repo.sire.ac.uk/bitstream/10943/315/1/SIRE_DP_2012_12.pdf

Record ID

237     [ Page 15 of 23, No. 21 ]

Date

2011

Author

Benjamin Morton Friedman

Affiliation

William Joseph Maier Professor of Political Economy at Harvard University (e-mail: bfriedman@harvard.edu)

Title

Reconstructing Economics in Light of the 2007-? Financial Crisis

Summary /
Abstract

The lessons learned from the recent financial crisis should significantly reshape the economics profession's thinking, including, importantly, what we teach our students. Five such lessons are that we live in a monetary economy and therefore aggregate demand and policies that affect aggregate demand are determinants of real economic outcomes; that what actually matters for this purpose is not money but the volume, availability, and price of credit; that the fact that most lending is done by financial institutions matters as well; that the prices set in our financial markets do not always exhibit the “rationality†economists normally claim for them; and that both frictions and the uneven impact of economic events prevent us from adapting to disturbances in the way textbook economics suggests.

Keywords

Financial crisis, teaching macroeconomics

URL

http://dash.harvard.edu/bitstream/handle/1/5241348/Friedman_ReconstructingEconomics.pdf

Record ID

236     [ Page 15 of 23, No. 22 ]

Date

2012-06

Author

Lund-Jensen, Kasper

Affiliation

Money and Capital Markets Department, IMF

Title

Monitoring Systemic Risk Based on Dynamic Thresholds

Summary /
Abstract

Successful implementation of macroprudential policy is contingent on the ability to identify and estimate systemic risk in real time. In this paper, systemic risk is defined as the conditional probability of a systemic banking crisis and this conditional probability is modeled in a fixed effect binary response model framework. The model structure is dynamic and is designed for monitoring as the systemic risk forecasts only depend on data that are available in real time. Several risk factors are identified and it is hereby shown that the level of systemic risk contains a predictable component which varies through time. Furthermore, it is shown how the systemic risk forecasts map into crisis signals and how policy thresholds are derived in this framework. Finally, in an out-of-sample exercise, it is shown that the systemic risk estimates provided reliable early warning signals ahead of the recent financial crisis for several economies.

Keywords

Systemic Risk, Financial Stability, Macroprudential Policy

URL

http://www.imf.org/external/pubs/ft/wp/2012/wp12159.pdf

Record ID

235     [ Page 15 of 23, No. 23 ]

Date

2012-05

Author

Markus K. Brunnermeier, Thomas M. Eisenbach and Yuliy Sannikov

Affiliation

National Bureau of Economic Research

Title

Macroeconomics with Financial Frictions: A Survey

Summary /
Abstract

This article surveys the macroeconomic implications of financial frictions. Financial frictions lead to persistence and when combined with illiquidity to non-linear amplification effects. Risk is endogenous and liquidity spirals cause financial instability. Increasing margins further restrict leverage and exacerbate downturns. A demand for liquid assets and a role for money emerges. The market outcome is generically not even constrained efficient and the issuance of government debt can lead to a Pareto improvement. While financial institutions can mitigate frictions, they introduce additional fragility and through their erratic money creation harm price stability.

Keywords

Macroeconomics, financial frictions

URL

http://d.repec.org/n?u=RePEc:nbr:nberwo:18102&r=mon

Record ID

234     [ Page 15 of 23, No. 24 ]

Date

2009-05

Author

Camilo Tovar

Affiliation

Bank for International Settlements

Title

DSGE Models and Central Banks

Summary /
Abstract

Over the past 15 years there has been remarkable progress in the specification and estimation of dynamic stochastic general equilibrium (DSGE) models. Central banks in developed and emerging market economies have become increasingly interested in their usefulness for policy analysis and forecasting. This paper reviews some issues and challenges surrounding the use of these models at central banks. It recognises that they offer coherent frameworks for structuring policy discussions. Nonetheless, they are not ready to accomplish all that is being asked of them. First, they still need to incorporate relevant transmission mechanisms or sectors of the economy; second, issues remain on how to empirically validate them; and finally, challenges remain on how to effectively communicate their features and implications to policy makers and to the public. Overall, at their current stage DSGE models have important limitations. How much of a problem this is will depend on their specific use at central banks.

Keywords

DSGE models; central banks; communication; estimation; modelling

URL

http://www.economics-ejournal.org/economics/journalarticles/2009-16/version_1/count

Record ID

233     [ Page 15 of 23, No. 25 ]

Date

2012-06

Author

Vitek, Francis

Affiliation

Strategy, Policy, and Review Department, IMF

Title

Policy Analysis and Forecasting in the World Economy: A Panel Unobserved Components Approach

Summary /
Abstract

This paper develops a structural macroeconometric model of the world economy, disaggregated into thirty five national economies. This panel unobserved components model features a monetary transmission mechanism, a fiscal transmission mechanism, and extensive macrofinancial linkages, both within and across economies. A variety of monetary policy analysis, fiscal policy analysis, spillover analysis, and forecasting applications of the estimated model are demonstrated, based on a Bayesian framework for conditioning on judgment.

Keywords

Monetary policy analysis; Fiscal policy analysis; Spillover analysis; Forecasting; World economy; Panel unobserved components model; Bayesian econometrics

URL

http://www.imf.org/external/pubs/ft/wp/2012/wp12149.pdf

Record ID

232     [ Page 15 of 23, No. 26 ]

Date

2012-05

Author

Temitope L.A. Leshoro

Affiliation

University of South Africa

Title

Estimating the inflation threshold for South Africa

Summary /
Abstract

How detrimental is inflation to growth in South Africa? At what level? Motivated by the adoption of inflation targeting by many countries, this paper sets out to empirically determine the threshold level of inflation in South Africa. This study adopts quarterly time series data spanning over the period 1980:Q2 to 2010:Q3. The threshold regression model developed by Khan and Senhadji (2001) was used in this study. The econometric technique used is the Ordinary Least Squares (OLS) and the model was re-estimated using the two-stage least squares instrumental variable (2SLS-IV) to check for robustness. The results show that the inflation threshold level occurs at 4 percent. At inflation levels below and up to 4 percent there is a positive but insignificant relationship between inflation and growth. The relationship becomes negative and significant when the inflation rate is above 4 percent. The tests of robustness support these findings.

Keywords

Inflation, GDP Growth, threshold level, South Africa

URL

http://d.repec.org/n?u=RePEc:rza:wpaper:285&r=mon

Record ID

231     [ Page 15 of 23, No. 27 ]

Date

2011-01

Author

Frankel, Jeffrey A.

Affiliation

Harvard Kennedy School

Title

Monetary Policy in Emerging Markets: A Survey

Summary /
Abstract

The characteristics that distinguish most developing countries, compared to large industrialized countries, include: greater exposure to supply shocks in general and trade volatility in particular, procyclicality of both domestic fiscal policy and international finance, lower credibility with respect to both price stability and default risk, and other imperfect institutions. These characteristics warrant appropriate models. Models of dynamic inconsistency in monetary policy and the need for central bank independence and commitment to nominal targets apply even more strongly to developing countries. But because most developing countries are price-takers on world markets, the small open economy model, with nontraded goods, is often more useful than the two-country two-good model. Contractionary effects of devaluation are also far more important for developing countries, particularly the balance sheet effects that arise from currency mismatch. The exchange rate was the favored nominal anchor for monetary policy in inflation stabilizations of the late 1980s and early 1990s. After the currency crises of 1994-2001, the conventional wisdom anointed Inflation Targeting as the preferred monetary regime in place of exchange rate targets. But events associated with the global crisis of 2007-09 have revealed limitations to the choice of CPI for the role of price index. The participation of emerging markets in global finance is a major reason why they have by now earned their own large body of research, but it also means that they remain highly prone to problems of asymmetric information, illiquidity, default risk, moral hazard and imperfect institutions. Many of the models designed to fit emerging market countries were built around such financial market imperfections; few economists thought this inappropriate. With the global crisis of 2007-09, the tables have turned: economists should now consider drawing on the models of emerging market crises to try to understand the unexpected imperfections and failures of advanced-country financial markets

Keywords

Central bank, crises, developing countries, emerging markets, macroeconomics, monetary policy

URL

http://dash.harvard.edu/bitstream/handle/1/4669671/RWP11-003_Frankel.pdf?sequence=1

Record ID

230     [ Page 15 of 23, No. 28 ]

Date

2012-06

Author

Tovar Mora, Camilo Ernesto ; Garcia-Escribano, Mercedes ; and Vera Martin, Mercedes

Affiliation

WHD, IMF

Title

Credit Growth and the Effectiveness of Reserve Requirements and Other Macroprudential Instruments in Latin America

Summary /
Abstract

Over the past decade policy makers in Latin America have adopted a number of macroprudential instruments to manage the procyclicality of bank credit dynamics to the private sector and contain systemic risk. Reserve requirements, in particular, have been actively employed. Despite their widespread use, little is known about their effectiveness and how they interact with monetary policy. In this paper, we examine the role of reserve requirements and other macroprudential instruments and report new cross-country evidence on how they influence real private bank credit growth. Our results show that these instruments have a moderate and transitory effect and play a complementary role to monetary policy.

Keywords

Reserve requirements, countercyclical policy, credit, monetary transmission, interest rate spreads

URL

http://www.imf.org/external/pubs/ft/wp/2012/wp12142.pdf

Record ID

229     [ Page 15 of 23, No. 29 ]

Date

2012-05

Author

Chowdhury, Ibrahim and Keller, Leonor

Affiliation

OED, IMF

Title

Managing Large-Scale Capital Inflows: The Case of the Czech Republic, Poland and Romania

Summary /
Abstract

Many emerging market economies have in the recent past experienced a surge in capital inflows that may threaten their economic and financial stability. The IMF in early 2011 proposed a framework intended to guide Fund advice to policymakers on how to best respond to such inflows, including both macroeconomic instruments and so-called capital flow management measures (CFMs). The paper applies this framework to three countries that have experienced elevated capital inflows after the onset of the 2008 global financial crisis - the Czech Republic, Poland, and Romania. It finds that the evaluation of the macroeconomic criteria as prescribed by the framework does not support the use of CFMs, but instead advocates macroeconomic policies as the first line of defense against large-scale capital inflows. This finding is by and large consistent with the IMF’s policy advice given to country authorities in the context of surveillance missions.

Keywords

Capital inflows, capital controls

URL

http://www.imf.org/external/pubs/ft/wp/2012/wp12138.pdf

Record ID

228     [ Page 15 of 23, No. 30 ]

Date

2011-11

Author

Athanasios Orphanides

Affiliation

Governor, Central Bank of Cyprus

Title

New Paradigms in Central Banking?

Summary /
Abstract

This paper reviews whether and how the ongoing financial crisis has influenced central banking policy practice. Taking a historical perspective, it argues that throughout the existence of central banks the main objective has remained the same¯stability. What has been evolving over time, and has been influenced by the crisis, is our understanding about how to achieve and maintain stability over time. The paper focuses on the role and relative importance of price stability, economic stability and financial stability arguing that while the crisis has not materially shifted views regarding the monetary policy framework, it has highlighted the need for greater emphasis on financial stability than was appreciated before the crisis. It further argues that central banks must not only have a strong role in macro-prudential supervision but have more direct involvement in micro-supervision of the banking sector. Lastly, the paper argues that the crisis has reaffirmed that strong economic governance is a prerequisite for stability in a monetary union and, in the context of the euro area sovereign crisis, discusses the tremendous costs stemming from of lack of sufficient progress regarding economic governance going forward.

Keywords

Monetary policy, financial stability, economic governance, micro-prudential supervision, macro-prudential supervision

URL

http://d.repec.org/n?u=RePEc:cyb:wpaper:2011-6&r=mon