Record ID

540     [ Page 4 of 14, No. 1 ]

Date

2014-08

Author

Matteo Ghilardi and Shanaka J. Peiris

Affiliation

Asia Pacific Department, Research Department and Strategy, Policy and Review Department, IMF

Title

Capital Flows, Financial Intermediation and Macroprudential Policies

Summary /
Abstract

This paper develops an open-economy DSGE model with an optimizing banking sector to assess the role of capital flows, macro-financial linkages, and macroprudential policies in emerging Asia. The key result is that macro-prudential measures can usefully complement monetary policy. Countercyclical macroprudential polices can help reduce macroeconomic volatility and enhance welfare. The results also demonstrate the importance of capital flows and financial stability for business cycle fluctuations as well as the role of supply side financial accelerator effects in the amplification and propagation of shocks.

Keywords

Financial Frictions, Capital Regulation, Monetary Policy

URL

http://www.imf.org/external/pubs/ft/wp/2014/wp14157.pdf

Record ID

539     [ Page 4 of 14, No. 2 ]

Date

2014-08

Author

Ray C. Fair

Affiliation

Cowles Foundation, Department of Economics, Yale University

Title

How Might a Central Bank Report Uncertainty?

Summary /
Abstract

An important question for central banks is how they should report the uncertainty of their forecasts. This paper discusses a way in which a central bank could report the uncertainty of its forecasts in a world in which it used a single macroeconometric model to make its forecasts and guide its policies. Suggestions are then made as to what might be feasible for a central bank to report given that it is unlikely to be willing to commit to a single model. A particular model is used as an illustration.

Keywords

Central bank; uncertainty; stochastic simulation

URL

http://www.economics-ejournal.org/economics/journalarticles/2014-27/version_1/count

Record ID

538     [ Page 4 of 14, No. 3 ]

Date

2014-07

Author

Irina Balteanu and Aitor Erce

Affiliation

Banco de España

Title

Banking crises and sovereign defaults in emerging markets: exploring the links

Summary /
Abstract

This paper provides a set of stylised facts on the mechanisms through which banking and sovereign distress feed into each other, using a large sample of emerging economies over three decades. We first define “twin crises” as events where banking crises and sovereign defaults combine, and further distinguish between those banking crises that end in sovereign debt crises, and vice-versa. We then assess what differentiates “single” episodes from “twin” ones. Using an event analysis methodology, we study the behaviour around crises of variables describing the balance sheet interconnection between the banking and public sectors, the characteristics of the banking sector, the state of public finances and the macroeconomic context. We find that there are systematic differences between “single” and “twin” crises across all these dimensions. Additionally, we find that “twin” crises are heterogeneous events: taking into account the proper time sequence of crises within “twin” episodes is important for understanding their drivers, transmission channels and economic consequences. Our results shed light on the mechanisms surrounding feedback loops of sovereign and banking stress.

Keywords

Banking crises, sovereign defaults, feedback loops, balance sheets

URL

http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/14/Fich/dt1414e.pdf

Record ID

537     [ Page 4 of 14, No. 4 ]

Date

2014-06

Author

IMF Policy Paper

Affiliation

IMF

Title

Update on the Fiscal Transparency Initiative

Summary /
Abstract

This paper provides an update on staff’s work on a new Fiscal Transparency Code (FTC) and experiences with the initial pilot Fiscal Transparency Evaluations (FTE), the ground work for which was laid in a 2012 paper “Fiscal Transparency, Accountability, and Risk.” Both are part of ongoing efforts by the Fiscal Affairs Department, in cooperation with other departments, to strengthen the Fund’s fiscal surveillance and capacity building.

The new FTC and FTE reflect the lessons of the recent crisis, incorporate developments in international standards, and build on feedback from consultations with stakeholders. The new FTC addresses the weaknesses of the existing FTC from 2007 and focuses on information needed for effective fiscal management and surveillance. Its 36 principles (i) concentrate on outputs rather than processes; (ii) differentiate between basic, good, and advanced practices to provide less developed countries with clear milestones toward international standards; (iii) stress the analysis and management of fiscal risks; and (iv) better complement other fiscal standards and diagnostics.

The FTC has a four-pillar structure: (i) Pillar I on fiscal reporting calls for fiscal statistics and accounts to provide relevant, comprehensive, timely, and reliable information on the government’s financial position and performance; (ii) Pillar II on fiscal forecasting and budgeting emphasizes the need for budget documentation to provide a clear statement of the government’s fiscal and policy objectives, and timely and credible forecasts for the evolution of public finances; (iii) Pillar III on fiscal risk analysis and management stresses the importance of comprehensive disclosure, analysis, and control of the key risks to the public finances; and (iv) Pillar IV on resource revenue management addresses transparency issues related to natural resource endowments and revenues. Work on the first three Pillars has been completed, with Pillar IV scheduled for completion later this year.

A Fiscal Transparency Manual (FTM) will provide detailed guidance on implementation of FTC principles and practices. Eight pilot FTEs have been conducted, of which four have been published so far. FTEs replace the traditional fiscal ROSCs and provide more rigorous and quantified analyses of the quality of published information and sources of fiscal vulnerability, an accessible summary of the strengths and weaknesses of country practices, and more targeted recommendations. FTEs also offer countries the option of a sequenced reform action plan and allow for modular assessments of individual pillars. Feedback from authorities, area departments, and stakeholders on FTEs has been very positive.

The Board is asked to approve the first three pillars of the new FTC and the replacement of the fiscal ROSC with the FTE. On this basis, the Fund will undertake up to five FTEs in FY 2015, finalize the fourth pillar of the FTC, and finalize the FTM.

Keywords

Fiscal Transparency

URL

http://www.imf.org/external/np/pp/eng/2014/061614.pdf

Record ID

536     [ Page 4 of 14, No. 5 ]

Date

2014-08

Author

Atish R. Ghosh, Mahvash Saeed Qureshi, and Charalambos G. Tsangarides

Affiliation

Research Department, IMF

Title

Friedman Redux: External Adjustment and Exchange Rate Flexibility

Summary /
Abstract

Milton Friedman argued that flexible exchange rates would facilitate external adjustment. Recent studies find surprisingly little robust evidence that they do. We argue that this is because they use composite (or aggregate) exchange rate regime classifications, which often mask very heterogeneous bilateral relationships between countries. Constructing a novel dataset of bilateral exchange rate regimes that differentiates by the degree of exchange rate flexibility, as well as by direct and indirect exchange rate relationships, for 181 countries over 1980–2011, we find a significant and empirically robust relationship between exchange rate flexibility and the speed of external adjustment. Our results are supported by several “natural experiments” of exogenous changes in bilateral exchange rate regimes.

Keywords

External dynamics, exchange rate regimes, global imbalances

URL

http://www.imf.org/external/pubs/ft/wp/2014/wp14146.pdf

Record ID

534     [ Page 4 of 14, No. 6 ]

Date

2014-06

Author

Hashem Pesaran and Ron Smith

Affiliation

University of Cambridge

Title

Tests of Policy Ineffectiveness in Macroeconometrics

Summary /
Abstract

This paper proposes tests of policy ineffectiveness in the context of macroeconometric rational expectations models. It is assumed that there is a policy intervention that takes the form of changes in the parameters of a policy rule, and that there are sufficient observations before and after the intervention. The test is based on the difference between the realisations of the outcome variable of interest and counterfactuals based on no policy intervention, using only the pre-intervention parameter estimates, and in consequence the Lucas Critique does not apply. The paper develops tests of policy ineffectiveness for a full structural model, with and without exogenous, policy or non-policy, variables. Asymptotic distributions of the proposed tests are derived both when the post intervention sample is fixed as the pre-intervention sample expands, and when both samples rise jointly but at different rates. The performance of the test is illustrated by a simulated policy analysis of a three equation New Keynesian Model, which shows that the test size is correct but the power may be low unless the model includes exogenous variables, or if the policy intervention changes the steady states, such as the inflation target.

Keywords

Counterfactuals, policy analysis, policy ine¤ectiveness test, macroeconomics

URL

http://www.econ.cam.ac.uk/research/repec/cam/pdf/cwpe1415.pdf

Record ID

533     [ Page 4 of 14, No. 7 ]

Date

2014-04

Author

Jaromir Benes, Michael Kumhof, and Douglas Laxton

Affiliation

Research Department, IMF

Title

Financial Crises in DSGE Models: A Prototype Model

Summary /
Abstract

This paper presents the theoretical structure of MAPMOD, a new IMF model designed to study vulnerabilities associated with excessive credit expansions, and to support macroprudential policy analysis. In MAPMOD, bank loans create purchasing power that facilitates adjustments in the real economy. But excessively large and risky loans can impair balance sheets and sow the seeds of a financial crisis. Banks respond to losses through higher spreads and rapid credit cutbacks, with adverse effects for the real economy. These features allow the model to capture the basic facts of financial cycles. A companion paper studies the simulation properties of MAPMOD.

Keywords

Financial crisis; Credit expansion; Bank credit; Credit risk; Banks;Loa ns; Macroprudential Policy; Monetary policy; Economic models; lending boom, credit crunch, financial crisis, financialy cycle, asset price bubble, macroprudential policy

URL

http://www.imf.org/external/pubs/ft/wp/2014/wp1457.pdf

Record ID

532     [ Page 4 of 14, No. 8 ]

Date

2014-06

Author

Prachi Mishra, Kenji Moriyama, Papa M'B. P. N'Diaye, and Lam Nguyen

Affiliation

Money and Capital Markets and Strategy and Policy Review Departments, IMF

Title

Impact of Fed Tapering Announcements on Emerging Markets

Summary /
Abstract

This paper analyzes market reactions to the 2013–14 Fed announcements relating to tapering of asset purchases and their relationship to macroeconomic fundamentals and country economic and financial structures. The study uses daily data on exchange rates, government bond yields, and stock prices for 21 emerging markets. It finds evidence of markets differentiating across countries around volatile episodes. Countries with stronger macroeconomic fundamentals, deeper financial markets, and a tighter macroprudential policy stance in the run-up to the tapering announcements experienced smaller currency depreciations and smaller increases in government bond yields. At the same time, there was less differentiation in the behavior of stock prices based on fundamentals.

Keywords

Monetary policy; United States; Unconventional monetary policy instruments; Announcements; Emerging markets; Financial markets; Bond yields; Stock prices; Emerging markets, tapering, Fed policy announcements, vulnerability.

URL

http://www.imf.org/external/pubs/ft/wp/2014/wp14109.pdf

Record ID

531     [ Page 4 of 14, No. 9 ]

Date

2014-05

Author

Jean-Louis Combes, Xavier Debrun, Alexandru Minea, and Rene Tapsoba

Affiliation

African and Fiscal Affairs Departments, IMF

Title

Inflation Targeting and Fiscal Rules: Do Interactions and Sequencing Matter?

Summary /
Abstract

The paper examines the joint impact of inflation targeting (IT) and fiscal rules (FR) on fiscal behavior and inflation in a broad panel of advanced and developing economies over the period 1990-2009. The main contribution of the paper is to show that, as suggested by the theoretical literature, interactions between FR and IT matter a great deal for policy outcomes. Specifically, the combination of FR and IT appears to deliver more disciplined macroeconomic policies than each of these institutions in isolation. In addition, the sequencing of the monetary and fiscal reforms plays a role: adopting FR before IT delivers stronger results than the reverse sequence.

Keywords

Inflation targeting; Fiscal rules; Fiscal policy; Macroprudential Policy; Monetary policy; Economic models; Inflation targeting, Fiscal rules, Institutional reform sequencing.

URL

http://www.imf.org/external/pubs/ft/wp/2014/wp1489.pdf

Record ID

530     [ Page 4 of 14, No. 10 ]

Date

2014-06

Author

F. Gulcin Ozkan and D. Filiz Unsal

Affiliation

Strategy, Policy, and Review Department

Title

On the use of Monetary and Macroprudential Policies for Small Open Economies

Summary /
Abstract

We explore optimal monetary and macroprudential policy rules for a small open economy. Delegating 'lean against the wind' squarely to macroprudential policy provides a more robust policy mix to shock uncertainty--(i) if macroprudential measures exist, there are no significant welfare gains from monetary policy reacting to credit growth under a financial shock; and (ii) monetary responses to financial markets could generate bigger welfare losses than macroprudential responses under different shocks. The source of outstanding liabilities also plays a role in the choice of policy instrument--macroprudential policies are particularly effective for emerging markets where foreign borrowing is sizeable.

Keywords

Macroprudential Policy; Monetary policy; Small open economies; Emerging markets; Entrepreneurship; External borrowing; Financial stability; Econometric models;Financial instability; monetary policy; macroprudential measures; emerging markets

URL

http://www.imf.org/external/pubs/ft/wp/2014/wp14112.pdf

Record ID

529     [ Page 4 of 14, No. 11 ]

Date

2014-02

Author

Juan Pablo Medina Guzman and Jorge Roldos

Affiliation

IMF Institute for Capacity Development

Title

Monetary and Macroprudential Policies to Manage Capital Flows

Summary /
Abstract

We study interactions between monetary and macroprudential policies in a model with nominal and financial frictions. The latter derive from a financial sector that provides credit and liquidity services that lead to a financial accelerator-cum-fire-sales amplification mechanism. In response to fluctuations in world interest rates, inflation targeting dominates standard Taylor rules, but leads to increased volatility in credit and asset prices. The use of a countercyclical macroprudential instrument in addition to the policy rate improves welfare and has important implications for the conduct of monetary policy. “Leaning against the wind” or augmenting a standard Taylor rule with an argument on credit growth may not be an effective policy response.

Keywords

Monetary policy; Macroprudential Policy; Capital flows; Business cycles; Financial sector; Economic models; Capital Inflows, Monetary Policy, Macroprudential Policy, Welfare Analysis

URL

http://www.imf.org/external/pubs/ft/wp/2014/wp1430.pdf

Record ID

528     [ Page 4 of 14, No. 12 ]

Date

2014-04

Author

Tamim Bayoumi, Giovanni Dell'Ariccia, Karl Friedrich Habermeier, Tommaso Mancini Griffoli, and Fabian Valencia

Affiliation

Research, Monetary and Capital Markets, and Strategy and Policy Review Departments, IMF

Title

Monetary Policy in the New Normal

Summary /
Abstract

The proposed Staff Discussion Note would take stock of the current debate on the shape that monetary policy should take after the crisis. It revisits the pros and cons of expanding the objectives of monetary policy, the merits of turning unconventional policies into conventional ones, how to make monetary policy frameworks more resilient to the risk of being constrained by the zero-lower bound going forward, and the institutional challenges to preserve central bank independence with regards to monetary policy, while allowing adequate government oversight over central banks’ new responsibilities. It will draw policy conclusions where consensus has been reached, and highlight the areas where more work is needed to get more granular policy advice.

Keywords

Monetary policy;Central banks;Central bank autonomy;Macroprudential Policy;Financial stability;Cross country analysis;Monetary Policy, Financial Stability, Central Bank Independence

URL

http://www.imf.org/external/pubs/ft/sdn/2014/sdn1403.pdf

Record ID

527     [ Page 4 of 14, No. 13 ]

Date

2014-07

Author

Elva Bova, Nathalie Carcenac, and Martine Guerguil

Affiliation

Fiscal Affairs Department, IMF

Title

Fiscal Rules and the Procyclicality of Fiscal Policy in the Developing World

Summary /
Abstract

This paper documents the spread of fiscal rules in the developing world and investigates the relation between fiscal rules and procyclical fiscal policy. We find that, since the early 2000s, developing countries outnumbered advanced economies as users of fiscal rules. Rules were adopted either as part of the toolkit to join currency unions or to strengthen fiscal frameworks during and after large stabilization and policy reform episodes. The paper also finds that the greater use of fiscal rules has not shielded these countries from procyclicality, since fiscal policy remains procyclical following the adoption of a fiscal rule. We find partial evidence that some features of “second generation” rules, such as the use of cyclically-adjusted targets, well-defined escape clauses, together with stronger legal and enforcement arrangements, may be associated with less procyclicality.

Keywords

Fiscal rules, fiscal policty, cyclicality, emerging markets, developing economies

Record ID

526     [ Page 4 of 14, No. 14 ]

Date

2014-04

Author

DeGroot, Oliver

Affiliation

Board of Governors of the Federal Reserve System

Title

The Risk Channel of Monetary Policy

Summary /
Abstract

This paper examines how monetary policy affects the riskiness of the financial sector's aggregate balance sheet, a mechanism referred to as the risk channel of monetary policy. I study the risk channel in a DSGE model with nominal frictions and a banking sector that can issue both outside equity and debt, making banks' exposure to risk an endogenous choice, and dependent on the (monetary) policy environment. Banks' equilibrium portfolio choice is determined by solving the model around a risk-adjusted steady state. I find that banks reduce their reliance on debt finance and decrease leverage when monetary policy shocks are prevalent. A monetary policy reaction function that responds to movements in bank leverage or to movements in credit spreads can incentivize banks to increase their use of debt finance and increase leverage, ceteris paribus, increasing the riskiness of the financial sector for the real economy.

Keywords

Financial intermediation; portfolio choice; debt and equity; monetary policy; risk-adjusted steady state

URL

http://www.federalreserve.gov/pubs/feds/2014/201431/201431pap.pdf

Record ID

525     [ Page 4 of 14, No. 15 ]

Date

2014-06

Author

Christoph E. Boehm and Christopher L. House

Affiliation

University of Michigan and NBER

Title

Optimal Taylor Rules in New Keynesian Models

Summary /
Abstract

We analyze the optimal Taylor rule in a standard New Keynesian model. If the central bank can observe the output gap and the inflation rate without error, then it is typically optimal to respond infinitely strongly to observed deviations from the central bank’s targets. If it observes inflation and the output gap with error, the central bank will temper its responses to observed deviations so as not to impart unnecessary volatility to the economy. If the Taylor rule is expressed in terms of estimated output and inflation then it is optimal to respond infinitely strongly to estimated deviations from the targets. Because filtered estimates are based on current and past observations, such Taylor rules appear to have an interest smoothing component. Under such a Taylor rule, if the central bank is behaving optimally, the estimates of inflation and the output gap should be perfectly negatively correlated. In the data, inflation and the output gap are weakly correlated, suggesting that the central bank is systematically underreacting to its estimates of inflation and the output gap.

Keywords

Optimal Taylor Rules, New Keynesian Models

URL

http://www.nber.org/papers/w20237.pdf

Record ID

524     [ Page 4 of 14, No. 16 ]

Date

2014-03

Author

Rogers, John H.; Scotti, Chiara; and Wright, Jonathan H.

Affiliation

Board of Governors of the Federal Reserve System (first two authors), and Johns Hopkins University

Title

Evaluating Asset-Market Effects of Unconventional Monetary Policy: A Cross-Country Comparison

Summary /
Abstract

This paper examines the effects of unconventional monetary policy by the Federal Reserve, Bank of England, European Central Bank and Bank of Japan on bond yields, stock prices and exchange rates. We use common methodologies for the four central banks, with daily and intradaily asset price data. We emphasize the use of intradaily data to identify the causal effect of monetary policy surprises. We find that these policies are effective in easing financial conditions when policy rates are stuck at the zero lower bound, apparently largely by reducing term premia.

Keywords

Large scale asset purchases; quantitative easing; zero bound; term premium

URL

http://www.federalreserve.gov/pubs/ifdp/2014/1101/ifdp1101.pdf

Record ID

523     [ Page 4 of 14, No. 17 ]

Date

2014-06

Author

Mark Gertler and Peter Karadi

Affiliation

New York University, European Central Bank, NBER

Title

Monetary Policy Surprises, Credit Costs and Economic Activity

Summary /
Abstract

We provide evidence on the nature of the monetary transmission mechanism. To identify policy shocks in a setting with both economic and financial variables, we combine traditional monetary vector autoregression (VAR) analysis with high frequency identification (HFI) of monetary policy shocks. We first show that the shocks identified using HFI surprises as external instruments produce responses in output and inflation consistent with both textbook theory and conventional monetary VAR analysis. We also find, however, that monetary policy surprises typically produce "modest movements" in short rates that lead to "large" movements in credit costs and economic activity. The large movements in credit costs are mainly due to the reaction of both term premia and credit spreads that are typically absent from the standard model of monetary policy transmission. Finally, we show that forward guidance is important to the overall strength of the transmission mechanism.

Keywords

Monetary Policy, Credit Costs, Economic Activity

URL

http://www.nber.org/papers/w20224.pdf

Record ID

522     [ Page 4 of 14, No. 18 ]

Date

2014-06

Author

Guillermo J. Escudé

Affiliation

Central Bank of Argentina

Title

The Possible Trinity: Optimal Interest Rate, Exchange Rate, and Taxes on Capital Flows in a DSGE Model for a Small Open Economy

Summary /
Abstract

A traditional way of thinking about the exchange rate (XR) regime and capital account openness has been framed in terms of the 'impossible trinity' or 'trilemma', in which policymakers can only have 2 of 3 possible outcomes: open capital markets, monetary independence and pegged XRs. This paper is an extension of Escude (A DSGE Model for a SOE with Systematic Interest and Foreign Exchange Policies in Which Policymakers Exploit the Risk Premium for Stabilization Purposes, 2013), which focused on interest rate and XR policies, since it introduces the third vertex of the 'trinity' in the form of taxes on private foreign debt. These affect the risk-adjusted uncovered interest parity equation and hence influence the SOE's international financial flows. A useful way to illustrate the range of policy alternatives is to associate them with the faces of a triangle. Each of 3 possible government intervention policies taken individually (in the domestic currency bond market, in the FX market, and in the foreign currency bonds market) corresponds to one of the vertices of the triangle, each of the 3 possible pairs of intervention policies corresponds to one of its 3 edges, and the 3 simultaneous intervention policies taken jointly correspond to its interior. This paper shows that this interior, or 'possible trinity' is quite generally not only possible but optimal, since the CB obtains a lower loss when it implements a policy with all three interventions.

Keywords

DSGE models; small open economy; monetary and exchange rate policy; capital controls; optimal policy

URL

http://www.economics-ejournal.org/economics/journalarticles/2014-25/version_1/count

Record ID

521     [ Page 4 of 14, No. 19 ]

Date

2014-05

Author

Laurence M. Ball

Affiliation

Johns Hopkins University, NBER

Title

Long-Term Damage from the Great Recession in OECD Countries

Summary /
Abstract

This paper estimates the long-term effects of the global recession of 2008-2009 on output in 23 countries. I measure these effects by comparing current estimates of potential output from the OECD and IMF to the path that potential was following in 2007, according to estimates at the time. The losses in potential output range from almost nothing in Australia and Switzerland to more than 30% in Greece, Hungary, and Ireland; the average loss, weighted by economy size, is 8.4%. Most countries have experienced strong hysteresis effects: shortfalls of actual output from pre-recession trends have reduced potential output almost one-for-one. In the hardest-hit economies, the current growth rate of potential is depressed, implying that the level of lost potential is growing over time.

Keywords

Great Recession, Potential Output

URL

http://www.nber.org/papers/w20185.pdf

Record ID

520     [ Page 4 of 14, No. 20 ]

Date

2014-06

Author

Ray C. Fair

Affiliation

Yale University

Title

How Might a Central Bank Report Uncertainty?

Summary /
Abstract

An important question for central banks is how they should report the uncertainty of their forecasts. This paper discusses a way in which a central bank could report the uncertainty of its forecasts in a world in
which it used a single macroeconometric model to make its forecasts and guide its policies. Suggestions are then made as to what might be feasible for a central bank to report given that it is unlikely to be willing to commit to a single model. A particular model is used as an illustration.

Keywords

Central bank, uncertainty, stochastic simulation

URL

http://www.economics-ejournal.org/economics/discussionpapers/2014-25/count

Record ID

519     [ Page 4 of 14, No. 21 ]

Date

2014-05

Author

Rudebusch, Glenn D. and Williams, John C.

Affiliation

Federal Reserve Bank of San Francisco

Title

A wedge in the dual mandate: monetary policy and long-term unemployment

Summary /
Abstract

In standard macroeconomic models, the two objectives in the Federal Reserve’s dual mandate—full employment and price stability—are closely intertwined. We motivate and estimate an alternative model in which long-term unemployment varies endogenously over the business cycle but does not affect price inflation. In this new model, an increase in long-term unemployment as a share of total unemployment creates short-term tradeoffs for optimal monetary policy and a wedge in the dual mandate. In particular, faced with high long-term unemployment following the Great Recession, optimal monetary policy would allow inflation to overshoot its target more than in standard models.

Keywords

Monetary Policy, Long-term Unemployment, Inflation Target, Short-Term Tradeoffs

URL

http://www.frbsf.org/economic-research/publications/working-papers/wp2014-14.pdf

Record ID

518     [ Page 4 of 14, No. 22 ]

Date

2014-02

Author

Dimas M. Fazio, Benjamin M. Tabak, and Daniel O. Cajueiro

Affiliation

Banco Central do Brazil

Title

Inflation Targeting and Banking System Soundness: A Comprehensive Analysis

Summary /
Abstract

Several specialists and authorities blame inflation targeting (IT) regime for not responding to the increasing systemic risk and the development of asset bubbles. Nevertheless, we employ a database with commercial banks from 71 countries between 1998 and 2012, and we present evidence that: banks from IT countries: (i) are, on average, more stable; (ii) have sounder systemically important banks; and (iii) are less affected in times of global liquidity shortage. These results are in line with the existence of a price stability channel towards financial stability. Our conclusions are robust to whether we compare banks from countries that have the same legal origins, whether we control for the responsibility of bank supervision being delegated to other bodies rather than the Central Bank.

Keywords

Inflation targeting, financial crisis, financial stability, bank’s risk.

URL

http://www.bcb.gov.br/pec/wps/ingl/wps347.pdf

Record ID

517     [ Page 4 of 14, No. 23 ]

Date

2014-06

Author

Tamim Bayoumi

Affiliation

Strategy, Policy, and Review Department, IMF

Title

After the Fall: Lessons for Policy Cooperation from the Global Crisis

Summary /
Abstract

A crisis is a terrible thing to waste, and nowhere is this truer than in the arena of international economic policy cooperation. With the world facing the largest and most synchronized plunge in output of the postwar era, policy makers banded together to find solutions. This paper looks at the lessons from what did—and did not—occur in the area of policy cooperation since the crisis. Outcomes seem to be weaker over time in areas such as macroeconomic policies, where institutional procedures were less well defined and there were disagreements over spillovers. By contrast, cooperation seems to have been most effective where there was a consensus that such policies could avoid the risk of highly detrimental outcomes and institutional arrangements were more concrete. Principle amongst these was trade, but bank capital buffers, IMF resources, and derivatives exchanges also fall into this category. Lessons for those interested in promoting cooperation seems to be: it may be more fruitful to: focus on the potential for major costs from a lack of cooperation, rather than the minor gains from fuller coordination; strive for more consensus estimated spillovers; convince policy-makers costs of loss of cooperation are large; and focus on building better and more enduring institutional arrangements.

Keywords

Policy cooperation, institutuinal coarregements; policy spillovers

URL

http://www.imf.org/external/pubs/ft/wp/2014/wp1497.pdf

Record ID

516     [ Page 4 of 14, No. 24 ]

Date

2014-05

Author

Curdia, Vasco; Ferrero, Andrea; Ng, Ging Cee; and Tambalotti, Andrea

Affiliation

Federal Reserve Bank of San Francisco, University of Oxford, University of Chicago and Federal Reserve Bank of New York

Title

Has U.S. monetary policy tracked the efficient interest rate?

Summary /
Abstract

Interest rate decisions by central banks are universally discussed in terms of Taylor rules, which describe policy rates as responding to inflation and some measure of the output gap. We show that an alternative specification of the monetary policy reaction function, in which the interest rate tracks the evolution of a Wicksellian efficient rate of return as the primary indicator of real activity, fits the U.S. data better than otherwise identical Taylor rules. This surprising result holds for a wide variety of specifications of the other ingredients of the policy rule and of approaches to the measurement of the output gap. Moreover, it is robust across two different models of private agents’ behavior.

Keywords

U.S. monetary policy; Interest rate rules; DSGE models; Bayesian model comparison

URL

http://www.frbsf.org/economic-research/files/wp2014-12.pdf

Record ID

515     [ Page 4 of 14, No. 25 ]

Date

2014-05

Author

Thierry Tressel and Thierry Verdier

Affiliation

European Department, IMF

Title

Optimal Prudential Regulation of Banks and the Political Economy of Supervision

Summary /
Abstract

We consider a moral hazard economy in banks and production to study how incentives for risk taking are affected by the quality of supervision. We show that low interest rates may generate excessive risk taking. Because of a pecuniary externality, the market equilibrium may not be optimal and there is a need for prudential regulation. We show that the optimal capital ratio depends on the macro-financial cycle, and that, in presence of production externalities, it should be complemented by a constraint on asset allocation. We show that the political process tends to exacerbate excessive risk taking and credit cycles.

Keywords

Banking Regulation, Regulatory Forbearance, Political Economy

URL

http://www.imf.org/external/pubs/ft/wp/2014/wp1490.pdf

Record ID

514     [ Page 4 of 14, No. 26 ]

Date

2014-05

Author

Ales Bulir, Jaromír Hurník, and Katerina Smidkova

Affiliation

Institute for Capacity Development, IMF

Title

Inflation Reports and Models: How Well Do Central Banks Really Write?

Summary /
Abstract

We offer a novel methodology for assessing the quality of inflation reports. In contrast to the existing literature, which mostly evaluates the formal quality of these reports, we evaluate their economic content by comparing inflation factors reported by the central banks with ex-post model-identified factors. Regarding the former, we use verbal analysis and coding of inflation reports to describe inflation factors communicated by central banks in real time. Regarding the latter, we use reduced-form, new Keynesian models and revised data to approximate the true inflation factors. Positive correlations indicate that the reported inflation factors were similar to the true, model-identified ones and hence mark high-quality inflation reports. Although central bank reports on average identify inflation factors correctly, the degree of forward-looking reporting varies across factors, time, and countries.

Keywords

Inflation targeting, Kalman filter, monetary policy communication

URL

http://www.imf.org/external/pubs/ft/wp/2014/wp1491.pdf

Record ID

513     [ Page 4 of 14, No. 27 ]

Date

2014-05

Author

Jean-Louis Combes, Xavier Debrun, Alexandru Minea, and Rene Tapsoba

Affiliation

African and Fiscal Affairs Departments, IMF

Title

Inflation Targeting and Fiscal Rules: Do Interactions and Sequencing Matter?

Summary /
Abstract

The paper examines the joint impact of inflation targeting (IT) and fiscal rules (FR) on fiscal behavior and inflation in a broad panel of advanced and developing economies over the period 1990-2009. The main contribution of the paper is to show that, as suggested by the theoretical literature, interactions between FR and IT matter a great deal for policy outcomes. Specifically, the combination of FR and IT appears to deliver more disciplined macroeconomic policies than each of these institutions in isolation. In addition, the sequencing of the monetary and fiscal reforms plays a role: adopting FR before IT delivers stronger results than the reverse sequence.

Keywords

Inflation targeting, fiscal rules, institutional reform sequencing

URL

http://www.imf.org/external/pubs/ft/wp/2014/wp1489.pdf

Record ID

512     [ Page 4 of 14, No. 28 ]

Date

2013-12

Author

Sir Christopher Pissarides

Affiliation

Co-recipient of the 2010 Nobel Memorial Prize in Economic Sciences, is the Regius Professor of Economics at LSE, European Studies Professor at the University of Cyprus and Chairman of the Council of National Economy of the Republic of Cyprus. Between 1999 and 2007, he was director of CEP’s macroeconomics research programme; and he is now Chairman of the new Centre for Macroeconomics at LSE.

Title

Tough choices for a troubled euro

Summary /
Abstract

Nobel laureate Christopher Pissarides was once a passionate believer in the benefits of European monetary union. He now thinks that either the euro should be dismantled or the direction of economic policy dramatically reversed so as to promote growth and jobs and avoid creating a lost generation of educated young people.

Keywords

Euro, monetary union, inflation, growth, unemployment

URL

http://cep.lse.ac.uk/pubs/download/cp409.pdf

Record ID

511     [ Page 4 of 14, No. 29 ]

Date

2014-05

Author

Benjamin M. Friedman

Affiliation

William Joseph Maier Professor of Political Economy, Harvard University

Title

Has the Financial Crisis Permanently Changed the Practice of Monetary Policy? Has It Changed the Theory of Monetary Policy?

Summary /
Abstract

I argue in this paper that one of the two forms of hitherto unconventional monetary policy that many central banks have implemented in response to the 2007 financial crisis – large-scale asset purchases, or to put the matter more generically, use of the central bank’s balance sheet as a distinct tool of monetary policy – is likely to become part of the standard toolkit of monetary policymaking in normal times as well. As intended, these purchases have lowered long-term interest rates relative to short-term rates, and lowered interest rates on more-risky compared to less-risky obligations. Moreover, their introduction fills a conceptual vacuum that has long stood at the heart of monetary policy analysis and implementation. By contrast, forward guidance on the future trajectory of monetary policy has been less successful. Public statements by central banks about their actions and intentions will no doubt continue, but transparency for the sake of transparency is not the same as the deliberate attempt to shape market expectations for purposes of achieving specific monetary policy objectives. Finally, there is a conceptual component to all this as well. In contrast to the last century or more of monetary theory, which has focused on central banks’ liabilities, the basis for the effectiveness of central bank asset purchases turns on the role of the asset side of the central bank’s balance sheet. The implications for monetary theory are profound.

Keywords

Financial Crisis, Monetary Policy, Monetary Theory

URL

http://www.nber.org/papers/w20128.pdf

Record ID

510     [ Page 4 of 14, No. 30 ]

Date

2014-05

Author

Neslihan Kaya

Affiliation

Central Bank of the Republic of Turkey

Title

A Comparison of Optimal Policy Rules for Pre and Post Inflation Targeting Eras : Empirical Evidence from Bank of Canada

Summary /
Abstract

In this paper, we derive policy rules of Bank of Canada for different preferences over the goal variables in their loss functions. The optimal rules are derived for the pre and post inflation-targeting eras. According to the results, the monetary policy rule of the Bank of Canada for the pre inflation-targeting era is best described with a loss function that attaches equal weight to inflation, interest rate smoothing incentive and the output gap in the loss function. In the post-inflation targeting era the optimal interest rate attaches the highest weight to inflation rate in the loss function; followed by the interest rate smoothing incentive and then the output gap. The inclusion of the exchange rate as another goal variable in the loss function does not significantly alter the results in approximating the actual policy rate of Bank of Canada. Next, simulations of demand (positive) and supply (negative) shocks are carried out for the post-IT period for two cases where the monetary policy rule is mimicked by (i) an ad-hoc Taylor rule and (ii) the derived optimal rule. The results indicate that the ad-hoc Taylor rule brings down inflation rates more quickly compared to the derived optimal rule, but only at the cost of higher contraction in output and more volatile interest rates.

Keywords

Inflation targeting, optimal monetary policy rule, linear-quadratic regulator problem

URL

http://www.tcmb.gov.tr/research/discus/2014/WP1413.php

Record ID

509     [ Page 4 of 14, No. 31 ]

Date

2014-03

Author

Alexander J. Gill

Affiliation

Duke University

Title

Ben Bernanke: Theory and Practice

Summary /
Abstract

Ben Bernanke researched monetary policy for over 25 years prior to becoming a policymaker, and his two-term career as Chairman of the Federal Reserve featured a severe recession coupled with a financial crisis, a chief subject of Bernanke's research. His reaction to economic events is noteworthy in its originality and breadth, but its intellectual underpinnings are, with a few exceptions discussed in the paper, not without written precedent. This paper will summarize and connect Bernanke's research and policymaking and show that the two are closely aligned.

Keywords

Economic thought, history of economic thought, central banking, Fed, Bernanke

URL

http://hope.econ.duke.edu/sites/default/files/Ben_Bernanke_Theory_and_Practice%20WP.pdf

Record ID

508     [ Page 4 of 14, No. 32 ]

Date

2014-05

Author

Marco Pagano

Affiliation

Centre for Studies in Economics and Finance, University of Naples

Title

Dealing with Financial Crises: How Much Help from Research

Summary /
Abstract

Has economic research been helpful in dealing with the financial crises of the early 2000s? On the whole, the answer is negative, although there are bright spots. Economists have largely failed to predict both crises, largely because most of them were not analytically equipped to understand them, in spite of their recurrence in the last 25 years. In the pre-crisis period, however, there have been important exceptions – theoretical and empirical strands of research that largely laid out the basis for our current thinking about financial crises. Since 2008, a flurry of new studies offered several different interpretations of the US crisis: to some extent, they point to potentially complementary factors, but disagree on their relative importance, and therefore on policy recommendations. Research on the euro debt crisis has so far been much more limited: even Europe-based researchers – including CEPR ones – have often directed their attention more to the US crisis than to that occurring on their doorstep. In terms of impact on policy and regulatory reform, the record is uneven. On the one hand, the swift and massive liquidity provision by central banks in the wake of both crises is, at least partly, to be credited to previous research on the role of central banks as lenders of last resort in crises and on the real effects of bank lending and monetary policy. On the other hand, economists have had limited impact on the reform of prudential and security market regulation. In part, this is due to their neglect of important regulatory choices, which policy-makers are therefore left to take without the guidance of academic research-based analysis.

Keywords

Financial crisis, risk taking, systemic risk, financial regulation, monetary policy, politics

URL

http://www.csef.it/WP/wp361.pdf

Record ID

507     [ Page 4 of 14, No. 33 ]

Date

2014-04

Author

Todd B. Walker, Alexander W. Richter, and Nathaniel A. Throckmorton

Affiliation

Auburn University and Indiana University

Title

Accuracy, Speed and Robustness of Policy Function Iteration

Summary /
Abstract

Policy function iteration methods for solving and analyzing dynamic stochastic general equilibrium models are powerful from a theoretical and computational perspective. Despite obvious theoretical appeal, significant startup costs and a reliance on grid-based methods have limited the use of policy function iteration as a solution algorithm. We reduce these costs by providing a user-friendly suite of MATLAB functions that introduce multi-core processing and Fortran via MATLAB's executable function. Within the class of policy function iteration methods, we advocate using time iteration with linear interpolation. We examine a canonical real business cycle model and a new Keynesian model that features regime switching in policy parameters, Epstein-Zin preferences, and monetary policy that occasionally hits the zero-lower bound on the nominal interest rate to highlight the attractiveness of our methodology. We compare our advocated approach to other familiar iteration and approximation methods, highlighting the tradeoffs between accuracy, speed and robustness.

Keywords

Policy function iteration; Zero lower bound; Epstein-Zin preferences; Markov switching; Chebyshev polynomials; Real business cycle model; New Keynesian model

URL

http://cla.auburn.edu/econwp/Archives/2014/2014-08.pdf

Record ID

506     [ Page 4 of 14, No. 34 ]

Date

2014-04

Author

Akio Hattori, Kentaro Kikuchi, Fuminori Niwa and Yoshihiko Uchida

Affiliation

All of Bank of Japan

Title

A Survey of Systemic Risk Measures: Methodology and Application to the Japanese Market

Summary /
Abstract

The recent financial crisis has prompted academia, country authorities, and international bodies to study quantitative tools to monitor the financial system, especially systemic risk measures. This paper aims to outline these measures and apply them to Japan's financial system. The paper demonstrates that they are effective tools for monitoring the robustness of financial system on a real-time basis, although there are some caveats.

Keywords

Systemic risk, Risk measure, Early warning indicators, Stress test, Scenario analysis, Macro-prudence, Financial crisis

URL

http://www.imes.boj.or.jp/research/papers/english/14-E-03.pdf

Record ID

505     [ Page 4 of 14, No. 35 ]

Date

2013-09

Author

Camilo González, Luisa F. Silva, Carmiña O. Vargas, and Andrés M. Velasco

Affiliation

Banco de la Republica Colombia

Title

An exploration on interbank markets and the operational framework of monetary policy in Colombia

Summary /
Abstract

We set up a dynamic stochastic model for the interbank daily market for funds in Colombia. The framework features exogenous reserve requirements and requirement period, competitive trading among heterogeneous commercial banks, daily open market operations held by the Central Bank (auctions and window facilities), and idiosyncratic demand shocks and uncertainty in the daily auction. The model highlights the institutional framework and the money supply mechanisms for the interbank market. We construct a data base for the Colombian case that incorporates the principal variables of the model and give us some insights about the behavior of them in a typical requirement period. We corroborate the Martingale hypothesis for the interbank interest rate.

Keywords

Interbank Market; Overnight Rates; Reserve Demand

URL

http://d.repec.org/n?u=RePEc:col:000094:010982&r=cba

Record ID

504     [ Page 4 of 14, No. 36 ]

Date

2014-04

Author

Dongho Song

Affiliation

University of Pennsylvania

Title

Bond Market Exposures to Macroeconomic and Monetary Policy Risks

Summary /
Abstract

I provide empirical evidence of changes in the U.S. Treasury yield curve and related macroeconomic factors, and investigate whether the changes are brought about by external shocks, monetary policy, or by both. To explore this, I characterize bond market exposures to macroeconomic and monetary policy risks, using an equilibrium term structure model with recursive preferences in which inflation dynamics are endogenously determined. In my model, the key risks that affect bond market prices are changes in the correlation between growth and inflation and changes in the conduct of monetary policy. Using a novel estimation technique, I find that the changes in monetary policy affect the volatility of yield spreads, while the changes in the correlation between growth and inflation affect both the level as well as the volatility of yield spreads. Consequently, the changes in the correlation structure are the main contributor to bond risk premia and to bond market volatility. The time variations within a regime and risks associated with moving across regimes lead to the failure of the Expectations Hypothesis and to the excess bond return predictability regression of Cochrane and Piazzesi (2005), as in the data.

Keywords

Monetary Policy Risks, Regime-Switching Macroeconomic Risks, Stochastic Volatility, Taylor-Rule, Term Structure

URL

http://d.repec.org/n?u=RePEc:pen:papers:14-017&r=cba

Record ID

503     [ Page 4 of 14, No. 37 ]

Date

2014-04

Author

Amstad, Marlene; Potter, Simon M.; and Rich, Robert W.

Affiliation

All of Federal Reserve Bank of New York

Title

The FRBNY staff underlying inflation gauge: UIG

Summary /
Abstract

Monetary policymakers and long-term investors would benefit greatly from a measure of underlying inflation that uses all relevant information, is available in real time, and forecasts inflation better than traditional underlying inflation measures such as core inflation measures. This paper presents the “FRBNY Staff Underlying Inflation Gauge (UIG)” for CPI and PCE. Using a dynamic factor model approach, the UIG is derived from a broad data set that extends beyond price series to include a wide range of nominal, real, and financial variables. It also considers the specific and time-varying persistence of individual sub-components of an inflation series. An attractive feature of the UIG is that it can be updated on a daily basis, which allows for a close monitoring of changes in underlying inflation. This capability can be very useful when large and sudden economic fluctuations occur, as at the end of 2008. In addition, the UIG displays greater forecast accuracy than traditional measures of core inflation.

Keywords

Expectations; survey forecasts; imperfect information; term structure of disagreement

URL

http://www.newyorkfed.org/research/staff_reports/sr672.pdf

Record ID

502     [ Page 4 of 14, No. 38 ]

Date

2014-04

Author

Thorsten Beck, Andrea Colciago, and Damjan Pfajfar

Affiliation

Cass Business School, City University London, and CEPR; De Nederlandsche Bank and University of Milano Bicocca; and EBC, CentER and Economics Department, Tilburg University

Title

The role of financial intermediaries in monetary policy transmission

Summary /
Abstract

The recent financial crisis has stimulated theoretical and empirical research on the propagation mechanisms underlying business cycles, in particular on the role of financial frictions. Many issues concerning the interactions between banking and monetary policy forced policy makers to redefine economic policies, and motivated macroeconomists to focus on the implications of financial intermediation constraints on asset price fluctuations, the behavior of non-financial firms, households, governments and in turn for real macroeconomic performance. This paper surveys research on the role of financial intermediaries and financial frictions in the transmission of monetary policy and discusses how to design both the new banking regulatory and supervisory structures and monetary policy in order to stabilize the economy. It also serves as an introduction to this special issue.

Keywords

Financial Intermediation; DSGE models; Financial Frictions

URL

http://www.dnb.nl/en/binaries/Working%20Paper%20420_tcm47-306757.pdf

Record ID

501     [ Page 4 of 14, No. 39 ]

Date

2014-04

Author

Pejman Bahramian, Mehmet Balcilar, Rangan Gupta and Patrick T. Kanda

Affiliation

Eastern Mediterranean University, and University of Pretoria

Title

Forecasting South African Inflation Using Non-Linear Models: A Weighted Loss-Based Evaluation

Summary /
Abstract

The conduct of inflation targeting is heavily dependent on accurate inflation forecasts. Non-linear models have increasingly featured, along with linear counterparts, in the forecasting literature. In this study, we focus on forecasting South African infl ation by means of non-linear models and using a long historical dataset of seasonally-adjusted monthly inflation rates spanning from 1921:02 to 2013:01. For an emerging market economy such as South Africa, non-linearities can be a salient feature of such long data, hence the relevance of evaluating non-linear models' forecast performance. In the same vein, given the fact that 1969:10 marks the beginning of a protracted rising trend in South African inflation data, we estimate the models for an in-sample period of 1921:02-1966:09 and evaluate 24 step-ahead forecasts over an out-of-sample period of 1966:10-2013:01. In addition, using a weighted loss function specification, we evaluate the forecast performance of different non-linear models across various extreme economic environments and forecast horizons. In general, we find that no competing model consistently and significantly beats the LoLiMoT's performance in forecasting South African inflation.

Keywords

Inflation, forecasting, non-linear models, weighted loss function, South Africa

URL

http://web.up.ac.za/sitefiles/file/40/677/WP_2014_16.pdf

Record ID

500     [ Page 4 of 14, No. 40 ]

Date

2014-02

Author

Pablo Pincheira and Andrés Gatty

Affiliation

Banco Central de Chile

Title

Forecasting Chilean Inflation with International Factors

Summary /
Abstract

In this paper we build forecasts for Chilean year-on-year inflation using simple time-series models augmented with different measures of international inflation. Broadly speaking, we construct two families of international inflation factors. The first family is built using year-on-year inflation of 18 Latin American (LA) countries (excluding Chile). The second family is built using year-on-year inflation of 30 OECD countries (excluding Chile). We show sound in-sample and pseudo out-ofsample evidence indicating that these international factors do help forecast Chilean inflation at several horizons. Incorporating the international factors reduce the Root Mean Squared Prediction Error of pure univariate SARIMA models statistically speaking. We also show that the predictive pass-through from international to local inflation has increased in the recent years. As a final exercise we construct another international inflation factor as an average of the inflation of fifteen countries from which Chile gets a high percentage of its imports. With the aid of this factor the models outperform our univariate benchmarks but also underperform the results obtained with the broader factors built with LA or OECD countries, suggesting that imported inflation is not the only channel explaining our findings.

Keywords

Inflation forecasting for IT central banks, international inflation factors

URL

http://www.bcentral.cl/estudios/documentos-trabajo/pdf/dtbc723.pdf

Record ID

499     [ Page 4 of 14, No. 41 ]

Date

2014-01

Author

Keiichiro Kobayashi and Tomoyuki Nakajima

Affiliation

Keio University/The Canon Institute for Global Studies and Institute of Economic Research, Kyoto University/The Canon Institute for Global Studies

Title

A macroeconomic model of liquidity crises

Summary /
Abstract

We develop a simple macroeconomic model that captures key features of a liquidity crisis. During a crisis, the supply of short-term loans vanishes, the interest rate rises sharply, and the level of economic activity declines. A crisis may be caused either by self-fulfilling beliefs or by fundamental shocks. It occurs as a result of market failure due to debt overhang in short-term loans. The government's commitment to deposit guarantee reduces the likelihood of self-fulfilling crisis but increases that of fundamental crisis.

Keywords

Debt overhang, liquidity, systemic crisis

URL

http://www.canon-igs.org/en/column/140203_nakajima_02.pdf

Record ID

498     [ Page 4 of 14, No. 42 ]

Date

2014-04

Author

Huw Dixon, Jeremy Franklin, and Stephen Millard

Affiliation

Cardiff Business School and Bank of England

Title

Sectoral shocks and monetary policy in the United Kingdom

Summary /
Abstract

In this paper, we use an open economy model of the United Kingdom to examine the extent to which monetary policy should respond to movements in sectoral inflation rates. To do this we construct a Generalised Taylor model that takes specific account of the sectoral make up of the consumer price index (CPI), where the sectors are based on the COICOP classification the UK CPI microdata. We calibrate the model for each sector using the UK CPI microdata and model the sectoral shocks that drive sectoral inflation rates as white noise processes, as in the UK data. We find that a policy rule that allows for different responses to inflation in different sectors outperforms a rule which just targets aggregate CPI. However, the gain is small and comes from partially looking through movements in aggregate inflation driven by movements in petrol price inflation, which is volatile and tends not to reflect underlying inflationary pressure.

Keywords

CPI inflation; Sectoral inflation rates; Generalised Taylor economy

URL

http://www.bankofengland.co.uk/research/Documents/workingpapers/2014/wp499.pdf

Record ID

497     [ Page 4 of 14, No. 43 ]

Date

2014-03

Author

Thomas Barnebeck Andersen, Nikolaj Malchow-Møller, and Jens Nordvig

Affiliation

CEPS

Title

Inflation-Targeting, Flexible Exchange Rates and Macroeconomic Performance since the Great Recession

Summary /
Abstract

Has inflation targeting (IT) conferred benefits in terms of economic growth on countries that followed this particular monetary policy strategy during the crisis period 2007-12? This paper answers this question in the affirmative. Countries with an IT monetary regime with flexible exchange rates weathered the crisis much better than countries with other monetary regimes, predominantly countries with fixed exchange rates. Part of this difference in growth performance reflects differences in export performance during the initial years of the crisis, which in turn can be explained by real exchange rate depreciations. However, IT seems also to confer other benefits on the countries above and beyond the effects from currency depreciation.

Keywords

Inflation targeting, flexible exchange rates, economic growth, Great Recession

URL

http://d.repec.org/n?u=RePEc:eps:cepswp:9116&r=cba

Record ID

496     [ Page 4 of 14, No. 44 ]

Date

2013-06

Author

Nidia Ruth Reyes, José Eduardo Gómez G. and Jair Ojeda Joya

Affiliation

Banco de la Republica Colombia

Title

Bank Lending, Risk Taking, and the Transmission of Monetary Policy: New Evidence for Colombia

Summary /
Abstract

We study the existence of a monetary policy transmission mechanism through banks in Colombia, using monthly banks’ balance sheet data for the period 1996:4 – 2012:12. We obtain results which are consistent with the basic postulates of the bank lending channel (and the risk-taking channel) literature. The impact of short-term interest rates on the growth rate of loans is negative, indicating that increases in these rates lead to reductions in the growth rate of loans. This impact is stronger for consumer loans than for commercial loans. We find important heterogeneity in the monetary policy transmission across banks depending on banks-specific characteristics.

Keywords

Monetary policy transmission, Bank lending channel, Risk taking channel, Colombia

URL

http://www.banrep.gov.co/sites/default/files/publicaciones/archivos/be_772.pdf?__utma=1.1731840165.1386797159.1397161236.1398087920.16&__utmb=1.7.10.1398087920&__utmc=1&__utmx=-&__utmz=1.1398087920.16.12.utmcsr=google|utmccn=(organic)|utmcmd=organic|utmct

Record ID

495     [ Page 4 of 14, No. 45 ]

Date

2014-03

Author

Willi Semmler and Pu Chen

Affiliation

New School for Social Research and Melbourne Institute of Technology

Title

Financial Stress, Regime Switching and Macrodynamics: Theory and Empirics for the US, the EU and Non-EU Countries

Summary /
Abstract

Over-borrowing and financial stress has recently become an important issue in macroeconomic and policy discussions in the US as well as in the EU. In this paper the authors study two regimes of financial stress. In a regime of high financial stress, stress shocks can have large and persistent impacts on the real side of the economy whereas in regimes of low stress, shocks can easily dissipate having no lasting effects. In order to study the macroeconomic dynamics, with alternative paths resulting from financial stress shocks, the authors introduce a macromodel with a finance-macro link which uses a multi-period decision framework of economic agents. The agents can, in a finite horizon context, borrow and accumulate assets where however the above two scenarios may occur. The model is solved through nonlinear model predictive control (NMPC). Empirically the authors use a multi-regime VAR (MRVAR) to study the impact of financial stress shocks on the macroeconomy in a large number of countries.

Keywords

Financial Stress, Macro dynamics, MRVAR

URL

http://www.economics-ejournal.org/economics/journalarticles/2014-20

Record ID

494     [ Page 4 of 14, No. 46 ]

Date

2014-04

Author

Benjamin Käfer

Affiliation

University of Kassel, Germany

Title

The Taylor Rule and Financial Stability: A Literature Review with Application for the Eurozone

Summary /
Abstract

The question of whether central banks should bear responsibility for financial stability is still unanswered. Regarding interest rate implementation, it is thus not clear if and how the Taylor rule should be augmented by an additional financial stability term. This paper reviews the normative and positive literature on Taylor rules augmented with exchange rates, asset prices, credit, and spreads. These measures have developed as common indicators of financial (in)stability in the Taylor rule literature. In addition, our own analysis describes the development of these indicators for the core and the periphery of the Eurozone. Given the large degree of heterogeneity between euro area countries, the conclusion here is that an interest rate reaction to instability by the European Central Bank would be inappropriate in times of crisis. However, this conclusion is somewhat weakened if there is no crisis.

Keywords

Taylor rule, financial stability, sovereign debt crisis, Eurozone heterogeneity, exchange rates, asset prices, credit spreads

URL

http://www.uni-marburg.de/fb02/makro/forschung/magkspapers/30-2014_kaefer.pdf

Record ID

493     [ Page 4 of 14, No. 47 ]

Date

2014-05

Author

Paolo Gelain and Pelin Ilbas

Affiliation

Norges Bank and National Bank of Belgium

Title

Monetary and macroprudential policies in an estimated model with financial intermediation

Summary /
Abstract

We estimate the Smets and Wouters (2007) model augmented with the Gertler and Karadi (2011) financial intermediation sector on US data by using real and financial observables. Given the framework of the estimated model, we address the question whether and how standard monetary policy should interact with macroprudential policy in order to safeguard real and financial stability. For this purpose, monetary policy is described by a flexible inflation targeting regime using the interest rate as instrument, while the macroprudential regulator adopts a tax/subsidy on bank capital in a countercyclical manner in order to stabilize nominal credit growth and the output gap. We look at the gains from coordination between the central bank and the macroprudential regulator under alternative assumptions regarding the degree of importance assigned to output gap fluctuations in the macroprudential mandate. The results suggest that there can be considerable gains from coordination if the macroprudential regulator has been assigned a sufficiently high weight on output gap stabilization, i.e. the common objective with monetary policy. If, on the other hand, the main focus of the macroprudential mandate is on credit growth, the macroprudential policy maker can reach better outcomes, while the central bank does worse, in the absence of coordination. Therefore, whether and to which extent monetary policy gains from coordination with the macroprudential regulator depends on the relative weight assigned to output fluctuations in the macroprudential mandate. Our counterfactual analysis further confirms the effectiveness of the countercyclical macroprudential tax/subsidy in containing the amplification effects triggered by a financial shock, and suggests that having a macroprudential regulatory tool at work could have successfully avoided the massive drop in credit such as the one observed at the onset of the Great Recession.

Keywords

Monetary policy, financial frictions, macroprudential policy, policy coordination, capital tax/subsidy

URL

http://www.nbb.be/doc/oc/repec/reswpp/wp258En.pdf

Record ID

492     [ Page 4 of 14, No. 48 ]

Date

2014-05

Author

J. Scott Davis and Ignacio Presno

Affiliation

Federal Reserve Bank of Dallas and Federal Reserve Bank of Boston

Title

Inflation targeting and the anchoring of inflation expectations: cross-country evidence from consensus forecasts

Summary /
Abstract

Using survey data of inflation expectations across a 36 developed and developing countries, this paper examines whether the adoption of inflation targeting has helped to anchor inflation expectations. We examine the response of inflation expectations following a shock to inflation, inflation expectations, and oil prices. For the 13 countries that adopted inflation targeting midway through the time period used in this study, there is a significant difference in the responses between the earlier and the later subperiods. A shock leads to a positive, significant, and persistent increase inflation expectations in the earlier, pre-targeting subperiod, but the same response is much less significant and persistent in the later, posttargeting subperiod. For the control group of 23 countries that did not adopt inflation targeting during this time period, there is no difference between responses in the earlier and the later sub-periods.

Keywords

Price levels, inflation, deflation, monetary policy

URL

http://www.dallasfed.org/assets/documents/institute/wpapers/2014/0174.pdf

Record ID

490     [ Page 4 of 14, No. 49 ]

Date

2014-03

Author

Franz Hamann, Marc Hofstetter, and Miguel Urrutia

Affiliation

Universidad de los Andes

Title

Inflation Targeting in Colombia, 2002-2012

Summary /
Abstract

After decades using monetary aggregates as the main instrument of monetary policy and having different varieties of crawling peg exchange rate regimes, Colombia adopted a full-fledged inflation-targeting (IT) regime in 1999, with inflation as the nominal anchor, a floating exchange rate, and the short-term interest rate as the main instrument. We examine the experience of the Colombian Central Bank over the last decade, a period of consolidation and innovation of its IT strategy. We study the increasing number of instruments used by the CB, including systematic foreign exchange interventions, announcements, and, sporadically, macro-prudential policies, capital controls, and changes in reserve requirements, among others. The study also examines some political economy dimensions that help explain the behavior of the CB during this period. To guide the discussion, we estimate a small-scale open-economy-policy-model.

Keywords

Inflation Targeting, Monetary Policy, Exchange Rate, Taylor Rule, Colombia

URL

file:///C:/Users/Dan/Downloads/dcede2014-09.pdf

Record ID

488     [ Page 4 of 14, No. 50 ]

Date

2014-05

Author

Charles I. Plosser

Affiliation

President and CEO, Federal Reserve Bank of Philadelphia

Title

Communication and Transparency in the Conduct of Monetary Policy

Summary /
Abstract

President Plosser outlines his views that policy transparency and forward guidance could be
enhanced if the central bank would be more explicit about its reaction function.

President Plosser notes that one way to be more explicit would be to indicate the likely behavior of the policy rate based on a few different Taylor-like rules that have been consistent with past conduct of monetary policy and are robust to our uncertainties regarding the true economic model.

President Plosser believes that the Federal Reserve Board staff’s model, called FRB/US, seems to be a reasonable starting point for providing economic forecasts based on those rule-based policies.

Keywords

Monetary policy, communications, transparency

URL

http://philadelphiafed.org/publications/speeches/plosser/2014/05-08-14-cfr.pdf