Selected Reference and Reading Materials compiled by Dan Villanueva


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Record ID

629     [ Page 7 of 68, No. 1 ]

Date

2015-01

Author

Charles Evans, Jonas Fisher, Francois Gourio, and Spencer Krane

Affiliation

Federal Reserve Bank of Chicago

Title

Risk Management for Monetary Policy at the Zero Lower Bound

Summary /
Abstract

As labor markets improve and projections have inflation heading back toward target, the Fed has begun to contemplate lifting the federal funds rate from its zero lower bound (ZLB). Under what conditions should the Fed start raising rates? We lay out an argument that calls for caution. It is founded on a risk management principle that says policy should be formulated taking into account the dispersion of outcomes around the mean forecast. On the one hand, raising rates early increases the likelihood of adverse shocks driving a fragile economy back to the ZLB. On the other hand, delaying lift-off when the economy turns out to be resilient could lead to an unwelcome bout of inflation. Since the tools available to counter the first scenario are hard to implement and may be less effective than the traditional tool of raising rates to counter the second scenario, the costs of premature lift-o exceed those of delay. This article shows in a canonical framework that uncertainty about being constrained by the ZLB in the future implies an optimal policy of delayed lift-o. We present evidence that such a risk manage- ment policy is consistent with past Fed actions and that unconventional tools will be hard to implement if the economy were to be constrained by the ZLB after a hasty exit.

Keywords

Monetary policy, risk management, zero lower bound

URL

https://www.economicdynamics.org/meetpapers/2015/paper_665.pdf



Record ID

628     [ Page 7 of 68, No. 2 ]

Date

2015-07

Author

Olivier Blanchard, Gustavo Adler and Irineu de Carvalho Filho

Affiliation

Research Department, International Monetary Fund

Title

Can Foreign Exchange Intervention Stem Exchange Rate Pressures from Global Capital Flow Shocks?

Summary /
Abstract

Many emerging market economies have relied on foreign exchange intervention (FXI) in response to gross capital inflows. In this paper, we study whether FXI has been an effective tool to dampen the effects of these inflows on the exchange rate. To deal with endogeneity issues, we look at the response of different countries to plausibly exogenous gross inflows, and explore the cross country variation of FXI and exchange rate responses. Consistent with the portfolio balance channel, we find that larger FXI leads to less exchange rate appreciation in response to gross inflows.

Keywords

Foreign exchange intervention, exchange rate, capital flows, gross capital flows

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp15159.pdf



Record ID

627     [ Page 7 of 68, No. 3 ]

Date

2015-06

Author

Ali Alichi, Kevin Clinton, Charles Freedman, Ondra Kamenik, Michel Juillard, Douglas Laxton, Jarkko Turunen, and Hou Wang

Affiliation

Research Department, International Monetary Fund

Title

Avoiding Dark Corners: A Robust Monetary Policy Framework for the United States

Summary /
Abstract

The Fed has taken several steps towards strengthening its monetary framework over the past several years. Those steps have supported the Fed's efforts to stimulate the economy through forward guidance despite being constrained by having policy rates at zero. We show that an optimal control approach to monetary policy, which includes the publication of a baseline forecast and a description of the uncertainties around that outlook, combined with an improvement in the Fed's communications toolkit, could further enhance the effectiveness of Fed policy. In the current conjuncture, such a risk management approach to monetary policy would result in both a later liftoff of policy rates and a modest, but planned, overshooting of inflation.

Keywords

Inflation Targeting, Monetary Policy, Optimal Control

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp15134.pdf



Record ID

626     [ Page 7 of 68, No. 4 ]

Date

2015-06

Author

Stefan Laseen, Andrea Pescatori, and Jarkko Turunen

Affiliation

WHD, International Monetary Fund

Title

Systemic Risk : A New Trade-off for Monetary Policy?

Summary /
Abstract

We introduce time-varying systemic risk in an otherwise standard New-Keynesian model to study whether a simple leaning-against-the-wind policy can reduce systemic risk and improve welfare. We find that an unexpected increase in policy rates reduces output, inflation, and asset prices without fundamentally mitigating financial risks. We also find that while a systematic monetary policy reaction can improve welfare, it is too simplistic: (1) it is highly sensitive to parameters of the model and (2) is detrimental in the presence of falling asset prices. Macroprudential policy, similar to a countercyclical capital requirement, is more robust and leads to higher welfare gains.

Keywords

Monetary Policy, Endogenous Financial Risk, DSGE models, Non-Linear Dynamics, Policy Evaluation

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp15142.pdf



Record ID

625     [ Page 7 of 68, No. 5 ]

Date

2015-07

Author

Troy Davig and Refet S. Gurkaynak

Affiliation

Federal Reserve Bank of Kansas City and Bilkent University

Title

Is optimal monetary policy always optimal?

Summary /
Abstract

No. And not only for the reason you think. In a world with multiple inefficiencies the single policy tool the central bank has control over will not undo all inefficiencies; this is well understood. We argue that the world is better characterized by multiple inefficiencies and multiple policy makers with various objectives. Asking the policy question only in terms of optimal monetary policy effectively turns the central bank into the residual claimant of all policy and gives the other policymakers a free hand in pursuing their own goals. This further worsens the tradeoffs faced by the central bank. The optimal monetary policy literature and the optimal simple rules often labeled flexible inflation targeting assign all of the cyclical policymaking duties to central banks. This distorts the policy discussion and narrows the policy choices to a suboptimal set. We highlight this issue and call for a broader thinking of optimal policies.

Keywords

Monetary policy, optimality, social welfare, fiscal policy, time consistency, inflation targeting, tax policy, inefficiencies

URL

https://www.kansascityfed.org/~/media/files/publicat/reswkpap/pdf/rwp15-05.pdf



Record ID

624     [ Page 7 of 68, No. 6 ]

Date

2014-09

Author

Javier Bianchi and Enrique Mendoza

Affiliation

University of Wisconsin & NBER, and University of Pennsylvania & NBER

Title

Optimal Time-Consistent Macroprudential Policy

Summary /
Abstract

Collateral constraints widely used in models of financial crises feature a pecuniary externality, because agents do not internalize how collateral prices respond to collective borrowing decisions, particularly when binding collateral constraints trigger a crisis. We study a production economy in which physical assets serve as collateral for debt and working capital loans, and show that agents in a competitive equilibrium borrow ``too much" during credit expansions compared with a financial regulator who internalizes this externality. Under commitment, however, this regulator faces a time inconsistency problem: It promises low future consumption to prop up current asset prices when collateral constraints bind, but this is not optimal ex post. Instead, we examine the optimal, time-consistent policy of a regulator who cannot commit to future policies. Quantitative analysis shows that this policy reduces the incidence and magnitude of crises, removes fat tails from the distribution of returns and reduces risk premia. A key element of this policy is a state-contingent macro-prudential debt tax (i.e. a tax imposed in normal times when a financial crisis has positive probability next period) of about 1 percent on average. Constant debt taxes also reduce the frequency of crises but are less effective at reducing their severity and reduce welfare when credit constraints bind.

Keywords

Financial crises, macroprudential policy, systemic risk, collateral constraints

URL

https://www.economicdynamics.org/meetpapers/2015/paper_289.pdf



Record ID

623     [ Page 7 of 68, No. 7 ]

Date

2015-07

Author

Leeper, Eric M.; and Nason, James M.

Affiliation

Indiana University and NBER; and North Carolina State University and CAMA

Title

Bringing Financial Stability into Monetary Policy (SVERIGES RIKSBANK Working Paper Series)

Summary /
Abstract

This paper arms central bank policy makers with ways to think about interactions between financial stability and monetary policy. We frame the issue of whether to integrate financial stability into monetary policy operating rules by appealing to the observation that in actual economies financial markets are incomplete. Incomplete markets create financial market frictions that prevent economic agents from perfectly sharing risk; in the absence of frictions, financial (in)stability would be of no concern. Overcoming these frictions to improve risk sharing across economic agents is, in our view, the intent of policies geared toward ensuring financial stability. There are many definitions of financial stability. Although the definitions share the notion that financial stability becomes an issue for policy makers when a breakdown in risk-sharing arrangements in financial markets has a negative effect on real economic activity, we give several examples that show this notion is too general for thinking about the role monetary policy might have in smoothing shocks to financial stability. Examples include statistical models that seek to separate “good” from “bad” changes in private-sector debt aggregates, new Keynesian policy prescriptions grounded in neo-Wicksellian natural rate rules, and a historical episode involving the 1920s Federal Reserve. These examples raise a cautionary flag for policy attempts to control the growth and the composition of debt that financial markets produce. We conclude with some advice for revising central banks’ Monetary Policy Reports.

Keywords

Financial frictions; incomplete markets; crises; new Keynesian; natural rate; monetary transmission mechanism

URL

http://www.riksbank.se/Documents/Rapporter/Working_papers/2015/rap_wp305_150714.pdf



Record ID

622     [ Page 7 of 68, No. 8 ]

Date

2015-07

Author

Carlos Góes

Affiliation

Western Hemisphere Department, IMF

Title

Institutions and Growth : a GMM/IV Panel VAR Approach

Summary /
Abstract

Both sides of the institutions and growth debate have resorted largely to microeconometric techniques in testing hypotheses. In this paper, I build a panel structural vector autoregression (SVAR) model for a short panel of 119 countries over 10 years and find support for the institutions hypothesis. Controlling for individual fixed effects, I find that exogenous shocks to a proxy for institutional quality have a positive and statistically significant effect on GDP per capita. On average, a 1 percent shock in institutional quality leads to a peak 1.7 percent increase in GDP per capita after six years. Results are robust to using a different proxy for institutional quality. There are different dynamics for advanced economies and developing countries. This suggests diminishing returns to institutional quality improvements.

Keywords

Institutions, Panel VAR, Economic Development

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp15174.pdf



Record ID

621     [ Page 7 of 68, No. 9 ]

Date

2015-07

Author

Tamim Bayoumi

Affiliation

Strategy, Policy, and Review Department, IMF

Title

The Dog That Didn’t Bark : The Strange Case of Domestic Policy Cooperation in the “New Normal”

Summary /
Abstract

This paper examines domestic policy cooperation, a curiously neglected issue. Both international and domestic cooperation were live issues in the 1970s when the IS/LM model predicted very different external outcomes from monetary and fiscal policies. Interest in domestic policy cooperation has since fallen on hard intellectual times—with knock-ons to international cooperation—as macroeconomic policy roles became highly compartmentalized. I first discuss the intellectual and policy making undercurrents behind this neglect, and explain why they are less relevant after the global crisis. This is followed by a discussion of: macroeconomic policy cooperation in a world of more fiscal activism; coordination across financial agencies and with macroeconomic policies; and how structural policies fit into this. The paper concludes with a proposal for a “grand bargain” across principle players to create a “new domestic cooperation.”

Keywords

Domestic Policy Cooperation, Ce ntral Bank Independence, Macroprudential Policy

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp15156.pdf



Record ID

620     [ Page 7 of 68, No. 10 ]

Date

2015-06

Author

Stergios Skaperdas

Affiliation

University of California, Irvine

Title

Myths and Self-Deceptions about the Greek Debt Crisis

Summary /
Abstract

The long-running Greek public debt crisis has been accompanied by an information war that has obscured what has occurred. The misconceptions, self-deceptions, and myths associated with the crisis have been at least partly responsible for the obviously inadequate response to the crisis and for the damage to the economies and societies of primarily Greece but also of other Eurozone countries. I argue against seven such myths about the effects of default, the primary cause of the crisis, the likely effects of an exit from the Eurozone, the bargaining power of the Greek government in its negotiations with the EU/ECB/IMF troika, and others. I also discuss the context of the wider slippage of democracy in the European Union and future prospects.

Keywords

Eurozone, Greece, debt, default.

URL

http://www.economics.uci.edu/files/docs/workingpapers/2014-15/14-15-11.pdf



Total records: 676 | Select no. of records per page: 10 | 20 | 30 | 50 | 100 | Show all | Search
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