Selected Reference and Reading Materials compiled by Dan Villanueva


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Record ID

528     [ Page 17 of 68, No. 1 ]

Date

2014-04

Author

Tamim Bayoumi, Giovanni Dell'Ariccia, Karl Friedrich Habermeier, Tommaso Mancini Griffoli, and Fabian Valencia

Affiliation

Research, Monetary and Capital Markets, and Strategy and Policy Review Departments, IMF

Title

Monetary Policy in the New Normal

Summary /
Abstract

The proposed Staff Discussion Note would take stock of the current debate on the shape that monetary policy should take after the crisis. It revisits the pros and cons of expanding the objectives of monetary policy, the merits of turning unconventional policies into conventional ones, how to make monetary policy frameworks more resilient to the risk of being constrained by the zero-lower bound going forward, and the institutional challenges to preserve central bank independence with regards to monetary policy, while allowing adequate government oversight over central banks’ new responsibilities. It will draw policy conclusions where consensus has been reached, and highlight the areas where more work is needed to get more granular policy advice.

Keywords

Monetary policy;Central banks;Central bank autonomy;Macroprudential Policy;Financial stability;Cross country analysis;Monetary Policy, Financial Stability, Central Bank Independence

URL

http://www.imf.org/external/pubs/ft/sdn/2014/sdn1403.pdf



Record ID

527     [ Page 17 of 68, No. 2 ]

Date

2014-07

Author

Elva Bova, Nathalie Carcenac, and Martine Guerguil

Affiliation

Fiscal Affairs Department, IMF

Title

Fiscal Rules and the Procyclicality of Fiscal Policy in the Developing World

Summary /
Abstract

This paper documents the spread of fiscal rules in the developing world and investigates the relation between fiscal rules and procyclical fiscal policy. We find that, since the early 2000s, developing countries outnumbered advanced economies as users of fiscal rules. Rules were adopted either as part of the toolkit to join currency unions or to strengthen fiscal frameworks during and after large stabilization and policy reform episodes. The paper also finds that the greater use of fiscal rules has not shielded these countries from procyclicality, since fiscal policy remains procyclical following the adoption of a fiscal rule. We find partial evidence that some features of “second generation” rules, such as the use of cyclically-adjusted targets, well-defined escape clauses, together with stronger legal and enforcement arrangements, may be associated with less procyclicality.

Keywords

Fiscal rules, fiscal policty, cyclicality, emerging markets, developing economies



Record ID

526     [ Page 17 of 68, No. 3 ]

Date

2014-04

Author

DeGroot, Oliver

Affiliation

Board of Governors of the Federal Reserve System

Title

The Risk Channel of Monetary Policy

Summary /
Abstract

This paper examines how monetary policy affects the riskiness of the financial sector's aggregate balance sheet, a mechanism referred to as the risk channel of monetary policy. I study the risk channel in a DSGE model with nominal frictions and a banking sector that can issue both outside equity and debt, making banks' exposure to risk an endogenous choice, and dependent on the (monetary) policy environment. Banks' equilibrium portfolio choice is determined by solving the model around a risk-adjusted steady state. I find that banks reduce their reliance on debt finance and decrease leverage when monetary policy shocks are prevalent. A monetary policy reaction function that responds to movements in bank leverage or to movements in credit spreads can incentivize banks to increase their use of debt finance and increase leverage, ceteris paribus, increasing the riskiness of the financial sector for the real economy.

Keywords

Financial intermediation; portfolio choice; debt and equity; monetary policy; risk-adjusted steady state

URL

http://www.federalreserve.gov/pubs/feds/2014/201431/201431pap.pdf



Record ID

525     [ Page 17 of 68, No. 4 ]

Date

2014-06

Author

Christoph E. Boehm and Christopher L. House

Affiliation

University of Michigan and NBER

Title

Optimal Taylor Rules in New Keynesian Models

Summary /
Abstract

We analyze the optimal Taylor rule in a standard New Keynesian model. If the central bank can observe the output gap and the inflation rate without error, then it is typically optimal to respond infinitely strongly to observed deviations from the central bank’s targets. If it observes inflation and the output gap with error, the central bank will temper its responses to observed deviations so as not to impart unnecessary volatility to the economy. If the Taylor rule is expressed in terms of estimated output and inflation then it is optimal to respond infinitely strongly to estimated deviations from the targets. Because filtered estimates are based on current and past observations, such Taylor rules appear to have an interest smoothing component. Under such a Taylor rule, if the central bank is behaving optimally, the estimates of inflation and the output gap should be perfectly negatively correlated. In the data, inflation and the output gap are weakly correlated, suggesting that the central bank is systematically underreacting to its estimates of inflation and the output gap.

Keywords

Optimal Taylor Rules, New Keynesian Models

URL

http://www.nber.org/papers/w20237.pdf



Record ID

524     [ Page 17 of 68, No. 5 ]

Date

2014-03

Author

Rogers, John H.; Scotti, Chiara; and Wright, Jonathan H.

Affiliation

Board of Governors of the Federal Reserve System (first two authors), and Johns Hopkins University

Title

Evaluating Asset-Market Effects of Unconventional Monetary Policy: A Cross-Country Comparison

Summary /
Abstract

This paper examines the effects of unconventional monetary policy by the Federal Reserve, Bank of England, European Central Bank and Bank of Japan on bond yields, stock prices and exchange rates. We use common methodologies for the four central banks, with daily and intradaily asset price data. We emphasize the use of intradaily data to identify the causal effect of monetary policy surprises. We find that these policies are effective in easing financial conditions when policy rates are stuck at the zero lower bound, apparently largely by reducing term premia.

Keywords

Large scale asset purchases; quantitative easing; zero bound; term premium

URL

http://www.federalreserve.gov/pubs/ifdp/2014/1101/ifdp1101.pdf



Record ID

523     [ Page 17 of 68, No. 6 ]

Date

2014-06

Author

Mark Gertler and Peter Karadi

Affiliation

New York University, European Central Bank, NBER

Title

Monetary Policy Surprises, Credit Costs and Economic Activity

Summary /
Abstract

We provide evidence on the nature of the monetary transmission mechanism. To identify policy shocks in a setting with both economic and financial variables, we combine traditional monetary vector autoregression (VAR) analysis with high frequency identification (HFI) of monetary policy shocks. We first show that the shocks identified using HFI surprises as external instruments produce responses in output and inflation consistent with both textbook theory and conventional monetary VAR analysis. We also find, however, that monetary policy surprises typically produce "modest movements" in short rates that lead to "large" movements in credit costs and economic activity. The large movements in credit costs are mainly due to the reaction of both term premia and credit spreads that are typically absent from the standard model of monetary policy transmission. Finally, we show that forward guidance is important to the overall strength of the transmission mechanism.

Keywords

Monetary Policy, Credit Costs, Economic Activity

URL

http://www.nber.org/papers/w20224.pdf



Record ID

522     [ Page 17 of 68, No. 7 ]

Date

2014-06

Author

Guillermo J. Escudé

Affiliation

Central Bank of Argentina

Title

The Possible Trinity: Optimal Interest Rate, Exchange Rate, and Taxes on Capital Flows in a DSGE Model for a Small Open Economy

Summary /
Abstract

A traditional way of thinking about the exchange rate (XR) regime and capital account openness has been framed in terms of the 'impossible trinity' or 'trilemma', in which policymakers can only have 2 of 3 possible outcomes: open capital markets, monetary independence and pegged XRs. This paper is an extension of Escude (A DSGE Model for a SOE with Systematic Interest and Foreign Exchange Policies in Which Policymakers Exploit the Risk Premium for Stabilization Purposes, 2013), which focused on interest rate and XR policies, since it introduces the third vertex of the 'trinity' in the form of taxes on private foreign debt. These affect the risk-adjusted uncovered interest parity equation and hence influence the SOE's international financial flows. A useful way to illustrate the range of policy alternatives is to associate them with the faces of a triangle. Each of 3 possible government intervention policies taken individually (in the domestic currency bond market, in the FX market, and in the foreign currency bonds market) corresponds to one of the vertices of the triangle, each of the 3 possible pairs of intervention policies corresponds to one of its 3 edges, and the 3 simultaneous intervention policies taken jointly correspond to its interior. This paper shows that this interior, or 'possible trinity' is quite generally not only possible but optimal, since the CB obtains a lower loss when it implements a policy with all three interventions.

Keywords

DSGE models; small open economy; monetary and exchange rate policy; capital controls; optimal policy

URL

http://www.economics-ejournal.org/economics/journalarticles/2014-25/version_1/count



Record ID

521     [ Page 17 of 68, No. 8 ]

Date

2014-05

Author

Laurence M. Ball

Affiliation

Johns Hopkins University, NBER

Title

Long-Term Damage from the Great Recession in OECD Countries

Summary /
Abstract

This paper estimates the long-term effects of the global recession of 2008-2009 on output in 23 countries. I measure these effects by comparing current estimates of potential output from the OECD and IMF to the path that potential was following in 2007, according to estimates at the time. The losses in potential output range from almost nothing in Australia and Switzerland to more than 30% in Greece, Hungary, and Ireland; the average loss, weighted by economy size, is 8.4%. Most countries have experienced strong hysteresis effects: shortfalls of actual output from pre-recession trends have reduced potential output almost one-for-one. In the hardest-hit economies, the current growth rate of potential is depressed, implying that the level of lost potential is growing over time.

Keywords

Great Recession, Potential Output

URL

http://www.nber.org/papers/w20185.pdf



Record ID

520     [ Page 17 of 68, No. 9 ]

Date

2014-06

Author

Ray C. Fair

Affiliation

Yale University

Title

How Might a Central Bank Report Uncertainty?

Summary /
Abstract

An important question for central banks is how they should report the uncertainty of their forecasts. This paper discusses a way in which a central bank could report the uncertainty of its forecasts in a world in
which it used a single macroeconometric model to make its forecasts and guide its policies. Suggestions are then made as to what might be feasible for a central bank to report given that it is unlikely to be willing to commit to a single model. A particular model is used as an illustration.

Keywords

Central bank, uncertainty, stochastic simulation

URL

http://www.economics-ejournal.org/economics/discussionpapers/2014-25/count



Record ID

519     [ Page 17 of 68, No. 10 ]

Date

2014-05

Author

Rudebusch, Glenn D. and Williams, John C.

Affiliation

Federal Reserve Bank of San Francisco

Title

A wedge in the dual mandate: monetary policy and long-term unemployment

Summary /
Abstract

In standard macroeconomic models, the two objectives in the Federal Reserve’s dual mandate—full employment and price stability—are closely intertwined. We motivate and estimate an alternative model in which long-term unemployment varies endogenously over the business cycle but does not affect price inflation. In this new model, an increase in long-term unemployment as a share of total unemployment creates short-term tradeoffs for optimal monetary policy and a wedge in the dual mandate. In particular, faced with high long-term unemployment following the Great Recession, optimal monetary policy would allow inflation to overshoot its target more than in standard models.

Keywords

Monetary Policy, Long-term Unemployment, Inflation Target, Short-Term Tradeoffs

URL

http://www.frbsf.org/economic-research/publications/working-papers/wp2014-14.pdf



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