Record ID

13     [ Page 22 of 23, No. 1 ]

Date

2010-08-01

Author

André Meie

Affiliation

IMF

Title

Still Minding the Gap - Inflation Dynamics during Episodes of Persistent Large Output Gaps

Summary /
Abstract

This paper studies inflation dynamics during 25 historical episodes in advanced economies where output remained well below potential for an extended period. We find that such episodes generally brought about significant disinflation, underpinned by weak labor markets, slowing wage growth, and, in many cases, falling oil prices. Indeed, inflation declined by about the same fraction of the initial inflation rate across episodes. That said, disinflation has tended to taper off at very low positive inflation rates, arguably reflecting downward nominal rigidities and well-anchored inflation expectations. Temporary inflation increases during episodes were, in turn, systematically related to currency depreciation or higher oil prices. Overall, the historical patterns suggest little upside inflation risk in advanced economies facing the prospect of persistent large output gaps.

Source: IMF Working Paper No. 10/189

URL

http://www.imf.org/external/pubs/cat/longres.cfm?sk=24144.0

Record ID

15     [ Page 22 of 23, No. 2 ]

Date

2010-08-01

Author

Emanuele Baldacci and Manmohan S. Kumar

Affiliation

IMF

Title

Fiscal Deficits, Public Debt, and Sovereign Bond Yields

Summary /
Abstract

The recent sharp increase in fiscal deficits and government debt in many countries raises questions regarding their impact on long-term sovereign bond yields. While economic theory suggests that this impact is likely to be adverse, empirical results have been less clear cut, have generally ignored nonlinear effects of deficits and debt through some other key determinants of yields, and have been mostly confined to advanced economies. This paper reexamines the impact of fiscal deficits and public debt on long-term interest rates during 1980 - 2008, taking into account a wide range of country-specific factors, for a panel of 31 advanced and emerging market economies. It finds that higher deficits and public debt lead to a significant increase in long-term interest rates, with the precise magnitude dependent on initial fiscal, institutional and other structural conditions, as well as spillovers from global financial markets. Taking into account these factors suggests that large fiscal deficits and public debts are likely to put substantial upward pressures on sovereign bond yields in many advanced economies over the medium term.

Source: IMF Working Paper No. 10/184

URL

http://www.imf.org/external/pubs/cat/longres.cfm?sk=24130.0

Remarks

The result from the attached paper is not good news for the trajectory of the Philippine fiscal deficit and government debt, which will increase long-term interest rates, to the detriment of long-run economic growth.

Record ID

8     [ Page 22 of 23, No. 3 ]

Date

2010-08

Author

Carmen Reinhart and Kenneth Rogoff

Affiliation

IMF

Title

Debt and Growth Revisited

Summary /
Abstract

In a recent paper, we studied economic growth and inflation at different levels of government and external debt. The public discussion of our empirical strategy and results has been somewhat muddled. Here, we attempt to clarify matters, particularly with respect sample coverage (our evidence encompasses forty-four countries over two centuries--not just the United States), debt-growth causality (our book emphasizes the bi-directional nature of the relationship), as well as nonlinearities in the debt-growth connection and thresholds evident in the data (absolutely central points that seem to have been lost in some commentary.) In addition to clarifying the earlier results, this paper enriches our original analysis by providing further discussion of the high debt (over 90 percent of GDP) episodes and their incidence. Some of the implications of our analysis, including for the United States, are taken up in the final section.

http://d.repec.org/n?u=RePEc:pra:mprapa:24376&r=mac

Keywords

debt; growth; crisis; advanced economies; historical

URL

http://mpra.ub.uni-muenchen.de/24376/

Remarks

This is an excellent study by two of my ex-colleagues at the IMF. Their empirical threshold of 60% of GDP for external debt above which negative growth effects show up is close to the upper limit of 52% of GDP produced by Ch 3, External Debt, Adjustment, and Growth in my book, Macroeconomic Policies for Stable Growth (2008, World Scientific).

Record ID

10     [ Page 22 of 23, No. 4 ]

Date

2010-08

Author

Peter Spahn

Title

Asset Prices, Inflation and Monetary Control - Re-inventing Money as a Policy Tool

Summary /
Abstract

Low inflation on goods markets provides no reliable precondition for asset-market stability; it might even promote the emergence of bubbles because interest rates and risk premia appear to be low. A further factor driving asset demand is easy availability of credit, which in turn roots in the banking system operating in a regime of endogenous central-bank money. A comparison of Bundesbank and ECB policies suggests that credit growth can be controlled more efficiently if rising interest rates are accompanied by some liquidity squeeze that supports the spillover of a monetary restriction to capital markets. The announcement effect of a central bank Charter including the goal of financial-market stability helps to deter private agents from excessive asset trading.

URL:http://d.repec.org/n?u=RePEc:hoh:hohdip:323&r=mac
- http://www.uni-hohenheim.de/RePEc/hoh/papers/323.pdf

Keywords

open-market policy; asset-price bubble; euro money market; ECB strategy

URL

http://d.repec.org/n?u=RePEc:hoh:hohdip:323&r=mac

Remarks

A very useful study

Record ID

7     [ Page 22 of 23, No. 5 ]

Date

2010-07-31

Author

Paul Levine

Affiliation

University of Surrey

Title

Monetary Policy in an Uncertain World: Probability Models and the Design of Robust Monetary Rules

Summary /
Abstract

The past forty years or so has seen a remarkable transformation in macro-models used by central banks, policymakers and forecasting bodies.This paper describes this transformation from reduced-form behavioural equations estimated separately, through to contemporary micro-founded dynamic stochastic general equilibrium (DSGE) models estimated by systems methods.

Keywords

structured uncertainty, DSGE models, robustness, Bayesian estimation, interest-rate rules

URL

http://www.esocialsciences.com/data/articles/document11182010520.771557.pdf

Remarks

This is a very useful survey of central bank modeling -
http://d.repec.org/n?u=RePEc:ess:wpaper:id:2761&r=mon

Record ID

24     [ Page 22 of 23, No. 6 ]

Date

2010-07-13

Author

IMF

Title

IMF Book - Global Economic Crisis: Reconstructing the World Economy

Summary /
Abstract

This volume presents papers from a conference organized by the Korea Development Institute and the IMF. The purpose of this high-level conference was for policymakers and academics from the Asian region and from G-20 countries to discuss forward-looking economic and financial issues of interest to the international community, such as restoring normalcy to fiscal policy, macroprudential regulation, the future of the financial system, global fiscal imbalances, and the international monetary system. Topics include: (1) A strategy for renormalizing fiscal and monetary policies in advanced economies. Key principles for restoring financial stability in the wake of the crisis, including the timing and sequence for exit, are identified. (2) Rethinking macroeconomic policy. This section examines if and how macroeconomic policy should respond to sectoral imbalances and asset-price and housing imbalances, as well as a potential role for macroprudential regulation. (3) Redesigning the financial system of the future. Responses by both policymakers and the private sector to recent events are evaluated in terms of how they will shape the future financial system and its role in the global economy. (4) Global imbalances. The argument is made that there is an urgent need to address the domestic and international distortions that are a key cause of imbalances; failure to do so would threaten the sustainability of the recovery. (5) The future of the international monetary system. Steps that can be taken to address the inherent weaknesses in the current system are described, including possible solutions on both the demand side and on the supply side.

URL

http://www.imf.org/external/pubs/ft/survey/so/2010/bok071310a.htm

Remarks

As the world emerges from the worst crisis in decades, the IMF is examining how macroeconomic and financial policy should be adjusted to take account of the new challenges facing global policymakers.

A new IMF book, Reconstructing the World Economy, presents a number of proposals to improve the stability of the global economy in light of the recent crisis.

In addition to discussing the immediate policy challenges, such as when to exit from stimulus measures, the book considers issues of a longer-term nature, such as how to correct flaws in the prevailing macroeconomic policy framework, redesign financial regulation and supervision, and strengthen the international financial architecture.

Edited by IMF Chief Economist Olivier Blanchard and Il SaKong, Chairman of the Presidential Committee for the Group of Twenty (G-20) summit of industrial and emerging market countries, the book is based on five papers prepared by IMF economists for a workshop last February in Seoul, Korea. The workshop provided an initial forum for discussing these challenges, a topic that will be taken up again in November at the G-20 summit in Seoul.

The conference volume is being released as the IMF and the Korean government conclude a jointly organized high-level conference to examine Asia’s economic dynamism and evolving role in international policymaking.

Reconstructing the World Economy contains the Seoul conference papers on the five topics listed below, as well as comments by eminent policymakers and academics, including Charles Bean, deputy governor of the Bank of England; Justin Lin, chief economist of the World Bank; Philip Lowe, assistant governor of the Reserve Bank of Australia, and Yung Chul Park, professor of economics at Korea University, among others.

Record ID

27     [ Page 22 of 23, No. 7 ]

Date

2010-07-07

Author

IMF

Title

GFSR Market Update

Summary /
Abstract

Financial Market Update -- July, 2010: Despite generally improved economic conditions and a long period of healing after the failure of Lehman Brothers, progress toward global financial stability has recently experienced a setback. Sovereign risks in parts of the euro area have materialized and spread to the financial sector there, threatening to spill over to other regions and re-establish an adverse feedback loop with the economy. Further decisive follow-up is needed to the significant national and supranational policy responses that have been taken in order to strengthen confidence in the financial system and ensure continuation of the economic recovery. Text also available in:

URL

http://www.imf.org/External/Pubs/FT/fmu/eng/2010/02/index.htm

Record ID

17     [ Page 22 of 23, No. 8 ]

Date

2010-07-01

Author

Stephen Tokarick

Affiliation

IMF

Title

A Method for Calculating Export Supply and Import Demand Elasticities

Summary /
Abstract

Trade elasticities are often needed in applied country work for various purposes and this paper describes a method for estimating import demand and export supply elasticities without using econometrics. The paper reports empirical estimates of these elasticities for a large number of low, middle, and upper income countries. One task for which trade elasticities are needed is in developing exchange rate assessments and this paper shows how the estimated elasticities can be used for this purpose.

Source:

URL

http://www.imf.org/external/pubs/cat/longres.cfm?sk=24117.0

Remarks

Useful paper. Contains estimates for the Philippines. Certainly useful for the hands-on computer exercises involving FPP courses and other applied country work for policy and other purposes....

Record ID

4     [ Page 22 of 23, No. 9 ]

Date

2010-07

Author

Vasco Curdia and Michael Woodford

Affiliation

Federal Reserve Bank of New York and Columbia University - Department of Economics

Title

The Central Bank Balance Sheet as an Instrument of Monetary Policy

Summary /
Abstract

While many analyses of monetary policy consider only the adjustment of a central bank's target for a short-term nominal interest rate, other dimensions of policy have recently been of greater importance: changes in the supply of bank reserves beyond those required to achieve an interest-rate target, changes in the assets acquired by central banks, and changes in the interest rate paid on reserves. We extend a standard New Keynesian model to allow a role for the central bank's balance sheet in equilibrium determination, and consider the connections between these alternative dimensions of policy and traditional interest-rate policy. We distinguish between "quantitative easing" in the strict sense and targeted asset purchases by a central bank, and argue that while the former is likely be ineffective at all times, the latter dimension of policy can be effective when financial markets are sufficiently disrupted. Neither is a perfect substitute for conventional interest-rate policy, but purchases of illiquid assets are particularly likely to improve welfare when the zero lower bound on the policy rate is reached. We also consider optimal policy with regard to the payment of interest on reserves, and argue that the interest rate on reserves should be kept near the central bank's target for the policy rate at all times.

URL: http://d.repec.org/n?u=repec:clu:wpaper:0910-16&r=mac
- http://www.newyorkfed.org/research/staff_reports/sr463.html
- http://www.newyorkfed.org/research/staff_reports/sr463.pdf

Keywords

Banks and banking, Central ; Monetary policy ; Interest rates ; Bank reserves

URL

http://www.newyorkfed.org/research/staff_reports/sr463.pdf

Record ID

11     [ Page 22 of 23, No. 10 ]

Date

2010-07

Author

Libero Monteforte and Gianluca Moretti

Affiliation

Bank of Italy

Title

Real time forecasts of inflation: the role of financial variables

Summary /
Abstract

We present a mixed-frequency model for daily forecasts of euro area inflation. The model combines a monthly index of core inflation with daily data from financial markets; estimates are carried out with the MIDAS regression approach. The forecasting ability of the model in real-time is compared with that of standard VARs and of daily quotes of economic derivatives on euro area inflation. We find that the inclusion of daily variables helps to reduce forecast errors with respect to models that consider only monthly variables. The mixed-frequency model also displays superior predictive performance with respect to forecasts solely based on economic derivatives.

URL:http://d.repec.org/n?u=RePEc:bdi:wptemi:td_767_10&r=mac

Keywords

forecasting inflation, real time forecasts, dynamic factor models, MIDAS regression, economic derivatives

URL

http://www.bancaditalia.it/pubblicazioni/econo/temidi/td10/td767_10/en_td_767_10/en_tema_767.pdf

Remarks

This methodology belongs to the class of mixed-frequency models, and is called MIxed DAta Sampling regression model (MIDAS). It may be potentially useful for your inflation forecasts. It incorporates daily prices of relevant commodities and …financial assets into a monthly forecasting model of inflation.

Record ID

5     [ Page 22 of 23, No. 11 ]

Date

2010-06-01

Author

Andrew Berg, Rafael Portillo and D. Filiz Unsal

Affiliation

IMF

Title

On the Optimal Adherence to Money Targets in a New-Keynesian Framework: An Application to Low-Income Countries

Summary /
Abstract

Many low-income countries continue to describe their monetary policy framework in terms of targets on monetary aggregates. This contrasts with most modern discussions of monetary policy, and with most practice. We extend the new-Keynesian model to provide a role for �M� in the conduct of monetary policy, and examine the conditions under which some adherence to money targets is optimal. In the spirit of Poole (1970), this role is based on the incompleteness of information available to the central bank, a pervasive issues in these countries. Ex-ante announcements/forecasts for money growth are consistent with a Taylor rule for the relevant short-term interest rate. Ex-post, the policy maker must choose his relative adherence to interest rate and money growth targets. Drawing on the method in Svensson and Woodford (2004), we show that the optimal adherence to ex-ante targets is equivalent to a signal extraction problem where the central bank uses the money market information to update its estimate of the state of the economy. We estimate the model, using Bayesian methods, for Tanzania, Uganda (both de jure money targeters), and Ghana (a de jure inflation targeter), and compare the de facto adherence to targets with the optimal use of money market information in each country.

Source: IMF Working Paper No. 10/134

URL

http://www.imf.org/external/pubs/cat/longres.cfm?sk=23928.0

Remarks

This useful empirical paper by the IMF Res Dept Andrew Berg et al can be applied to the Philippines. Since the economy is subject to shocks, the ex ante equivalence between the money and interest rate targets breaks down (Poole 1970). Their work is also closely related to more recent work, starting with Svensson and Woodford (2003, 2004), on the optimal use of indicator variables in forward-looking models.

Record ID

1     [ Page 22 of 23, No. 12 ]

Date

2010-06

Author

Michael Woodford

Affiliation

Columbia University

Title

Optimal Monetary Stabilization Policy

Summary /
Abstract

This chapter reviews the theory of optimal monetary stabilization policy in New Keynesian models, with particular emphasis on developments since the treatment of this topic in Woodford (2003). The primary emphasis of the chapter is on methods of analysis that are useful in this area, rather than on final conclusions about the ideal conduct of policy (that are obviously model-dependent, and hence dependent on the stand that one might take on many issues that remain controversial), and on general themes that have been found to be important under a range of possible model specifications. With regard to methodology, some of the central themes of this review will be the application of the method of Ramsey policy analysis to the problem of the optimal conduct of monetary policy, and the connection that can be established between utility maximization and linear-quadratic policy problems of the sort often considered in the central banking literature. With regard to the structure of a desirable decision framework for monetary policy deliberations, some of the central themes will be the importance of commitment for a superior stabilization outcome, and more generally, the importance of advance signals about the future conduct of policy; the advantages of history-dependent policies over purely forward-looking approaches; and the usefulness of a target criterion as a way of characterizing a central bank's policy commitment.

URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:16095&r=mon
- http://www.nber.org/papers/w16095.pdf
- http://www.econ.columbia.edu/RePEc/pdf/DP0910-18.pdf

URL

http://d.repec.org/n?u=RePEc:nbr:nberwo:16095&r=mon

Record ID

32     [ Page 22 of 23, No. 13 ]

Date

2010-05-28

Author

IMF

Title

Colombia: Arrangement Under the Flexible Credit Line

Summary /
Abstract

Colombia: Arrangement Under the Flexible Credit Line and Cancellation of the Current Arrangement - Staff Report; Staff Supplement; Press Release on the Executive Board Discussion; and Statement by the authorities of Colombia

URL: http://www.imf.org/external/pubs/cat/longres.cfm?sk=23919.0

URL

http://www.imf.org/external/pubs/cat/longres.cfm?sk=23919.0

Remarks

The paper is all about Colombia's precautionary request under the FCL. Note that the strengths of the three F's (Fiscal Framework, Flexible Exchange Rate, Financial Sector Oversight) and of IT are deemed sufficient. Colombia is noteworthy as far as the Philippines is concerned, because of Colombia's strong inflation targeting monetary policy framework, introduced at about the same time as did the Philippines. I think that the area that needs significant improvement for the Philippines is the Fiscal Framework. Don't you agree? With BSP's strong reserve position, I did not mean to imply that the Philippines needs an FCL, but note that Colombia's reserves (aided by workers' remittances just like in the Philippines) are also at a comfortable level. The Colombian authorities made the request for the FCL in case the external environment turns worse than expected.

Record ID

22     [ Page 22 of 23, No. 14 ]

Date

2010-05-27

Author

Kenji Fujita, Karl Habermeier, Erlend Nier, Scott Roger, Noel Sacasa, Mark Stone, and Jan Vlcek

Affiliation

IMF-MCMD

Title

Central Banking Lessons from the Crisis

Summary /
Abstract

The crisis brought the financial system to the verge of systemic collapse and raised the prospect of depression and deflation. Central banks helped defuse these threats, including through exceptional measures. Considerable efforts are now under way to draw policy lessons from the crisis. For central banks, the crisis seems to provide three important lessons for policy frameworks-mainly concerning systemic financial stability.

Source: IMF Policy Paper

URL

http://www.imf.org/external/pp/longres.aspx?id=4461

Record ID

30     [ Page 22 of 23, No. 15 ]

Date

2010-05-27

Author

Krisztina Molnár and Sergio Santoro

Affiliation

Norges Bank and Bank of Italy

Title

Optimal Monetary Policy When Agents Are Learning

Summary /
Abstract

We derive the optimal monetary policy in a sticky price model when private agents follow adaptive learning. We show that this slight departure from rationality has important implications for policy design. The central bank faces a new intertemporal trade-off, not present under rational expectations: it is optimal to forego stabilizing the economy in the present in order to facilitate private sector learning and thus ease the future intratemporal inflation-output gap trade-offs. The policy recommendation is robust: the welfare loss entailed by the optimal policy under learning if the private sector actually has rational expectations is much smaller than if the central bank mistakenly assumes rational expectations when in fact agents are learning.

URL:http://d.repec.org/n?u=RePEc:bno:worpap:2010_08&r=mac

Keywords

optimal monetary policy, learning, rational expectations

URL

http://www.norges-bank.no/templates/article____76978.aspx

Remarks

This interesting paper concludes that, if the central bank does not know the exact nature of private inflation expectations (whether rational or adaptive), monetary policy focused on lowering and stabilizing inflation, as opposed to stabilizing employment/economic activity, is the optimal monetary policy.

Record ID

33     [ Page 22 of 23, No. 16 ]

Date

2010-05-25

Author

Karl Aiginger

Title

The Great Recession versus the Great Depression: Stylized Facts on Siblings That Were Given Different Foster Parents

Summary /
Abstract

This paper compares the depth of the recent crisis and the Great Depression. We use a new data set to compare the drop in activity in the industrialized countries for seven activity indicators. This is done under the assumption that the recent crisis leveled off in mid-2009 for production and will do so for unemployment in 2010. Our data indicate that the recent crisis indeed had the potential to be another Great Depression, as shown by the speed and simultaneity of the decline in the first nine months. However, if we assume that a large second dip can be avoided, the drop in all indicators will have been smaller than during the Great Depression. This holds true specifically for GDP, employment and prices, and least for manufacturing output. The difference in the depth in the crises concurs with differences in policy reaction. This time monetary policy and fiscal policy were applied courageously, speedily and partly internationally coordinated.During the Great Depression for several years fiscal policy tried to stabilize budgets instead of aggregate demand, and either monetary policy was not applied or was rather ineffective insofar as deflation turned lower nominal interest rates into higher real rates. Only future research will be able to prove the exact impact of economic policy, but the current tentative conclusion is that economic policy prevented the recent crisis from developing into a second Great Depression. This is also a partial vindication for economists. The majority of them might not have been able to predict the crisis, but the science did learn its lesson from the Great Depression and was able to give decent policy advice to at least limit thedepth of the recent crisis.

URL

http://www.economics-ejournal.org/economics/journalarticles/2010-18

Record ID

3     [ Page 22 of 23, No. 17 ]

Date

2010-05

Author

Vasco Curdia and Michael Woodford

Affiliation

Federal Reserve Bank of New York and Columbia University - Department of Economics

Title

Conventional and Unconventional Monetary Policy

Summary /
Abstract

We extend a standard New Keynesian model to incorporate heterogeneity in spending opportunities and two sources of (potentially time-varying) credit spreads, and to allow a role for the central bank's balance sheet in equilibrium determination. We use the model to investigate the implications of imperfect financial intermediation for familiar monetary policy prescriptions, and to consider additional dimensions of central-bank policy | variations in the size and composition of the central bank's balance sheet, and payment of interest on reserves, alongside the traditional question of the proper choice of an operating target for an overnight policy rate. We also give particular attention to the special problems that arise when the zero lower bound for the policy rate is reached. We show that it is possible to provide criteria for the choice of policy along each of these possible dimensions, within a single unified framework, and to provide policy prescriptions that apply equally when financial markets work efficiently and when they are subject to substantial disruptions, and equally when the zero bound is reached and when it is not a concern.

URL:http://d.repec.org/n?u=RePEc:clu:wpaper:0910-17&r=mac

URL

http://d.repec.org/n?u=RePEc:clu:wpaper:0910-17&r=mac

Remarks

- http://www.econ.columbia.edu/RePEc/pdf/DP0910-17.pdf

Record ID

31     [ Page 22 of 23, No. 18 ]

Date

2010-05

Author

Sandra Gomes, Pascal Jacquinot and Massimiliano Pisani

Affiliation

Bank of Portugal, ECB, Bank of Italy

Title

The EAGLE-- A Model for Policy Analysis of Macroeconomic Interdependence in the Euro Area

Summary /
Abstract

Building on the New Area Wide Model, we develop a 4-region macroeconomic model of the euro area and the world economy. The model (EAGLE, Euro Area and Global Economy model) is microfounded and designed for conducting quantitative policy analysis of macroeconomic interdependence across regions belonging to the euro area and between euro area regions and the world economy. Simulation analysis shows the transmission mechanism of region-specific or common shocks, originating in the euro area and abroad.

Source: Working Paper Series No. 1195 / May 2010

URL

www.ecb.int/pub/pdf/scpwps/ecbwp1195.pdf

Record ID

35     [ Page 22 of 23, No. 19 ]

Date

2010-05

Author

Laura Jaramillo

Affiliation

IMF

Title

Determinants of Investment Grade Status in Emerging Markets

Summary /
Abstract

"The paper finds that investment grade ratings by the three major credit agencies can be explained by a small number of variables. The panel random effects framework identifies a set of five core variables that are relevant for the determination of investment grade status, in particular external public debt, domestic public debt, political risk, exports, and financial depth. Overall, the specification correctly predicts 86 percent of investment grade status of all observations, and two thirds of the upgrades and downgrades from and to investment grade. The findings suggest that efforts by emerging markets to increase the likelihood of an upgrade to investment grade should focus on a faster pace of public debt reduction, in particular external public debt. While efforts to improve on all fronts would be desirable, progress on trade, financial depth and political risk is likely to be gradual and not directly linked with macroeconomic policies. In contrast, a strong process of fiscal consolidation could result in a steady reduction in debt levels. Furthermore, given the larger weight assigned by rating agencies to external debt over domestic debt in their assessments, a sharper decline in external debt is likely to have greater impact on increasing the near-term probability of achieving investment grade status."

Source: IMF Working Paper No. 10/117

URL

http://www.imf.org/external/pubs/ft/wp/2010/wp10117.pdf

Record ID

36     [ Page 22 of 23, No. 20 ]

Date

2010-05

Author

Hiromi Yamaoka and Murtaza Syed

Affiliation

IMF

Title

Managing the Exit: Lessons from Japan’s Reversal of Unconventional Monetary Policy

Summary /
Abstract

In responding to the global crisis, central banks in several advanced economies ventured beyond traditional monetary policy. A variety of unorthodox measures, including purchases of public and private assets, have significantly enlarged their balance sheets. As recoveries take hold, focus will increasingly shift from countering the Great Recession to orchestrating an exit and returning to a more normal monetary framework. Five years ago, as its economy recovered from a severe financial crisis, Japan attempted just such an exit. This note revisits the Bank of Japan’s experience and draws potential lessons for managing an orderly exit today, with a focus on technical aspects, practicalities, and communication strategies. While the nature of the assets acquired during the present crisis could pose additional complications, parts of Japan’s arsenal—communication, flexibility, a sufficient set of policy tools and a strategy for using them, safeguards against potential losses, the revival of risk appetite through decisive restructuring of balance sheets, and refinements to the monetary framework upon exit—also could be important this time around.

Source: IMF Working Paper No. 10/114

URL

http://www.imf.org/external/pubs/ft/wp/2010/wp10114.pdf

Record ID

37     [ Page 22 of 23, No. 21 ]

Date

2010-05

Author

Charles Freedman and Inci Ötker-Robe

Title

Important Elements for Inflation Targeting for Emerging Economies

Summary /
Abstract

This is the fifth chapter of a forthcoming monograph entitled "On Implementing Full-Fledged Inflation-Targeting Regimes: Saying What You Do and Doing What You Say." It examines whether certain conditions have to be met before emerging economies can adopt an inflation-targeting regime and provides some empirical evidence on the matter. The issues analyzed are the priority of inflation targeting over other goals, the absence of fiscal dominance, central bank independence, the degree of control over the policy interest rate, a sound methodology for forecasting, and the soundness of financial institutions and markets, and resilience to changes in exchange rates and interest rates.

Source: IMF Wokring Paper No. 10/113

URL

http://www.imf.org/external/pubs/ft/wp/2010/wp10113.pdf

Remarks

This paper represents the fifth chapter of a manuscript that is being prepared by Charles Freedman, Douglas Laxton and Inci Ötker-Robe On Developing a Full-Fledged Inflation Targeting Regime: Doing What You Say and Saying What you Do.

Record ID

38     [ Page 22 of 23, No. 22 ]

Date

2010-04

Author

Ansgar Belke

Affiliation

University of Duisburg-Essen, DIW Berlin and IZA Bonn

Title

How Much Fiscal Backing Must the ECB Have? The Euro Area Is Not the Philippines

Summary /
Abstract

The ECB has accepted increasing amounts of rubbish collateral since the crisis started leading to exposure to serious private sector credit risk (i.e. default risk) on its collateralised lending and reverse operations ("repo"). This has led some commentators to argue that the ECB needs "fiscal back-up" to cover any potential losses to be able to continue pursuing price stability. This Brief argues that fiscal backing is not necessary for the ECB for three reasons. Firstly, the ECB balance sheet risk is small compared to the FED and BoE as it neither increased its quasi-fiscal operations as much as the Fed or the BoE nor did it engage to a very large extent in outright bond purchases during the financial crisis. Secondly, the ECB's specific accounting principles of repo operations provide for more clarity and earlier recognition of losses. Thirdly, the ECB can draw on substantial reserves of the euro area national banks.

Keywords

Central bank independence, central bank capital, counterparty risk, repurchase agreements, collateral, fiscal backing, liquidity, haircuts

Remarks

This is a briefing paper prepared for presentation at the Committee on Economic and Monetary Affairs of the European Parliament for the quarterly dialogue with the President of the European Central Bank, Brussels, March 2010. I find the title arrogant and insulting. The author's main thesis--that the ECB is immune from fiscal dominance--is not even true, in light of the recent crisis in Greece and the further potential threats to the euro posed by fiscal problems in Spain and Portugal.

Record ID

41     [ Page 22 of 23, No. 23 ]

Date

2010-04

Author

Jorge A. Chan-Lau

Affiliation

IMF

Title

The Global Financial Crisis and its Impact on the Chilean Banking System

Summary /
Abstract

This paper explores how the global turmoil affected the risk of banks operating in Chile, and provides evidence that could help strengthen work on vulnerability indicators and off-site supervision. The analysis is based on the study of default risk codependence, or CoRisk, between Chilean banks and global financial institutions. The results suggest that the impact of the global financial crisis was limited, inducing at most a one-rating downgrade to banks operating in Chile. The paper concludes by assessing government measures aimed at reducing systemic risk in the domestic banking sector and the recommendations to allocate SWF assets to domestic banks.

Source: IMF Working Paper No. 10/108

URL

http://www.imf.org/external/pubs/ft/wp/2010/wp10108.pdf

Remarks

Continuing on new methods of assessing banking risk, This is another paper by Jorge Chan Lau of the IMF as addition to your inventory of useful tools.

Record ID

42     [ Page 22 of 23, No. 24 ]

Date

2010-04

Author

Jorge A. Chan-Lau

Affiliation

IMF

Title

Balance Sheet Network Analysis of Too-Connected-to-Fail Risk in Global and Domestic Banking Systems

Summary /
Abstract

The 2008/2009 financial crisis highlighted the importance of evaluating vulnerabilities owing to interconnectedness, or Too-Connected-to-Fail risk, among financial institutions for country monitoring, financial surveillance, investment analysis and risk management purposes. This paper illustrates the use of balance sheet-based network analysis to evaluate interconnectedness risk, under extreme adverse scenarios, in banking systems in mature and emerging market countries, and between individual banks in Chile, an advanced emerging market economy."

Source: IMF Working Paper No. 10/107

URL

http://www.imf.org/external/pubs/ft/wp/2010/wp10107.pdf

Remarks

Another application of balance sheet-based network analysis.

Record ID

43     [ Page 22 of 23, No. 25 ]

Date

2010-04

Author

Kimberly Beaton, Carlos de Resende, René Lalonde, and Stephen Snudden

Affiliation

Bank of Canada

Title

Prospects for Global Current Account Rebalancing

Summary /
Abstract

The authors use the Bank of Canada's version of the Global Economy Model, a multi-country, multi-sector dynamic stochastic general-equilibrium model with an active banking system (the BoC-GEM-FIN), to study the evolution of global current account balances following the recent global financial crisis. More specifically, they use several shocks from the model to generate a simulated baseline scenario that mimics: (i) the initial, pre-crisis state of disequilibrium in global current account balances, and (ii) the effects of the crisis, including those of the policy responses undertaken worldwide. The authors find that a sufficient set of conditions and policies for a sustainable resolution of the global current account imbalances relies on three key elements: (i) a continuous upward adjustment of U.S. private savings, (ii) fiscal consolidation in advanced countries, and (iii) an orderly adjustment of exchange rates. These three criteria facilitate a gradual decline in the U.S. current account deficit going forward. A fourth key element, the implementation of policies aimed at stimulating domestic demand in emerging Asia, is needed to ensure that the counterpart of the decrease in the U.S. current account deficit is mainly a reduction in the surpluses of emerging Asia. Sensitivity analysis based on deviations from these conditions illustrates the factors behind the main results and the costs associated with the alternative scenarios considered.

Source: Bank of Canada Discussion Paper 2010-4

Record ID

44     [ Page 22 of 23, No. 26 ]

Date

2010-04

Author

Marco A. Espinosa-Vega and Juan Solé

Affiliation

IMF

Title

Cross-Border Financial Surveillance: A Network Perspective

Summary /
Abstract

Effective cross-border financial surveillance requires the monitoring of direct and indirect systemic linkages. This paper illustrates how network analysis could make a significant contribution in this regard by simulating different credit and funding shocks to the banking systems of a number of selected countries. After that, we show that the inclusion of risk transfers could modify the risk profile of entire financial systems, and thus an enriched simulation algorithm able to account for risk transfers is proposed. Finally, we discuss how some of the limitations of our simulations are a reflection of existing information and data gaps, and thus view these shortcomings as a call to improve the collection and analysis of data on cross-border financial exposures.

Source: IMF Working Paper No. 10/105

URL

http://www.imf.org/external/pubs/ft/wp/2010/wp10105.pdf

Remarks

This is an IMF WP coming from the Money and Capital Markets Dept, using a pretty simple balance sheet identities' framework they call "network analysis."

Record ID

46     [ Page 22 of 23, No. 27 ]

Date

2010-04

Author

Ruben Atoyan

Affiliation

IMF

Title

Beyond the Crisis: Revisiting Emerging Europe’s Growth Model

Summary /
Abstract

Focusing on the nexus between economic growth and buildup of external vulnerabilities, this
paper provides a systematic account of different growth strategies followed in Central and
Eastern Europe in 2000-08 and then uses this growth diagnostics to derive implications for
the post-crisis recovery. The main findings point to three policy lessons for improving
growth sustainability. First, greater reliance on tradable sectors should be the cornerstone of
the future growth model. Second, enhancing domestic sources of bank credit funding would
contribute to mitigation of external vulnerabilities and make domestic financial system more
resilient to global financial shocks. Third, prudential and macroeconomic policies will have
to be more proactive in managing capital inflows, including funneling these inflows into
investment in the export-oriented industries.

Source: IMF Working Paper No. 10/92

URL

http://www.imf.org/external/pubs/ft/wp/2010/wp1092.pdf

Remarks

This is an empirical paper linking economic growth to external vulnerabilities, going beyond the recent crisis, and using the experiences and data on Central and Eastern Europe from 2000-08.
Using cluster analysis and multinomial logit model, the author draws three major policy conclusions: "First, greater reliance on tradable sectors should be the cornerstone of the future growth model. Second, enhancing domestic sources of bank credit funding would contribute to mitigation of external vulnerabilities and make domestic financial system more resilient to global financial shocks. Third, prudential and macroeconomic policies will have to be more proactive in managing capital inflows, including funneling these inflows into investment in the export-oriented industries."


All the above policy conclusions are identical to the macroeconomic policies for stable growth that I analyzed and derived in my World Scientific book.

Record ID

2     [ Page 22 of 23, No. 28 ]

Date

2010-03

Author

Alan S. Blinder

Affiliation

Princeton University

Title

Quantitative Easing: Entrance and Exit Strategies

Summary /
Abstract

Apparently, it can happen here. On December 16, 2008, the Federal Open Market Committee (FOMC), in an effort to fight what was shaping up to be the worst recession since 1937, reduced the federal funds rate to nearly zero.1 From then on, with all of its conventional ammunition spent, the Federal Reserve was squarely in the brave new world of quantitative easing. Chairman Ben Bernanke tried to call the Fed�s new policies credit easing, probably to differentiate them from what the Bank of Japan had done earlier in the decade, but the label did not stick.

URL:http://d.repec.org/n?u=RePEc:pri:cepsud:1219&r=mac

Keywords

Recession, Federal Reserve, open market committee, banking policy, deflation, monetary policy

URL

http://d.repec.org/n?u=RePEc:pri:cepsud:1219&r=mac

Remarks

http://www.princeton.edu/~ceps/workingpapers/204blinder.pdf

Record ID

39     [ Page 22 of 23, No. 29 ]

Date

2010-03

Author

Ida Wolden Bache, Leif Brubakk and Junior Maih

Title

Simple rules versus optimal policy: what fits?

Summary /
Abstract

We estimate a small open-economy DSGE model for Norway with two specifications of monetary policy: a simple instrument rule and optimal policy based on an intertemporal loss function. The empirical fit of the model with optimal policy is as good as the model with a simple rule. This result is robust to allowing for misspecification following the DSGE-VAR approach proposed by Del Negro and Schorfheide (2004). The interest rate forecasts from the DSGE-VARs are close to Norges Bank's official forecasts since 2005. One interpretation is that the DSGE-VAR approximates the judgment imposed by the policymakers in the forecasting process.

Source: Norges Bank Working Paper No. 2010-03

Keywords

DSGE models, forecasting, optimal monetary policy

Remarks

This is an empirical study by economists from the Monetary Policy Dept of the Central Bank of Norway.

Record ID

45     [ Page 22 of 23, No. 30 ]

Date

2010-02

Author

Structural macro-econometric modelling in a policy environment

Affiliation

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 characterise 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.

Source: Research Working Paper of the Federal Reserve Bank of Kansas City

Keywords

Structural macro-econometric modelling in a policy environment

Remarks

This is a very useful survey paper (jointly with Martin Fukac) by the world-renowned Australian econometrician, Adrian Pagan, whom I met in Singapore when we were both Visiting Profs at Bobby Mariano's SMU during 2005-06. By policy environment, they mean "central banking."