Record ID

366     [ Page 32 of 68, No. 1 ]

Date

2013-02

Author

Paul Hubert

Affiliation

OFCE – SciencesPo

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

365     [ Page 32 of 68, No. 2 ]

Date

2007-04

Author

Gerhard Illing

Affiliation

University of Munich

Title

Financial Stability and Monetary Policy – A Framework

Summary /
Abstract

The paper presents a stylised framework to analyse conditions under which monetary policy contributes to amplified movements in the housing market. Extending work by Hyun Shin (2005), the paper analyses self enforcing feedback mechanisms resulting in amplifier effects in a credit constrained economy. The paper characterizes conditions for asymmetric effects, causing systemic crises. By injecting liquidity, monetary policy can prevent a meltdown. Anticipating such a response, private agents are encouraged to take higher risks. Provision of liquidity works as a public good, but it may create potential conflicts with other policy objectives and may give incentives to build up leverage with a high systemic exposure to small probability events.

Keywords

Financial stability, monetary policy, interactions

URL

http://www.cesifo-group.de/DocDL/cesifo1_wp1971.pdf

Record ID

364     [ Page 32 of 68, No. 3 ]

Date

2011-12

Author

Deniz Igan and Heedon Kang

Affiliation

Research Department and Monetary and Capital Markets Department, IMF

Title

Do Loan-to-Value and Debt-to-Income Limits Work? Evidence from Korea

Summary /
Abstract

With another real estate boom-bust bringing woes to the world economy, a quest for a better policy toolkit to deal with these boom-busts has begun. Macroprudential measures could be in such a toolkit. Yet, we know
very little about their impact. This paper takes a step to fill this gap by analyzing the Korean experience with
these measures. We find that loan-to-value and debt-to-income limits are associated with a decline in house price appreciation and transaction activity. Furthermore, the limits alter expectations, which play a key role in bubble dynamics.

Keywords

Housing markets, mortgage, macroprudential regulation

URL

http://www.imf.org/external/pubs/ft/wp/2011/wp11297.pdf

Record ID

363     [ Page 32 of 68, No. 4 ]

Date

2009-03

Author

Vasco Cúrdia and Michael Woodford

Affiliation

Federal Reserve Bank of New York and Columbia University

Title

Credit frictions and optimal monetary policy

Summary /
Abstract

We extend the basic (representative-household) New Keynesian [NK] model of the monetary transmission mechanism to allow for a spread between the interest rate available to savers and borrowers, that can vary for either exogenous or endogenous reasons. We find that the mere existence of a positive average spread makes little quantitative difference for the predicted effects of particular policies. Variation in spreads over time is of greater significance, with consequences both for the equilibrium relation between the policy rate and aggregate expenditure and for the relation between real activity and inflation.

Nonetheless, we find that the target criterion - a linear relation that should be maintained between the inflation rate and changes in the output gap - that characterises optimal policy in the basic NK model continues to provide a good approximation to optimal policy, even in the presence of variations in credit spreads. We also consider a "spread-adjusted Taylor rule", in which the intercept of the Taylor rule is adjusted in proportion to changes in credit spreads. We show that while such an adjustment can improve upon an unadjusted Taylor rule, the optimal degree of adjustment is less than 100 percent; and even with the correct size of adjustment, such a rule of thumb remains inferior to the targeting rule.

This is part of a series of BIS Working Papers (273 to 278) collecting papers presented at the BIS's Seventh Annual Conference on "Whither monetary policy? Monetary policy challenges in the decade ahead" in Luzern, Switzerland, on 26-27 June 2008. The event brought together senior representatives of central banks and academic institutions to exchange views on this topic. BIS Paper 45 contains the opening address of William R White (BIS), the contributions of the policy panel on "Beyond price stability - the challenges ahead" and speeches by Edmund Phelps (Columbia University) and Martin Wolf (Financial Times). The participants in the policy panel discussion chaired by Malcolm D Knight (BIS) were Martin Feldstein (Harvard University), Stanley Fischer (Bank of Israel), Mark Carney (Bank of Canada) and Jean-Pierre Landau (Banque de France). This Working Paper includes comments by Olivier Blanchard and Charles Goodhart.

Keywords

Financial Frictions, Interest Rate Spreads

URL

http://www.bis.org/publ/work278.pdf

Record ID

362     [ Page 32 of 68, No. 5 ]

Date

2012-12

Author

Working Group chaired by José-Manuel González-Páramo, formerly European Central Bank

Affiliation

Committee on the Global Financial System. BIS

Title

Operationalising the selection and application of macroprudential instruments

Summary /
Abstract

This report aims to help policymakers in operationalising macroprudential policies. Specifically, it draws out three high-level criteria that are key in determining the selection and application of macroprudential instruments:

1. the ability to determine the appropriate timing for the activation or deactivation of the instrument;
2. the effectiveness of the instrument in achieving the stated policy objective; and
3. the efficiency of the instrument in terms of a cost-benefit assessment.

In trying to operationalise these criteria, this report proposes a number of practical tools. First, to help determine the appropriate timing for the activation and deactivation of instruments, it lays out stylised scenarios. Their identification is facilitated by two alternative approaches that seek to link systemic risk analysis and instrument selection. Second, to support the evaluation of the effectiveness and efficiency of macroprudential tools for a range of macroprudential instruments, the report proposes "transmission maps" - stylised presentations of how changes in individual instruments are expected to contribute to the objectives of macroprudential policy.

Keywords

Macroprudential instruments, selection criteria

URL

http://www.bis.org/publ/cgfs48.pdf

Record ID

361     [ Page 32 of 68, No. 6 ]

Date

2013-05

Author

Ceyhun Elgin and Tolga Umut Kuzubas

Affiliation

Bogazici University, Istanbul, Turkey

Title

Wage-Productivity Gap in OECD Economies

Summary /
Abstract

The Walrasian theory of labor market equilibrium predicts that in the absence of any market frictions, workers earn a wage rate equal to their marginal productivity. In this paper, based on the neoclassical tradition, the authors define the ratio of the marginal product of labor to real wages as the Pigouvian exploitation rate and then construct a panel dataset of this specific wage-productivity gap for the manufacturing sector in OECD economies. Next, they investigate its relationship with the unemployment rate along with various other variables such as the government taxation, capital expansion, unionization, inflation. Their findings suggest that the wage-productivity gap gives a robust and significantly positive response to shocks to unemployment rate and a negative response to shocks to unionization.

Keywords

Wages; marginal productivity of labor; panel-VAR; OECD economies

URL

http://www.economics-ejournal.org/economics/journalarticles/2013-21/version_1/count

Record ID

360     [ Page 32 of 68, No. 7 ]

Date

2013-05

Author

Valentina Bruno and Hyun Song Shin

Affiliation

National Bureau of Economic Research

Title

Capital Flows, Cross-Border Banking and Global Liquidity

Summary /
Abstract

We investigate global factors associated with cross-border capital flows. We formulate a model of gross capital flows through the international banking system and derive a closed form solution that highlights the leverage cycle of global banks as being a prime determinant of the transmission of financial conditions across borders. We then test the predictions of our model in a panel study of 46 countries and find that global factors dominate local factors as determinants of banking sector capital flows.

Keywords

Capital Flows, Cross-Border Banking, Global Liquidity

URL

http://www.nber.org/papers/w19038.pdf

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Record ID

359     [ Page 32 of 68, No. 8 ]

Date

2013-04

Author

Simone Meier

Affiliation

Swiss National Bank

Title

Financial Globalization and Monetary Transmission

Summary /
Abstract

This paper analyzes the way in which international financial integration affects the transmission of monetary policy in a New Keynesian open economy framework. It extends Woodford’s (2010) analysis to a model with a richer financial markets structure, allowing for international trading in multiple assets and subject to financial intermediation costs. Two different forms of financial integration are considered, in particular an increase in the level of gross foreign asset holdings and a decrease in the costs of international asset trading. The simulations in the calibrated model show that none of the analyzed forms of financial integration undermine the effectiveness of monetary policy in influencing domestic output and inflation. Under realistic parameterizations, monetary policy is more, rather than less, effective as the positive impact of strengthened exchange rate and wealth channels more than offsets the negative impact of weakened interest rate channels. The paper also analyzes the interaction of financial integration with trade integration, varying both the importance of trade linkages and the degree of exchange rate pass-through. These interactions show that the positive effects of financial integration are amplified by trade integration. Overall, monetary policy is most effective in parameterizations with the highest degree of both financial and real integration.

Keywords

Globalization, Monetary Policy, Monetary Transmission

URL

http://www.dallasfed.org/assets/documents/institute/wpapers/2013/0145.pdf

Record ID

358     [ Page 32 of 68, No. 9 ]

Date

2013-05

Author

Ivailo Arsov, Elie Canetti, Laura Kodres and Srobona Mitra

Affiliation

Money and Capital Markets Department, IMF

Title

"Near-Coincident" Indicators of Systemic Stress

Summary /
Abstract

The G-20 Data Gaps Initiative has called for the IMF to develop standard measures of tail risk, which we identify in this paper with systemic risk. To understand the conditions under which tail risk is present, it is first necessary to develop a measure of what constitutes a systemic stress, or tail, event. We develop such a measure and uses it to assess the performance of eleven near-term systemic risk indicators as ‘early’ warning of distress among top financial institutions in the United States and the euro area. Two indicators perform particularly well in both regions, and a couple of other simple indicators do well across a number of criteria. We also find that the sizes of institutions do not necessarily correspond with their contribution to spillover risk. Some practical guidance for policies is provided.

Keywords

Coincident Indicator; Early Warning; Financial Stress; Systemic Risk; Tail Risk

URL

http://www.imf.org/external/pubs/ft/wp/2013/wp13115.pdf

Record ID

357     [ Page 32 of 68, No. 10 ]

Date

2013-05

Author

Catão, Luis and Chang, Roberto

Affiliation

Research Department, IMF

Title

World Food Prices, the Terms of Trade-Real Exchange Rate Nexus, and Monetary Policy

Summary /
Abstract

How should monetary policy respond to large fluctuations in world food prices? We study this question in an open economy model in which imported food has a larger weight in domestic consumption than abroad and international risk sharing can be imperfect. A key novelty is that the real exchange rate and the terms of trade can move in opposite directions in response to world food price shocks. This exacerbates the policy trade-off between stabilizing output prices vis a vis the real exchange rate, to an extent that depends on risk sharing and the price elasticity of exports. Under perfect risk sharing, targeting the headline CPI welfare-dominates targeting the PPI if the variance of food price shocks is not too small and the export price elasticity is realistically high. In such a case, however, targeting forecast CPI is a superior choice. With incomplete risk sharing, PPI targeting is clearly a winner.

Keywords

Commodity Price Shoc ks, Inflation Targeting, Taylor rules, Incomplete Markets

URL

http://www.imf.org/external/pubs/ft/wp/2013/wp13114.pdf