Record ID

659     [ Page 4 of 68, No. 1 ]

Date

2016-08

Author

Mikael Juselius, Claudio Borio, Piti Disyatat, and Mathias Drehmann

Affiliation

Bank of Finland, Bank for International Settlements, Bank of Thailand, and Bank for International Settlements

Title

Monetary policy, The Financial Cycle and Ultralow Interest Rates

Summary /
Abstract

Do the prevailing unusually and persistently low real interest rates reflect a decline in the natural rate of interest as commonly thought? We argue that this is only part of the story. The critical role of financial factors in influencing medium-term economic fluctuations must also be taken into account. Doing so for the United States yields estimates of the natural rate that are higher and, at least since 2000, decline by less. As a result, policy rates have been persistently and systematically below this measure. Moreover, we find that monetary policy, through the financial cycle, has a long-lasting impact on output and, by implication, on real interest rates. Therefore, a narrative that attributes the decline in real rates primarily to an exogenous fall in the natural rate is incomplete. The influence of monetary and financial factors should not be ignored. Exploiting these results, an illustrative counterfactual experiment suggests that a monetary policy rule that takes financial developments systematically into account during both good and bad times could help dampen the financial cycle, leading to higher output even in the long run.

Keywords

Natural interest rate, financial cycle, monetary policy, credit, business cycle

URL

http://d.repec.org/n?u=RePEc:bof:bofrdp:2016_024&r=fdg

Record ID

658     [ Page 4 of 68, No. 2 ]

Date

2016-08

Author

Vladimir Klyuev and To-Nhu Dao

Affiliation

Asia and Pacific Department, IMF

Title

Evolution of Exchange Rate Behavior in the ASEAN-5 Countries

Summary /
Abstract

This paper examines exchange rate behavior in the ASEAN-5 countries (Indonesia, Malaysia, the Philippines, Singapore, and Thailand). It finds that for the last 10 years there is no evidence that their central banks target particular exchange rate levels against any currency or basket. Thus, contrary to some assertions, they do not belong to a U.S. dollar club, a Japanese yen club, a Chinese renminbi club, or an ASEAN club. At the same time, they clearly try to smooth short-term volatility, particularly vis-à-vis the U.S. dollar. The degree of smoothing declined noticeably after the Asian Financial Crisis and less obviously after the Global Financial Crisis, with heterogeneity across countries. Short-term smoothing without level targeting does not interfere with monetary policies aimed at price stability.

Keywords

Exchange rate regimes; exchange rate volatility; fear of floating; currency blocks; ASEAN

URL

http://www.imf.org/external/pubs/ft/wp/2016/wp16165.pdf

Record ID

657     [ Page 4 of 68, No. 3 ]

Date

2016-06

Author

Özer Karagedikli and John McDermott

Affiliation

Reserve Bank of New Zealand

Title

Inflation expectations and low inflation in New Zealand

Summary /
Abstract

This paper finds that the changing behaviour of inflation expectations can explain much of the unusually low inflation in New Zealand. Across several empirical specifications of the Phillips curve, we observe that inflation expectations have become more backward-looking. We also find that the speed of adjustment in inflation expectations, proxied by the spread between short- and longer-term inflation expectations, can explain the unusually low inflation.

Keywords

Inflation expectations, low stable inflation, Phillips curve

URL

http://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Discussion%20papers/2016/dp16-09.pdf

Record ID

656     [ Page 4 of 68, No. 4 ]

Date

2016-06

Author

Guglielmo Maria Caporale ; Abdurrahman Nazif Catik ; Mohamad Husam Helmi ; Faek Menla Ali ; and Coskun Akdeniz

Affiliation

Department of Economics and Finance, Brunel University London, UK; Department of Economics, Ege University, Turkey

Title

Monetary Policy Rules in Emerging Countries: Is There an Augmented Nonlinear Taylor Rule?

Summary /
Abstract

This paper examines the Taylor rule in five emerging economies, namely Indonesia, Israel, South Korea, Thailand, and Turkey. In particular, it investigates whether monetary policy in these countries can be more accurately described by (i) an augmented rule including the exchange rate, as well as (ii) a nonlinear threshold specification (estimated using GMM), instead of a baseline linear rule. The results suggest that the reaction of monetary authorities to deviations from target of either the inflation or the output gap varies in terms of magnitude and/or statistical significance across the high and low inflation regimes in all countries. In particular, the exchange rate has an impact in the former but not in the latter regime. Overall, an augmented nonlinear Taylor rule appears to capture more accurately the behaviour of monetary authorities in these countries.

Keywords

Taylor rule, nonlinearities, emerging countries

URL

http://www.diw.de/documents/publikationen/73/diw_01.c.536363.de/dp1588.pdf

Record ID

655     [ Page 4 of 68, No. 5 ]

Date

2016-05

Author

William R. Cline

Affiliation

Peterson Institute for International Economics

Title

Estimates of Fundamental Equilibrium Exchange Rates, May 2016

Summary /
Abstract

The US dollar is overvalued by about 7 percent, approximately the same amount as estimated last year (May and November 2015). Divergent phases of monetary policy in the United States, on one hand, and the euro area and Japan, on the other, and a collapse in commodity prices drove the stronger dollar. After rising about 5 percent from October 2015 (the base of the November 2015 assessment) to January 2016, the real effective exchange rate of the dollar fell slightly below its October level by April 2016 (the base of the current estimates). This semiannual evaluation also finds the yen is slightly undervalued (by 3 percent) despite its recent strengthening, but there is no misalignment of the other two leading currencies, the euro and Chinese renminbi.

Keywords

Fundamental Equilibrium Exchange Rates, May 2016

URL

https://piie.com/system/files/documents/pb16-6.pdf

Record ID

654     [ Page 4 of 68, No. 6 ]

Date

2015-02

Author

Christophe Blot, Jérôme Creel, Paul Hubert, Fabien Labondance, and Francesco Saraceno

Affiliation

OFCE

Title

Assessing the link between price and financial stability

Summary /
Abstract

This paper aims at investigating first, the (possibly time-varying) empirical relationship between price and financial stability, and second, the effects of some macro and policy variables on this relationship in the United States and the Eurozone. Three empirical methods are used to examine the relevance of A.J. Schwartz's “conventional wisdom” that price stability would yield financial stability. Using simple correlations and VAR and Dynamic Conditional Correlations, we reject the hypotheses that price stability is positively correlated with financial stability and that the correlation is stable over time. The latter result and the analysis of the determinants of the link between price stability and financial stability cast some doubt on the appropriateness of the “leaning against the wind” monetary policy approach.

Keywords

Price stability; Financial stability; DCC-GARCH; VAR.

URL

http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/114p6m6s0395gqm0es4g7kgv3u&r=mon

Record ID

653     [ Page 4 of 68, No. 7 ]

Date

2016-05

Author

Ambrogio Cesa-Bianchi and Alessandro Rebucci

Affiliation

NBER

Title

Does Easing Monetary Policy Increase Financial Instability?

Summary /
Abstract

This paper develops a model featuring both a macroeconomic and a financial friction that speaks to the interaction between monetary and macro-prudential policy and to the role of U.S. monetary and regulatory policy in the run up to the Great Recession. There are two main results. First, real interest rate rigidities in a monopolistic banking system increase the probability of a financial crisis (relative to the case of flexible interest rate) in response to contractionary shocks to the economy, while they act as automatic macro-prudential stabilizers in response to expansionary shocks. Second, when the interest rate is the only available policy 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. An implication of our analysis is that the weak link in the U.S. policy framework in the run up to the Global Recession was not excessively lax monetary policy after 2002, but rather the absence of an effective second policy instrument aimed at preserving financial stability.

Keywords

Monetary Policy, Financial Instability

URL

http://www.nber.org/papers/w22283.pdf

Record ID

652     [ Page 4 of 68, No. 8 ]

Date

2016-05

Author

Woodford, Michael

Affiliation

CEPR

Title

Quantitative Easing and Financial Stability

Summary /
Abstract

This paper compares three alternative dimensions of central-bank policy --- conventional interest-rate policy, quantitative easing, and macroprudential policy --- showing in the context of a simple intertemporal general-equilibrium model why they are logically independent dimensions of policy, and how they jointly determine financial conditions, aggregate demand, and the severity of risks to financial stability. Quantitative easing policies increase financial stability risk less than either of the other two policies, relative to the magnitude of aggregate demand stimulus; and a combination of expansion of the cental bank's balance sheet with a suitable tightening of macroprudential policy can have a net expansionary effect on aggregate demand with no increased risk to financial stability. This suggests that quantitative easing policies may be useful as an approach to aggregate demand management not only when the zero lower bound precludes further use of conventional interest-rate policy, but also when it is not desirable to further reduce interest rates because of financial stability concerns.

Keywords

Macroprudential policy; money premium; zero lower bound

URL

http://d.repec.org/n?u=RePEc:cpr:ceprdp:11287&r=mon

Record ID

651     [ Page 4 of 68, No. 9 ]

Date

2016-05

Author

Joshua Aizenman and Hiro Ito

Affiliation

National Bureau of Economic Research

Title

East Asian Economies and Financial Globalization In the Post-Crisis World

Summary /
Abstract

This paper assesses the East Asian Economies’ openness to cross-border capital flows and exchange rate arrangements in the past decades, with the main focus on emerging market economies. Using Mundell’s trilemma indexes, we note that the convergence of the three policy goals in East Asia toward a “middle ground” pre-dates the convergence of these indices in other regions. Another more recent development involves the high level of international reserve (IR) holdings–a feature that is known as the most distinct characteristic of Asian EMEs. Financial globalization made asset prices and interest rates in Asian EMEs more vulnerable to global movements of capital, and to the monetary policy of the center country, the United-States. The U.S. presence in trade ties with Asian economies has been declining over the last two decades, whereas China’s has been on a rising trend. Yet, the share of trade among Asian economies with the dollar zone economies has been quite stable. China has been recently making efforts to “internationalize” its currency, the yuan (RMB). Hence, if China succeeds in its internationalization efforts and creates the RMB zone, the dynamics between the U.S. and Asia will most likely change. Recently, Chinese authorities have become more interventionist because of the slowdown of the economy and financial markets. For now, the Asian region’s international finance continues to be dollar-centric.

Keywords

East Asian Economies, Financial Globalization, Capital Flows, Exchange Rate Arrangements Mundell's Trilemma

URL

http://www.nber.org/papers/w22268.pdf

Record ID

650     [ Page 4 of 68, No. 10 ]

Date

2016-05

Author

Lindé, Jesper; Smets, Frank; and Wouters, Rafael

Affiliation

Central Bank of Sweden; ECB, KU Leuven and CEPR; and National Bank of Belgium and CEPR

Title

Challenges for Central Banks' Macro Models

Summary /
Abstract

In this paper we discuss a number of challenges for structural macroeconomic models in the light of the Great Recession and its aftermath. It shows that a benchmark DSGE model that shares many features with models currently used by central banks and large international institutions has difficulty explaining both the depth and the slow recovery of the Great Recession. In order to better account for these observations, the paper analyses three extensions of the benchmark model. First, we estimate the model allowing explicitly for the zero lower bound constraint on nominal interest rates. Second, we introduce time-variation in the volatility of the exogenous disturbances to account for the non-Gaussian nature of some of the shocks. Third and finally, we extend the model with a financial accelerator and allow for time-variation in the endogenous propagation of financial shocks. All three extensions require that we go beyond the linear Gaussian assumptions that are standard in most policy models. We conclude that these extensions go some way in accounting for features of the Great Recession and its aftermath, but they do not suffice to address some of the major policy challenges associated with the use of non-standard monetary policy and macroprudential policies.

Keywords

Monetary policy; DSGE; and VAR models; Regime-Switching; Zero Lower Bound; Financial Frictions; Great Recession; Macroprudential policy; Open economy

URL

http://www.riksbank.se/Documents/Rapporter/Working_papers/2016/rap_wp323_160512.pdf