Record ID

237     [ Page 23 of 34, No. 1 ]

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 23 of 34, No. 2 ]

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 23 of 34, No. 3 ]

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 23 of 34, No. 4 ]

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 23 of 34, No. 5 ]

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 23 of 34, No. 6 ]

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 23 of 34, No. 7 ]

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 23 of 34, No. 8 ]

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 23 of 34, No. 9 ]

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 23 of 34, No. 10 ]

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

Record ID

227     [ Page 23 of 34, No. 11 ]

Date

2012-05

Author

Richard P.C. Brown and Fabrizio Carmignani

Affiliation

School of Economics, The University of Queensland

Title

Revisiting the effects of remittances on bank credit: a macro perspective

Summary /
Abstract

We investigate the effect of remittances on bank credit in developing countries. Understanding this link is important in view of the growing relevance of remittances as a source of external finance and of the beneficial impact that financial intermediation is likely to have on economic growth. Using a simple theoretical formalization, we predict the relationship to be U-shaped. We test this prediction using panel data for a large group of developing and emerging economies over the period 1960-2009. The empirical results suggest that at initially low levels of remittances, an increase in remittances reduces the volume of credit extended by banks. However, at sufficiently high levels of remittances, the effect becomes positive. The turning point of the relationship occurs at a level of remittances of about 2.5% of GDP.

Keywords

Bank credit, remittances, panel data, financial development

URL

http://d.repec.org/n?u=RePEc:qld:uq2004:461&r=cba

Record ID

226     [ Page 23 of 34, No. 12 ]

Date

2012-04

Author

Luis Fernando Melo and Rubén Albeiro Loaiza Maya

Affiliation

Bank of the Republic of Colombia

Title

Bayesian Forecast Combination for Inflation Using Rolling Windows: An Emerging Country Case

Summary /
Abstract

Typically, when forecasting inflation rates, there are a variety of individual models and a combination of several of these models. We implement a Bayesian shrinkage combination methodology to include information that is not captured by the individual models using expert forecasts as prior information. To take into account two common characteristics in emerging countries’ economies, possible parameter instabilities and non-stationary dynamics, we use a rolling estimation windows technique for series integrated of order one. The empirical results of Colombian inflation show that the Bayesian forecast combination model outperforms the individual models and the random walk predictions for every evaluated forecast horizon. Moreover, these results outperform shrinkage forecasts that consider other priors as equal or zero weights.

Keywords

Forecast combination, shrinkage, expert forecasts, rolling window estimation, inflation forecasts.

URL

http://d.repec.org/n?u=RePEc:col:000094:009511&r=cba

Record ID

225     [ Page 23 of 34, No. 13 ]

Date

2012-05

Author

Opoku-Afari, Maxwell and Dixit, Shiv

Affiliation

African Department, IMF

Title

Tracking Short-Term Dynamics of Economic Activity in Low-Income Countries in the Absence of High-Frequency GDP Data

Summary /
Abstract

This paper uses a set of routinely collected high-frequency data in low-income countries (LICs) to construct an aggregate and a comprehensive index of economic activity which could serve (i) as a measure of the direction of economic activity; and (ii) as a useful input in analyzing contemporaneous real sector performance in LICs in the absence of high-frequency, and often outdated, GDP data. It could also serve as a useful tool for policymakers to gauge short-term dynamics of economic activity and shape appropriate and timely policy responses.

Keywords

Short-Term Dynamics, Economic Activity, GDP

URL

http://www.imf.org/external/pubs/ft/wp/2012/wp12119.pdf

Record ID

224     [ Page 23 of 34, No. 14 ]

Date

2012-04

Author

Caglayan, Mustafa; Jehan, Zainab; and Mouratidis, Kostas

Affiliation

University of Sheffield

Title

Asymmetric monetary policy rules for open economies: Evidence from four countries

Summary /
Abstract

This study presents an analytical framework to examine the policy reaction function of a central bank in an open economy context while allowing for asymmetric preferences. The paper then empirically examines the policy rule obtained from this framework using quarterly data for the US, Canada, Japan, and the UK. The results, based on GMM approach, provide evidence that domestic policy is affected by changes in the foreign interest rate and exchange rate. We also provide evidence of the presence of asymmetries in response to the inflation rate and output gap for all the sample countries.

Keywords

Monetary policy rule; asymmetric preferences; open economy

URL

http://mpra.ub.uni-muenchen.de/37401/1/MPRA_paper_37401.pdf

Record ID

223     [ Page 23 of 34, No. 15 ]

Date

2012-02

Author

In Choi and Seong Jin Hwang

Affiliation

Department of Economics, Sogang University, Seoul

Title

Forecasting Korean inflation

Summary /
Abstract

This paper studies the performance of various forecasting models for Ko- rean inflation rates. The models studied in this paper are the AR(p) model, the dynamic predictive regression model with such exogenous variables as the unemployment rate and the term spread, the inflation target model, the random walk model, and the dynamic predictive regression model using estimated factors along with the unemployment rate and the term spread. The sampling period studied in this paper is 2000M11-2011M06. Among the studied models, the dynamic predictive regression model using estimated factors along with the unemployment rate and the term spread tends to perform best at the 6-month horizon when the factors are extracted from I(0) series and the variables for the factor extraction are selected by the criterion of the correlation of each variable with the inflation rate. The dynamic predictive regression models with the unemployment rate and the term spread also work well at shorter horizons.

Keywords

Inflation forecasting, Phillips curve, term spread, factor model, principal-component estimation, generalized principal-component estimation

URL

http://d.repec.org/n?u=RePEc:sgo:wpaper:1202&r=mon

Record ID

222     [ Page 23 of 34, No. 16 ]

Date

2012-04

Author

Chen, Jiaqian and Imam, Patrick A.

Affiliation

Money and Capital Markets Department, IMF

Title

Consequences of Asset Shortages in Emerging Markets

Summary /
Abstract

We assess econometrically the impact of asset shortages on economic growth, asset bubbles, the probability of a crisis, and the current account for a group of 41 Emerging markets for 1995-2008. The econometric estimations confirm that asset shortages pose a serious danger to EMs in terms of reducing economic growth, raising the probability of a crisis, and leading to asset price bubbles. Moreover, asset shortages can also explain the current account positions of EMs. The findings suggest that the consequences of asset shortages for macroeconomic stability are significant, and must be tackled urgently. We conclude with policy implications.

Keywords

Asset Shortage, Emerging Market, Crisis, Current Account, Asset Bubble

URL

http://www.imf.org/external/pubs/ft/wp/2012/wp12102.pdf

Record ID

221     [ Page 23 of 34, No. 17 ]

Date

2011-09

Author

Jurgen von Hagen and Haiping Zhang

Affiliation

University of Bonn, Indiana University and CEPR, and School of Economics, Singapore Management University

Title

International Capital Flows with Limited Commitment and Incomplete Markets

Summary /
Abstract

Recent literature has proposed two alternative types of financial frictions, i.e., limited commitment and incomplete markets, to explain the patterns of international capital flows between developed and developing countries observed in the past two decades. This paper integrates both types of frictions into a two-country overlapping-generations framework to facilitate a direct comparison of their effects. In our model, limited commitment distorts the investment made by agents with different productivity, which creates a wedge between the interest rates on equity capital vs. credit capital; while incomplete markets distort the investment among projects with different riskiness, which creates a wedge between the risk-free rate and the mean rate of return to risky capital. We show that the two approaches are observationally equivalent with respect to their implications for international capital flows, production efficiency, and aggregate output.

Keywords

Financial development, financial frictions, foreign direct investment, incomplete markets, limited commitment, international capital flows

URL

http://d.repec.org/n?u=RePEc:siu:wpaper:10-2012&r=cba

Record ID

220     [ Page 23 of 34, No. 18 ]

Date

2012-02

Author

Frédérique Bec and Songlin Zeng

Affiliation

THEMA - Théorie économique, modélisation et applications - CNRS : UMR8184 - Université de Cergy Pontoise

Title

Are Southeast Asian Real Exchange Rates Mean Reverting?

Summary /
Abstract

Since the late nineties, both theoretical and empirical analysis devoted to the real exchange rate suggest that their dynamics might be well approximated by nonlinear models. This paper examines this possibility for post-1970 monthly ASEAN-5 data, extending the existing research in two directions. First, we use recently developed unit root tests which allow for more flexible nonlinear stationary models under the alternative than the commonly used Self-Exciting Threshold or Exponantial Smooth Transition AutoRegressions. Second, while different nonlinear models survive the mis-specification tests, a Monte Carlo experiment from generalized impulse response functions is used to compare their relative relevance. Our results i) support the nonlinear mean-reverting hypothesis, and hence the Purchasing Power Parity, in most of the ASEAN-5 countries and ii) point to the Multiple Regime-Logistic Smooth Transition and the Exponantial Smooth Transition AutoRegression models as the most likely data generating processes of these real exchange rates.

Keywords

Purchasing Power Parity; Nonlinear ThresholdModels; Southeast Asian Real Exchange Rates

URL

http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00685812&r=cba

Record ID

219     [ Page 23 of 34, No. 19 ]

Date

2012-04

Author

Glocker, Ch. and Towbin P.

Affiliation

Austrian Institute of Economic Research and Banque de France

Title

The Macroeconomic Effects of Reserve Requirements

Summary /
Abstract

Monetary authorities in emerging markets are often reluctant to raise interest rates when dealing with credit booms driven by capital inflows, as they fear that an increase attracts even more capital and appreciates the currency. A number of countries therefore use reserve requirements as an additional policy instrument. The present study provides evidence on their macroeconomic effects. We estimate a vector autoregressive (VAR) model for the Brazilian economy and identify interest rate and reserve requirement shocks. For both instruments a discretionary tightening leads to a decline in domestic credit. We find, however, very different effects for other macroeconomic aggregates. In contrast to interest rate policy, a positive reserve requirement shock leads to an exchange rate depreciation and an improvement in the current account, but also to an increase in prices. The results suggest that reserve requirement policy can complement interest rate policy in pursuing a financial stability objective, but cannot be its substitute with regards to a price stability objective.

Keywords

Reserve Requirements, Capital flows, Monetary Policy, Business Cycle

URL

http://d.repec.org/n?u=RePEc:bfr:banfra:374&r=cba

Record ID

218     [ Page 23 of 34, No. 20 ]

Date

2012-03

Author

Goodhart, Ch. A. E., Kashyap, A. K., Tsomocos, D. P., and Vardoulakis, A. P.

Affiliation

London School of Economics, Federal Reserve Bank of Chicago, Oxford University, and Banque de France

Title

Financial Regulation in General Equilibrium

Summary /
Abstract

This paper explores how different types of financial regulation could combat many of the phenomena that were observed in the financial crisis of 2007 to 2009. The primary contribution is the introduction of a model that includes both a banking system and a “shadow banking system” that each help households finance their expenditures. Households sometimes choose to default on their loans, and when they do this triggers forced selling by the shadow banks. Because the forced selling comes when net worth of potential buyers is low, the ensuing price dynamics can be described as a fire sale. The proposed framework can assess five different policy options that officials have advocated for combating defaults, credit crunches and fire sales, namely: limits on loan to value ratios, capital requirements for banks, liquidity coverage ratios for banks, dynamic loan loss provisioning for banks, and margin requirements on repurchase agreements used by shadow banks. The paper aims to develop some general intuition about the interactions between the tools and to determine whether they act as complements and substitutes.

Keywords

Price setting, changeover, euro, inflation

URL

http://d.repec.org/n?u=RePEc:bfr:banfra:372&r=cba