Record ID

559     [ Page 14 of 68, No. 1 ]

Date

2014-05

Author

Marco Pagano

Affiliation

Center for Financial Studies (CFS), Goethe University Frankfurt

Title

Dealing with financial crises: How much help from research?

Summary /
Abstract

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

Keywords

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

URL

http://econstor.eu/bitstream/10419/102957/1/798409630.pdf

Record ID

558     [ Page 14 of 68, No. 2 ]

Date

2014-10

Author

Richard Clarida

Affiliation

NBER

Title

Monetary Policy in Open Economies: Practical Perspectives for Pragmatic Central Bankers

Summary /
Abstract

This paper reviews and interprets some of the key policy implications that flow from a class of DSGE models for optimal monetary policy in the open economy. The framework suggests that good macroeconomic outcomes in open economies are possible by focusing inflation targeting that is implemented by a Taylor type rule, a rule that in equilibrium is reflected in the exchange rate as an asset price. Optimal monetary policy will not be able deliver a stationary ('stable') nominal exchange rate - let alone a fixed exchange rate or one that remains inside a target zone ‐ because, absent a commitment device, optimal monetary can't deliver a stationary domestic price level. Another feature in the data for inflation targeting countries that is consistent with monetary policy via Taylor type rule is that it will tend push the nominal exchange rate in the opposite direction from PPP in response to an 'inflation' shock - the 'bad news god news' result of Clarida -Waldman (2008;2014). This is so even though in the long run of these models the nominal exchange rate must in expectation obey PPP.

Keywords

Monetary policy, inflation targeting

URL

http://www.nber.org/papers/w20545.pdf

Remarks

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Record ID

557     [ Page 14 of 68, No. 3 ]

Date

2014-09

Author

Martin Bodenstein, Luca Guerrieri, and Joe LaBriola

Affiliation

National University of Singapore, Board of Governors of the Federal Reserve System, and University of California, Berkeley

Title

Macroeconomic Policy Games

Summary /
Abstract

Strategic interactions between policymakers arise whenever each policymaker has distinct objectives. Deviating from full cooperation can result in large welfare losses. To facilitate the study of strategic interactions, we develop a toolbox that characterizes the welfare-maximizing cooperative Ramsey policies under full commitment and open-loop Nash games. Two examples for the use of our toolbox offer some novel results. The first example revisits the case of monetary policy coordination in a two-country model to confirm that our approach replicates well-known results in the literature and extends these results by highlighting their sensitivity to the choice of policy instrument. For the second example, a central bank and a macroprudential regulator are assigned distinct objectives in a model with financial frictions. Lack of coordination leads to large welfare losses even if technology shocks are the only source of fluctuations.

Keywords

Optimal policy; strategic interaction; welfare analysis; monetary policy cooperation; marcroprudential regulation

URL

http://www.federalreserve.gov/econresdata/feds/2014/files/201487pap.pdf

Record ID

556     [ Page 14 of 68, No. 4 ]

Date

2014-10

Author

Fernando López Vicente and José María Serena Garralda

Affiliation

Banco de España

Title

Macroeconomic policy in Brazil: inflation targeting, public debt structure and credit policies

Summary /
Abstract

Macroeconomic policy in Latin America underwent significant changes in the late nineties. Brazil is an outstanding example: inflation targeting was introduced in 1999 and a new fiscal policy framework was set up in 2000 with the Fiscal Responsibility Law. However, two elements of the Brazilian economy constrained the apparently state-of-the-art macroeconomic policy framework: the composition of public debt and the structure of the banking system. This paper discusses why macroeconomic policies were restricted by those factors and how they have evolved differently. The structure of public debt, characterised by indexation, short-term maturities and short US dollar positions, imposed significant constraints on macroeconomic policies during the 2000s. Nevertheless, these vulnerabilities were gradually overcome and the composition of public debt has remained stable in the aftermath of the global financial crisis. At the same time, the structure of the banking system was characterised by credit segmentation and high interest spreads, and these characteristics are still present today. These features have become key elements in understanding current macroeconomic developments, credit dynamics and the economic policy stance.

Keywords

Public debt, central banking, credit policies, Brazil.

URL

http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosOcasionales/14/Fich/do1405.pdf

Record ID

555     [ Page 14 of 68, No. 5 ]

Date

2014-11

Author

Jesús A. Bejarano and Luisa F. Charry

Affiliation

Banco de la Republica de Colombia

Title

Financial Frictions and Optimal Monetary Policy in a Small Open Economy

Summary /
Abstract

In this paper we set up a small open economy model with financial frictions, following Curdia and Woodford (2010)’s model. Unlike other results in the literature such as Curdia and Woodford (2010), McCulley and Ramin (2008) and Taylor (2008), we find that optimal monetary policy should not respond to changes in domestic interest rate spreads when the source of fluctuations are exogenous financial shocks. A novel result here is that the optimal size of policy responses to changes in the credit spread is large when the disturbance source are shocks to the foreign interest rate. Our results suggest that such a response is welfare enhancing.

Keywords

Financial frictions, optimal interest rate rules, interest rate spreads, welfare, small open economy, second order approximation

URL

http://www.banrep.gov.co/sites/default/files/publicaciones/archivos/be_852.pdf

Record ID

554     [ Page 14 of 68, No. 6 ]

Date

2014-11

Author

BEN ROMDHANE, Ikram and MENSI, Sami

Affiliation

University of Mannouba Tunisia

Title

Assessing the macroeconomic effects of inflation targeting: Evidence from OECD Economies

Summary /
Abstract

With the numerous monetary policy reforms undertaken during the 1990s, inflation targeting emerged as one of the possible solutions. The macroeconomic performance of this regime has attracted the attention of recent research, yet no final consensus on its role is reached. The aim of this paper is to contribute to this debate through a panoply of mixed results proven by the recent literature. Empirically, the purpose of this study is to assess the impact of inflation targeting on inflation and output based on a panel of 30 OECD countries over the period 1980_2012, using the “differences-in- differences” approach of Ball and Sheridan (2005). Our results indicate that inflation targeting helps to improve macroeconomic performance of targeters OECD countries more than non- targeters in terms of average inflation and volatility. Our findings corroborate previous studies like those of Wu (2004), Ball and Sheridan (2005) and Manai,O (2014). However, our results point to an insignificant impact of this regime on output consistent with Gonçalves- Salles (2008) and Ftiti & Essadi (2013). Our results contrast those of S-Hebbel (2007) and Ftiti J. Goux (2011) which assume that there is no difference between targeters and non-targeters OECD countries.

Keywords

Inflation targeting, Performance, Macroeconomic Dimensions, Monetary Policy, Panel Analysis.

URL

http://mpra.ub.uni-muenchen.de/60108/1/MPRA_paper_60108.pdf

Record ID

553     [ Page 14 of 68, No. 7 ]

Date

2014-12

Author

Stijn Claessens

Affiliation

Research Department, IMF

Title

An Overview of Macroprudential Policy Tools

Summary /
Abstract

Macroprudential policies – caps on loan to value ratios, limits on credit growth and other balance sheets restrictions, (countercyclical) capital and reserve requirements and surcharges, and Pigouvian levies – have become part of the policy paradigm in emerging markets and advanced countries alike. But knowledge is still limited on these tools. Macroprudential policies ought to be motivated by market failures and externalities, but these can be hard to identify. They can also interact with various other policies, such as monetary and microprudential, raising coordination issues. Some countries, especially emerging markets, have used these tools and analyses suggest that some can reduce procyclicality and crisis risks. Yet, much remains to be studied, including tools’ costs ? by adversely affecting resource allocations; how to best adapt tools to country circumstances; and preferred institutional designs, including how to address political economy risks. As such, policy makers should move carefully in adopting tools.

Keywords

Financial stability, financial intermediation, externalities, market failures, procyclicality, systemic risk

URL

http://www.imf.org/external/pubs/ft/wp/2014/wp14214.pdf

Record ID

552     [ Page 14 of 68, No. 8 ]

Date

2014-11

Author

Bradley Jones

Affiliation

Monetary and Capital Markets Department, IMF

Title

Identifying Speculative Bubbles: A Two-Pillar Surveillance Framework

Summary /
Abstract

In the aftermath of the global financial crisis, the issue of how best to identify speculative asset bubbles (in real-time) remains in flux. This owes to the difficulty of disentangling irrational investor exuberance from the rational response to lower risk based on price behavior alone. In response, I introduce a two-pillar (price and quantity) approach for financial market surveillance. The intuition is straightforward: while asset pricing models comprise a valuable component of the surveillance toolkit, risk taking behavior, and financial vulnerabilities more generally, can also be reflected in subtler, non-price terms. The framework appears to capture stylized facts of asset booms and busts—some of the largest in history have been associated with below average risk premia (captured by the ‘pricing pillar’) and unusually elevated patterns of issuance, trading volumes, fund flows, and survey-based return projections (reflected in the ‘quantities pillar’). Based on a comparison to past boom-bust episodes, the approach is signaling mounting vulnerabilities in risky U.S. credit markets. Policy makers and regulators should be attune to any further deterioration in issuance quality, and where possible, take steps to ensure the post-crisis financial infrastructure is braced to accommodate a re-pricing in credit risk.

Keywords

Asset bubbles, Market efficiency, Financial stability, Financial crises

URL

http://www.imf.org/external/pubs/ft/wp/2014/wp14208.pdf

Record ID

551     [ Page 14 of 68, No. 9 ]

Date

2014-09

Author

Manai Daboussi, Olfa

Affiliation

University of Tunis

Title

Inflation Targeting As a Monetary Policy Rule: Experience and Prospects

Summary /
Abstract

This paper examines the inflation targeting experience in developing countries. Based on panel data of 53 developing countries, of which 20 those have adopted inflation targeting policy by the end of 2007, the purpose is to show the effects of inflation targeting on macroeconomic performance in these economies. We use the Great Moderation approach of Pétursson (2005) to analyze the relationship between inflation targeting and macroeconomic performance over the period 1980-2012. A key lesson from this experience is that this monetary policy realizes macroeconomic performance and contributes to the reduction of inflation, especially in developing countries with hyperinflation.

Keywords

Monetary policy, Inflation targeting, Macroeconomic performance, Developing economies

URL

http://mpra.ub.uni-muenchen.de/59336/1/MPRA_paper_59336.pdf

Record ID

550     [ Page 14 of 68, No. 10 ]

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