Record ID

417     [ Page 27 of 68, No. 1 ]

Date

2013-06

Author

Valentina Bruno and Hyun Song Shin

Affiliation

American University and Princeton University

Title

Assessing Macroprudential Policies: Case of Korea

Summary /
Abstract

This paper develops methods for assessing the sensitivity of capital flows to global financial conditions, and applies the methods in assessing the impact of macroprudential policies introduced by Korea in 2010. Relative to a comparison group of countries, we find that the sensitivity of capital flows into Korea to global conditions decreased in the period following the introduction of macroprudential policies.

Keywords

Capital flows, credit booms, macroprudential policy

URL

http://www.tcmb.gov.tr/yeni/konferans/Required_Reserves/Reserve_Requirements_files/Hyun_Song_Shin-paper2.pdf

Record ID

416     [ Page 27 of 68, No. 2 ]

Date

2013-10

Author

Anton Korinek and Jonathan Kreamer

Affiliation

National Bureau of Economic Research

Title

THE REDISTRIBUTIVE EFFECTS OF FINANCIAL DEREGULATION

Summary /
Abstract

Financial regulation is often framed as a question of economic efficiency. This paper, by contrast, puts the distributive implications of financial regulation center stage. We develop a model in which the financial sector benefits from risk-taking by earning greater expected returns. However, risk-taking also increases the incidence of large losses that lead to credit crunches and impose negative externalities on the real economy. Assuming incomplete risk markets between the financial sector and the real economy, we describe a Pareto frontier along which different levels of risk-taking map into different levels of welfare for the two parties. A regulator has to trade off efficiency in the financial sector, which is aided by deregulation, against efficiency in the real economy, which is aided by tighter regulation and a more stable supply of credit. We also show that financial innovation, asymmetric compensation schemes, concentration in the banking system, and bailout expectations enable or encourage greater risk-taking and allocate greater surplus to the financial sector at the expense of the rest of the economy.

Keywords

Financial deregulation, economic efficiency, risk-taking, financial innovation, asymmetric compensation schemes, concentration in the banking system, and bailout expectations

URL

http://www.nber.org/papers/w19572.pdf

Record ID

415     [ Page 27 of 68, No. 3 ]

Date

2012-10

Author

Martin Ellison and Andreas Tischbirek

Affiliation

University of Oxford

Title

Unconventional government debt purchases as a supplement to conventional monetary policy

Summary /
Abstract

In response to the Great Financial Crisis, the Federal Reserve, the Bank of England and many other central banks have adopted unconventional monetary policy instruments. We investigate if one of these, purchases of long-term government debt, could be a valuable addition to conventional short-term interest rate policy even if the main policy rate is not constrained by the zero lower bound. To do so, we add a stylised financial sector and central bank asset purchases to an otherwise standard New Keynesian DSGE model. Asset quantities matter for interest rates through a preferred habitat channel. If conventional and unconventional monetary policy instruments are coordinated appropriately, then the central bank is better able to stabilise both output and inflation.

Keywords

Quantitative Easing, Large-Scale Asset Purchases, Preferred Habitat, Optimal Monetary Policy

URL

http://www.economics.ox.ac.uk/materials/papers/13054/paper679.pdf

Record ID

414     [ Page 27 of 68, No. 4 ]

Date

2013-08

Author

José A Carrasco-Gallego and Margarita Rubio

Affiliation

Centre for Finance and Credit Markets School of Economics, Sir Clive Granger Building, University of Nottingham

Title

Macroprudential and Monetary Policies: Implications for Financial Stability and Welfare

Summary /
Abstract

In this paper, we analyse the implications of macroprudential and monetary policies for business cycles, welfare, and financial stability. We consider a dynamic stochastic general equilibrium (DSGE) model with housing and collateral constraints. A macroprudential rule on the loan-to-value ratio (LTV), which responds to output and house price deviations, interacts with a traditional Taylor rule for monetary policy. From a positive perspective, introducing a macroprudential tool mitigates the effects of booms in the economy by restricting credit. However, monetary and macroprudential policies may enter in conflict when shocks come from the supply-side of the economy. From a normative point of view, results show that the introduction of this macroprudential measure is welfare improving. Then, we calculate the combination of policy parameters that maximizes welfare and find that the optimal LTV rule should respond relatively more aggressively to house prices than to output deviations. Finally, we study the efficiency of the policy mix. We propose a tool that includes not only the variability of output and inflation but also the variability of borrowing, to capture the effects of policies on financial stability: a three-dimensional policy frontier (3DPF). We find that both policies acting together unambiguously improve the stability of the system.

Keywords

Macroprudential, monetary policy, welfare, financial stability, three-dimensional policy frontier, loan-to-value, Taylor curve

URL

http://www.nottingham.ac.uk/cfcm/documents/papers/13-04.pdf

Record ID

413     [ Page 27 of 68, No. 5 ]

Date

2013-09

Author

Antoine Martin, James McAndrews, Ali Palida, and David Skeie

Affiliation

Federal Reserve Bank of New York

Title

Federal Reserve tools for managing rates and reserves

Summary /
Abstract

Monetary policy measures taken by the Federal Reserve as a response to the 2007-09 financial crisis and subsequent economic conditions led to a large increase in the level of outstanding reserves. The Federal Open Market Committee (FOMC) has a range of tools to control short-term market rates in this situation. We study several of these tools, namely, interest on excess reserves (IOER), reverse repurchase agreements (RRPs), and the term deposit facility (TDF). We find that overnight RRPs (ON RRPs) may provide a better floor on rates than term RRPs because they are available to absorb daily liquidity shocks. Whether the TDF or RRPs best support equilibrium rates depends on the intensity of interbank monitoring costs versus balance sheet costs, respectively, that banks face. In our model, using the RRP and TDF concurrently may most effectively stabilize short-term rates close to the IOER rate when such costs are rapidly increasing.

Keywords

Federal Open Market Committee; Monetary policy ; Bank reserves ; Bank liquidity ; Interest rates ; Repurchase agreements

URL

http://www.newyorkfed.org/research/staff_reports/sr642.pdf

Record ID

412     [ Page 27 of 68, No. 6 ]

Date

2013-09

Author

William R. White

Affiliation

Chairman, Economic Development and Review Committee, OECD, Paris.

Title

Is monetary policy a science? the interaction of theory and practice over the last 50 years

Summary /
Abstract

In recent decades, the declarations of “independent” central banks and the conduct of monetary policy have been assigned an ever increasing role in the pursuit of economic and financial stability. This is curious since there is, in practice, no body of scientific knowledge (evidence based beliefs) solid enough to have ensured agreement among central banks on the best way to conduct monetary policy. Moreover, beliefs pertaining to every aspect of monetary policy have also changed markedly and repeatedly. This paper documents how the objectives of monetary policy, the optimal exchange rate framework, beliefs about the transmission mechanism, the mechanism of political oversight, and many other aspects of domestic monetary frameworks have all been subject to great flux over the last fifty years. The paper also suggests ways in which the current economic and financial crisis seems likely to affect the conduct of monetary policy in the future. One possibility is that it might lead to yet another fundamental reexamination of our beliefs about how best to conduct monetary policy in an increasingly globalized world. The role played by money and credit, the interactions between price stability and financial stability, the possible medium term risks generated by “ultra easy” monetary policies, and the facilitating role played by the international monetary (non) system all need urgent attention. The paper concludes that, absent the degree of knowledge required about its effects, monetary policy is currently being relied on too heavily in the pursuit of “strong, balanced and sustainable growth.

Keywords

National security

URL

http://www.dallasfed.org/assets/documents/institute/wpapers/2013/0155.pdf

Record ID

411     [ Page 27 of 68, No. 7 ]

Date

2013-04

Author

Olivier Blanchard, Giovanni Dell'Ariccia, Paolo Mauro

Affiliation

Research Department, IMF

Title

Rethinking Macro Policy II: Getting Granular

Summary /
Abstract

The 2008–09 global economic and financial crisis shook the consensus on how to run macroeconomic policy. It reminded us of the dangers associated with financial sector imbalances; showed the limitations of monetary policy and cast doubt on some of the tenets of its intellectual foundations; and led to a reevaluation of what levels of public debt can be considered safe. This prompted a healthy reconsideration of what worked and what did not, and a debate on how to fix things, ranging from nitty-gritty technical points to broad-based institutional design questions. Five years from the beginning of the crisis, the contours of a new macroeconomic policy consensus remain unclear. But policies have been tried and progress has been made, both theoretical and empirical. This paper updates the status of the debate.

The crisis rekindled old debates and raised new questions about monetary policy and the role of central banks. The large costs of busts and doubts about the effectiveness of new regulatory tools reopened the “lean versus clean” debate on how to deal with asset-price and credit bubbles. The extension of liquidity to non-deposit-taking institutions, specific market segments, and (indirectly) sovereigns raised questions about what the scope of central banks’ traditional lender-of-last-resort function should be. The recourse to unconventional measures in the face of the zero lower bound on interest rates brought about a discussion of the relative role of interest rate policy, forward guidance, and open market operations going forward. The increasing disconnect between activity and inflation triggered a reevaluation of the appropriate intermediate target of monetary policy.

On fiscal policy, the crisis in the euro area periphery (with the associated risk of self-fulfilling runs and multiple equilibria) raised new doubts about what levels of public debt are safe in advanced economies. The widespread need for major fiscal adjustment and the difficulties associated with austerity programs rekindled a debate on fiscal multipliers, the optimal speed of fiscal consolidation, and the design of medium-term adjustment programs to reassure market participants and the public at large. The simultaneous presence of fiscal needs and large asset-purchase programs by central banks led to a discussion about the role of financial repression in past consolidation episodes, set off concerns about a possible shift to fiscal dominance, and induced consideration of ways to support central bank independence.

Macroprudential tools may provide a new policy lever to curb dangerous booms and contain imbalances. But evidence about their effectiveness is mixed and we are a long way from knowing how to use them reliably. Their relation with other policies is not yet fully understood; they are fraught with complicated political economy issues; and there is little consensus on how to organize their governance.

Keywords

Monetary policy, Inflation targets, Zero lower bound, Fiscal consolidation, Fiscal multipliers, Financial stability, Macroprudential policy

URL

http://www.imf.org/external/pubs/ft/sdn/2013/sdn1303.pdf

Record ID

410     [ Page 27 of 68, No. 8 ]

Date

2013-08

Author

David Greenlaw, James D. Hamilton, Peter Hooper and Frederic S. Mishkin

Affiliation

National Bureau of Economic Research

Title

Crunch Time: Fiscal Crises and the Role of Monetary Policy

Summary /
Abstract

Countries with high debt loads are vulnerable to an adverse feedback loop in which doubts by lenders lead to higher sovereign interest rates which in turn make the debt problems more severe. We analyze the recent experience of advanced economies using both econometric methods and case studies and conclude that countries with debt above 80% of GDP and persistent current-account deficits are vulnerable to a rapid fiscal deterioration as a result of these tipping-point dynamics. Such feedback is left out of current long-term U.S. budget projections and could make it much more difficult for the U.S. to maintain a sustainable budget course. A potential fiscal crunch also puts fundamental limits on what monetary policy is able to achieve. In simulations of the Federal Reserve’s balance sheet, we find that under our baseline assumptions, in 2017-18 the Fed will be running sizable income losses on its portfolio net of operating and other expenses and therefore for a time will be unable to make remittances to the U.S. Treasury. Under alternative scenarios that allow for an emergence of fiscal concerns, the Fed’s net losses would be more substantial.

Keywords

Fiscal crises, monetary policy, sovereign interest rates, central bank net losses

URL

http://www.nber.org/papers/w19297.pdf

Record ID

409     [ Page 27 of 68, No. 9 ]

Date

2013-10

Author

Roger Farmer and Vadim Khramov

Affiliation

Office of Executive Director for the Russian Federation, IMF

Title

Solving and Estimating Indeterminate DSGE Models

Summary /
Abstract

We propose a method for solving and estimating linear rational expectations models that exhibit indeterminacy and we provide step-by-step guidelines for implementing this method in the Matlab-based packages Dynare and Gensys. Our method redefines a subset of expectational errors as new fundamentals. This redefinition allows us to treat indeterminate models as determinate and to apply standard solution algorithms. We provide a selection method, based on Bayesian model comparison, to decide which errors to pick as fundamental and we present simulation results to show how our procedure works in practice.

Keywords

Indeterminacy, DSGE Models, Expectational Errors.

URL

http://www.imf.org/external/pubs/ft/wp/2013/wp13200.pdf

Record ID

408     [ Page 27 of 68, No. 10 ]

Date

2013-09

Author

Ajay Pratap Singh and Michael Nikolaou

Affiliation

University of Houston

Title

Optimal Rules for Central Bank Interest Rates Subject to Zero Lower Bound

Summary /
Abstract

The celebrated Taylor rule provides a simple formula that aims to capture how the central bank interest rate is adjusted as a linear function of inflation and output gap. However, the rule does not take explicitly into account the zero lower bound on the interest rate. Prior studies on interest rate selection subject to the zero lower bound have not produced rigorous derivations of explicit rules. In this work, Taylor-like rules for central bank interest rates bounded below by zero are derived rigorously using a multi-parametric model predictive control (mpMPC) framework. Rules with or without inertia are included in the derivation. The proposed approach is illustrated through simulation on US economy data. A number of issues for future study are proposed.

Keywords

Taylor rule; zero lower bound; liquidity trap; model predictive control; multiparametric programming

URL

http://www.economics-ejournal.org/economics/discussionpapers/2013-49/count