Selected Reference and Reading Materials compiled by Dan Villanueva


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Record ID

639     [ Page 6 of 68, No. 1 ]

Date

2015-12

Author

Ambrogio Cesa-Bianchi and Alessandro Rebucci

Affiliation

Bank of England and Johns Hopkins University

Title

Does easing monetary policy increase financial instability?

Summary /
Abstract

This paper develops a model featuring both a macroeconomic and a financial friction that speaks to the interaction between monetary and macroprudential policy and to the role of US monetary and regulatory policy in the run up to the Great Recession. There are two main results. First, real interest rate rigidities in a monopolistic banking system increase the probability of a financial crisis (relative to the case of flexible interest rate) in response to contractionary shocks to the economy, while they act as automatic macroprudential stabilizers in response to expansionary shocks. Second, when the interest rate is the only available policy instrument, a monetary authority subject to the same constraints as private agents cannot always achieve a (constrained) efficient allocation and faces a trade-off between macroeconomic and financial stability in response to contractionary shocks. An implication of our analysis is that the weak link in the US policy framework in the run up to the Global Recession was not excessively lax monetary policy after 2002, but rather the absence of an effective second policy instrument aimed at preserving financial stability.

Keywords

Macroprudential policies; monetary policy; financial crises; frictions; interest rate rigidities.

URL

http://www.bankofengland.co.uk/research/Documents/workingpapers/2015/swp570.pdf



Record ID

638     [ Page 6 of 68, No. 2 ]

Date

2015-12

Author

Ali Alichi, Olivier Bizimana, Silvia Domit, Emilio Fernandez Corugedo, Douglas Laxton, Kadir Tanyeri, Hou Wang, and Fan Zhang

Affiliation

Research Department, IMF

Title

Multivariate Filter Estimation of Potential Output for the Euro Area and the United States

Summary /
Abstract

Estimates of potential output are an important component of a structured forecasting and policy analysis system. Using information on consensus forecasts, this paper extends the multivariate filter developed by Laxton and Tetlow (1992) and modified by Benes and others (2010) and Blagrave and others (2015). We show that, although still fairly uncertain, the real time estimates from this approach are more accurate relative to those of naïve univariate statistical filters. The paper presents estimates for the euro area and the United States and discusses how the filtered estimates at the end of the sample period can be improved with additional information.

Keywords

Macroeconomic Modeling, Potential Output

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp15253.pdf



Record ID

637     [ Page 6 of 68, No. 3 ]

Date

2015-11

Author

Kaplan, Robert Steven

Affiliation

President and CEO, Federal Reserve Bank of Dallas Remarks before the University of Houston, November 18, 2015.

Title

A discussion of economic conditions and Federal Reserve policy

Summary /
Abstract

The Fed has a dual mandate given to it by Congress -- fostering full employment and price stability. Further, the Fed has set 2 percent as its longer run target rate for inflation. At this stage, it appears that we are well on our way to meeting our full - employment objective, although there is still some question as to the rate of unemployment that constitutes full employment in a more global world. As I mentioned earlier, a critical question I am focusing on is: What is the unemployment rate at which we have depleted excess capacity in the labor force? This rate may be lower than we would have previously thought. Inflation continues to run below our 2 percent long-run target. However, as the labor market tightens and certain transitory factors ultimately pass through the data, our economic team in Dallas still expects to see inflation gradually rising to 2 percent over the medium term. Our economic team is continuing to consider how overcapacity, demographic trends, high degrees of leverage in some sectors and other secular issues in countries outside the U.S. (particularly China) might adversely affect GDP, unemployment and inflation within the U.S. In light of all these factors, it will likely be appropriate that U.S. monetary policy remain accommodative for some time. Moreover, a lower-than-usual federal funds rate may well be needed to achieve any given desired level of accommodation. Accordingly, it is probable that the return to “normal” interest rates will be gradual. As a business manager or as an investor, I think these are key messages I would be taking from our FOMC statements. However, accommodative policy does not necessarily mean a zero fed funds rate. There are various costs to maintaining a zero fed funds rate for too long particularly in terms of potential distortions in investment and business decisions. These distortions can create imbalances in investments, inventory and hiring decisions that may later need to be (painfully) unwound when policy normalizes. My experience is that these imbalances are sometimes tough to see in real time but often relatively easier to recognize in hindsight. In thinking about these potential imbalances, we are sensitive to the fact that monetary policy affects the economy with a lag. These are all issues that will have to be assessed and reassessed as the economic outlook unfolds. In my view, the FOMC in the previous two meetings has been prudent in waiting for more data before taking policy action.

Keywords

Full employment, price stability, Federal funds rate, liftoff

URL

http://www.dallasfed.org/assets/documents/news/speeches/kaplan/2015/rsk151118.pdf



Record ID

636     [ Page 6 of 68, No. 4 ]

Date

2015-11

Author

Olivier J. Blanchard, Eugenio Cerutti and Lawrence Summers

Affiliation

Research Department, International Monetary Fund

Title

Inflation and Activity – Two Explorations and their Monetary Policy Implications

Summary /
Abstract

We explore two issues triggered by the crisis. First, in most advanced countries, output remains far below the pre-recession trend, suggesting hysteresis. Second, while inflation has decreased, it has decreased less than anticipated, suggesting a breakdown of the relation between inflation and activity. To examine the first, we look at 122 recessions over the past 50 years in 23 countries. We find that a high proportion of them have been followed by lower output or even lower growth. To examine the second, we estimate a Phillips curve relation over the past 50 years for 20 countries. We find that the effect of unemployment on inflation, for given expected inflation, decreased until the early 1990s, but has remained roughly stable since then. We draw implications of our findings for monetary policy.

Keywords

Recessions; Hysteresis; Phillips Curve; Monetary Policy

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp15230.pdf



Record ID

635     [ Page 6 of 68, No. 5 ]

Date

2014-09

Author

Scott Davis and Ignacio Presno

Affiliation

Federal Reserve Bank of Dallas and Universidad de Montevideo

Title

Capital Controls as an Instrument of Monetary Policy

Summary /
Abstract

Large swings in capital flows into and out of emerging markets can potentially lead to excessive volatility in asset prices and credit supply. In order to lessen the impact of capital flows on financial instability, a number of researchers and policy makers have recently proposed the use of capital controls. This paper considers the benefit of adding capital controls as a potential instrument of monetary policy in a small open economy. In a DSGE framework, we find that when domestic agents are subject to collateral constraints and the value of collateral is subject to fluctuations driven by foreign capital inflows and outflows, the adoption of temporary capital controls can lead to a significant welfare improvement. The benefits of capital controls are present even when monetary policy is determined optimally, implying that there may be a role for capital controls to exist side-by-side with conventional monetary tools as an instrument of monetary policy.

Keywords

Capital controls; credit constraints; small open economy

URL

https://www.economicdynamics.org/meetpapers/2015/paper_1167.pdf



Record ID

634     [ Page 6 of 68, No. 6 ]

Date

2015-10

Author

Anton Korinek and Damiano Sandri

Affiliation

Research Department, IMF

Title

Capital Controls or Macroprudential Regulation?

Summary /
Abstract

International capital flows can create significant financial instability in emerging economies because of pecuniary externalities associated with exchange rate movements. Does this make it optimal to impose capital controls or should policymakers rely on domestic macroprudential regulation? This paper presents a tractable model to show that it is desirable to employ both types of instruments: Macroprudential regulation reduces overborrowing, while capital controls increase the aggregate net worth of the economy as a whole by also stimulating savings. The two policy measures should be set higher the greater an economy's debt burden and the higher domestic inequality. In our baseline calibration based on the East Asian crisis countries, we find optimal capital controls and macroprudential regulation in the magnitude of 2 percent. In advanced countries where the risk of sharp exchange rate depreciations is more limited, the role for capital controls subsides. However, macroprudential regulation remains essential to mitigate booms and busts in asset prices.

Keywords

Financial stability, pecuniary externalities, capital controls, macroprudential regulation, inequality

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp15218.pdf



Record ID

633     [ Page 6 of 68, No. 7 ]

Date

2015-09

Author

C. A. E. Goodhart and Miguel A. Segoviano

Affiliation

Money and Capital Markets Department, IMF

Title

Optimal Bank Recovery

Summary /
Abstract

Banks’ living wills involve both recovery and resolution. Since it may not always be clear when recovery plans or actions should be triggered, there is a role for an objective metric to trigger recovery. We outline how such a metric could be constructed meeting criteria of (i) adequate loss absorption; (ii) distinguishing between weak and sound banks; (iii) little susceptibility to manipulation; (iv) timeliness; (v) scalable from the individual bank to the system. We show how this would have worked in the U.K., during 2007–11. This approach has the added advantage that it could be extended to encompass a whole ladder of sanctions of increasing severity as capital erodes.

Keywords

Bank Recovery, Bank Resolution, Metrics for Triggers, Loss Absorption, Probability of Distress, Loan Default

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp15217.pdf



Record ID

632     [ Page 6 of 68, No. 8 ]

Date

2015-09

Author

Julian T. S. Chow

Affiliation

Money and Capital Markets Department, IMF

Title

Stress Testing Corporate Balance Sheets in Emerging Economies

Summary /
Abstract

In recent years, firms in emerging market countries have increased borrowing, particularly in foreign currency, owing to easy access to global capital markets, prolonged low interest rates and good investment opportunities. This paper discusses the trends in emerging market corporate debt and leverage, and illustrates how those firms are vulnerable to interest rate, exchange rate and earnings shocks. The results of a stress test show that while corporate sector risk remains moderate in most emerging economies, a combination of macroeconomic and financial shocks could significantly erode firms’ ability to service debt and lead to higher debt at risk, especially in countries with high shares of foreign currency debt and low natural hedges.

Keywords

Emerging market corporate debt, leverage, debt at risk

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp15216.pdf



Record ID

631     [ Page 6 of 68, No. 9 ]

Date

2015-09

Author

Carolina Osorio Buitron and Esteban Vesperoni

Affiliation

Research Department, IMF

Title

Big Players Out of Synch: Spillovers Implications of US and Euro Area Shocks

Summary /
Abstract

Given the prospects of asynchronous monetary conditions in the United States and the euro area, this paper analyzes spillovers among these two economies, as well as the implications of asynchronicity for spillovers to other advanced economies and emerging markets. Through a structural vector autoregression analysis, country-specific shocks to economic activity and monetary conditions since the early 1990s are identified, and are used to draw implications about spillovers. The empirical findings suggest that real and monetary conditions in the United States and the euro area have oftentimes been asynchronous. The results also point to significant spillovers among them, in particular since early 2014—with spillovers from the euro area to the United States being particularly large. Against the backdrop of asynchronous conditions in these two economies, spillovers from real and money shocks to emerging markets and non-systemic advanced economies could be dampened.

Keywords

Spillovers, Monetary Policy, Economic News, Emerging Economies

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp15215.pdf



Record ID

630     [ Page 6 of 68, No. 10 ]

Date

2015-06

Author

Orphanides, Athanasios

Affiliation

MIT Sloan School of Management

Title

Fear of liftoff: Uncertainty, rules and discreation in monetary policy normalization

Summary /
Abstract

The Federal Reserve's muddled mandate to attain simultaneously the incompatible goals of maximum employment and price stability invites short-term-oriented discretionary policymaking inconsistent with the systematic approach needed for monetary policy to contribute best to the economy over time. Fear of liftoff-the reluctance to start the process of policy normalization after the end of a recession-serves as an example. Causes of the problem are discussed, drawing on public choice and cognitive psychology perspectives. The Federal Reserve could adopt a framework that relies on a simple policy rule subject to periodic reviews and adaptation. Replacing meeting-by-meeting discretion with a simple policy rule would eschew discretion in favor of systematic policy. Periodic review of the rule would allow the Federal Reserve the flexibility to account for and occasionally adapt to the evolving understanding of the economy. Congressional legislation could guide the Federal Reserve in this direction. However the Federal Reserve may be best placed to select the simple rule and could embrace this improvement on its own, within its current mandate, with the publication of a simple rule along the lines of its statement of longer-run goals.

Keywords

Federal Reserve, liftoff, discretion, policy rules, policy normalization

URL

http://econstor.eu/bitstream/10419/118612/1/834807947.pdf

Remarks

This article is based on the author’s Homer Jones lecture at the Federal Reserve Bank of St Louis on June 3, 2015.



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