Record ID

550     [ Page 8 of 34, No. 1 ]

Date

2005-05

Author

Thórarinn G. Pétursson

Affiliation

Central Bank of Iceland and Reykjavík University

Title

INFLATION TARGETING AND ITS EFFECTS ON MACROECONOMIC PERFORMANCE

Summary /
Abstract

An increasing number of countries have adopted inflation targeting since New Zealand first adopted this framework in early 1990. Currently there are 21 countries using inflation targeting in every continent of the world. This paper discusses the characteristics of these countries and how the adoption of inflation targeting has affected their economic performance along several dimensions. The main conclusion is that inflation targeting has largely been a success. The new framework has made central banks, which previously lacked credibility, able to change the way they do monetary policy towards what is commonly considered best practice. In many respects they have even been leading in creating a new benchmark for how to formulate monetary policy.

Keywords

Inflation Targeting, Monetary Policy

URL

http://press.suerf.org/download/studies/study20055.pdf

Record ID

549     [ Page 8 of 34, No. 2 ]

Date

2014-09

Author

André Minella, Paulo Springer de Freitas, Ilan Goldfajn, and Marcelo Kfoury Muinhos

Affiliation

Central Bank of Brazil

Title

Inflation Targeting in Brazil: Constructing Credibility under Exchange Rate Volatility

Summary /
Abstract

This paper assesses the challenges faced by the inflation-targeting regime in Brazil. The confidence crisis in the future performance of the Brazilian economy and the increase in risk aversion in international markets were responsible for a sudden stop of capital inflows in 2002 that caused a significant depreciation of the exchange rate. The inflation-targeting framework has played a critical role in macroeconomic stabilization. We stress two important challenges: construction of credibility and exchange rate volatility. The estimations indicate the following results: i) the inflation targets have worked as an important coordinator of expectations; ii) the Central Bank has reacted strongly to inflation expectations; iii) there has been a reduction in the degree of inflation persistence; and iv) the exchange rate pass-through for "administered or monitored" prices is two times higher than for "market" prices.

Keywords

Inflation targeting, Brazil, monetary policy

URL

http://ecomod.net/sites/default/files/document-conference/ecomod2003/Minella.pdf

Record ID

548     [ Page 8 of 34, No. 3 ]

Date

2014-09

Author

Adrian, Tobias and Liang, J. Nellie

Affiliation

Federal Reserve Bank of New York

Title

Monetary policy, financial conditions, and financial stability

Summary /
Abstract

In the conduct of monetary policy, there exists a risk-return trade-off between financial conditions and financial stability, which complements monetary policy’s traditional trade-off between inflation and real activity. The trade-off exists even if monetary policy does not target financial stability considerations independently of its inflation and real activity goals, because risks to future financial stability are increased by the buildup of financial vulnerabilities from persistent accommodative monetary policy when the economy is close to potential. We review monetary policy transmission channels and financial frictions that give rise to this trade-off between financial conditions and financial stability, within a monitoring program across asset markets, banking firms, shadow banking, and the nonfinancial sector. We focus on vulnerabilities that affect monetary policy’s risk-return trade-off, including 1) pricing of risk, 2) leverage, 3) maturity and liquidity mismatch, and 4) interconnectedness and complexity. We also discuss the extent to which structural and time-varying macroprudential policies can counteract the buildup of vulnerabilities, thus mitigating monetary policy’s risk-return trade-off.

Keywords

Risk-taking channel of monetary policy; monetary policy transmission; monetary policy rules; financial stability; financial conditions; macroprudential policy

URL

http://www.newyorkfed.org/research/staff_reports/sr690.pdf

Record ID

547     [ Page 8 of 34, No. 4 ]

Date

2014-09

Author

Aiyar, Shekhar; Calomiris, Charles; and Wieladek, Tomasz

Affiliation

International Monetary Fund, Columbia Business School, and Bank of England

Title

How does credit supply respond to monetary policy and bank minimum capital requirements?

Summary /
Abstract

We use data on UK banks’ minimum capital requirements to study the interaction of monetary policy and capital requirement regulation. UK banks were subject to both time-varying capital requirements and changes in interest rate policy. Tightening of either capital requirements or monetary policy reduces the supply of lending. Lending by large banks reacts substantially to capital requirement changes, but not to monetary policy changes. Lending by small banks reacts to both. There is little evidence of interaction between these two policy instruments. The differences in the responses of small and large banks, and the lack of interaction between capital requirement changes and monetary policy, have important policy implications. Our results confirm the theoretical consensus view that monetary policy should focus on price stability objectives and that capital requirement changes are a more effective tool to achieve financial stability objectives related to loan supply. We also identify important distributional consequences within the financial system of these two policy instruments. Finally, our findings do not corroborate theoretical models that raise concerns about complex interactions between monetary policy and macroprudential variation in capital requirements.

Keywords

Loan supply; capital requirements; monetary policy; macroprudential regulation

URL

http://www.bankofengland.co.uk/research/Documents/workingpapers/2014/wp508.pdf

Record ID

546     [ Page 8 of 34, No. 5 ]

Date

2014-08

Author

William Tayler and Roy Zilberman

Affiliation

Lancaster University Management School

Title

Macroprudential Regulation and the Role of Monetary Policy

Summary /
Abstract

We study the macroprudential roles of bank capital regulation and monetary policy in a borrowing cost channel model with endogenous financial frictions, driven by credit risk, bank losses and bank capital costs. These frictions induce financial accelerator mechanisms and motivate the examination of a macroprudential toolkit. Following credit shocks, countercyclical regulation is more effective than monetary policy in promoting price, financial and macroeconomic stability. For supply shocks, combining macroprudential regulation with a stronger anti-inflationary policy stance is optimal. The findings emphasize the importance of the Basel III accords and cast doubt on the desirability of conventional Taylor rules during periods of financial distress.

Keywords

Bank Capital Regulation, Macroprudential Policy, Basel III, Monetary Policy, Borrowing Cost Channel

URL

http://eprints.lancs.ac.uk/70632/1/MacroprudentialRegulation.pdf

Record ID

545     [ Page 8 of 34, No. 6 ]

Date

2014-08

Author

S. Boragan Aruoba

Affiliation

Federal Reserve Bank of Minneapolis

Title

Term Structures of Inflation Expectations and Real Interest Rates: The Effects of Unconventional Monetary Policy

Summary /
Abstract

Inflation expectations have recently received increased interest because of the uncertainty created by the Federal Reserve’s unprecedented reaction to the Great Recession. The effect of this reaction on the real economy is also an important topic. In this paper I use various surveys to produce a term structure of inflation expectations – inflation expectations at any horizon from 3 to 120 months – and an associated term structure of real interest rates. Inflation expectations extracted from this model track actual (ex-post) realizations of inflation quite well, and in terms of forecast accuracy they are at par with or superior to some popular alternatives obtained from financial variables. Looking at the period 2008–2013, I conclude that the unconventional policies of the Federal Reserve kept long-run inflation expectations anchored and provided a large level of monetary stimulus to the economy.

Keywords

Inflation expectations; Real interest rate; Unconventional policies

URL

http://www.minneapolisfed.org/research/sr/sr502.pdf

Record ID

544     [ Page 8 of 34, No. 7 ]

Date

2014-06

Author

Plosser, Charles I.

Affiliation

Federal Reserve Bank of Philadelphia

Title

Systematic Monetary Policy and Communication

Summary /
Abstract

President Plosser gives his views on the economy and the FOMC’s most recent policy decisions. He also discusses the benefits of rule-like, systematic behavior in the design and conduct of monetary policy and how this behavior combined with greater transparency leads to more effective communication. He explains how a detailed monetary policy report could promote the
FOMC to conduct policy in a more systematic manner, which he believes will lead to better decisions and better economic outcomes over the longer run. When policymakers deviate, it would require that they explain why. He uses five widely recognized simple rules to explore their implications for the future path of policy and highlights the real uncertainties that policymakers face making policy.

Keywords

Monetary policy; FOMC

URL

http://www.philadelphiafed.org/publications/speeches/plosser/2014/06-24-14-economicclubny.pdf

Record ID

543     [ Page 8 of 34, No. 8 ]

Date

2014-07

Author

Marlene Amstad, Simon Potter and Robert Rich

Affiliation

Bank for International Settlements

Title

The FRBNY Staff Underlying Inflation Gauge: UIG

Summary /
Abstract

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

Keywords

Inflation, Dynamic Factor Models, Core Inflation, Monetary Policy, Forecasting

URL

http://www.bis.org/publ/work453.pdf

Record ID

542     [ Page 8 of 34, No. 9 ]

Date

2014-07

Author

Fabio Verona, Manuel M. F. Martins, and Inês Drumond

Affiliation

Bank of Finland, Monetary Policy and Research Department; Banco de Portugal, Financial Stability Department; and University of Porto

Title

Financial Shocks and Optimal Monetary Policy Rules

Summary /
Abstract

We assess the performance of optimal Taylor-type interest rate rules, with and without reaction to financial variables, in stabilizing the macroeconomy following financial shocks. We use a DSGE model that comprises both a loan and a bond market, which best suits the contemporary structure of the U.S. financial system and allows for a wide set of financial shocks and transmission mechanisms. Overall, we find that targeting financial stability – in particular credit growth, but in some cases also financial spreads and asset prices – improves macroeconomic stabilization. The specific policy implications depend on the policy regime, and on the origin and the persistence of the financial shock.

Keywords

Financial shocks, optimal monetary policy, Taylor rules, DSGE models, bond market, loan market

URL

http://cefup.fep.up.pt/uploads/WorkingPapers/wp1402.pdf

Record ID

541     [ Page 8 of 34, No. 10 ]

Date

2014-07

Author

Fabio Verona, Manuel M. F. Martins, and Inês Drumond

Affiliation

Bank of Finland, University of Porto, and Banco de Portugal

Title

Financial Shocks and Optimal Monetary Policy Rules

Summary /
Abstract

We assess the performance of optimal Taylor-type interest rate rules, with and without reaction to financial variables, in stabilizing the macroeconomy following financial shocks. We use a DSGE model that comprises both a loan and a bond market, which best suits the contemporary structure of the U.S. financial system and allows for a wide set of financial shocks and transmission mechanisms. Overall, we find that targeting financial stability – in particular credit growth, but in some cases also financial spreads and asset prices – improves macroeconomic stabilization. The specific policy implications depend on the policy regime, and on the origin and the persistence of the financial shock.

Keywords

Financial shocks, optimal monetary policy, Taylor rules, DSGE models, bond market, loan market

URL

http://cefup.fep.up.pt/uploads/WorkingPapers/wp1402.pdf

Record ID

540     [ Page 8 of 34, No. 11 ]

Date

2014-08

Author

Matteo Ghilardi and Shanaka J. Peiris

Affiliation

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

Title

Capital Flows, Financial Intermediation and Macroprudential Policies

Summary /
Abstract

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

Keywords

Financial Frictions, Capital Regulation, Monetary Policy

URL

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

Record ID

539     [ Page 8 of 34, No. 12 ]

Date

2014-08

Author

Ray C. Fair

Affiliation

Cowles Foundation, Department of Economics, Yale University

Title

How Might a Central Bank Report Uncertainty?

Summary /
Abstract

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

Keywords

Central bank; uncertainty; stochastic simulation

URL

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

Record ID

538     [ Page 8 of 34, No. 13 ]

Date

2014-07

Author

Irina Balteanu and Aitor Erce

Affiliation

Banco de España

Title

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

Summary /
Abstract

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

Keywords

Banking crises, sovereign defaults, feedback loops, balance sheets

URL

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

Record ID

537     [ Page 8 of 34, No. 14 ]

Date

2014-06

Author

IMF Policy Paper

Affiliation

IMF

Title

Update on the Fiscal Transparency Initiative

Summary /
Abstract

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

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

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

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

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

Keywords

Fiscal Transparency

URL

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

Record ID

536     [ Page 8 of 34, No. 15 ]

Date

2014-08

Author

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

Affiliation

Research Department, IMF

Title

Friedman Redux: External Adjustment and Exchange Rate Flexibility

Summary /
Abstract

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

Keywords

External dynamics, exchange rate regimes, global imbalances

URL

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

Record ID

534     [ Page 8 of 34, No. 16 ]

Date

2014-06

Author

Hashem Pesaran and Ron Smith

Affiliation

University of Cambridge

Title

Tests of Policy Ineffectiveness in Macroeconometrics

Summary /
Abstract

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

Keywords

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

URL

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

Record ID

533     [ Page 8 of 34, No. 17 ]

Date

2014-04

Author

Jaromir Benes, Michael Kumhof, and Douglas Laxton

Affiliation

Research Department, IMF

Title

Financial Crises in DSGE Models: A Prototype Model

Summary /
Abstract

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

Keywords

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

URL

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

Record ID

532     [ Page 8 of 34, No. 18 ]

Date

2014-06

Author

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

Affiliation

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

Title

Impact of Fed Tapering Announcements on Emerging Markets

Summary /
Abstract

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

Keywords

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

URL

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

Record ID

531     [ Page 8 of 34, No. 19 ]

Date

2014-05

Author

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

Affiliation

African and Fiscal Affairs Departments, IMF

Title

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

Summary /
Abstract

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

Keywords

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

URL

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

Record ID

530     [ Page 8 of 34, No. 20 ]

Date

2014-06

Author

F. Gulcin Ozkan and D. Filiz Unsal

Affiliation

Strategy, Policy, and Review Department

Title

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

Summary /
Abstract

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

Keywords

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

URL

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