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Record ID
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377
[ Page 31 of 68, No. 1 ]
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Date
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2013-05 |
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Author
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William R. Cline
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Affiliation
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Peterson Institute for International Economics |
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Title
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Estimates of Fundamental Equilibrium Exchange Rates |
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Summary /
Abstract
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In this semiannual update, William R. Cline presents new estimates of fundamental equilibrium exchange rates (FEERs). Once again it is found that the key cases of the United States and China involve only modest over- and undervaluation, respectively. However, the Japanese yen is found to have fallen substantially below its FEER as a consequence of the aggressive quantitative easing policy, and Cline suggests that if the currency continues much further along a downward path, the G-7 may need to consider joint intervention to curb its decline. The study concludes by adding a variant of the calculations in which rich countries are set a floor target of at least a zero current account balance, and emerging market economies are set a ceiling target of zero balance. In this "aggressive rebalancing" in which capital would no longer flow "uphill" from poor to rich countries, the US dollar would require a much larger depreciation and the Chinese renminbi a much larger appreciation. |
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Keywords
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FEERs, G-7, zero current account balance, capital flows |
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URL
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http://www.piie.com/publications/pb/pb13-15.pdf
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Record ID
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376
[ Page 31 of 68, No. 2 ]
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Date
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2012-09 |
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Author
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Florina-Cristina Badarau and Alexandra Popescu
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Affiliation
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Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - Université Montesquieu and LEO - Laboratoire d'économie d'Orleans - Université d'Orléans |
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Title
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Monetary Policy and Credit Cycles: A DSGE Analysis |
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Summary /
Abstract
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The recent financial crisis revealed several flaws in both monetary and financial regulation. Contrary to what was believed, price stability is not a sufficient condition for financial stability. At the same time, micro-prudential regulation alone becomes insufficient to ensure the financial stability objective. In this paper, we propose an ex-post analysis of what a central bank could have done to improve the reaction of the economy to the financial bubble. We study by means of a financial accelerator DSGE model the dynamics of our economy when the central bank has, first, only traditional objectives, and second, when an additional financial stability objective is added. Overall, results indicate that a more aggressive monetary policy would have had little success in improving the response of the economy to the financial bubble, as the actions of the central bank would have remained limited by the use of a single instrument, the interest rate. |
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Keywords
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Bank capital channel, credit cycles, financial stability, monetary policy. |
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URL
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http://halshs.archives-ouvertes.fr/docs/00/82/80/74/PDF/dr201214.pdf
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Remarks
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The above analytical paper concludes that raising the interest rate to counter an asset price bubble makes matters worse, assuming that the central bank uses only this single policy instrument in an augmented Taylor rule (augmented to include a credit-to-GDP ratio as a third argument besides inflation and unemployment--all three variables measured as deviations from their steady-state values). The reason is that raising the interest rate "fails to discourage speculative investors. Actually, higher interest rates attract only risky agents (Stiglitz and Weiss, 1981, reference by the authors)." This is the same argument I used in my recent paper,"Should Policymakers Respond Directly to Financial Stability in Their Interest-Rate Rule?" in The Future of Inflation Targeting (http://www.seacen.org/products/702001-100305-PDF.pdf).
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Record ID
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375
[ Page 31 of 68, No. 3 ]
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Date
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2013-06 |
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Author
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Poirson, Hélène ; and Schmittmann, Jochen M.
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Affiliation
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European Department and Monetary and Capital Markets Department, IMF |
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Title
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Risk Exposures and Financial Spillovers in Tranquil and Crisis Times: Bank-Level Evidence |
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Summary /
Abstract
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For a sample of 83 financial institutions during 2003–2011, this paper attempts to answer three questions: first, what is the evolution of banks’ stock price exposure to country-level and global risk factors as approximated by equity indices; second, which bank-specific characteristics explain these risk exposures; third, are there clusters of banks with equity price linkages beyond market risk factors. The paper finds a rise in sensitivities to both country and global risk factors in 2011, although on average to levels still below those of the subprime crisis. The average sensitivity to European risk, specifically, has been steadily rising since 2008. Banks that are reliant on wholesale funding, have weaker capital levels and low valuations, and higher exposures to crisis countries are found to be the most vulnerable to shocks. The analysis of bank-to-bank linkages suggests that any “globalization” of the euro area crisis is likely to be channelled through U.K. and U.S. banks, with little evidence of direct spillover effects to other regions. |
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Keywords
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Financial sector; financial institutions; banks; Europe; financial crisis; spillovers |
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URL
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http://www.imf.org/external/pubs/ft/wp/2013/wp13142.pdf
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Record ID
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374
[ Page 31 of 68, No. 4 ]
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Date
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2013-06 |
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Author
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Dell'Ariccia, Giovanni ; Laeven, Luc ; and Suarez, Gustavo
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Affiliation
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Research Department, IMF |
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Title
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Bank Leverage and Monetary Policy's Risk-Taking Channel: Evidence from the United States |
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Summary /
Abstract
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We present evidence of a risk-taking channel of monetary policy for the U.S. banking system. We use confidential data on the internal ratings of U.S. banks on loans to businesses over the period 1997 to 2011 from the Federal Reserve’s survey of terms of business lending. We find that ex-ante risk taking by banks (as measured by the risk rating of the bank’s loan portfolio) is negatively associated with increases in short-term policy interest rates. This relationship is less pronounced for banks with relatively low capital or during periods when banks’ capital erodes, such as episodes of financial and economic distress. These results contribute to the ongoing debate on the role of monetary policy in financial stability and suggest that monetary policy has a bearing on the riskiness of banks and financial stability more generally. |
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Keywords
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Interest rates, monetary policy, banks, leverage, risk |
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URL
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http://www.imf.org/external/pubs/ft/wp/2013/wp13143.pdf
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Record ID
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372
[ Page 31 of 68, No. 6 ]
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Date
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2013-03 |
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Author
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Guillermo Escudé
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Affiliation
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Central Bank of Argentina |
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Title
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A DSGE Model for a Small, Open Economy with Systematic Interest and Foreign Exchange Policies in Which Policymakers Exploit the Risk Premium for Stabilization Purposes |
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Summary /
Abstract
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This paper builds a DSGE model for a SOE in which the central bank systematically intervenes in both the domestic currency bond and the FX markets using two policy rules: a Taylor-type rule and a second rule in which the operational target is the rate of nominal currency depreciation. For this, the instruments used by the central bank (bonds and international reserves) must be included in the model, as well as the institutional arrangements that determine the total amount of resources the central bank can use. The "corner" regimes in which only one of the policy rules is used are particular cases of the model. The model is calibrated and implemented in Dynare for 1) simple policy rules, 2) optimal simple policy rules, and 3) optimal policy under commitment. Numerical losses are obtained for ad-hoc loss functions for different sets of central bank preferences (styles). The results show that the losses are systematically lower when both policy rules are used simultaneously, and much lower for the usual preferences (in which only inflation and/or output stabilization matter). It is shown that this result is basically due to the central bank´s enhanced ability, when it uses the two policy rules, to influence capital flows through the effects of its actions on the endogenous risk premium in the (risk-adjusted) interest parity equation. |
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Keywords
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DSGE models, exchange rate policy, optimal policy, Small Open Economy |
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URL
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http://www.bcra.gov.ar/pdfs/investigaciones/WP_61_2013.pdf
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Record ID
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371
[ Page 31 of 68, No. 7 ]
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Date
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2012-03 |
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Author
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Orphanides, Athanasios and Wieland, Volker
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Affiliation
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Massachusetts Institute of Technology and University of Frankfurt |
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Title
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Complexity and monetary policy* |
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Summary /
Abstract
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The complexity resulting from intertwined uncertainties regarding model misspecification and mismeasurement of the state of the economy defines the monetary policy landscape. Using the euro area as laboratory this paper explores the design of robust policy guides aiming to maintain stability in the economy while recognizing this complexity. We document substantial output gap mismeasurement and make use of a new model data base to capture the evolution of model specification. A simple interest rate rule is employed to interpret ECB policy since 1999. An evaluation of alternative policy rules across 11 models of the euro area confirms the fragility of policy analysis optimized for any specific model and shows the merits of model averaging in policy design. Interestingly, a simple difference rule with the same coefficients on inflation and output growth as the one used to interpret ECB policy is quite robust as long as it responds to current outcomes of these variables. |
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Keywords
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Financial Crisis, Complexity, Monetary Policy, Model Uncertainty, Robust Simple Rules, ECB |
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URL
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http://econstor.eu/bitstream/10419/71149/1/726555479.pdf
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Remarks
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*Prepared for the Federal Reserve Board conference on Central Banking: Before, During, and After the Crisis, Washington, DC, 23-24 March 2012. |
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Record ID
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370
[ Page 31 of 68, No. 8 ]
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Date
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2012-08 |
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Author
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Klaus Schmidt-Hebbel and Francisco Muñoz
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Affiliation
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Catholic University of Chile |
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Title
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Monetary policy decisions by the world's central banks using real-time data |
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Summary /
Abstract
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This paper contributes to the empirical understanding of monetary policy in five dimensions. First, specifiying a generalized Taylor equation that nests backward and forward-looking inflation and activity variables in setting policy rates. Second, using real-time data. Third, estimating the model on a world panel of monthly 1994-2011 data for 28 advanced and emerging economies. Fourth, using alternative panel data estimators to test for robustness. Fifth, testing for differences in monetary policy over time and across country groups. The findings are very supportive of the nested model and generally show that the Taylor principle is satisfied by the world's central banks. |
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Keywords
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Monetary policy, Taylor rule, Taylor principle, heterogeneous panels |
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URL
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http://www.economia.puc.cl/docs/dt_426.pdf
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Record ID
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369
[ Page 31 of 68, No. 9 ]
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Date
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2013-06 |
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Author
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Adedeji, Olumuyiwa ; Du, Huancheng ; Opoku-Afari, Maxwell
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Affiliation
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African Department, IMF |
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Title
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Inclusive Growth: An Application of the Social Opportunity Function to Selected African Countries |
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Summary /
Abstract
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The inclusiveness of growth depends on the extent of access to economic and social opportunities. This paper applies the concept of social opportunity function to ascertain the inclusiveness of growth episodes in selected African countries. Premised on the concept of social welfare function, inclusive growth is associated with increased average opportunities available to the population and improvement in their distribution. The paper establishes that the high growth episodes in the last decade in the selected countries came with increased average opportunities in education and health; but distribution of such opportunities varied across countries, depending on the country-specific policies underpining the growth episodes.
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Keywords
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Inclusive growth, social opportunity curve, and equity |
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URL
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http://www.imf.org/external/pubs/ft/wp/2013/wp13139.pdf
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Record ID
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368
[ Page 31 of 68, No. 10 ]
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Date
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2013-05 |
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Author
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Rahul Anand, David Coady, Adil Mohommad, Vimal Thakoor, and James P. Walsh
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Affiliation
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Asia and Pacific Department, IMF |
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Title
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The Fiscal and Welfare Impacts of Reforming Fuel Subsidies in India |
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Summary /
Abstract
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Rising fuel subsidies have contributed to fiscal pressures in India. A key policy concern regarding subsidy reform is the adverse welfare impact on households, in particular poor households. This paper evaluates the fiscal and welfare implications of fuel subsidy reform in India. Fuel subsidies are found to be badly targeted, with the richest ten percent of households receiving seven times more in benefits than the poorest ten percent. Although subsidy reform would generate substantial fiscal savings, the associated increases in fuel and other prices would lower household real incomes of all income groups. Better targeting of fuel subsidies would fully protect lower income households while still generating substantial net fiscal savings. Lessons from subsidy reforms in other countries are identified and discussed.
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Keywords
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Fuel pricing, subsidy reform, distributional impact, compensating transfers, India |
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URL
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http://www.imf.org/external/pubs/ft/wp/2013/wp13128.pdf
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