Record ID

317     [ Page 19 of 34, No. 1 ]

Date

2013-03

Author

David Miles, Jing Yang and Gilberto Marcheggiano

Affiliation

Monetary Policy Committee, Bank of England, Bank for International Settlements, and Bank of England

Title

OPTIMAL BANK CAPITAL

Summary /
Abstract

This article reports estimates of the long-run costs and benefits of having banks fund more of their assets with loss-absorbing capital, or equity. We model how shifts in funding affect required rates of return and how costs are influenced by the tax system. We draw a clear distinction between costs to individual institutions (private costs) and overall economic (or social) costs. We find that the amount of equity capital that is likely to be desirable for banks to use is very much larger than banks have used in recent years and also higher than targets agreed under the Basel III framework.

Keywords

Bank capital, Basle III framework, private vs social costs

URL

http://onlinelibrary.wiley.com/doi/10.1111/j.1468-0297.2012.02521.x/pdf

Record ID

316     [ Page 19 of 34, No. 2 ]

Date

2013-03

Author

Adolfo Barajas, Thorsten Beck, Era Dabla-Norris, and Seyed Reza Yousefi

Affiliation

Strategy, Policy, and Review Department, IMF

Title

Too Cold, Too Hot, Or Just Right? Assessing Financial Sector Development Across the Globe

Summary /
Abstract

This paper introduces the concept of the financial possibility frontier as a constrained optimum level of financial development to gauge the relative performance of financial systems across the globe. This frontier takes into account structural country characteristics, institutional, and macroeconomic factors that impact financial system deepening. We operationalize this framework using a benchmarking exercise, which relates the difference between the actual level of financial development and the level predicted by structural characteristics, to an array of policy variables. We also show that an overshooting of the financial system significantly beyond levels predicted by its structural fundamentals is associated with credit booms and busts.

Keywords

Financial Development; Financial Sector Policies; Benchmarking

URL

http://www.imf.org/external/pubs/ft/wp/2013/wp1381.pdf

Record ID

315     [ Page 19 of 34, No. 3 ]

Date

2010-02

Author

Martin Fukac

Affiliation

Federal Reserve Bank of Kansas City

Title

Impulse Response Identification in DSGE Models

Summary /
Abstract

Dynamic stochastic general equilibrium (DSGE) models have become a widely used tool for policymakers. This paper modifies the global identification theory used for structural vectorautoregressions, and applies it to DSGE models. We use this theory to check whether a DSGE model structure allows for unique estimates of structural shocks and their dynamic effects. The potential cost of a lack of identification for policy oriented models along that specific dimension is huge, as the same model can generate a number of contrasting yet theoretically and empirically justifiable recommendations. The problem and methodology are illustrated using a simple New Keynesian business cycle model.

Keywords

Identification of DSGE models, impulse response, identification, minimal system realisation

URL

http://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1553933_code694895.pdf?abstractid=1553933&mirid=2

Record ID

314     [ Page 19 of 34, No. 4 ]

Date

2010-02

Author

Adrian Pagan and Martin Fukac

Affiliation

Australian National University (ANU) - Research School of Social Sciences (RSSS), University of New South Wales - Australian School of Business - School of Economics, and Federal Reserve Bank of Kansas City

Title

Structural Macro-Econometric Modelling in a Policy Environment

Summary /
Abstract

In this paper we review the evolution of macroeconomic modelling in a policy environment that took place over the past sixty years. We identify and characterize four generations of macro models. Particular attention is paid to the fourth generation - dynamic stochastic general equilibrium models. We discuss some of the problems in how these models are implemented and quantified.

Keywords

History of macroeconomic modeling, policy oriented models, structural model evaluation, DSGE models

URL

http://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1553948_code694895.pdf?abstractid=1553948&mirid=2

Record ID

313     [ Page 19 of 34, No. 5 ]

Date

2010-02

Author

Pier Francesco Asso, George A. Kahn, and Robert Leeson

Affiliation

University of Palermo, Federal Reserve Bank of Kansas City, and Hoover Institution

Title

The Taylor Rule and the Practice of Central Banking

Summary /
Abstract

The Taylor rule has revolutionized the way many policymakers at central banks think about monetary policy. It has framed policy actions as a systematic response to incoming information about economic conditions, as opposed to a period-by-period optimization problem. It has emphasized the importance of adjusting policy rates more than one-for-one in response to an increase in inflation. And, various versions of the Taylor rule have been incorporated into macroeconomic models that are used at central banks to understand and forecast the economy.

This paper examines how the Taylor rule is used as an input in monetary policy deliberations and decision-making at central banks. The paper characterizes the policy environment at the time of the development of the Taylor rule and describes how and why the Taylor rule became integrated into policy discussions and, in some cases, the policy framework itself. Speeches by policymakers and transcripts and minutes of policy meetings are examined to explore the practical uses of the Taylor rule by central bankers. While many issues remain unresolved and views still differ about how the Taylor rule can best be applied in practice, the paper shows that the rule has advanced the practice of central banking.

Keywords

Taylor rule, monetary policy, rules versus discretion

URL

http://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1553978_code694895.pdf?abstractid=1553978&mirid=2

Record ID

312     [ Page 19 of 34, No. 6 ]

Date

2013-03

Author

Luis Felipe Cespedes, Roberto Chang, and Andres Velasco

Affiliation

Universidad Adolfo Ibáñez, Rutgers University and National Bureau of Economic Research, and Columbia University and National Bureau of Economic Research

Title

Is Inflation Targeting Still on Target? The Recent Experience of Latin America

Summary /
Abstract

This paper reviews the recent experience of a half-dozen Latin American inflation targeting (IT) nations. Repeated and large deviations from the standard IT framework are documented: exchange market interventions have been lasting and widespread; the real exchange rate has often become a target of policy, though this target is seldom made explicit; a range of other non-conventional policy tools, especially changes in reserve requirements but occasionally taxes or restrictions on international capital movements, also came into common use. As in developed nations, during the 2008-2009 crisis issues of liquidity provision took center stage. A first evaluation of the emerging modified framework of monetary policy is also attempted. In general terms, the new approach seems to have been effective, at the very least since the region weathered the crisis reasonably well. But also, and perhaps more importantly, many questions remain about the desirability of non-conventional monetary policies in Latin America.

Keywords

Inflation targeting, monetary policy, financial crisis

URL

http://idbdocs.iadb.org/wsdocs/getdocument.aspx?docnum=37635005

Remarks

Are countries in the region moving toward a new monetary policy framework? Or are they simply adding bells and whistles to the basic Inflation Targeting logic? The authors of this paper are inclined to take the second alternative. What seems to be emerging is not an alternative regime to IT, but rather an expanded and enriched version. The old IT may no longer be on target, but perhaps a new version soon will be.

Record ID

311     [ Page 19 of 34, No. 7 ]

Date

2013-01

Author

Armand Fouejieu A. and Scott Roger

Affiliation

International Monetary Fund

Title

Inflation Targeting and Country Risk: an Empirical Investigation

Summary /
Abstract

The sovereign debt crisis in Europe has highlighted the role of country risk premia as a link between countries’ fiscal and external balances, financial conditions and monetary policy. The purpose of this paper is to estimate how adoption of inflation targeting (IT) affects spreads. It is hypothesized that country risk premia for IT countries (especially among emerging market economies) may be lower than for other countries owing to greater policy predictability and more stable long-term inflation. The findings suggest that IT reduces the risk premium, both through adoption of the IT regime, and through the observed track record in stabilizing inflation.

Keywords

Inflation targeting, risk premium, external debt

URL

http://www.imf.org/external/pubs/ft/wp/2013/wp1321.pdf

Record ID

310     [ Page 19 of 34, No. 8 ]

Date

2013-01

Author

Benes, Jaromir ; Berg, Andrew ; Portillo, Rafael ; Vavra, David

Affiliation

Research Department, IMF

Title

Modeling Sterilized Interventions and Balance Sheet Effects of Monetary Policy in a New-Keynesian Framework

Summary /
Abstract

We study a wide range of hybrid inflation-targeting (IT) and managed exchange rate regimes, analyzing their implications for inflation, output and the exchange rate in the presence of various domestic and external shocks. To this end, we develop an open economy new-Keynesian model featuring sterilized interventions in the foreign exchange (FX) market as an additional central bank instrument operating alongside the Taylor rule, and affecting the economy through portfolio balance sheet effects in the financial sector. We find that there can be advantages to combining IT with some degree of exchange rate management via FX interventions. Unlike "pure" IT or exchange rate management via interest rates, FX interventions can help insulate the economy against certain shocks, especially shocks to international financial conditions. However, managing the exchange rate through FX interventions may also hinder necessary exchange rate adjustments, e.g., in the presence of terms of trade shocks.

Keywords

Sterilized FX inte rventions, monetary policy, emer ging markets, new-Keynesian economics.

URL

http://www.imf.org/external/pubs/ft/wp/2013/wp1311.pdf

Record ID

309     [ Page 19 of 34, No. 9 ]

Date

2013-02

Author

Atish R. Ghosh, Jun I. Kim, Enrique G. Mendoza, Jonathan D. Ostry and Mahvash S. Qureshi

Affiliation

International Monetary Fund and University of Pennsyulvania (Mendoza)

Title

FISCAL FATIGUE, FISCAL SPACE AND DEBT SUSTAINABILITY IN ADVANCED ECONOMIES

Summary /
Abstract

How high can public debt rise without compromising fiscal solvency? We answer this question using a stochastic model of sovereign default in which risk-neutral investors lend to a government that displays ‘fiscal fatigue’, whereby its ability to increase primary balances cannot keep pace with rising debt. As a result, the government faces an endogenous debt limit beyond which debt cannot be rolled over. Using data for 23 advanced economies over the period 1970-2007, we find evidence of a fiscal reaction function with these features, and use it to compute ‘fiscal space’, defined as the difference between current debt ratios and the estimated debt limits.

Keywords

Fiscal fatigue, fiscal space, debt sustainability

URL

http://onlinelibrary.wiley.com/doi/10.1111/ecoj.12010/pdf

Remarks

A practical guide to public borrowing.

Record ID

308     [ Page 19 of 34, No. 10 ]

Date

2012-09

Author

Strategy, Policy, and Review Department, in consultation with other Departments

Affiliation

IMF

Title

IMF Policy Paper: Fifth Periodic Monitoring Report on the Status of Implementation Plans in Response to Board-Endorsed IEO Recommendations

Summary /
Abstract

Periodic Monitoring Reports update the status on Management Implementation Plans (MIPs) in response to Executive Board-endorsed IEO recommendations. The last Periodic Monitoring Report (PMR) was discussed by the Board Evaluation Committee (EVC) and then agreed by the Board in August 2011. That report concluded that all key performance benchmarks related to the MIPs covered in that report had either been met or were on track for timely completion, that no new remedial actions were proposed, and that there were no outstanding performance benchmarks to be reviewed in the next PMR. In their assessment to the Executive Board, the EVC did, however, note that further work was needed on three other issues—staff mobility, enhanced coverage of previous implementation plans, and the process for following up on IEO recommendations. This fifth report therefore updates work on these three issues, including a consolidated picture of recent progress on all Board-endorsed recommendations made since the first PMR in 2007. This PMR also presents progress on the Implementation Plan in response to Board-endorsed recommendations arising from the IEO Evaluation of IMF Interactions with Member Countries (hereafter, Interactions Evaluation).

Keywords

Independent Evaluation Office (IEO)

URL

http://www.imf.org/external/np/pp/eng/2012/092412.pdf

Remarks

It would be useful for the BSP and other national authorities in the Philippines to be aware of recent initiatives that the IMF Executive Board had approved or been pursuing or intending to pursue in areas of relationships and obligations between the Philippines and the IMF.

Record ID

307     [ Page 19 of 34, No. 11 ]

Date

2013-03

Author

Shekhar Aiyar, Romain Duval, Damien Puy, Yiqun Wu, and Longmei Zhang

Affiliation

Asia and Pacific Department, IMF

Title

Growth Slowdowns and the Middle-Income Trap

Summary /
Abstract

The “middle-income trap” is the phenomenon of hitherto rapidly growing economies stagnating at middle-income levels and failing to graduate into the ranks of high-income countries. In this study we examine the middle-income trap as a special case of growth slowdowns, which are identified as large sudden and sustained deviations from the growth path predicted by a basic conditional convergence framework. We then examine their determinants by means of probit regressions, looking into the role of institutions, demography, infrastructure, the macroeconomic environment, output structure and trade structure. Two variants of Bayesian Model Averaging are used as robustness checks. The results—including some that indeed speak to the special status of middle-income countries—are then used to derive policy implications, with a particular focus on Asian economies.

Keywords

Growth, slowdown, middle income trap, Bayesian Model Averaging

URL

http://www.imf.org/external/pubs/ft/wp/2013/wp1371.pdf

Remarks

The Philippines is included in this study. The authors, all from the Asia and Pacific Department of the IMF, examine the role of institutions, demography, infrastructure, the macroeconomic environment, output structure and trade structure in the potential risk of growth slowdown. They conclude that "taken at face value, the empirical results imply that, compared with other Asian economies, Malaysia, the Philippines and China would face a larger risk of growth slowdown stemming from institutions." The authors measure "institutions" from indices on (1) government size, (2) rule of law, (3) freedom to trade internationally, (4) regulation, and (5) financial openness.

Record ID

306     [ Page 19 of 34, No. 12 ]

Date

2013-03

Author

Michael J. Lamla and Jan-Egbert Sturm

Affiliation

KOF Swiss Economic Institute, ETH Zurich, Switzerland

Title

Interest Rate Expectations in the Media and Central Bank Communication

Summary /
Abstract

While there is ample evidence how central bank communication and interest rate decisions are perceived by financial markets, insights regarding the response of the public is lacking. Media is known to be an important transmitter of news to the public. Based on articles in the Financial Times Europe, we test how expectations on the future course of monetary policy presented in the media are affected by central bank communication and interest rate decisions.

Keywords

European Central Bank, monetary policy announcements, central bank communication, media expectations

URL

http://d.repec.org/n?u=RePEc:kof:wpskof:13-334&r=mon

Record ID

305     [ Page 19 of 34, No. 13 ]

Date

2013-02

Author

Wolfgang J. Luhan and Johann Scharler

Affiliation

Ruhr-Universität Bochum and University of Innsbruck

Title

Monetary Policy, Inflation Illusion and the Taylor Principle – An Experimental Study

Summary /
Abstract

We develop a simple experimental setting to evaluate the role of the Taylor principle, which holds that the nominal interest rate has to respond more than one-for-one to fluctuations in the inflation rate. In our setting, the average inflation rate fluctuates around the inflation target if the computerized central bank obeys the Taylor principle. If the Taylor principle is violated, then the average inflation rate persistently deviates from the target. We find that these deviations from the target are less pronounced, if inflation rates cannot be as readily observed as nominal interest rates. This result is consistent with the interpretation that subjects underestimate the influence of inflation on the real return to savings if the inflation rate is only observed ex post.

Keywords

Taylor principle, interest rate rule, inflation illusion, laboratory experiment

URL

http://repec.rwi-essen.de/files/REP_13_402.pdf

Record ID

304     [ Page 19 of 34, No. 14 ]

Date

2013-03

Author

Phan, Tuan

Affiliation

Australian National University

Title

Should central banks publish interest rate forecasts? - a survey

Summary /
Abstract

As a particular form of transparency, some central banks publish their interest rate forecasts while many others refuse to do that. Whether the publication is good or bad for economic performance and social welfare is now a hotly debated subject. This paper provides a review of the literature in both theoretical and empirical aspects. We also establish a criteria table which could be used as a preliminary guideline for central banks in answering the question whether they should reveal the forecasts, and how to publish the policy rate inclinations. The suggested conclusion is that interest rate projections should be considered as one of the last items that central banks should reveal and they should be very careful in publishing their policy rate forecasts.

Keywords

Central bank transparency, interest rate forecasts

URL

http://mpra.ub.uni-muenchen.de/44676/1/MPRA_paper_44676.pdf

Record ID

303     [ Page 19 of 34, No. 15 ]

Date

2013-02

Author

Ambrogio Cesa-Bianchi and Alessandro Rebucci

Affiliation

Inter-American Development Bank

Title

Does Easing Monetary Policy Increase Financial Instability?

Summary /
Abstract

This paper develops a model featuring both a macroeconomic and a financial stability objective that speaks to the interaction between monetary and macroprudential policies. First, we find that interest rate rigidities in a monopolistic banking system have an asymmetric impact on financial stability: they lead to greater financial instability in response to contractionary shocks, while they act as an automatic financial stabilizer in response to expansionary shocks. Second, we find that when the policy interest rate is the only instrument, a monetary authority subject to the same constraints as private agents cannot always achieve a (constrained) efficient allocation and faces a trade-off between macroeconomic and financial stability in response to contractionary shocks. This has important implications for the role played by U. S. monetary policy in the run-up to the global financial crisis: the model suggests that the weak link in the U. S. policy framework was not the monetary policy stance after 2002, but rather the absence of an effective second policy pillar aimed at preserving financial stability.

Keywords

Monetary policy, macroprudential policies, financial crises, real rigidities, credit friction

URL

http://idbdocs.iadb.org/wsdocs/getdocument.aspx?docnum=37462291

Remarks

This paper's conclusion that "... the weak link in the U. S. policy framework was not the monetary policy stance after 2002, but rather the absence of an effective second policy pillar aimed at preserving financial stability" is similar to the conclusion of my paper "Should Policymakers Respond Directly to Financial Stability in Their Interest Rule?" in http://www.seacen.org/file/file/2nd_seacen_cemla/2nd_SC_danvillanueva.pdf

Record ID

302     [ Page 19 of 34, No. 16 ]

Date

2013-02

Author

Michael Bleaney and Sharmila Devadas

Affiliation

School of Economics, University of Nottingham, and Bank Negara Malaysia

Title

Foreign Exchange Inflows in Emerging Markets: How Much Are They Sterilised?

Summary /
Abstract

As some emerging market economies have amassed large quantities of foreign exchange reserves, concern has arisen over the sterilisation of the domestic money stock from these flows. Existing studies focus mostly on narrow (reserve) money, and estimate a high degree of sterilisation. Empirical work on the long-run relationship between money and prices emphasises broad money, yet the long-run effect of foreign exchange inflows on broad money has been almost entirely ignored. Using a sample of quarterly data from 28 countries over the period 1990-2010, it is shown that broad money is sterilised to a significantly smaller degree than reserve money. This pattern is not confined to any particular group of countries and is unrelated to the nature of the flows (e.g. current account versus capital account surpluses). Sterilisation rates have increased in Asia during the recent period of persistent accumulation of foreign exchange reserves.

Keywords

Foreign exchange intervention, money, sterilisation, emerging markets

URL

http://www.nottingham.ac.uk/economics/documents/discussion-papers/13-01.pdf

Record ID

301     [ Page 19 of 34, No. 17 ]

Date

2013-01

Author

Mehrotra, Aaron

Affiliation

Bank of Finland

Title

On the use of sterilisation bonds in emerging Asia

Summary /
Abstract

We document recent developments in the use of sterilisation bonds by six central banks in emerging Asia, and discuss the implications for monetary policy and the financial sector. An important development in the sterilisation of foreign exchange interventions in past years has been the frequent use of central banks’ own paper. There has been an attempt to lengthen the maturity structure of sterilisation bills, and maturities have risen, especially in 2010–11. The choice of sterilisation instrument is likely to depend partly on their relative costs. In particular, as the yield on central bank securities has fallen relative to the rate of remuneration of required reserves, some central banks in Asia have increasingly used central bank securities for sterilisation.

Keywords

Sterilisation bonds, central bank bonds and bills, foreign exchange reserves, Emerging Asia

URL

http://www.suomenpankki.fi/bofit_en/tutkimus/tutkimusjulkaisut/dp/Documents/2013/dp0113.pdf

Record ID

300     [ Page 19 of 34, No. 18 ]

Date

2013-02

Author

Paul Hubert

Affiliation

Ofce sciences-po, France

Title

The influence and policy signaling role of FOMC forecasts

Summary /
Abstract

Policymakers at the Federal Open Market Committee (FOMC) publish forecasts since 1979. We examine the effects of publishing FOMC inflation forecasts in two steps using a structural VAR model. We assess whether they influence private inflation expectations and the underlying mechanism at work: do they convey policy signals for forward guidance or help interpreting current policy decisions? We provide original evidence that FOMC inflation forecasts are able to influence private ones. We also find that FOMC forecasts give information about future Fed rate movements and affect private expectations in a different way than Fed rate shocks. This body of evidence supports the use of central bank forecasts to affect inflation expectations especially while conventional policy instruments are at the zero lower bound.

Keywords

Monetary policy, Forecasts, FOMC, influence, Policy signals, structural Var

URL

http://www.ofce.sciences-po.fr/pdf/dtravail/WP2013-03.pdf

Record ID

299     [ Page 19 of 34, No. 19 ]

Date

2013-01

Author

Nidhaleddine Ben Cheikh

Affiliation

University of Rennes 1 - CREM UMR CNRS 6211, France

Title

Nonlinear Mechanism of the Exchange Rate Pass-Through: Does Business Cycle Matter?

Summary /
Abstract

This paper examines the presence of nonlinear mechanism in the exchange rate pass-through (ERPT) to CPI inflation for 12 euro area (EA) countries. Using logistic smooth transition models, we explore the existence of nonlinearity with respect to economic activity along the business cycle. Our results provide a strong evidence of nonlinearity in 6 out of 12 EA countries with significant differences in the degree of ERPT between the periods of expansion and recession. However, we find no clear direction in this regime-dependence of pass-through to business cycle. In some countries, ERPT is higher during expansions than in recessions; however, in other countries, this result is reversed. These cross-country differences in the nonlinear mechanism of pass-through would have important implications for the design of monetary policy and the control of inflation in the EA context.

Keywords

Exchange Rate Pass-Through, Inflation, Smooth Transition Regression

URL

http://crem.univ-rennes1.fr/wp/2013/201306.pdf

Record ID

298     [ Page 19 of 34, No. 20 ]

Date

2012-02

Author

Hyeong Ho Moon, Tae-Hwan Kim, and Seongho Nah

Affiliation

Department of Economics, University of California at San Diego, USA, School of Economics, Yonsei University, South Korea, and Bank of Korea, South Korea

Title

On measuring the nonlinear effect of interest rates on inflation and output

Summary /
Abstract

While economists are interested in the reaction of the interest rate to changes in the inflation rate, central bankers are usually more interested in the reverse causal relationship, i.e., the response of inflation (and output) to a change in the official interest rate as administrated by the central bank. Whether the reverse causal relationship is linear or nonlinear is an empirical issue. We investigated the reverse causal relationship by employing the LSTVAR model proposed by Weise (1999). We found strong evidence in favor of nonlinearity. As a consequence of the nonlinearity, we discovered various types of asymmetric effects of the interest rate on inflation and output. An asymmetric effect of monetary shocks of different sizes was uncovered, which implies that when the unexpected change in the official rate is doubled (i.e. from 0.25% to 0.5%), its effect on inflation and output is likely to be more than doubled. However, this finding is upheld only when the economy is in recession. The opposite result, in which the effect is smaller, is supported when the economy is expanding. Regarding the other asymmetric effect of monetary shocks with different signs, we found that central banks can expect that increasing the official rate by some certain amount (e.g. 0.25%) is likely to have much larger effect on inflation and output than decreasing the rate by the same amount (e.g. -0.25%) regardless of the state of the economy.

Keywords

Nonlinear VAR, impulse response function, asymmetric monetary effect

URL

ftp://repec.yonsei.ac.kr/repec/yon/wpaper/2013rwp-53.pdf