Record ID

167     [ Page 18 of 23, No. 1 ]

Date

2011-06

Author

Kotaro Ishi, Kenji Fujita, and Mark R. Stone

Affiliation

Money and Capital Markets Dept., IMF

Title

Should Unconventional Balance Sheet Policies be Added to the Central Bank Toolkit? A Review of the Experience So Far

Summary /
Abstract

What is the case for adding the unconventional balance sheet policies used by major central banks since 2007 to the standard policy toolkit? The record so far suggests that the new liquidity providing policies in support of financial stability generally warrant inclusion. As the balance sheet policies aimed at macroeconomic stability were used only by a small number of highly credible central banks facing a lower bound constraint on conventional interest rate policy, they are not relevant for most central banks or states of the world. Best practices of these policies are documented in this paper.

Keywords

Monetary policy, crisis policies, liquidity support

URL

http://d.repec.org/n?u=RePEc:imf:imfwpa:11/145&r=ban

Record ID

166     [ Page 18 of 23, No. 2 ]

Date

2010-11

Author

Matthieu Bussiere and Livio Stracca

Affiliation

Banque de France and ECB

Title

A decade (and a global financial crisis) after Blinder: The interaction between researchers and policy-makers in central banks

Summary /
Abstract

Periods of economic and financial stress traditionally give rise to profound changes in economic theory and in the way policy decisions are taken. Motivated by the recent interest in renewing macroeconomics after the global financial crisis, we collected the views of senior central bank staff in 32 central banks by means of a special questionnaire on a number of issues related to the interaction between research and policy-making. Thereafter, the paper first surveys the existing literature on the relation between researchers and practitioners and offers some reflections on the fundamental and practical differences between research and policy work. Finally, it delves on the issue of model-based versus judgment-based approaches to economic forecasts and policy simulations, with a special emphasis on the growing role of DSGE models within central banks. We conclude with practical suggestions on how best to integrate models and research into policy making decisions.

Keywords

Economic research, policy making, central bank communication,economic crises, DSGE models

URL

http://www.ecb.int/pub/pdf/scpwps/ecbwp1260.pdf

Record ID

165     [ Page 18 of 23, No. 3 ]

Date

2011-07

Author

Adler, Gustavo and Tovar Mora, Camilo E.

Affiliation

WHD, IMF

Title

Foreign Exchange Intervention: A Shield Against Appreciation Winds?

Summary /
Abstract

This paper examines foreign exchange intervention practices and their effectiveness using a new qualitative and quantitative database for a panel of 15 economies covering 2004 - 10, with special focus on Latin America. Qualitatively, it examines institutional aspects such as declared motives, instruments employed, the use of rules versus discretion, and the degree of transparency. Quantitatively, it assesses the effectiveness of sterilized interventions in influencing the exchange rate using a two-stage IV-panel data approach to overcome endogeneity bias. Results suggest that interventions slow the pace of appreciation, but the effects decrease rapidly with the degree of capital account openness. At the same time, interventions are more effective in the context of already ‘overvalued’ exchange rates.

Keywords

Foreign exchange intervention, exchange rates, sterilization

URL

http://www.imf.org/external/pubs/ft/wp/2011/wp11165.pdf

Record ID

164     [ Page 18 of 23, No. 4 ]

Date

2011-07

Author

Gilbert Terrier, Rodrigo Valdés, Camilo E. Tovar, Jorge ChanLau, Carlos Fernández-Valdovinos, Mercedes GarcíaEscribano, Carlos Medeiros, Man-Keung Tang, Mercedes Vera Martin, and Chris Walker

Affiliation

WHD, IMF

Title

Policy Instruments To Lean Against The Wind In Latin America

Summary /
Abstract

This paper reviews policy tools that have been used and/or are available for policy makers in the region to lean against the wind and review relevant country experiences using them. The instruments examined include: (i) capital requirements, dynamic provisioning, and leverage ratios; (ii) liquidity requirements; (iii) debt-to-income ratios; (iv) loan-to-value ratios; (v) reserve requirements on bank liabilities (deposits and nondeposits); (vi) instruments to manage and limit systemic foreign exchange risk; and, finally, (vii) reserve requirements or taxes on capital inflows. Although the instruments analyzed are mainly microprudential in nature, appropriately calibrated over the financial cycle they may serve for macroprudential purposes.

Keywords

Capital Requirements, Dynamic Provisions, Leverage Ratios, Liquidity Requirements, Debt-to-Income Ratios, Loan-to-Value Ratios, Reserve Requirements, Foreign Exchange Credit Risk, Foreign Exchange Positions, Taxes on Capital Inflows

URL

http://www.imf.org/external/pubs/ft/wp/2011/wp11159.pdf

Record ID

163     [ Page 18 of 23, No. 5 ]

Date

2011-04

Author

MCM Staff, Approved by José Viñals

Affiliation

IMF

Title

Managing Sovereign Debt and Debt Markets through a Crisis - Practical Insights and Policy Lessons

Summary /
Abstract

The crisis highlighted the importance of debt management in containing debt-related risks and the associated impact on debt markets. The impact of the crisis on debt levels, and the consequent implications for fiscal consolidation, has been the subject of much discussion and analysis. However, there has been relatively less focus on the issue of how that debt should be managed, including how its composition should be structured so as to mitigate key risk exposures, and its implications for debt market functioning. That task proved significantly complex and challenging through the crisis, particularly in advanced economies, with additional dimensions of risk revealed.

Keywords

Sovereign debt, risk and debt management

URL

http://www.imf.org/external/np/pp/eng/2011/041811.pdf

Record ID

162     [ Page 18 of 23, No. 6 ]

Date

2011-06

Author

Magnusson Bernard, Kristin

Affiliation

WHD, IMF

Title

International Reserve Adequacy in Central America

Summary /
Abstract

Countries’ absolute and relative international reserves adequacy has recently attracted considerable attention. The analysis has however concentrated on the largest and most advanced economies. We apply various methodologies for assessing reserve adequacy in Central America, taking into account the region’s high degree of deposit dollarization. We find that reserve cover is low both in an absolute and relative sense, suggesting further reserve accumulation is an important policy option for reducing vulnerabilities.

Keywords

Foreign reserves, balance of payments crises, financial dollarization

URL

http://www.imf.org/external/pubs/ft/wp/2011/wp11144.pdf

Record ID

161     [ Page 18 of 23, No. 7 ]

Date

2011-02

Author

Gabriele Galati and Richhild Moessner

Affiliation

Monetary and Economic Department, BIS

Title

Macroprudential policy - a literature review

Summary /
Abstract

The recent financial crisis has highlighted the need to go beyond a purely micro approach to financial regulation and supervision. In recent months, the number of policy speeches, research papers and conferences that discuss a macro perspective on financial regulation has grown considerably. The policy debate is focusing in particular on macroprudential tools and their usage, their relationship with monetary policy, their implementation and their effectiveness. Macroprudential policy has recently also attracted considerable attention among researchers. This paper provides an overview of research on this topic. We also identify important future research questions that emerge from both the literature and the current policy debate.

Keywords

Macroprudential policy

URL

http://www.bis.org/publ/work337.pdf

Record ID

160     [ Page 18 of 23, No. 8 ]

Date

2011-06

Author

Igor Vetlov, Tibor Hlédik, Magnus Jonsson, Henrik Kucsera, and Massimiliano Pisani

Affiliation

Bank of Lithuania, Czech National Bank, Sveriges Riksbank, Magyar Nemzeti Bank, Banca d'Italia

Title

Potential Output in DSGE Models

Summary /
Abstract

In view of the increasing use of Dynamic Stochastic General Equilibrium (DSGE) models in the macroeconomic projections and the policy process, this paper examines, both conceptually and empirically, alternative notions of potential output within DSGE models. Furthermore, it provides historical estimates of potential output/output gaps on the basis of selected DSGE models developed by the European System of Central Banks’ staff. These estimates are compared to the corresponding estimates obtained applying more traditional methods. Finally, the paper assesses the usefulness of the DSGE model-based output gaps for gauging inflationary pressures.

Keywords

Potential output, simulation and forecasting models, monetary policy

URL

http://d.repec.org/n?u=RePEc:lie:wpaper:9&r=mac

Record ID

159     [ Page 18 of 23, No. 9 ]

Date

2006-10

Author

Peter C. B. Phillips and Zhijie Xiao

Affiliation

Yale University and University of Illinois at Urbana-Champaign

Title

A Primer on Unit Root Testing

Summary /
Abstract

The immense literature and diversity of unit root tests can at times be confusing even to the specialist and presents a truly daunting prospect to the uninitiated. In consequence, much empirical work still makes use of the simplest testing procedures because it is unclear from the literature and from recent reviews which tests if any are superior. This paper presents a survey of unit root theory with an emphasis on testing principles and recent developments. The general framework adopted makes it possible to consider tests of stochastic trends against trend stationarity and trend breaks of a general type. The main tests are listed, and asymptotic distributions are given in a simple form that emphasizes commonalities in the theory. Some simulation results are reported, and an extensive list of references and all annotated bibliography are provided.

Keywords

Autoregressive unit root; Brownian motion; Functional central limit theorem; Integrated process; LM principle; Model selection; Moving average unit root; Nonstationarity; Quasi-differencing; Stationarity; Stochastic trend

URL

http://onlinelibrary.wiley.com/doi/10.1111/1467-6419.00064/pdf

Record ID

158     [ Page 18 of 23, No. 10 ]

Date

2006-10

Author

Anil Bera and Matthew Higgins

Affiliation

University of Illinois at Urbana-Champaign and University of Wisconsin-Milwaukee

Title

ARCH models: properties, estimation and testing

Summary /
Abstract

The aim of this survey paper is to provide an account of some of the important developments in the autoregressive conditional heteroskedasticity (ARCH) model since its inception in a seminal paper by Engle (1982). This model takes account of many observed properties of asset prices, and therefore, various interpretations can be attributed to it. We start with the basic ARCH models and discuss their different interpretations. ARCH models have been generalized in different directions to accommodate more and more features of the real world. We provide a comprehensive treatment of many of the extensions of the original ARCH model. Next we discuss estimation and testing for ARCH models and note that these models lead to some interesting and unique problems. There have been numerous applications and we mention some of these as we present different models. The paper includes a glossary of the acronyms for the models we describe.

Keywords

ARCH; GARCH; nonlinearity; nonnormality; persistence; random coefficient model; volatility

URL

http://onlinelibrary.wiley.com/doi/10.1111/j.1467-6419.1993.tb00170.x/pdf

Record ID

157     [ Page 18 of 23, No. 11 ]

Date

2006-10

Author

George Alogoskoufis and Ron Smith

Affiliation

University of London and

Title

On Error Correction Models: Specification, Interpretation, Estimation

Summary /
Abstract

Error Correction Models (ECMs) have proved a popular organizing principle in applied econometrics, despite the lack of consensus as to exactly what constitutes their defining characteristic, and the rather limited role that has been given to economic theory by their proponents. This paper uses a historical survey of the evolution of ECMs to explain the alternative specifications and interpretations and proceeds to examine their implications for estimation. The various approaches are illustrated for wage equations by application to UK labour market data 1855-1987. We demonstrate that error correction models impose strong and testable non-linear restrictions on dynamic econometric equations, and that they do not obviate the need for modelling the process of expectations formation. With the exception of a few special cases, both the non-linear restrictions and the modelling of expectations have been ignored by those who have treated ECMs as merely re-parameterisations of dynamic linear regression models or vector autoregressions.

Keywords

Error correction models; wage equations

URL

http://onlinelibrary.wiley.com/doi/10.1111/j.1467-6419.1991.tb00128.x/pdf

Record ID

156     [ Page 18 of 23, No. 12 ]

Date

2006-10

Author

Juan Dolado, Tim Jenkinson, and Simon Sosvilla-Rivero

Affiliation

Bank of Spain, University of Oxford, and University of Birmingham

Title

Cointegration and Unit Roots

Summary /
Abstract

This paper provides an updated survey of a burgeoning literature on testing, estimation and model specification in the presence of integrated variables. Integrated variables are a specific class of non-stationary variables which seem to characterize faithfully the properties of many macroeconomic time series. The analysis of co-integration develops out of the existence of unit roots and offers a generic route to test the validity of the equilibrium predictions of economic theories. Special emphasis is put on the empirical researcher’s point of view.

Keywords

Unit root, co-integration, trends, error correction mechanisms

URL

http://onlinelibrary.wiley.com/doi/10.1111/j.1467-6419.1990.tb00088.x/pdf

Record ID

155     [ Page 18 of 23, No. 13 ]

Date

2006-10

Author

Adrian Pagan

Affiliation

University of Rochester

Title

Three Econometric Methodologies: A Critical Appraisal

Summary /
Abstract

Three econometric methodologies, associated respectively with David Hendry, Christopher Sims and Edward Leamer have been advocated and practiced by their adherents in recent years. A number of good papers have appeared about each methodology, but little has been written in a comparative vein. This paper is concerned with that task. It provides a statement of the main steps to be followed in using each of the methodologies and comments upon the strengths and weaknesses of each approach. An attempt is made to contrast and compare the techniques used, the information provided, and the questions addressed by each of the methodologies. It is hoped that such a comparison will aid researchers in choosing the best way to examine their particular problem.

Keywords

Econometric methodologies; Hendry; Sims; Learner; extreme bounds analysis; vector autoregressions; dynamic specification

URL

http://onlinelibrary.wiley.com/doi/10.1111/j.1467-6419.1987.tb00022.x/pdf

Record ID

154     [ Page 18 of 23, No. 14 ]

Date

2011-05

Author

Jordi Galí, Frank Smets, and Rafael Wouters

Affiliation

National Bureau of Economic Research

Title

Unemployment in an Estimated New Keynesian Model

Summary /
Abstract

We reformulate the Smets-Wouters (2007) framework by embedding the theory of unemployment proposed in Galí (2011a,b). We estimate the resulting model using postwar U.S. data, while treating the unemployment rate as an additional observable variable. Our approach overcomes the lack of identification of wage markup and labor supply shocks highlighted by Chari, Kehoe and McGrattan (2008) in their criticism of New Keynesian models, and allows us to estimate a "correct" measure of the output gap. In addition, the estimated model can be used to analyze the sources of unemployment fluctuations.

URL

http://d.repec.org/n?u=RePEc:nbr:nberwo:17084&r=mac

Record ID

153     [ Page 18 of 23, No. 15 ]

Date

2011-05

Author

Andrés González, Lavan Mahadeva, Juan D. Prada and Diego Rodríguez

Affiliation

Banco de la República, Colombia, Bank of England, Northwestern University, and Banco de la República, Colombia

Title

Policy Analysis Tool Applied to Colombian Needs: PATACON Model Description

Summary /
Abstract

In this document we lay out the microeconomic foundations of a dynamic stochastic general equilibrium model designed to forecast and to advice monetary policy authorities in Colombia. The model is called Policy Analysis Tool Applied to Colombian Needs (PATACON). In companion documents we present other aspects of the model and its platform, including the estimation of the parameters that affect the dynamics and the impulse responses functions.

Keywords

Monetary Policy, DSGE, Small open economy

URL

http://d.repec.org/n?u=RePEc:col:000094:008698&r=mon

Record ID

152     [ Page 18 of 23, No. 16 ]

Date

2011-05

Author

Berganza, Juan Carlos and Broto, Carmen

Affiliation

Bank of Finland

Title

Flexible inflation targets, forex interventions and exchange rate volatility in emerging countries

Summary /
Abstract

Emerging economies with inflation targets (IT) face a dilemma between fulflling the theoretical conditions of "strict IT", which implies a fully flexible exchange rate, or applying a "flexible IT", which entails a de facto managed floating exchange rate with forex interventions to moderate exchange rate volatility. Using a panel data model for 37 countries we find that, although IT lead to higher exchange rate instability than alternative regimes, forex interventions in some IT countries have been more effective in reducing volatility than in non-IT countries, which may justify the use of "flexible IT" by policymakers.

Keywords

Inflation targeting; exchange rate volatility; foreign exchange interventions; emerging economies

URL

http://www.suomenpankki.fi/bofit_en/tutkimus/tutkimusjulkaisut/dp/Documents/DP0911.pdf

Record ID

151     [ Page 18 of 23, No. 17 ]

Date

2011-05

Author

E. Gasteiger

Affiliation

University of Vienna

Title

Heterogeneous Expectations, Taylor Rules and the Merit of Monetary Policy Inertia

Summary /
Abstract

We present new results for the performance of Taylor rules in a New Keynesian model with heterogeneous expectations. Agents have either rational or adaptive expectations. We find that depending on the particular rule, expectational heterogeneity can create or increase the set of policies that leads to local explosiveness. This is a new level of destabilization compared to what is known. In addition, we demonstrate that policy inertia is an effective tool to safeguard the economy against local explosiveness. Thus, we provide a rationalization for central banks to adjust interest rates with notable inertia in response to shocks.

Keywords

Monetary Policy, Taylor Rules, Heterogeneous Expectations

URL

http://mpra.ub.uni-muenchen.de/31004/1/MPRA_paper_31004.pdf

Record ID

150     [ Page 18 of 23, No. 18 ]

Date

2010-12

Author

Mark Gertler

Affiliation

NYU

Title

Banking Crises and Real Activity: Identifying the Linkages

Summary /
Abstract

I interpret some key aspects of the recent crisis through the lens of macroeconomic modeling of financial factors.

Keywords

Banking crises, financial frictions, real economic activity

URL

http://www.ijcb.org/journal/ijcb10q4a6.pdf

Record ID

149     [ Page 18 of 23, No. 19 ]

Date

2010-05

Author

Luis Catão and Adrian Pagan

Affiliation

IADB, IMF and University of Technology, Sydney and Queensland University of Technology

Title

The Credit Channel and Monetary Transmission in Brazil and Chile: A Structural VAR Approach

Summary /
Abstract

We use an expectation-augmented SVAR representation of an open economy New Keynesian model to study monetary transmission in Brazil and Chile. The underlying structural model incorporates key structural features of Emerging Market economies, notably the role of a bank-credit channel. We find that interest rate changes have swifter effects on output and inflation in both countries compared to advanced economies and that exchange rate dynamics plays an important role in monetary transmission, as currency movements are highly responsive to changes in policy-controlled interest rates. We also find the typical size of credit shocks to have large effects on output and inflation in the two economies, being stronger in Chile where bank penetration is higher.

Keywords

Credit channel, SVAR, DSGE, EMEs

URL

http://d.repec.org/n?u=RePEc:chb:bcchwp:579&r=ban

Record ID

148     [ Page 18 of 23, No. 20 ]

Date

2011-05

Author

Laurence Ball and Sandeep Mazumder

Affiliation

Johns Hopkins University and Wake Forest University

Title

Inflation Dynamics and the Great Recession

Summary /
Abstract

This paper examines inflation dynamics in the Unites States since 1960, with a particular focus on the Great Recession. A puzzle emerges when Phillips curves estimated over 1960- 2007 are used to predict inflation over 2008-2010: inflation should have fallen by more than it did. We resolve this puzzle with two modifications of the Phillips curve, both suggested by theories of costly price adjustment: we measure core inflation with the median CPI inflation rate, and we allow the slope of the Phillips curve to change with the level and variance of inflation. We then examine the hypothesis of anchored inflation expectations. We find that expectations have been fully "shock-anchored" since the 1980s, while "level anchoring" has been gradual and partial, but significant. It is not clear whether expectations are sufficiently anchored to prevent deflation over the next few years. Finally, we show that the Great Recession provides fresh evidence against the New Keynesian Phillips curve with rational expectations.

Keywords

Inflation; Phillips curve; Great Recession.

URL

http://d.repec.org/n?u=RePEc:jhu:papers:580&r=mon

Record ID

147     [ Page 18 of 23, No. 21 ]

Date

2011-03

Author

Daniel Sámano Peñaloza

Affiliation

Banco de Mexico

Title

In the quest of macroprudential policy tools

Summary /
Abstract

The global fnancial crisis of late 2008 could not have provided more convincing evidence that price stability is not a sufficient condition for financial stability. In order to attain both, central banks must develop macroprudential instruments in order to prevent the occurrence of systemic risk episodes. For this reason testing the effectiveness of different macroprudential tools and their interaction with monetary policy is crucial. In this paper we explore whether two policy instruments, namely, a capital adequacy ratio (CAR) rule in combination with a Taylor rule may provide a better macroeconomic outcome than a Taylor rule alone. We conduct our analysis by appending a macroeconometric financial block to an otherwise standard semistructural small open economy neokeynesian model for policy analysis estimated for the Mexican economy. Our results show that with the inclusion of the second policy instrument the central bank can obtain substantial gains. Moreover, we find that when the CAR rule is adequately designed the central authority can mitigate output gap shocks of twice the variance than the Taylor rule alone scenario. Thus, under this two rule case the central authority can isolate financial shocks and dampen their e¤ects over macroeconomic variables.

Keywords

Macroprudential policy, monetary policy, CAR, Taylor rule

URL

http://mpra.ub.uni-muenchen.de/30738/1/MPRA_paper_30738.pdf

Record ID

146     [ Page 18 of 23, No. 22 ]

Date

2011-04

Author

Otmar Issing

Affiliation

President, Center for Financial Studies and Chairman of the Advisory Board of the House of Finance, Goethe University Frankfurt.

Title

Lessons for Monetary Policy: What Should the Consensus Be?

Summary /
Abstract

This paper outlines important lessons for monetary policy. In particular, the role of inflation targeting, which was much acclaimed prior to the financial crisis and since then has not lost much of its endorsement, is critically reviewed. Ignoring the relation between monetary policy and asset prices, as is the case in this monetary policy approach, can lead to financial instability. In contrast, giving, inter alia, monetary factors a role in central banks’ policy decisions, as is done in the ECB’s encompassing approach, helps prevent these potentially harmful side effects and thus allows for fostering financial stability. Finally, this paper makes a case against increasing the central banks’ inflation target.

Keywords

Inflation targeting, asset prices, financial stability, ECB

URL

http://d.repec.org/n?u=RePEc:imf:imfwpa:11/97&r=mon

Record ID

145     [ Page 18 of 23, No. 23 ]

Date

2011-04

Author

Jagjit S. Chadha and Luisa Corrado

Affiliation

University of Kent

Title

Macro-prudential Policy on Liquidity: What does a DSGE Model tell us?

Summary /
Abstract

The financial crisis has led to the development of an active debate on the use of macro-prudential instruments for regulating the banking system, in particular for liquidity and capital holdings. Within the context of a micro-founded macroeconomic model, we allow commercial banks to choose their optimal mix of assets, apportioning these either to reserves or private sector loans. We examine the implications for quantities, relative non-financial and financial prices from standard macroeconomic shocks alongside shocks to the expected liquidity of banks and to the efficiency of the banking sector. We focus on the response by the monetary sector, in particular the optimal reserve-deposit ratio adopted by commercial banks over the business cycle. Overall we find some rationale for Basel III in providing commercial banks with an incentive to hold a greater stock of liquid assets, such as reserves, but also to provide incentives to increase the cyclical variation in reserves holdings as this acts to limit excessive procyclicality of lending to the private sector.

Keywords

Liquidity, interest on reserves, policy instruments, Basel

URL

http://d.repec.org/n?u=RePEc:ukc:ukcedp:1108&r=mon

Record ID

144     [ Page 18 of 23, No. 24 ]

Date

2011-01

Author

Evren Caglar, Jagjit S. Chadha, Jack Meaning, James Warren and Alex Waters

Affiliation

University of Kent

Title

Non-Conventional Monetary Policies: QE and the DSGE literature

Summary /
Abstract

At the zero lower bound, the scale and scope of non-conventional monetary policies have become the key decision variables for monetary policy makers. In the UK, quantitative easing has involved the creation of a fund to purchase medium term dated government bonds with borrowed central bank reserves and so has increased the liquidity of the non-bank financial sector and temporarily eased the budget constraint of HMT. Some of these reserves have been used to increase the extent of capital held by banks and there have also been direct injections of capital into the banking system. We assess some of the issues arising from the three policies by using three separate DSGE models, which take seriously the role of financial frictions. We find that it is possible to correct the effects of a lower zero bound in DSGE models, by (i) offsetting the liquidity premium embedded in long term bonds and/or (ii) adopting countercyclical subsidies to bank capital able and/or (iii) the creation of central bank reserves that reduce the costs of loan supply. But the correct quantitative response and ongoing interaction with standard monetary policy remains an open question.

Keywords

Zero bound, open-market operations, quantitative easing, monetary policy

URL

http://d.repec.org/n?u=RePEc:ukc:ukcedp:1110&r=mon

Record ID

143     [ Page 18 of 23, No. 25 ]

Date

2011-01

Author

Jagjit S. Chadha and Sean Holly

Affiliation

University of Kent

Title

New Instruments of Monetary Policy

Summary /
Abstract

We assess recent developments in monetary policy practice following the financial crisis drawing on papers from a specially convened conference in March 2010. In particular, we consider why central banks throughout the world have injected substantial quantities of liquidity into the financial system and seen their balance sheets expand to multiples of GDP. We outline the rationale for balance sheet operations: (i) portfolio balance of the non-bank financial sector; (ii) an offset for the zero bound; (iii) signalling mechanism about medium term inflation expectations and (iv) the alleviation of the government's budget constraint. We briefly outline the recent experience with QE and draw a distinction between liquidity and macroeconomic stabilisation operations.

Keywords

Zero bound, open-market operations, quantitative easing, monetary policy

URL

http://d.repec.org/n?u=RePEc:ukc:ukcedp:1109&r=mon

Record ID

142     [ Page 18 of 23, No. 26 ]

Date

2011-05

Author

Arbatli, Elif C ; Moriyama, Kenji

Affiliation

Middle East and Central Asia Department, IMF

Title

Estimating a Small Open-Economy Model for Egypt: Spillovers, Inflation Dynamics, and Implications for Monetary Policy

Summary /
Abstract

This paper estimates a small open economy model for Egypt to analyze inflation, output dynamics and monetary policy during 2005-2010. The interest rate channel is found to be relatively weak in Egypt, complicating the use of interest rates as the immediate target of monetary policy. However, the paper also finds a significant level of persistence in the policy rate, making monetary policy pro-cyclical. More active use of interest rate policy, measures to improve domestic debt markets and a gradual move towards inflation targeting can help support a successful disinflation strategy for Egypt.

Keywords

Small open economy model, monetary policy, transmission mechanism

URL

http://www.imf.org/external/pubs/ft/wp/2011/wp11108.pdf

Record ID

141     [ Page 18 of 23, No. 27 ]

Date

2011-05

Author

Roger, Scott ; Vlcek, Jan

Affiliation

Money and Capital Markets Department, IMF

Title

Macroeconomic Costs of Higher Bank Capital and Liquidity Requirements

Summary /
Abstract

This paper uses a DSGE model with banks and financial frictions in credit markets to assess the medium-term macroeconomic costs of increasing capital and liquidity requirements. The analysis indicates that the macroeconomic costs of such measures are sensitive to the length of the implementation period as well as to the adjustment strategy used by banks, and the scope for monetary policy to respond to the regulatory changes.

Keywords

Capital and liquidity requirements, financial frictions, macro-financial linkages

URL

http://www.imf.org/external/pubs/ft/wp/2011/wp11103.pdf

Record ID

140     [ Page 18 of 23, No. 28 ]

Date

2011-04

Author

Issing, Otmar

Affiliation

Research Department, IMF

Title

Lessons for Monetary Policy: What Should the Consensus Be?

Summary /
Abstract

This paper outlines important lessons for monetary policy. In particular, the role of inflation targeting, which was much acclaimed prior to the financial crisis and since then has not lost much of its endorsement, is critically reviewed. Ignoring the relation between monetary policy and asset prices, as is the case in this monetary policy approach, can lead to financial instability. In contrast, giving, inter alia, monetary factors a role in central banks’ policy decisions, as is done in the ECB’s encompassing approach, helps prevent these potentially harmful side effects and thus allows for fostering financial stability. Finally, this paper makes a case against increasing the central banks’ inflation target.

Keywords

Inflation targeting, asset prices, financial stability, ECB

URL

http://www.imf.org/external/pubs/ft/wp/2011/wp1197.pdf

Record ID

139     [ Page 18 of 23, No. 29 ]

Date

2011-04

Author

Baldacci, Emanuele ; McHugh, James ; Petrova, Iva

Affiliation

Fiscal Affairs Department, IMF

Title

Measuring Fiscal Vulnerability and Fiscal Stress: A Proposed Set of Indicators

Summary /
Abstract

This paper proposes a set of fiscal indicators to assess rollover risks using the conceptual framework developed by Cottarelli (2011). These indicators provide early warning signals about the manifestation of these risks, giving policymakers the opportunity to adjust policies before extreme fiscal stress events. Two aggregate indices are calculated: an index of fiscal vulnerability and an index of fiscal stress. Results show that both indices are elevated for advanced economies, reflecting unfavorable medium-term debt dynamics and aging-related spending pressures. In emerging economies, solvency risks are lower, but the composition of public debt remains a source of risk and the fiscal position is weaker than before the crisis.

Keywords

Fiscal vulnerability, fiscal stress, fiscal indicators

URL

http://www.imf.org/external/pubs/ft/wp/2011/wp1194.pdf

Record ID

138     [ Page 18 of 23, No. 30 ]

Date

2010-03

Author

Carlos Montoro

Affiliation

BIS

Title

Oil shocks and optimal monetary policy

Summary /
Abstract

In practice, central banks have been confronted with a trade-off between stabilising inflation and output when dealing with rising oil prices. This contrasts with the result in the standard New Keynesian model that ensuring complete price stability is the optimal thing to do, even when an oil shock leads to large output drops. To reconcile this apparent contradiction, this paper investigates how monetary policy should react to oil shocks in a microfounded model with staggered price-setting and with oil as an input in a CES production function. In particular, we extend Benigno and Woodford (2005) to obtain a second order approximation to the expected utility of the representative household when the steady state is distorted and the economy is hit by oil price shocks. The main result is that oil price shocks generate an endogenous trade-off between inflation and output stabilisation when oil has low substitutability in production. Therefore, it becomes optimal for the monetary authority to stabilise partially the effects of oil shocks on inflation and some inflation is desirable. We also find, in contrast to Benigno and Woodford (2005), that this trade-of is reduced, but not eliminated, when we get rid of the effects of monopolistic distortions in the steady state. Moreover, the size of the endogenous “cost-push” shock generated by fluctuations in the oil price increases when oil is more difficult to substitute by other factors.

Keywords

Optimal Monetary Policy, Welfare, Second Order Solution, Oil Price Shocks, Endogenous Trade-off

URL

http://www.bis.org/publ/work307.pdf