Selected Reference and Reading Materials compiled by Dan Villanueva


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Record ID

426     [ Page 6 of 14, No. 1 ]

Date

2013-10

Author

John C. Williams

Affiliation

President and CEO, Federal Reserve Bank of San Francisco

Title

Lessons from the Financial Crisis for Unconventional Monetary Policy

Summary /
Abstract

Panel discussion at the NBER Conference

Keywords

Financial crisis, unconventional monetary policy

URL

http://www.frbsf.org/our-district/press/presidents-speeches/williams-speeches/2013/october/research-unconventional-monetary-policy-financial-crisis/Williams-Lessons-from-the-Financial-Crisis-for-Unconventional-Monetary-Policy.pdf



Record ID

425     [ Page 6 of 14, No. 2 ]

Date

2013-03

Author

Eric S. Rosengren

Affiliation

President and Chief Executive Officer, Federal Reserve Bank of Boston

Title

Monetary policy and financial stability

Summary /
Abstract

Remarks by Eric S. Rosengren, President and Chief Executive Officer, Federal Reserve Bank of Boston, to the Business and Industry Association of New Hampshire and the New Hampshire Bankers Association, Saint Anselm College, Manchester, New Hampshire, March 27, 2013.

Keywords

Monetary policy, financial stability

URL

http://www.bostonfed.org/news/speeches/rosengren/2013/032713/032713text.pdf



Record ID

424     [ Page 6 of 14, No. 3 ]

Date

2013-09

Author

Pierre-Richard Agénor and Luiz A. Pereira da Silva

Affiliation

Banco Central do Brasil

Title

Inflation Targeting and Financial Stability: A Perspective from the Developing World

Summary /
Abstract

This paper discusses recent experiences with inflation targeting (IT), the challenges that it faces since the global financial crisis, and ways to address them. The discussion is conducted from the perspective of upper middle-income countries (MICs). As background for the analysis, the second part provides a review of financial systems in MICs (with a focus on the role of bank credit), the extent to which exposure to capital flows affect economic stability in these countries, and the link between excessive credit growth and financial crises. The third and fourth parts review the main features and evidence on the performance of IT regimes in MICs. The fifth part discusses a number of challenges that IT faces, including fiscal dominance, fear of floating, imperfect credibility, and with respect to an explicit financial stability objective assigned to monetary policy. The issue of complementarity between macroprudential regulation and monetary policy, in the context of an “integrated” IT (or IIT) regime, is taken up next. The nature of monetary policy rules in an IIT regime, and their practical implementation, is also discussed. Our analysis suggests that there are robust arguments to support the view that in an IIT regime monetary policy should react in a state contingent fashion to a credit gap measure – and possibly to the real exchange rate – to address the time-series dimension of systemic risk. However, monetary policy and macroprudential policy are largely complementary instruments. They must be calibrated jointly, in the context of macroeconomic models that account for the type of credit market imperfections observed in MICs and for the fact that macroprudential regimes may affect in substantial ways the monetary transmission mechanism.

Keywords

Inflation targeting; Monetary policy; International finance; Developing countries

URL

http://www.bcb.gov.br/pec/wps/ingl/wps324.pdf



Record ID

423     [ Page 6 of 14, No. 4 ]

Date

2013-09

Author

Greene, William H.; Gillman, Max; Harris, Mark; and Spencer, Christopher

Affiliation

New York University, University of Missouri, Curtin University, and Loughborough University

Title

The Tempered Ordered Probit (TOP) Model with an Application to Monetary Policy

Summary /
Abstract

We propose a Tempered Ordered Probit (TOP) model. Our contribution lies not only in explicitly accounting for an excessive number of observations in a given choice category - as is the case in the standard literature on inflated models; rather, we introduce a new econometric model which nests the recently developed Middle Inflated Ordered Probit (MIOP) models of Bagozzi and Mukherjee (2012) and Brooks, Harris, and Spencer (2012) as a special case, and further, can be used as a specification test of the MIOP, where the implicit test is described as being one of symmetry versus asymmetry. In our application, which exploits a panel data-set containing the votes of Bank of England Monetary Policy Committee (MPC) members, we show that the TOP model affords the econometrician considerable flexibility with respect to modeling the impact of different forms of uncertainty on interest rate decisions. Our findings, we argue, reveal MPC members. asymmetric attitudes towards uncertainty and the changeability of interest rates.

Keywords

Monetary policy committee, voting, discrete data, uncertainty, tempered equations

URL

http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/25891/1/wp2013-4.pdf



Record ID

422     [ Page 6 of 14, No. 5 ]

Date

2013-11

Author

Dave Reifschneider, William Wascher and David Wilcox

Affiliation

Divisions of Research & Statistics and Monetary Affairs, Federal Reserve Board

Title

Aggregate supply in the United States: recent developments and implications for the conduct of monetary policy

Summary /
Abstract

The recent financial crisis and ensuing recession appear to have put the productive capacity of the economy on a lower and shallower trajectory than the one that seemed to be in place prior to 2007. Using a version of an unobserved components model introduced by Fleischman and Roberts (2011), we estimate that potential GDP is currently about 7 percent below the trajectory it appeared to be on prior to 2007. We also examine the recent performance of the labor market. While the available indicators are still inconclusive, some indicators suggest that hysteresis should be a more present concern now than it has been during previous periods of economic recovery in the United States. We go on to argue that a significant portion of the recent damage to the supply side of the economy plausibly was endogenous to the weakness in aggregate demand—contrary to the conventional view that policymakers must simply accommodate themselves to aggregate supply conditions. Endogeneity of supply with respect to demand provides a strong motivation for a vigorous policy response to a weakening in aggregate demand, and we present optimal-control simulations showing how monetary policy might respond to such endogeneity in the absence of other considerations. We then discuss how other considerations--such as increased risks of financial instability or inflation instability--could cause policymakers to exercise restraint in their response to cyclical weakness.

Keywords

Aggregate supply, monetary policy

URL

http://www.federalreserve.gov/pubs/feds/2013/201377/201377pap.pdf



Record ID

421     [ Page 6 of 14, No. 6 ]

Date

2013-11

Author

William B. English, J. David López-Salido and Robert J. Tetlow

Affiliation

Divisions of Research & Statistics and Monetary Affairs, Federal Reserve Board

Title

The Federal Reserve's framework for monetary policy - recent changes and new questions

Summary /
Abstract

In recent years, the Federal Reserve has made substantial changes to its framework for monetary policymaking by providing greater clarity regarding its objectives, its intentions regarding the use of monetary policy--including nontraditional policy tools such as forward guidance and asset purchases--in the pursuit of those objectives, and its broader policy strategy. These changes reflected both a response to changes in economists' understanding of the most effective way to implement monetary policy and a response to specific challenges posed by the financial crisis and its aftermath, particularly the effective lower bound on nominal interest rates. We trace the recent evolution of the Federal Reserve's framework, and use a small-scale macro model and a simple static model to help illuminate the approaches taken with nontraditional monetary policy tools. A number of foreign central banks have made similar innovations in response to similar developments. On balance, the Federal Reserve has moved closer to "flexible inflation targeting," but the Federal Reserve's approach includes a balanced focus on two objectives and the use of a flexible horizon over which policy aims to foster those objectives. Going forward, further changes in central banks' frameworks may be needed to address issues raised by the financial crisis. For example, some have suggested that the sustained period at the effective lower bound points to the need for central banks to establish a different policy objective, such as a higher inflation target or a nominal income target. We use our small-scale model of the U.S. economy to examine the potential benefits and costs of such changes. We also discuss the broad issue of how central banks should integrate financial stability policy and monetary policy.

Keywords

Forward guidance, asset purchase. flexible inflation targeting

URL

http://www.federalreserve.gov/pubs/feds/2013/201376/201376pap.pdf



Record ID

420     [ Page 6 of 14, No. 7 ]

Date

2013-11

Author

Dennis P. J. Botman, Irineu E. Carvalho Filho, and Raphael W. Lam

Affiliation

Asia and Pacific Department, IMF

Title

The Curious Case of the Yen as a Safe Haven Currency: A Forensic Analysis

Summary /
Abstract

During risk-off episodes, the yen is a safe haven currency and on average appreciates against the U.S. dollar. We investigate the proximate causes of yen risk-off appreciations. We find that neither capital inflows nor expectations of the future monetary policy stance can explain the yen’s safe haven behavior. In contrast, we find evidence that changes in market participants’ risk perceptions trigger derivatives trading, which in turn lead to changes in the spot exchange rate without capital flows. Specifically, we find that risk-off episodes coincide with forward hedging and reduced net short positions or a buildup of net long positions in yen. These empirical findings suggest that offshore and complex financial transactions should be part of spillover analyses and that the effectiveness of capital flow management measures or monetary policy coordination to address excessive exchange rate volatility might be limited in certain cases.

Keywords

Safe Haven, Yen Volatility, Capital Flows, Derivatives

URL

http://www.imf.org/external/pubs/ft/wp/2013/wp13228.pdf



Record ID

419     [ Page 6 of 14, No. 8 ]

Date

2013-10

Author

Dominic Quint and Pau Rabanal

Affiliation

Institute for Capacity Development, IMF

Title

Monetary and Macroprudential Policy in an Estimated DSGE Model of the Euro Area

Summary /
Abstract

In this paper, we study the optimal mix of monetary and macroprudential policies in an estimated two-country model of the euro area. The model includes real, nominal and financial frictions, and hence both monetary and macroprudential policy can play a role. We find that the introduction of a macroprudential rule would help in reducing macroeconomic volatility, improve welfare, and partially substitute for the lack of national monetary policies. Macroprudential policy would always increase the welfare of savers, but their effects on borrowers depend on the shock that hits the economy. In particular, macroprudential policy may entail welfare costs for borrowers under technology shocks, by increasing the countercyclical behavior of lending spreads.

Keywords

Monetary Policy, EMU, Basel III, Financial Frictions.

URL

http://www.imf.org/external/pubs/ft/wp/2013/wp13209.pdf



Record ID

418     [ Page 6 of 14, No. 9 ]

Date

2013-10

Author

Daniela Prates and Barbara Fritz

Affiliation

Instituto de Economia, Universidade de Campinas, Brasil and Institute for Latin American Studies, FreieUniversität Berlin, Germany

Title

Beyond capital controls: the regulation of foreign currency derivatives markets in South Korea and Brazil after the global financial crisis

Summary /
Abstract

Besides the management of capital flows, some emerging economies have been facing policy dilemmas related to foreign (nonresident) and domestic (residents) operations of Foreign Currency (FX) derivatives in the post-global crisis setting. In a context of abundant liquidity and historical low interest rates in the advanced economies, searching for yield foreign investors as well as domestic agents generally obtain huge profits, through these markets, from the interest rate differentials between advanced and emerging economies. Yet, the regulation of FX derivatives in the emerging economies has not received due attention both in the academic literature and in the international financial institutions, even though these could be crucial for the emerging economies with high degree of financial openness and liquid as well as deep FX derivatives markets, such as Brazil and South Korea. The paper aims at analyzing the Brazilian and Korean approach for FX derivatives regulation after the global financial crisis. Therefore, it seeks to contribute to the debate on financial regulation brought about by the global crisis. The two cases show the relevance of the institutional features of FX derivatives market for the drawing of the financial regulatory toolkit. In the case of Brazil we found that a third type of financial regulation, which we have labeled as FX derivative regulation, was needed to curb the currency appreciation trend, along with capital controls and traditional prudential financial regulations.

Keywords

Foreign Currency derivatives regulation, capital flows, capital controls, prudential regulation

URL

http://finance-and-trade.htw-berlin.de/fileadmin/working_paper_series/wp_07_2013_Prates_Fritz_Beyond_Capital_Controls.pdf



Record ID

417     [ Page 6 of 14, No. 10 ]

Date

2013-06

Author

Valentina Bruno and Hyun Song Shin

Affiliation

American University and Princeton University

Title

Assessing Macroprudential Policies: Case of Korea

Summary /
Abstract

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

Keywords

Capital flows, credit booms, macroprudential policy

URL

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



Record ID

416     [ Page 6 of 14, No. 11 ]

Date

2013-10

Author

Anton Korinek and Jonathan Kreamer

Affiliation

National Bureau of Economic Research

Title

THE REDISTRIBUTIVE EFFECTS OF FINANCIAL DEREGULATION

Summary /
Abstract

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

Keywords

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

URL

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



Record ID

415     [ Page 6 of 14, No. 12 ]

Date

2012-10

Author

Martin Ellison and Andreas Tischbirek

Affiliation

University of Oxford

Title

Unconventional government debt purchases as a supplement to conventional monetary policy

Summary /
Abstract

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

Keywords

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

URL

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



Record ID

414     [ Page 6 of 14, No. 13 ]

Date

2013-08

Author

José A Carrasco-Gallego and Margarita Rubio

Affiliation

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

Title

Macroprudential and Monetary Policies: Implications for Financial Stability and Welfare

Summary /
Abstract

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

Keywords

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

URL

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



Record ID

413     [ Page 6 of 14, No. 14 ]

Date

2013-09

Author

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

Affiliation

Federal Reserve Bank of New York

Title

Federal Reserve tools for managing rates and reserves

Summary /
Abstract

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

Keywords

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

URL

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



Record ID

412     [ Page 6 of 14, No. 15 ]

Date

2013-09

Author

William R. White

Affiliation

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

Title

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

Summary /
Abstract

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

Keywords

National security

URL

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



Record ID

411     [ Page 6 of 14, No. 16 ]

Date

2013-04

Author

Olivier Blanchard, Giovanni Dell'Ariccia, Paolo Mauro

Affiliation

Research Department, IMF

Title

Rethinking Macro Policy II: Getting Granular

Summary /
Abstract

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

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

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

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

Keywords

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

URL

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



Record ID

410     [ Page 6 of 14, No. 17 ]

Date

2013-08

Author

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

Affiliation

National Bureau of Economic Research

Title

Crunch Time: Fiscal Crises and the Role of Monetary Policy

Summary /
Abstract

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

Keywords

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

URL

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



Record ID

409     [ Page 6 of 14, No. 18 ]

Date

2013-10

Author

Roger Farmer and Vadim Khramov

Affiliation

Office of Executive Director for the Russian Federation, IMF

Title

Solving and Estimating Indeterminate DSGE Models

Summary /
Abstract

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

Keywords

Indeterminacy, DSGE Models, Expectational Errors.

URL

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



Record ID

408     [ Page 6 of 14, No. 19 ]

Date

2013-09

Author

Ajay Pratap Singh and Michael Nikolaou

Affiliation

University of Houston

Title

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

Summary /
Abstract

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

Keywords

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

URL

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



Record ID

407     [ Page 6 of 14, No. 20 ]

Date

2013-06

Author

Staff Team from FAD, RES, and EUR

Affiliation

International Monetary Fund

Title

IMF Policy Paper: Reassessing the Role and Modalities of Fiscal Policy in Advanced Economies

Summary /
Abstract

This paper investigates how developments during and after the 2008–09 crisis have changed economists’ and policymakers’ views on: (i) fiscal risks and fiscal sustainability; (ii) the effectiveness of fiscal policy as a countercyclical tool; (iii) the appropriate design of fiscal adjustment programs; and (iv) the role of fiscal institutions.

Advanced economies have experienced much larger shocks than was previously thought possible and sovereign-bank feedback loops have amplified sovereign debt crises. This has led to reassessing what constitutes “safe” sovereign debt levels for advanced economies and has prompted a more risk-based approach to analyzing debt sustainability. Pre-crisis views about the interaction between monetary and fiscal policy have also been challenged by the surge in central bank purchases of government debt. This has helped restore financial market functioning, but, to minimize the risk of fiscal dominance, it is critical that central bank support is a complement to, not a substitute for, fiscal adjustment.

Keywords

Fiscal riks, solvency, sustainability, transparency, rules, institutions, adjustment

URL

http://www.imf.org/external/np/pp/eng/2013/072113.pdf



Record ID

406     [ Page 6 of 14, No. 21 ]

Date

2013-06

Author

IMF Staff Team from MCM, FAD, RES, SPR, and STA

Affiliation

International Monetary Fund

Title

IMF Policy Paper: Key Aspects of Macroprudential Policy

Summary /
Abstract

The crisis has underscored the costs of systemic instability at both the national and the global levels and highlighted the need for dedicated macroprudential policies to achieve financial stability. Building on recent advances, this paper provides a framework to inform the IMF’s country-specific advice on macroprudential policy. It recognizes that developing macroprudential policy is a work in progress, and addresses key issues to help ensure its effectiveness.

Keywords

Financial stability, systemic risk, macroprudential policies

URL

http://www.imf.org/external/np/pp/eng/2013/061013b.pdf



Record ID

405     [ Page 6 of 14, No. 22 ]

Date

2013-07

Author

Yuki Teranishi

Affiliation

Department of Business and Commerce, Keio University and Centre for Applied Macroeconomic Analysis (CAMA), Australian National University

Title

Smoothed Interest Rate Setting by Central Banks and Staggered Loan Contracts

Summary /
Abstract

We investigate a new source of economic stickiness: namely, staggered loan interest rate contracts under monopolistic competition. The paper introduces this mechanism into a standard New Keynesian model. Simulations show that a response to a financial shock is greatly amplified by the staggered loan contracts though a response to a productivity, cost-push or monetary policy shock is not much affected. We derive an approximated loss function and analyse optimal monetary policy. Unlike other models, the function includes a quadratic loss of the first-order difference in loan rates. Thus, central banks have an incentive to smooth the policy rate.

Keywords

Staggered loan interest rate, economic fluctuation, optimal monetary policy

URL

https://cama.crawford.anu.edu.au/pdf/working-papers/2013/452013.pdf



Record ID

404     [ Page 6 of 14, No. 23 ]

Date

2013-08

Author

Manmohan Singh

Affiliation

Research Department, IMF

Title

Collateral and Monetary Policy

Summary /
Abstract

Financial lubrication in markets is indifferent to margin posting via money or collateral; the relative price(s) of money and collateral matter. Some central banks are now a major player in the collateral markets. Analogous to a coiled spring, the larger the quantitative easing (QE) efforts, the longer the central banks will impact the collateral market and associated repo rate. This may have monetary policy and financial stability implications since the repo rates map the financial landscape that straddles the bank/nonbank nexus.

Keywords

Velocity of collateral; IS/LM; quantitative easing; central banks; repo rate.

URL

http://www.imf.org/external/pubs/ft/wp/2013/wp13186.pdf



Record ID

403     [ Page 6 of 14, No. 24 ]

Date

2013-08

Author

John C Bluedorn, Rupa Duttagupta, Jaime Guajardo, and Petia Topalova

Affiliation

Research Department, IMF

Title

Capital Flows are Fickle: Anytime, Anywhere

Summary /
Abstract

Has the unprecedented financial globalization of recent years changed the behavior of capital flows across countries? Using a newly constructed database of gross and net capital flows since 1980 for a sample of nearly 150 countries, this paper finds that private capital flows are typically volatile for all countries, advanced or emerging, across all points in time. This holds true across most types of flows, including bank, portfolio debt, and equity flows. Advanced economies enjoy a greater substitutability between types of inflows, and complementarity between gross inflows and outflows, than do emerging markets, which reduces the volatility of their total net inflows despite higher volatility of the components. Capital flows also exhibit low persistence, across all economies and across most types of flows. Inflows tend to rise temporarily when global financing conditions are relatively easy. These findings suggest that fickle capital flows are an unavoidable fact of life to which policymakers across all countries need to continue to manage and adapt.

Keywords

International capital flows; volatility; persistence; comovement; global factors.

URL

http://www.imf.org/external/pubs/ft/wp/2013/wp13183.pdf



Record ID

402     [ Page 6 of 14, No. 25 ]

Date

2013-08

Author

Ran Bi, Haonan Qu, and James Roaf

Affiliation

Strategy, Policy, and Review Department, IMF

Title

Assessing the Impact and Phasing of Multi-year Fiscal Adjustment: A General Framework

Summary /
Abstract

This paper provides a general framework to assess the output and debt dynamics of an economy undertaking multi-year fiscal adjustment. The framework allows country-specific assumptions about the magnitude and persistence of fiscal multipliers, hysteresis effects, and endogenous financing costs. In addition to informing macro projections, the framework can also shed light on the appropriate phasing of fiscal consolidation—in particular, on whether it should be front- or back-loaded. The framework is applied to stylized advanced and emerging economy examples. It suggests that for a highly-indebted economy undertaking large multi-year fiscal consolidation, high multipliers do not always argue against front-loaded adjustment. The case for more gradual or back-loaded adjustment is strongest when hysteresis effects are in play, but it needs to be balanced against implications for debt sustainability. Application to actual country examples tends to cast doubt on claims that very large multipliers have been operating post-crisis. It seems that the GDP forecast errors for Greece may have been due more to over-optimism on potential growth estimates than to underestimating fiscal multipliers.

Keywords

Fiscal Multiplier, Hysteresis Effect, Phasing of Fiscal Consolidation

URL

http://www.imf.org/external/pubs/ft/wp/2013/wp13182.pdf



Record ID

401     [ Page 6 of 14, No. 26 ]

Date

2013-04

Author

Prepared by a team led by Toshiyuki Miyoshi and comprising Stephanie Segal, Preya Sharma, and Anish Tailor, with inputs provided by Mali Chivakul, Lorenzo Giorgianni, Gavin Gray, Bikas Joshi, Ben Kelmanson, Sergi Lanau, Martin Mühleisen, Uma Ramakrishnan, and Edouard Vidon. Overall guidance was provided by James Roaf (all SPR).

Affiliation

Strategy, Policy, and Review Department, IMF

Title

Stocktaking the Fund’s Engagement with Regional Financing Arrangements

Summary /
Abstract

Following the global financial crisis of 2008-09, regional financing arrangements (RFAs) have been recognized as an important layer of the global financial safety net. This paper summarizes the current landscape of RFAs, and discusses IMF-RFA coordination to date and options for enhancing cooperation going forward. In so doing, it intends to contribute to discussions underway at international fora and solicit views from the Fund and RFA memberships on how to enhance cooperation.

Keywords

International monetary system, Financial safety nets, External financing, International cooperation, Fund role

URL

http://www.imf.org/external/np/pp/eng/2013/041113b.pdf



Record ID

400     [ Page 6 of 14, No. 27 ]

Date

2013-08

Author

Bas B. Bakker and Li Zeng

Affiliation

European Department, IMF

Title

Dismal Employment Growth in EU Countries: The Role of Corporate Balance Sheet Repair and Dual Labor Markets

Summary /
Abstract

This paper argues that the large differences among EU countries in post-crisis employment performance are to a large extent driven by the need to adjust corporate balance sheets, which had greatly deteriorated during the boom years in some countries but not in others. To close the large gaps between saving and investment, firms reduced investment and cut costs to boost profits. With much of the cost adjustment falling on firms’ wage bills, employment losses were largest in countries under the most intense pressures to improve corporate profitability and with limited wage flexibility due to labor market duality.

Keywords

Employment, saving, debt, firms

URL

http://www.imf.org/external/pubs/ft/wp/2013/wp13179.pdf



Record ID

399     [ Page 6 of 14, No. 28 ]

Date

2012-02

Author

Leonardo Martinez, Juan Hatchondo, and Javier Bianchi

Affiliation

International Monetary Fund, Federal Reserve Bank of Richmond, and New York University and University of Wisconsin

Title

Sovereign Defaults and Optimal Reserves Management

Summary /
Abstract

A long-standing puzzle of international capital flows is why countries hold large amount of external debt and foreign reserves at the same time. To address this puzzle, we propose a sovereign default model where the government decides jointly over the accumulation of long-duration bonds and foreign reserves. When calibrated to the data, the model can successfully explain the simultaneous holdings of debt and foreign reserves. We also show that the relationship between reserves and default risk may be non-monotonic.

Keywords

Sovereign default, optimal reserves management, international capital flows, external debt, foreign reserves

URL

http://www.economicdynamics.org/meetpapers/2012/paper_1125.pdf



Record ID

398     [ Page 6 of 14, No. 29 ]

Date

2013-07

Author

Serkan Arslanalp and Yin Liao

Affiliation

International Monetary Fund and Australian National University

Title

Contingent Liabilities and Sovereign Risk: Evidence from Banking Sectors

Summary /
Abstract

This paper proposes a simple method to estimate contingent liabilities that arise from (implicit and explicit) government guarantees to the banking sector. This method allows us to construct cross-country estimates on potential costs of bank failures. Furthermore, we empirically test whether the contingent liabilities from the banking sector is a significant determinant of sovereign risk based on the data from 32 countries. Our results suggest that a 1% of GDP increase in contingent liabilities is associated with an increase in sovereign CDS spreads of 24 basis points in advanced countries and 75 basis points in emerging economies.

Keywords

Contingent Liabilities, Sovereign Risk, Banking Sector

URL

http://cama.crawford.anu.edu.au/pdf/working-papers/2013/432013.pdf



Record ID

397     [ Page 6 of 14, No. 30 ]

Date

2013-07

Author

Ricardo Reis

Affiliation

National Bureau of Economic Research

Title

Central Bank Design

Summary /
Abstract

What set of institutions can support the activity of a central bank? Designing a central bank requires specifying its objective function, including the bank's mandate at different horizons and the choice of banker(s), specifying the resource constraint that limits the resources that the central bank generates, the assets it holds, or the payments on its liabilities, and finally specifying how the central bank will communicate with private agents to affect the way they respond to policy choices. This paper summarizes the relevant economic literature that bears on these choices, leading to twelve principles on central bank design.

Keywords

Central bank design

URL

http://www.nber.org/papers/w19187.pdf

Remarks

Information about Free Papers

You should expect a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.



Record ID

396     [ Page 6 of 14, No. 31 ]

Date

2013-08

Author

Li L. Ong and Ceyla Pazarbasioglu

Affiliation

Monetary and Capital Markets Department, IMF

Title

Credibility and Crisis Stress Testing

Summary /
Abstract

Credibility is the bedrock of any crisis stress test. The use of stress tests to manage systemic risk was introduced by the U.S. authorities in 2009 in the form of the Supervisory Capital Assessment Program. Since then, supervisory authorities in other jurisdictions have also conducted similar exercises. In some of those cases, the design and implementation of certainelements of the framework have been criticized for their lack of credibility. This paper proposes a set of guidelines for constructing an effective crisis stress test. It combines financial markets impact studies of previous exercises with relevant case study information gleaned from those experiences to identify the key elements and to formulate their appropriate design. Pertinent concepts, issues and nuances particular to crisis stress testing are also discussed. The findings may be useful for country authorities seeking to include stress tests in their crisis management arsenal, as well as for the design of crisis programs.

Keywords

Asset quality review, crisis, disclosure, financial backstop, hurdle rates, liquidity risk, restructuring, solvency, transpar ency, CCAR, CEBS, EBA, PCAR, SCAP

URL

http://www.imf.org/external/pubs/ft/wp/2013/wp13178.pdf



Record ID

395     [ Page 6 of 14, No. 32 ]

Date

2013-08

Author

Li L. Ong, Phakawa Jeasakul and Sarah Kwoh

Affiliation

Monetary and Capital Markets Department, IMF

Title

HEAT! A Bank Health Assessment Tool

Summary /
Abstract

Developments during the global financial crisis have highlighted the importance of differentiating across financial systems and institutions. Assessments of financial stability have increasingly considered the characteristics of individual banks within a financial system, as well as those with significant international reach, to identify vulnerabilities and inform policy decisions. This paper proposes a simple measure of bank soundness, the Bank Health Index (BHI), to facilitate preliminary analyses of individual financial institutions relative to their peers. The evidence suggests that the BHI is useful for a first-pass identification of bank soundness conditions. Automated spreadsheet templates of the bank Health Assessment Tool (HEAT!) are provided for users with access to the BankScope, Bloomberg and/or SNL database(s).

Keywords

Asset quality, Bank Health Index, bank soundness, capital adequacy, earnings, HEAT!, heatm ap, leverage, liquidity.

URL

http://www.imf.org/external/pubs/ft/wp/2013/wp13177.pdf



Record ID

394     [ Page 6 of 14, No. 33 ]

Date

2013-07

Author

Tobias Hagen

Affiliation

Frankfurt University of Applied Sciences, Department of Business and Law, Nibelungenplatz 1, 60318 Frankfurt am Main, Germany

Title

The Impact of National Financial Regulation on Macroeconomic and Fiscal Performance after the 2007 Financial Shock – Econometric Analyses Based on Cross-Country Data

Summary /
Abstract

Using cross-country data, this paper estimates the impact of the 2007 financial shock on countries’ macroeconomic developments conditional on national financial regulations before the crisis. For this purpose, the “financial reform index” developed by Abiad et al. (A New Database of Financial Reforms, 2008a) is used. The econometric analyses indicate that countries with more deregulated financial markets experienced deeper recessions, stronger employment losses, and larger government budget deficits. Against the background of the ongoing global crisis and the results of other studies, the usefulness of liberalized financial markets for macroeconomic stability and economic development should be rigorously reconsidered.

Keywords

Financial crisis; financial regulation; Great Recession; robust regression; semiparametric regression

URL

http://dx.doi.org/10.5018/economics-ejournal.ja.2013-33



Record ID

393     [ Page 6 of 14, No. 34 ]

Date

2012-12

Author

Committee on Global Financial Stability Working Group

Affiliation

Bank for International Settlements

Title

Operationalising the selection and application of macroprudential instruments

Summary /
Abstract

This report - prepared by a Working Group chaired by José-Manuel González-Páramo, formerly European Central Bank - aims to help policymakers in operationalising macroprudential policies. Specifically, it draws out three high-level criteria that are key in determining the selection and application of macroprudential instruments: (1) the ability to determine the appropriate timing for the activation or deactivation of the instrument; (2) the effectiveness of the instrument in achieving the stated policy objective; and (3) the efficiency of the instrument in terms of a cost-benefit assessment. In trying to operationalise these criteria, this report proposes a number of practical tools. First, to help determine the appropriate timing for the activation and deactivation of instruments, it lays out stylised scenarios. Their identification is facilitated by two alternative approaches that seek to link systemic risk analysis and instrument selection. Second, to support the evaluation of the effectiveness and efficiency of macroprudential tools for a range of macroprudential instruments, the report proposes "transmission maps" - stylised presentations of how changes in individual instruments are expected to contribute to the objectives of macroprudential policy.

Keywords

Global financial stability, macroprudential instruments

URL

https://www.bis.org/publ/cgfs48.pdf



Record ID

392     [ Page 6 of 14, No. 35 ]

Date

2012-06

Author

Gianni De Nicolò, Giovanni Favara and Lev Ratnovski

Affiliation

Research Department, IMF

Title

EXTERNALITIES AND MACROPRUDENTIAL POLICY

Summary /
Abstract

The recent financial crisis has led to a reexamination of policies for macroeconomic and financial stability. Part of the current debate involves the adoption of a macroprudential approach to financial regulation, with an aim toward mitigating boom-bust patterns and systemic risks in financial markets. The fundamental rationale behind macroprudential policies, however, is not always clearly articulated. The contribution of this paper is to lay out the key sources of market failures that can justify macroprudential regulation. It explains how externalities associated with the activity of financial intermediaries can lead to systemic risk, and thus require specific policies to mitigate such risk. The paper classifies externalities that can lead to systemic risk as: (1) Externalities related to strategic complementarities , that arise from the strategic interaction of banks (and other financial institutions) and cause the build-up of vulnerabilities during the expansionary phase of a financial cycle; (2) Externalities related to fire sales, that arise from a generalized sell-off of financial assets causing a decline in a sset prices and a deterioration of the balance sheets of intermediaries, especially during the contractionary phase of a financial cycle; and (3) Externalities related to interconnectedness , caused by the propagation of shocks from systemic institutions or through financial networks. The correction of these externalities can be seen as intermediate targets for macroprudential policy, since policies that control externalities mitigate market failures that create systemic risk. This paper discusses how the main proposed macroprudential policy tools—capital requirements, liquidity requirements, restrictions on activities, and taxes—address the identified externalities. It is argued that each externality can be corrected by different tools that can complement each other. Capital surcharges, however, are likely to play an important role in the design of macroprudential regulation. This paper’s analysis of macroprudential policy complements the more traditional one that builds on the distinction between time-series and cross-sectional dimensions of systemic risk.

Keywords

Externalities, systemic risk, macroprudential policy

URL

http://www.imf.org/external/pubs/ft/sdn/2012/sdn1205.pdf



Record ID

391     [ Page 6 of 14, No. 36 ]

Date

2013-07

Author

Juan Carlos Hatchondo and Leonardo Martinez

Affiliation

IMF Institute for Capacity Development

Title

Sudden stops, time inconsistency, and the duration of sovereign debt

Summary /
Abstract

We study the sovereign debt duration chosen by the government in the context of a standard model of sovereign default. The government balances off increasing the duration of its debt to mitigate rollover risk and lowering duration to mitigate the debt dilution problem. We present two main results. First, when the government decides the debt duration on a sequential basis, sudden stop risk increases the average duration by 1 year. Second, we illustrate the time inconsistency problem in the choice of sovereign debt duration: governments would like to commit to a duration that is 1.7 years shorter than the one they choose when decisions are made sequentially.

Keywords

Sovereign debt, default, sudden stops, debt dilution, time inconsistency, debt maturity

URL

http://www.imf.org/external/pubs/ft/wp/2013/wp13174.pdf



Record ID

390     [ Page 6 of 14, No. 37 ]

Date

2011-04

Author

Jonathan D. Ostry, Atish R. Ghosh, Karl Habermeier, Luc Laeven, Marcos Chamon, Mahvash S. Qureshi, and Annamaria Kokenyne

Affiliation

Research Department, IMF

Title

Managing Capital Inflows: What Tools to Use?

Summary /
Abstract

Emerging market economies are facing increasing challenges in managing the current wave of capital inflows. In an earlier note (Ostry et al., 2010), we laid out a set of circumstances under which capital controls could usefully form part of the policy response to inflow surges. For countries whose currencies were on the strong side, where reserves were adequate, where overheating concerns precluded easier monetary policy, and where the fiscal balance was consistent with macroeconomic and public debt considerations, capital controls were a useful part of the policy toolkit to address inflow surges. Beyond macroeconomic considerations, capital controls could also help to address financial-stability concerns when prudential tools were insufficient or could not be made effective in a timely manner. We also stressed that the use of capital controls needs to take account of multilateral considerations, as well as their costs and the mixed evidence on their effectiveness in restraining aggregate flows. This note elaborates on how the macro and financial-stability rationales for capital controls fit together; how prudential and capital control measures should be deployed against various risks that inflow surges may bring; and specifically, how capital controls should be designed to best meet the goals of efficiency and effectiveness. Four broad conclusions emerge. First, capital controls may be useful in addressing both macroeconomic and financial-stability concerns in the face of inflow surges , but before imposing capital controls, countries need first to exhaust their macroeconomic-cum-exchange-rate policy options. The macropolicy response needs to have primacy both because of its importance in helping to abate the inflow surge, and because it ensures that countries act in a multilaterally-consistent manner and do not impose controls merely to avoid necessary external and macro-policy adjustment. Second, while prudential regulations and capital controls can help reduce the buildup of vulnerabilities on domestic balance sheets, they both inevitably create distortions—reducing some “good” financial flows alongside “bad” on es—and may be circumvented. Thus, there is no unambiguous welfare ranking of policy instruments (though non-discriminatory prudential measures are always appropriate), and a pragmatic approach taking account of the economy’s most pertinent risks and distortions needs to be adopted. Third, measures need to be targeted to the risks at hand. When inflows are intermediated through the regulated financial system, prudential regulation will be the main instrument. When inflows bypass regulated markets and institutions, capital controls may be the best option if the perimeter of regulation cannot be widened sufficiently quick ly or effectively. Fourth, the design of capital controls needs to be tailored to country circumstances. Where inflows raise macro concerns, controls will need to be broad, usually price-based, and temporary (though institutional arrangements to implement controls could be maintained). To address financial-stability concerns, controls could be targeted on the riskiest flows, might include administrative measures, and could be used even against more persistent inflows.

Keywords

Capital inflows, capital controls, prudential tools

URL

http://www.imf.org/external/pubs/ft/sdn/2011/sdn1106.pdf



Record ID

389     [ Page 6 of 14, No. 38 ]

Date

2013-05

Author

James A. Clouse

Affiliation

Federal Reserve Board, Washington, D.C.

Title

Monetary policy and financial stability risks: an example

Summary /
Abstract

The financial crisis and its aftermath have raised numerous questions about the appropriate role of financial stability considerations in the conduct of monetary policy. This paper develops a simple example of the possible connections between financial stability and monetary policy. We find that even without an explicit financial stability goal for monetary policy, financial stability considerations arise naturally in the context of standard models of optimal monetary policy if the potential magnitude of financial stability shocks is affected by the stance of policy. In this case, similar to the classic analysis of Brainard (1967), policymakers may seek to reduce the variance of output by scaling back the level of policy accommodation provided today in response to an aggregate demand shock relative to the level that would otherwise be provided. However, the policy implications of this possible connection between monetary policy and financial stability are complex even in the simple example considered here. In particular, financial stability considerations may also increase the relative benefits of following a commitment policy relative to a discretionary strategy.

Keywords

Monetary policy

URL

http://www.federalreserve.gov/pubs/feds/2013/201341/201341pap.pdf



Record ID

388     [ Page 6 of 14, No. 39 ]

Date

2013-07

Author

Roberto Leon-Gonzalez and Thanabalasingam Vinayagathasan

Affiliation

National Graduate Institute for Policy Studies, Tokyo, Japan

Title

Robust Determinants of Growth in Asian Developing Economies: A Bayesian Panel Data Model Averaging Approach

Summary /
Abstract

This paper investigates the determinants of growth in the Asian developing economies. We use Bayesian model averaging (BMA) in the context of a dynamic panel data growth regression to overcome the uncertainty over the choice of control variables. In addition, we use a Bayesian algorithm to analyze a large number of competing models. Among the explanatory variables, we include a non-linear function of inflation that allows for threshold effects. We use an unbalanced panel data set of 27 Asian developing countries over the period 1980–2009. Our empirical evidence on the determinants of growth suggests that an economy’s investment ratio and trade openness are positively correlated to growth, whereas government consumption expenditure is negatively correlated. Further, our empirical results indicate a substantial probability that inflation impedes economic growth when it exceeds 5.43%. We also find no evidence of conditional convergence or divergence.

Keywords

Determinants of Growth, Bayesian Model Averaging, Panel Data Model, Inflation Threshold

URL

http://r-center.grips.ac.jp/gallery/docs/13-12.pdf

Remarks

This empirical study finds that "the investment ratio of an economy is positively associated with its growth rate whereas government consumption expenditure is negatively correlated. Evidence also indicates that trade openness stimulates economic growth. Further, substantial evidence shows that inflation hurts economic growth when it is beyond the threshold value of 5.43% but does not have any significant effect on growth below that level." Thus, the BSP inflation target through 2016 seems appropriate, as far as the implications of this excellent empirical study are concerned.



Record ID

387     [ Page 6 of 14, No. 40 ]

Date

2013-06

Author

Prepared by a FAD team led by Michael Keen and Victoria Perry

Affiliation

Fiscal Affairs Department, IMF

Title

IMF Policy Paper: Issues in International Taxation and the Role of the IMF

Summary /
Abstract

In the discussion of the Board work program on June 3, 2013, it was urged that the Fund be more present in current discussions of international tax issues. This note reviews key issues and initiatives in this area, and sets out a work plan that is focused on the Fund‘s mandate and macroeconomic expertise and that complements the work of other institutions, notably the OECD.

Keywords

International Tax Issues

URL

http://www.imf.org/external/np/pp/eng/2013/062813.pdf



Record ID

386     [ Page 6 of 14, No. 41 ]

Date

2013-07

Author

John C. Williams

Affiliation

Federal Reserve Bank of San Francisco

Title

A defense of moderation in monetary policy

Summary /
Abstract

This paper examines the implications of uncertainty about the effects of monetary policy for optimal monetary policy with an application to the current situation. Using a stylized macroeconomic model, I derive optimal policies under uncertainty for both conventional and unconventional monetary policies. According to an estimated version of this model, the U.S. economy is currently suffering from a large and persistent adverse demand shock. Optimal monetary policy absent uncertainty would quickly restore real GDP close to its potential level and allow the inflation rate to rise temporarily above the longer-run target. By contrast, the optimal policy under uncertainty is more muted in its response. As a result, output and inflation return to target levels only gradually. This analysis highlights three important insights for monetary policy under uncertainty. First, even in the presence of considerable uncertainty about the effects of monetary policy, the optimal policy nevertheless responds strongly to shocks: uncertainty does not imply inaction. Second, one cannot simply look at point forecasts and judge whether policy is optimal. Indeed, once one recognizes uncertainty, some moderation in monetary policy may well be optimal. Third, in the context of multiple policy instruments, the optimal strategy is to rely on the instrument associated with the least uncertainty and use alternative, more uncertain instruments only when the least uncertain instrument is employed to its fullest extent possible.

Keywords

Monetary policy

URL

http://www.frbsf.org/economic-research/files/wp2013-15.pdf



Record ID

385     [ Page 6 of 14, No. 42 ]

Date

2013-06

Author

Laurence Ball, Davide Furceri, Daniel Leigh, and Prakash Loungani

Affiliation

Research Department, IMF

Title

The Distributional Effects of Fiscal Consolidation

Summary /
Abstract

This paper examines the distributional effects of fiscal consolidation. Using episodes of fiscal consolidation for a sample of 17 OECD countries over the period 1978–2009, we find that fiscal consolidation has typically had significant distributional effects by raising inequality, decreasing wage income shares and increasing long-term unemployment. The evidence also suggests that spending-based adjustments have had, on average, larger distributional effects than tax-based adjustments.

Keywords

Fiscal consolidation, distributional effects, income inequality

URL

http://www.imf.org/external/pubs/ft/wp/2013/wp13151.pdf



Record ID

384     [ Page 6 of 14, No. 43 ]

Date

2013-03

Author

Leonardo Melosi

Affiliation

Federal Reserve Bank of Chicago

Title

Signaling Effects of Monetary Policy

Summary /
Abstract

We develop a DSGE model in which the policy rate signals to price setters the central bank’s view about macroeconomic developments. The model is estimated with likelihood methods on a U.S. data set that includes the Survey of Professional Forecasters as a measure of price setters’ inflation expectations. We find that the model fits the data better than a prototypical New Keynesian DSGE model because the signaling effects of monetary policy help the model account for the run-up in inflation expectations in the 1970s. The estimated model with signaling effects delivers large and persistent real effects of monetary disturbances even though the average duration of price contracts is fairly short. While the signaling effects do not substantially alter the transmission of technology shocks, they bring about deflationary pressures in the aftermath of positive demand shocks. The signaling effects of monetary policy have contributed (i ) to heightening inflation expectations in the 1970s, (ii ) to raising inflation and to exacerbating the recession during the first years of Volcker’s monetary tightening, and (iii ) to subduing inflation and to stimulating economic activity from 1991 through 2007.

Keywords

Bayesian econometrics; price puzzle; persistent real effects of nominal shocks; imperfect common knowledge; public signal; heterogeneous beliefs

URL

http://d.repec.org/n?u=RePEc:pen:papers:13-029&r=mon



Record ID

383     [ Page 6 of 14, No. 44 ]

Date

2013-05

Author

Dieter Gramlich, Mikhail V. Oet, and Stephen J. Ong

Affiliation

Federal Reserve Bank of Cleveland

Title

Policy in adaptive financial markets—the use of systemic risk early warning tools

Summary /
Abstract

How can a systemic risk early warning system (EWS) facilitate the financial stability work of policymakers? In the context of evolving financial market dynamics and limitations of microprudential policy, this study examines new directions for financial macroprudential policy. A flexible macroprudential approach is anchored in strategic capacities of systemic risk EWSs. Tactically, macroprudential applications are founded on information about the level, structure, and institutional drivers of systemic financial stress and aim to manage the financial system risk and imbalances in two dimensions: across time and institutions. Time-related EWS policy applications are analyzed in pursuit of prevention and mitigation. EWS applications across institutions are considered via common exposures and interconnectedness. Care must be taken in the calibration of macroprudential applications, given their reliance on quality of the underlying systemic risk-modeling framework.

Keywords

Business cycles, regulation, financial stability

URL

http://www.clevelandfed.org/research/workpaper/2013/wp1309.pdf



Record ID

382     [ Page 6 of 14, No. 45 ]

Date

2013-05

Author

Christiane Baumeister and Lutz Kilian

Affiliation

Bank of Canada and University of Michigan

Title

What Central Bankers Need to Know about Forecasting Oil Prices

Summary /
Abstract

Forecasts of the quarterly real price of oil are routinely used by international organizations and central banks worldwide in assessing the global and domestic economic outlook, yet little is known about how best to generate such forecasts. Our analysis breaks new ground in several dimensions. First, we address a number of econometric and data issues specific to real-time forecasts of quarterly oil prices. Second, we develop real-time forecasting models not only for U.S. benchmarks such as West Texas Intermediate crude oil, but we also develop forecasting models for the price of Brent crude oil, which has become increasingly accepted as the best measure of the global price of oil in recent years. Third, we design for the first time methods for forecasting the real price of oil in foreign consumption units rather than U.S. consumption units, taking the point of view of forecasters outside the United States. In addition, we investigate the costs and benefits of allowing for time variation in vector autoregressive (VAR) model parameters and of constructing forecast combinations. We conclude that quarterly forecasts of the real price of oil from suitably designed VAR models estimated on monthly data generate the most accurate forecasts among a wide range of methods including forecasts based on oil futures prices, no-change forecasts and forecasts based on regression models estimated on quarterly data.

Keywords

Econometric and statistical methods; International topics

URL

http://www.bankofcanada.ca/wp-content/uploads/2013/05/wp2013-15.pdf



Record ID

381     [ Page 6 of 14, No. 46 ]

Date

2013-06

Author

Paolo Manasse, Roberto Savona and Marika Vezzoli

Affiliation

University of Bologna and IGIER, Bocconi University, and University of Brescia

Title

Rules of Thumb for Banking Crises in Emerging Markets

Summary /
Abstract

This paper employs a recent statistical algorithm (CRAGGING) in order to build an early warning model for banking crises in emerging markets. We perturb our data set many times and create “artificial” samples from which we estimated our model, so that, by construction, it is flexible enough to be applied to new data for out-of-sample prediction. We find that, out of a large number (540) of candidate explanatory variables, from macroeconomic to balance sheet indicators of the countries’ financial sector, we can accurately predict banking crises by just a handful of variables. Using data over the period from 1980 to 2010, the model identifies two basic types of banking crises in emerging markets: a “Latin American type”, resulting from the combination of a (past) credit boom, a flight from domestic assets, and high levels of interest rates on deposits; and an “Asian type”, which is characterized by an investment boom financed by banks’ foreign debt. We compare our model to other models obtained using more traditional techniques, a Stepwise Logit, a Classification Tree, and an “Average” model, and we find that our model strongly dominates the others in terms of out-of-sample predictive power.

Keywords

Banking Crises, Early Warnings, Regression and Classification Trees, Stepwise Logit

URL

ftp://ftp.igier.unibocconi.it/wp/2013/481.pdf



Record ID

380     [ Page 6 of 14, No. 47 ]

Date

2013-06

Author

Bob Hills and Glenn Hoggarth

Affiliation

International Finance Division, Bank of England

Title

Cross-border bank credit and global financial stability

Summary /
Abstract

This article looks in detail at one aspect of global liquidity: cross-border credit provided by banks. Cross-border banking can potentially have considerable benefits, especially by diversifying the available sources of lending and borrowing, and by increasing banking competition. But such flows can also amplify risks in times of stress. As this article sets out, cross-border bank lending contributed to the build-up in vulnerabilities before the recent crisis, and exacerbated the bust once the crisis hit. The article then considers possible policy responses, arguing in particular that policymakers need to ensure that they can properly monitor these flows, from the point of view of recipient countries and the global system as a whole.

Keywords

Cross-border banking, global financial stability

URL

http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2013/qb130204.pdf?goback=.gde_2942155_member_251289549



Record ID

379     [ Page 6 of 14, No. 48 ]

Date

2012-12

Author

Daniel Gros and Thorsten Beck

Affiliation

Centre for European Policy Studies and the European Banking Center, Tilburg University

Title

Monetary Policy and Banking Supervision: Coordination Instead of Separation

Summary /
Abstract

Following the June 2012 European Council's decision to place the ‘Single Supervisory Mechanism’ (SSM) within the European Central Bank, the general presumption in the policy discussions has been that there should be ‘Chinese walls’ between the supervisory and monetary policy arms of the ECB. The current legislative proposal, in fact, is explicit on this account. On the contrary, however, this paper finds that there is no need to impose a strict separation between these two functions. The authors argue, in fact, that a strict separation of supervision and monetary policy is not even desirable during a financial crisis when the systemic stability of the financial system represents the biggest threat to a monetary policy that aims at price stability. In their view, the key problem hampering the ECB today is that it lacks detailed information on the state of health of the banking system, which is often highly confidential. Chinese walls would not solve this problem. Moreover, in light of the fact that the new, proposed Supervisory Board will be composed to a large extent of representatives of the same institutions that also dominate the Governing Council, the paper finds that it does not make sense to have Chinese walls between two boards with largely overlapping memberships. In addition, it recommends that some members of the Supervisory Boards should be “independents” in order to reduce the tendency of supervisors to unduly delay the recognition of losses.

Keywords

Monetary Policy, Banking Supervision, Coordination

URL

http://d.repec.org/n?u=RePEc:eps:cepswp:7528&r=mon



Record ID

378     [ Page 6 of 14, No. 49 ]

Date

2012-05

Author

Armand Fouejieu Azangue

Affiliation

LEO - Laboratoire d'économie d'Orleans - Université d'Orléans

Title

Coping with the Recent Financial Crisis, did Inflation Targeting Make Any Difference?

Summary /
Abstract

The 2008/2009 financial crisis hit the real economy, generating one of the greatest global economic shocks. The aim of this study is to investigate whether inflation targeting has made a difference during this crisis. We first present some arguments suggesting that inflation targeters can be expected to do better when facing a global shock. Applying difference in difference in the spirit of Ball and Sheridan (2005), we assess the difference between targeters and non-targeters and find that there is no significant difference concerning inflation rate and GDP growth. However, the rise in interest rates and inflation volatility during the crisis have been significantly less pronounced for targeters.

Keywords

Inflation targeting, financial crisis, macroeconomic performances

URL

http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00826277&r=mon



Record ID

377     [ Page 6 of 14, No. 50 ]

Date

2013-05

Author

William R. Cline

Affiliation

Peterson Institute for International Economics

Title

Estimates of Fundamental Equilibrium Exchange Rates

Summary /
Abstract

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.

Keywords

FEERs, G-7, zero current account balance, capital flows

URL

http://www.piie.com/publications/pb/pb13-15.pdf



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