Record ID

177     [ Page 26 of 34, No. 1 ]

Date

2011-09

Author

Kenneth N. Kuttner and Adam S. Posen

Affiliation

Oberlin College, Department of Economics and Peterson Institute for International Economics

Title

How Flexible Can Inflation Targeting Be and Still Work?

Summary /
Abstract

This paper takes up the issue of the flexibility of inflation targeting regimes, with the specific goal of determining whether the monetary policy of the Bank of England, which has a formal inflation target, has been any less flexible than that of the Federal Reserve, which does not have such a target. The empirical analysis uses the speed of inflation forecast convergence, estimated from professional forecasters’ predictions at successive forecast horizons, to gauge the perceived flexibility of the central bank’s response to macroeconomic shocks. Based on this criterion, there is no evidence to suggest that the Bank of England’s inflation target has compelled it to be more aggressive in pursuit of low inflation than the Federal Reserve.

Keywords

Inflation targeting, inflation expectations, monetary policy.

URL

http://d.repec.org/n?u=RePEc:iie:wpaper:wp11-15&r=mon

Record ID

176     [ Page 26 of 34, No. 2 ]

Date

2011-10

Author

Mukherjee, Sanchita and Bhattacharya, Rina

Affiliation

Middle East and Central Asia Department, IMF

Title

Inflation Targeting and Monetary Policy Transmission Mechanisms in Emerging Market Economies

Summary /
Abstract

In this paper we empirically examine the operation of the traditional Keynesian interest rate channel of the monetary policy transmission mechanism in five potential inflation targeting economies in the MENA region and compare it with fourteen inflation targeting (IT) emerging market economies (EMEs) using panel data analysis. Contrary to some existing studies, our empirical results suggest that private consumption and investment in both groups of countries are sensitive to movements in real interest rates. Moreover, we find that the adoption of IT did not significantly alter the operation of the interest rate channel in IT EMEs. Also, the interest rate elasticities of private consumption and private investment vary with the level of development of the domestic financial market. Finally, capital account liberalization have opposite effects on private consumption and private investment in the two groups of countries.

Keywords

Inflation targeting; private consumption; private investment; monetary policy; interest rate elasticity; financial market development.

URL

http://www.imf.org/external/pubs/ft/wp/2011/wp11229.pdf

Record ID

175     [ Page 26 of 34, No. 3 ]

Date

2008-05

Author

Camilo E. Tovar

Affiliation

Bank for International Settlements

Title

DSGE models for policy analysis at central banks: an overview of issues and challenges

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 both 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 such models 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 are likely to perform well in some dimensions but not in others. Thus, if they are to be used as policy tools, room must be left for judgement.

Keywords

DSGE models; central banks; communication; estimation; modelling

URL

http://www.hkimr.org/cms/upload/seminar_app/sem_paper_0_288_Tovar-DSGE%20models%20for%20policy%20analysis%20at%20central%20banks.pdf

Record ID

174     [ Page 26 of 34, No. 4 ]

Date

2011-09

Author

Dale Gray, Carlos García, Leonardo Luna, and Jorge E. Restrepo

Affiliation

MCM Department, IMF

Title

Incorporating Financial Sector Risk into Monetary Policy Models: Application to Chile

Summary /
Abstract

This paper builds a model of financial sector vulnerability and integrates it into a macroeconomic framework, typically used for monetary policy analysis. The main question to be answered with the integrated model is whether or not the central bank should include explicitly the financial stability indicator in its monetary policy (interest rate) reaction function. It is found in general, that including distance-to-default (dtd) of the banking system in the central bank reaction function reduces both inflation and output volatility. Moreover, the results are robust to different model calibrations: whenever exchange-rate pass-through is higher; financial vulnerability has a larger impact on the exchange rate, as well as on GDP (or the reverse, there is more effect of GDP on bank’s equity—i.e., what we call endogeneity), it is more efficient to include dtd in the reaction function.

Keywords

Financial vulnerability, monetary policy, central banking

URL

http://www.imf.org/external/pubs/ft/wp/2011/wp11228.pdf

Record ID

173     [ Page 26 of 34, No. 5 ]

Date

2011-09

Author

Lars Svensson

Affiliation

Sveriges Riksbank, Stockholm University, CEPR, and NBER

Title

Practical Monetary Policy: Examples from Sweden and the United States

Summary /
Abstract

In the summer of 2010, the Federal Reserve and Riksbank forecasts for inflation and unemployment were quite similar. The forecasts for inflation were below the Federal Reserve’s mandate-consistent rate and the Riksbank’s inflation target, and the forecasts for unemployment were above a sustainable unemployment rate. This situation seems to call for more expansionary policy, if more expansionary policy is feasible. The Federal Reserve and the Riksbank chose dramatically different policies. The Federal Reserve maintained a minimum policy rate, communicated possible future easing, and later in the fall launched QE2. The Riksbank started a period of rapid tightening. I examine the arguments against policy easing by the Federal Reserve and the arguments in favor of policy tightening for the Riksbank and find them unconvincing. Thus, I find that the Federal Reserve in easing policy did the right thing and the Riksbank in tightening policy the wrong thing. The Riksbank’s published policy-rate path has been too high, which may to a large extent be explained by a too high forecast for foreign policy rates and a too high estimate and forecast of resource utilization. A year later, the Swedish economy has developed better than expected, whereas the U.S. economy has developed worse than expected. The good Swedish development may to a considerable extent be explained by the market implementing much easier financial conditions than those consistent with the Riksbank’s policy-rate path. Development would have been better with even easier policy and financial conditions. The less good U.S. development depends on factors other than monetary policy, and development would have been worse without the Federal Reserve’s policy easing.

Keywords

Practical monetary policy

URL

http://www.brookings.edu/~/media/Files/Programs/ES/BPEA/2011_fall_bpea_papers/2011_fall_bpea_conference_svensson.pdf

Remarks

Prepared for the Fall 2011 issue of Brookings Papers on Economic Activity.

Record ID

172     [ Page 26 of 34, No. 6 ]

Date

2011-06

Author

Scott Davis and Kevin X.D. Huang

Affiliation

Federal Reserve Bank of Dallas and Vanderbilt University

Title

Optimal monetary policy under financial sector risk

Summary /
Abstract

We consider whether or not a central bank should respond directly to financial market conditions when setting monetary policy. Specifically, should a central bank put weight on interbank lending spreads in its Taylor rule policy function? ; Using a model with risk and balance sheet effects in both the real and financial sectors (Davis, "The Adverse Feedback Loop and the Effects of Risk in the both the Real and Financial Sectors" Federal Reserve Bank of Dallas, Globalization and Monetary Policy Institute Working Paper No. 66, November 2010) we find that when the conventional parameters in the Taylor rule (the coefficients on the lagged interest rate, inflation, and the output gap) are optimally chosen, the central bank should not put any weight on endogenous fluctuations in the interbank lending spread. ; However, the central bank should adjust the risk free rate in response to fluctuations in the spread that occur because of exogenous financial shocks, but we find that the central bank should not be too aggressive in its easing policy. Optimal policy calls for a two-thirds of a percentage point cut in the risk free rate in response to a financial shock that causes a one percentage point increase in interbank lending spreads.

Keywords

Monetary policy, financial sector risk, Taylor rule, interbank lending spread, risk free rate

URL

http://www.dallasfed.org/institute/wpapers/2011/0085.pdf

Record ID

171     [ Page 26 of 34, No. 7 ]

Date

2011-09

Author

Kryshko, Maxym

Affiliation

IMF Institute, IMF

Title

Bayesian Dynamic Factor Analysis of a Simple Monetary DSGE Model

Summary /
Abstract

When estimating DSGE models, the number of observable economic variables is usually kept small, and it is conveniently assumed that DSGE model variables are perfectly measured by a single data series. Building upon Boivin and Giannoni (2006), we relax these two assumptions and estimate a fairly simple monetary DSGE model on a richer data set. Using post-1983 U.S.data on real output, inflation, nominal interest rates, measures of inverse money velocity, and a large panel of informational series, we compare the data-rich DSGE model with the regular -- few observables, perfect measurement -- DSGE model in terms of deep parameter estimates, propagation of monetary policy and technology shocks and sources of business cycle fluctuations. We document that the data-rich DSGE model generates a higher implied duration of Calvo price contracts and a lower slope of the New Keynesian Phillips curve. To reduce the computational costs of the likelihood-based estimation, we employed a novel speedup as in Jungbacker and Koopman (2008) and achieved the time savings of 60 percent.

Keywords

Regular and data-rich DSGE models; dynamic factor models; Bayesian estimation

URL

http://www.imf.org/external/pubs/ft/wp/2011/wp11219.pdf

Record ID

170     [ Page 26 of 34, No. 8 ]

Date

2011-08

Author

Stefan Gerlach and Peter Tillmann

Affiliation

Institute for Monetary and Financial Stability and Goethe-University Frankfurt, Justus-Liebig-University Giessen, and Hong Kong Institute for Monetary Research

Title

Inflation Targeting and Inflation Persistence in Asia-Pacific

Summary /
Abstract

Following the Asian financial crisis in 1997-98, a number of Asian central banks adopted inflation targeting. While it is possible for the average inflation rate to be close to target, deviations of inflation could nevertheless be large and protracted. We therefore explore how successful this framework has been by looking at the persistence of inflation, as measured by the sum of the coefficients in an autoregressive model for inflation, using a median unbiased estimator and bootstrapped confidence bands. We find a significant reduction in inflation persistence following the adoption of inflation targeting. The speed by which persistence falls varies across countries. Interestingly, the economies not adopting inflation targeting do not show a decline in persistence. Measuring the performance of monetary policy strategies in terms of inflation persistence rather than the level of inflation shows that inflation targeting performs better than alternative strategies.

Keywords

Inflation Targeting, Asia, Inflation Persistence, Monetary Policy Strategy

URL

http://www.hkimr.org/cms/upload/publication_app/pub_full_0_2_291_WP%20No.25_2011%20%28Final%29.pdf

Record ID

169     [ Page 26 of 34, No. 9 ]

Date

2011-09

Author

Errico, Luca and Massara, Alexander

Affiliation

Statistics Department, IMF

Title

Assessing Systemic Trade Interconnectedness - An Empirical Approach

Summary /
Abstract

The paper focuses on systemically important jurisdictions in the global trade network, complementing recent IMF work on systemically important financial sectors. Using the IMF’s Direction of Trade Statistics (DOTS) database and network analysis, the paper develops a framework for ranking jurisdictions based on trade size and trade interconnectedness indicators using data for 2000 and 2010. The results show a near perfect overlap between the top 25 systemically important trade and financial jurisdictions, suggesting that these ought to be the focus of risk-based surveillance on cross-border spillovers and contagion. In addition, a number of extensions to the approach are developed that can provide a better understanding of trade dynamics at the bilateral, regional, and global levels.

Keywords

Systemic, trade, interconnectedness, DOTS, network analysis, cross-border spillovers, contagion

URL

http://www.imf.org/external/pubs/ft/wp/2011/wp11214.pdf

Record ID

168     [ Page 26 of 34, No. 10 ]

Date

2011-08

Author

Fiscal Affairs Department and the Strategy, Policy, and Review Department

Affiliation

IMF

Title

Modernizing the Framework for Fiscal Policy and Public Debt Sustainability Analysis

Summary /
Abstract

Modernizing the framework for fiscal policy and public debt sustainability analysis (DSA) has become necessary, particularly in light of the recent crisis and rising sustainability concerns in some advanced economies. While recognizing the inherently challenging nature of such analysis, this paper highlights areas where improvements are needed and makes both general and specific proposals on how this could be achieved. It also proposes to move to a risk-based approach to DSAs for all market-access countries, where the depth and extent of analysis would be commensurate with concerns regarding sustainability, while a reasonable level of standardization would be maintained.

Keywords

Fiscal Policy, Public Debt Sustainability Analysis (DSA), Risk-based DSA

URL

http://www.imf.org/external/np/pp/eng/2011/080511.pdf

Remarks

This is an IMF Policy Paper.

Record ID

167     [ Page 26 of 34, No. 11 ]

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 26 of 34, No. 12 ]

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 26 of 34, No. 13 ]

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 26 of 34, No. 14 ]

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 26 of 34, No. 15 ]

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 26 of 34, No. 16 ]

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 26 of 34, No. 17 ]

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 26 of 34, No. 18 ]

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 26 of 34, No. 19 ]

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 26 of 34, No. 20 ]

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