Record ID

477     [ Page 22 of 68, No. 1 ]

Date

2014-02

Author

Ahmet Faruk Aysan, Salih Fendoglu, and Mustafa Kilinc

Affiliation

Central Bank of Turkey

Title

Macroprudential Policies as Buffer Against Volatile Cross-border Capital Flows

Summary /
Abstract

This paper investigates the effectiveness of macroprudential policies introduced by Turkey in late 2010. The unprecedented quantitative easing policies of advanced countries after the global financial crisis have presented serious financial stability concerns for most emerging countries including Turkey. To cope with these challenges, Turkey has devised new policy tools such as asymmetric interest rate corridor and reserve option mechanism. From the perspective of capital flows, the interest rate corridor works mainly through stabilizing supply of foreign funds, and the reserve option mechanism through decreasing the sensitivity of equilibrium exchange rate to shifts in the demand for foreign funds. Using a large panel of 46 countries and employing Bruno and Shin (2013a,b)’s methodology, we investigate whether the new policy framework in Turkey has been successful in cushioning the economy from volatile cross-border capital flows from a comparative perspective. The results show that, after controlling for a set of domestic and external variables and relative to a group of advanced and emerging countries, cross-border capital flows to Turkey have been less sensitive to global factors after the implementation of macroprudential policies.

Keywords

Capital Flows, Macroprudential Policies

URL

http://www.tcmb.gov.tr/research/discus/2014/WP1404.pdf

Record ID

476     [ Page 22 of 68, No. 2 ]

Date

2014-02

Author

Davis, Scott and Presno, Ignacio

Affiliation

Federal Reserve Bank of Dallas and Federal Reserve Bank of Boston

Title

Capital controls as an instrument of monetary policy

Summary /
Abstract

Large swings in capital flows into and out of emerging markets can potentially lead to excessive volatility in asset prices and credit supply. In order to lessen the impact of capital flows on financial instability, a number of researchers and policy markers have recently proposed the use of capital controls. This paper considers the benefit of adding capital controls as a potential instrument of monetary policy in a small open economy. In a DSGE framework, we find that when domestic agents are subject to collateral constraints and the value of collateral is subject to fluctuations driven by foreign capital inflows and outflows, the adoption of temporary capital controls can lead to a significant welfare improvement. The benefits of capital controls are present even when monetary policy is determined optimally, implying that there may be a role for capital controls to exist side-by-side with conventional monetary tools as an instrument of monetary policy.

Keywords

Capital controls, capital flows, DSGE, monetary policy instrument

URL

http://www.dallasfed.org/assets/documents/institute/wpapers/2014/0171.pdf

Record ID

475     [ Page 22 of 68, No. 3 ]

Date

2014-02

Author

Ahmet Faruk Aysan, Salih Fendoğlu, and Mustafa Kılınç

Affiliation

Central Bank of the Republic of Turkey

Title

Managing Short-Term Capital Flows in New Central Banking: Unconventional Monetary Policy Framework in Turkey

Summary /
Abstract

During the global financial crisis of 2008-2009, both advanced and emerging countries have implemented significant easing policies on monetary and fiscal fronts. Yet, the recovery, especially in advanced countries, was not as quick or strong as expected. These quantitative easing policies, coupled with weak recovery and restricted fiscal positions, have created not only abundant but also excessively volatile global liquidity conditions, leading to short-term and excessively volatile capital flows to emerging markets. To contain potential risks due to such flows, emerging countries have augmented their existing policy frameworks. Central Bank of the Republic of Turkey (CBRT), for example, has introduced two new policy tools in its new monetary policy framework: the asymmetric interest rate corridor and the reserve option mechanism. From a capital flows perspective, the interest rate corridor helps smooth fluctuations in supply of foreign funds, whereas the reserve option mechanism helps contain movements in demand for foreign funds. Both policies have been actively used by the CBRT and appeared to be effective in containing financial stability risks stemming from excessively volatile capital flows.

Keywords

Capital flows, macroprudential policies, central banking.

URL

http://www.tcmb.gov.tr/research/discus/2014/WP1403.pdf

Record ID

474     [ Page 22 of 68, No. 4 ]

Date

2014-02

Author

Mauro Napoletano, Andrea Roventini, Giovanni Dosi, Giorgio Fagiolo and Tania Treibich

Affiliation

OFCE, SKEMA Business School, Scuola Superiore Sant’Anna; Università di Verona, Scuola Superiore Sant’Anna, OFCE; Scuola Superiore Sant’Anna; Scuola Superiore Sant’Anna; and Maastricht University, Scuola Superiore Sant’Anna, and GREDEG-CNRS University of Nice-Sophia Antipolis

Title

Fiscal and monetary policies in complex evolving economies

Summary /
Abstract

In this paper we explore the effects of alternative combinations of fiscal and monetary policies under different income distribution regimes. In particular, we aim at evaluating fiscal rules in economies subject to banking crises and deep recessions. We do so using an agent-based model populated by heterogeneous capital- and consumption-good forms, heterogeneous banks, workers/consumers, a Central Bank and a Government. We show that the model is able to reproduce a wide array of macro and micro empirical regularities, including stylised facts concerning financial dynamics and banking crises. Simulation results suggest that the most appropriate policy mix to stabilise the economy requires unconstrained counter-cyclical fiscal policies, where automatic stabilisers are free to dampen business cycles fluctuations, and a monetary policy targeting also employment. Instead, discipline-guided" fiscal rules such as the Stability and Growth Pact or the Fiscal Compact in the Eurozone always depress the economy, without improving public finances, even when escape clauses in case of recessions are considered. Consequently, austerity policies appear to be in general self-defeating. Furthermore, we show that the negative effects of austere fiscal rules are magnified by conservative monetary policies focused on inflation stabilisation only. Finally, the effects of monetary and fiscal policies become sharper as the level of income inequality increases.

Keywords

Agent based model; fiscal policy; monetary policy; banking crises; income inequality; austerity policies; disequilibrium dynamics

URL

http://spire.sciences-po.fr/hdl:/2441/f6h8764enu2lskk9p6go0e900/resources/wp2014-05.pdf

Record ID

473     [ Page 22 of 68, No. 5 ]

Date

2014-02

Author

Zied Ftiti and Walid Hichri

Affiliation

IPAG Business School 75006 Paris, France

Title

The Price Stability Under Inflation Targeting Regime : An Analysis With a New Intermediate Approach

Summary /
Abstract

This paper analyzes the relevance of the inflation targeting (IT) policy in achieving its primary goal of medium-term price stability. Contrary to previous studies, we propose, in this work, a new approach; an intermediate approach that consists in conducting a time-series analysis (employed in the literature under unilateral cases-absolute approach-) with a comparison of inflation performance of IT countries and those of non-IT countries (comparison made in literature under the relative approach). Empirically, we employ a frequency analysis based on evolutionary spectral theory of Priestley (1965-1996) in order to distinguish between different inflation horizons; short-run and the medium-run inflation rate. To check the stability of spectral density functions for inflation series for each country under studied frequencies, we apply a Bai and Perron (2003a, b) test. Our results show that after IT framework implementation, there is no break point in inflation series in short and medium terms. This result is not verified for non-IT countries. Therefore, IT is more relevant in achieving price stability and consequently more effective on inflation expectation anchoring than other monetary policies.

Keywords

Inflation Targeting, Inflation Stability, Structural Change, Evolutionary Spectral Analysis, intermediate approach

Record ID

472     [ Page 22 of 68, No. 6 ]

Date

2014-02

Author

Angel Ubide

Affiliation

Peterson Institute for International Economics

Title

Is the European Central Bank Failing Its Price Stability Mandate?

Summary /
Abstract

Inflation in the euro area is too low, and the European Central Bank (ECB) is at risk of missing its price stability mandate. With the market forecasting average inflation in the euro area over the next five years in the 1.25 to 1.5 percent range, the ECB must prepare to act forcefully to push inflation higher. The ECB should (1) update the definition of price stability as inflation at 2 percent over 2 to 3 years to eliminate the ambiguity over the inflation objective; (2) reduce risk premia in the yield curve via a program of quantitative easing, making clear that this is a monetary policy operation—and thus legal under the Maastricht Treaty; and (3) ease the quantitative credit shortages to small and medium enterprises (SMEs) via a well-designed lending program, offering long-term funds at the policy rate to banks who lend to SMEs. These actions would restore price stability and encourage sustainable growth.

Keywords

Price stability, target inflation, quantitative easing, risk premia, yield curve, monetary policy, growth

URL

http://www.piie.com/publications/pb/pb14-5.pdf

Record ID

471     [ Page 22 of 68, No. 7 ]

Date

2014-02

Author

Olivier Jeanne

Affiliation

Johns Hopkins University, Peterson Institute for International Economics, NBER and CEPR

Title

Macroprudential Policies in a Global Perspective

Summary /
Abstract

This paper analyzes the case for the international coordination of macroprudential policies in the context of a simple theoretical framework. Both domestic macroprudential policies and prudential capital controls have international spillovers through their impact on capital flows. The uncoordinated use of macroprudential policies may lead to a "capital war" that depresses global interest rates. International coordination of macroprudential policies is not warranted, however, unless there is unemployment in some countries. There is scope for Pareto-improving international policy coordination when one part of the world is in a liquidity trap while the rest of the world accumulates reserves for prudential reasons.

Keywords

Macroprudential Policy, Capital Flows, Capital Controls, International Reserves, International Coordination, Liquidity Trap

URL

http://www.imes.boj.or.jp/research/papers/english/14-E-01.pdf

Record ID

470     [ Page 22 of 68, No. 8 ]

Date

2014-02

Author

Andreas Hoffmann

Affiliation

University of Leipzig, Institute for Economic Policy

Title

Zero-Interest Rate Policy and Unintended Consequences in Emerging Markets

Summary /
Abstract

Since 2009, central banks in the major advanced economies have held interest rates at very low levels to stabilize financial markets and support the recovery of their economies. Based on a Mises-Hayek-BIS view on credit booms and Mises’ law of unintended consequences, this paper suggests that the prolonged period of very low interest rates in the large advanced economies (unintentionally) spurs volatile capital flows and fuels asset market bubbles in fast-growing emerging markets. The resulting inflationary pressure and risks of capital flow reversals gives rise to a new wave of interventionism as policymakers in emerging markets increasingly reintroduce financially repressive measures to isolate the economies from foreign capital inflows.

Keywords

Monetary Policy, Emerging Markets, Financial Repression

URL

http://www.icer.it/docs/wp2014/ICERwp02-14.pdf

Record ID

469     [ Page 22 of 68, No. 9 ]

Date

2014-01

Author

Bang Nam Jeon and Ji Wu

Affiliation

The Role of Foreign Banks in Monetary Policy Transmission: Evidence from Asia during the Crisis of 2008-9 Date: 2014-01 Drexel University and Hong Kong Institute for Monetary Research, and Southwestern University of Finance and Economics

Title

The Role of Foreign Banks in Monetary Policy Transmission: Evidence from Asia during the Crisis of 2008-9

Summary /
Abstract

Since the 1997-8 Asian financial crisis, the level of foreign bank penetration has increased steadily in Asian banking markets. This paper examines the impact of foreign banks on the monetary policy transmission mechanism in emerging Asian economies during the period from 2000 to 2009, with a specific focus on the global financial crisis of 2008-9. We present consistent evidence that, on the whole, an increase in foreign bank penetration weakened the effectiveness of the monetary policy transmission mechanism in the host emerging Asian countries during crisis periods. We also investigate various conditions and environments, including the type of monetary policy shocks, the severity of shocks upon parent banks in global crisis, the dependence of parent banks on the wholesale funding market, the country of origin of foreign banks, and entry modes, under which the effectiveness of monetary policy transmission is reduced more severely due to the increasing presence of foreign banks in the emerging Asian banking markets.

Keywords

Foreign Bank Penetration, Monetary Policy Transmission, Asian Banking

URL

http://motu-www.motu.org.nz/wpapers/14_02.pdf

Record ID

468     [ Page 22 of 68, No. 10 ]

Date

2014-02

Author

Arthur Grimes

Affiliation

Motu Economic and Public Policy Research and the University of Auckland

Title

Four Lectures on Central Banking

Summary /
Abstract

These four lectures on central banking topics were presented in London between September and December 2013. The lectures were delivered as part of Arthur Grimes’ NZ-UK Link Foundation Visiting Professorship, based at the University of London’s School of Advanced Study. They followed his stepping down as Chair of the Reserve Bank of New Zealand in September 2013 after ten years in that role. The four lecture topics (and the institution at which they were delivered) are: Inflation Targeting: 25 Years’ Experience of the Pioneer (Bank of England); A Floating Exchange Rate is the Worst Exchange Rate Regime (except for all the others that have been tried) (University College London); How Prudent are Macroprudential Policies? (London School of Economics); Responsibility and Accountability in the Financial Sector (Institute of Advanced Legal Studies). A key theme across all four lectures is the importance of ensuring that central bank policies and actions are time consistent. Time consistency requires that a central bank can commit to implementing the policies that it says it will implement. For instance, if a central bank commits to delivering low inflation, it will not use its powers to deliver other goals at the expense of low inflation. Similarly, if it commits not to bail out banks in the event of failure, then it (and other official bodies) will not bail out a failed bank.

Keywords

Central banking; inflation targeting; exchange rate systems; macroprudential policy; microprudential policy

URL

http://motu-www.motu.org.nz/wpapers/14_02.pdf