Selected Reference and Reading Materials compiled by Dan Villanueva


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Record ID

456     [ Page 24 of 68, No. 1 ]

Date

2013-08

Author

Dennis, Richard

Affiliation

University of Glasgow

Title

Imperfect Credibility and Robust Monetary Policy

Summary /
Abstract

This paper studies the behavior of a central bank that seeks to conduct policy optimally while having imperfect credibility and harboring doubts about its model. Taking the Smets-Wouters model as the central bank.s approximating model, the paper's main findings are as follows. First, a central bank.s credibility can have large consequences for how policy responds to shocks. Second, central banks that have low credibility can bene.t from a desire for robustness because this desire motivates the central bank to follow through on policy announcements that would otherwise not be time-consistent. Third, even relatively small departures from perfect credibility can produce important declines in policy performance. Finally, as a technical contribution, the paper develops a numerical procedure to solve the decision-problem facing an imperfectly credible policymaker that seeks robustness.

Keywords

Imperfect Credibility, Robust Policymaking, Time-consistency

URL

http://repo.sire.ac.uk/bitstream/10943/514/1/media_292453_en.pdf



Record ID

455     [ Page 24 of 68, No. 2 ]

Date

2013-03

Author

Kirsanova, Tatiana; Leith, Campbell; and Chen, Xiaoshan

Affiliation

University of Glasgow, University of Glasgow, and University of Stirling

Title

How Optimal is US Monetary Policy?

Summary /
Abstract

Most of the literature estimating DSGE models for monetary policy analysis assume that policy follows a simple rule. In this paper we allow policy to be described by various forms of optimal policy - commitment, discretion and quasi-commitment. We find that, even after allowing for Markov switching in shock variances, the inflation target and/or rule parameters, the data preferred description of policy is that the US Fed operates under discretion with a marked increase in conservatism after the 1970s. Parameter estimates are similar to those obtained under simple rules, except that the degree of habits is significantly lower and the prevalence of cost-push shocks greater. Moreover, we find that the greatest welfare gains from the ‘Great Moderation’ arose from the reduction in the variances in shocks hitting the economy, rather than increased inflation aversion. However, much of the high inflation of the 1970s could have been avoided had policy makers been able to commit, even without adopting stronger anti-inflation objectives. More recently the Fed appears to have temporarily relaxed policy following the 1987 stock market crash, and has lost, without regaining, its post-Volcker conservatism following the bursting of the dot-com bubble in 2000.

Keywords

Bayesian Estimation, Interest Rate Rules, Optimal Monetary Policy, Great Moderation, Commitment, Discretion

URL

http://repo.sire.ac.uk/bitstream/10943/480/1/SIRE-DP-2013-53.pdf



Record ID

454     [ Page 24 of 68, No. 3 ]

Date

2013-12

Author

John B Taylor

Affiliation

Bank for International Settlements

Title

International monetary policy coordination: past, present and future

Summary /
Abstract

This paper examines two explanations for the recent spate of complaints about cross-border monetary policy spillovers and calls for international monetary policy coordination, a development that contrasts sharply with the monetary system in the 1980s, 1990s and until recently. The first explanation holds that deviations from rules-based policy at several central banks created incentives for other central banks to deviate from such policies. The second explanation either does not see deviations from rules or finds such deviations benign; it characterises recent unusual monetary policies as appropriate, explains the complaints as an adjustment to optimal policies, and downplays concerns about interest rate differentials and capital controls. Going forward, the goal for central banks should be an expanded rulesbased system similar to that of the 1980s and 1990s, which would operate near an international cooperative equilibrium. International monetary policy coordination – at least formal discussions of rules-based policies and the issues reviewed here – would help central banks get such equilibrium.

Keywords

Monetary policy spillovers, unconventional monetary policy, international policy coordination

URL

http://www.bis.org/publ/work437.pdf



Record ID

443     [ Page 24 of 68, No. 4 ]

Date

2013-12

Author

Athanasios Orphanides

Affiliation

Bank for International Settlements

Title

Is monetary policy overburdened?

Summary /
Abstract

Following the experience of the global financial crisis, central banks have been asked to undertake unprecedented responsibilities. Governments and the public appear to have high expectations that monetary policy can provide solutions to problems that do not necessarily fit in the realm of traditional monetary policy. This paper examines three broad public policy goals that may overburden monetary policy: full employment, fiscal sustainability and financial stability. While central banks have a crucial position in public policy, the appropriate policy mix also involves other institutions, and overreliance on monetary policy to achieve these goals is bound to disappoint. Central bank policies that facilitate postponement of needed policy actions by governments may also have longer-term adverse consequences that could outweigh more immediate benefits. Overburdening monetary policy may eventually diminish and compromise the independence and credibility of the central bank, thereby reducing its effectiveness in maintaining price stability and contributing to crisis management.

Keywords

Global financial crisis, monetary policy, real-time output gap, fiscal dominance, financial stability, central bank independence

URL

http://www.bis.org/publ/work435.pdf



Record ID

442     [ Page 24 of 68, No. 5 ]

Date

2013-12

Author

Mark Setterfield

Affiliation

Trinity College

Title

Using Interest Rates as the Instrument of Monetary Policy: Beware Real effects, Positive Feedbacks, and Discontinuities

Summary /
Abstract

This paper discusses central banks’ use of the interest rate as the instrument of monetary policy, in light of a reconsideration of macroeconomic theory induced by the financial crisis and Great Recession. Three main guiding principles for the future conduct of interest rate policy are identified: beware real effects; beware positive feedbacks; and beware discontinuities. The paper also reflects on the use of policy targets as a “quasi-instrument” of stabilization policy.

Keywords

Interest rates, monetary policy, central banking, New Consensus, Post Keynesian Economics

URL

http://internet2.trincoll.edu/repec/WorkingPapers2013/WP13-20.pdf



Record ID

441     [ Page 24 of 68, No. 6 ]

Date

2013-10

Author

Morten L. Bech and Todd Keister

Affiliation

Bank for International Settlements

Title

Liquidity regulation and the implementation of monetary policy

Summary /
Abstract

In addition to revamping existing rules for bank capital, Basel III introduces a new global framework for liquidity regulation. One part of this framework is the liquidity coverage ratio (LCR), which requires banks to hold sufficient high-quality liquid assets to survive a 30-day period of market stress. As monetary policy typically involves targeting the interest rate on loans of one of these assets — central bank reserves — it is important to understand how this regulation may impact the efficacy of central banks’ current operational frameworks. We introduce term funding and an LCR requirement into an otherwise standard model of monetary policy implementation. Our model shows that if banks face the possibility of an LCR shortfall, then the usual link between open market operations and the overnight interest rate changes and the short end of the yield curve becomes steeper. Our results suggest that central banks may want to adjust their operational frameworks as the new regulation is implemented.

Keywords

Basel III, Liquidity regulation, LCR, Reserves, Corridor system, Monetary policy

URL

http://www.bis.org/publ/work432.pdf



Record ID

440     [ Page 24 of 68, No. 7 ]

Date

2013-09

Author

Kara, Gazi

Affiliation

Board of Governors of the Federal Reserve System

Title

Systemic Risk, International Regulation, and the Limits of Coordination

Summary /
Abstract

This paper examines the incentives of national regulators to coordinate regulatory policies in the presence of systemic risk in global financial markets. In a two-country and three-period model, correlated asset fire sales by banks generate systemic risk across national financial markets. Relaxing regulatory standards in one country increases both the cost and the severity of crises for both countries in this framework. In the absence of coordination, independent regulators choose inefficiently low levels of macro-prudential regulation. A central regulator internalizes the systemic risk and thereby can improve the welfare of coordinating countries. Symmetric countries always benefit from coordination. Asymmetric countries choose different levels of macro-prudential regulation when they act independently. Common central regulation will voluntarily emerge only between sufficiently similar countries.

Keywords

Systemic risk; macroprudential regulation; international policy coordination

URL

http://www.federalreserve.gov/pubs/feds/2013/201387/201387pap.pdf



Record ID

439     [ Page 24 of 68, No. 8 ]

Date

2013-12

Author

Philip Lane

Affiliation

Trinity College Dublin

Title

International Capital Flows and Domestic Financial Conditions: Lessons for Emerging Asia

Summary /
Abstract

This paper provides an empirical review of the dynamics of international capital áows, with a focus on emerging Asia. Next, it outlines the various channels by which international capital flows affect domestic financial conditions in the host economies. Finally, it explores the implications for the design of policy frameworks that can deliver macro-financial stability.

Keywords

International capital flows, financial stability, emerging Asia

URL

http://www.tcd.ie/iiis/documents/discussion/pdfs/iiisdp438.pdf



Record ID

438     [ Page 24 of 68, No. 9 ]

Date

2013-10

Author

Dong He and Robert N McCauley

Affiliation

Hong Kong Monetary Authority and Hong Kong Institute for Monetary Research, and Bank for International Settlements

Title

Transmitting Global Liquidity to East Asia: Policy Rates, Bond Yields, Currencies and Dollar Credit

Summary /
Abstract

We review extant work on the transmission of monetary policy, both conventional and unconventional, of the major advanced economies to East Asia through monetary policy reactions, integrated bond markets and induced currency appreciation. We present new results on the growth of foreign currency credit, especially US dollar credit, as a transmission mechanism. Restrained growth of dollar credit in Korea contrasts with very rapid growth on the Chinese mainland and in Hong Kong SAR.

Keywords

Global liquidity, East Asia, policy rates, bond yields, currencies, dollar credit

URL

http://www.hkimr.org/uploads/publication/360/wp-no-15_2013-final-.pdf



Record ID

437     [ Page 24 of 68, No. 10 ]

Date

2013-12

Author

Christensen, Jens H.E. Lopez, Jose A., and Rudebusch, Glenn D.

Affiliation

Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, and Federal Reserve Bank of San Francisco

Title

A probability-based stress test of Federal Reserve assets and income

Summary /
Abstract

To support the economy, the Federal Reserve amassed a large portfolio of long-term bonds. We assess the Fed’s associated interest rate risk — including potential losses to its Treasury securities holdings and declines in remittances to the Treasury. Unlike past examinations of this interest rate risk, we attach probabilities to alternative interest rate scenarios. These probabilities are obtained from a dynamic term structure model that respects the zero lower bound on yields. The resulting probability-based stress test finds that the Fed’s losses are unlikely to be large and remittances are unlikely to exhibit more than a brief cessation.

Keywords

Term structure modeling; zero lower bound; monetary policy; quantitative easing

URL

http://www.frbsf.org/economic-research/files/wp2013-38.pdf



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