Record ID

256     [ Page 43 of 68, No. 1 ]

Date

2012-08

Author

Research Department, under the general direction of Olivier Blanchard and Jonathan Ostry

Affiliation

IMF

Title

External Balance Assessment (EBA): Technical Background of the Pilot Methodology

Summary /
Abstract

The IMF's Research Department is developing the External Balance Assessment (EBA) methodology as a successor to the CGER methodology for assessing current accounts and exchange rates. The new methodology brings a greater focus on the role of policies and policy distortions, as well as on global capital market and cyclical influences.* A pilot version of EBA was implemented recently; the Pilot External Sector Report draws in part on the results of that exercise, and includes a general overview of EBA in its Appendix I. This technical background note provides a more extended description of the pilot EBA methodology and is being made available to solicit comments and suggestions for the future development and refinement of EBA.

*The EBA methodology is a project of the IMF’s Research Department, under the general direction of Olivier Blanchard and Jonathan D. Ostry. The EBA Team comprises Steve Phillips (head), Luis Catão (lead on current account analysis), Luca Ricci (lead on real exchange rate analysis), Mitali Das (lead on external sustainability analysis), D. Filiz Unsal, Jungjin Lee, Marola Castillo, John Kowalski, and Mauricio Vargas. The EBA Team gratefully acknowledges comments and suggestions received, on various aspects of the project, from Joshua Aizenman, Menzie Chinn, Martin Evans, Joseph Gagnon, Eduardo Lora, Maurice Obstfeld, Dennis Quinn, and Jay Shambaugh, as well from numerous IMF colleagues.

Keywords

Current account, real exchange rate, external balance assessment

URL

http://www.imf.org/external/np/res/eba/pdf/080312.pdf

Record ID

255     [ Page 43 of 68, No. 2 ]

Date

2012-07

Author

Martin Schmitz

Affiliation

European Central Bank

Title

Financial markets and international risk sharing in emerging market economics

Summary /
Abstract

In light of rapidly increasing foreign equity liability positions of emerging market economies, we test for a necessary condition of international risk sharing, namely for systematic patterns between idiosyncratic output fluctuations and financial market developments. Panel analysis of 22 emerging market economies shows strong evidence for pro-cyclicality of capital gains on domestic stock markets both over short and medium term horizons. This implies that domestic output fluctuations can be hedged through cross-border ownership of financial markets.

Keywords

International risk sharing, capital gains, cross-border investment, financial globalisation, emerging market economies

URL

http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121451&r=cba

Record ID

254     [ Page 43 of 68, No. 3 ]

Date

2012-08

Author

Paolo Guarda, Abdelaziz Rouabah, and John Theal

Affiliation

Banque Centrale du Luxembourg

Title

An MVAR framework to capture extreme events in macro-prudential stress tests

Summary /
Abstract

Severe financial turbulences are driven by high impact and low probability events that are the characteristic hallmarks of systemic financial stress. These unlikely adverse events arise from the extreme tail of a probability distribution and are therefore very poorly captured by traditional econometric models that rely on the assumption of normality. In order to address the problem of extreme tail events, we adopt a mixture vector autoregressive (MVAR) model framework that allows for a multi-modal distribution of the residuals. A comparison between the respective results of a VAR and MVAR approach suggests that the mixture of distributions allows for a better assessment of the effect that adverse shocks have on counterparty credit risk, the real economy and banks’ capital requirements. Consequently, we argue that the MVAR provides a more accurate assessment of risk since it captures the fat tail events often observed in time series of default probabilities.

Keywords

Stress testing, MVAR, tier 1 capital ratio, counterparty risk, Luxembourg banking sector

URL

http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121464&r=cba

Record ID

253     [ Page 43 of 68, No. 4 ]

Date

2012-01

Author

Yener Altunbas, Leonardo Gambacorta and David Marques-Ibanez

Affiliation

Bangor Business School, Bank for International Settlements, and European Central Bank

Title

Does monetary policy affect bank risk?

Summary /
Abstract

We investigate the effect of relatively loose monetary policy on bank risk through a large panel including quarterly information from listed banks operating in the European Union and the United States. We find evidence that relatively low levels of interest rates over an extended period of time contributed to an increase in bank risk. This result holds for a wide range of measures of risk, as well as macroeconomic and institutional controls including the intensity of supervision, securitization activity and bank competition. The results also hold when changes in realized bank risk due to the crisis are accounted for. The results suggest that monetary policy is not neutral from a financial stability perspective.

Keywords

Bank risk, monetary policy, credit crisis

URL

http://d.repec.org/n?u=RePEc:bng:wpaper:12002&r=cba

Record ID

252     [ Page 43 of 68, No. 5 ]

Date

2012-08

Author

Itai Agur and Maria Demertzis

Affiliation

IMF, STI and De Nederlandsche Bank

Title

Excessive bank risk taking and monetary policy

Summary /
Abstract

Why should monetary policy "lean against the wind"? Can’t bank regulation perform its task alone? We model banks that choose both asset volatility and leverage, and identify how monetary policy transmits to bank risk. Subsequently, we introduce a regulator whose tool is a risk-based capital requirement. We derive from welfare that the regulator trades off bank risk and credit supply, and show that monetary policy affects both sides of this trade-off. Hence, regulation cannot neutralize the policy rate’s impact, and monetary policy matters for financial stability. An extension shows how the commonality of bank exposures affects monetary transmission.

Keywords

Macroprudential, leverage, supervision, monetary transmission

URL

http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121457&r=cba

Record ID

251     [ Page 43 of 68, No. 6 ]

Date

2012-08

Author

Luca Gattini, Huw Pill, and Ludger Schuknecht

Affiliation

European Investment Bank, Goldman Sachs, and German Ministry of Finance/European Central Bank

Title

A global perspective on inflation and propagation channels

Summary /
Abstract

This paper revisits the evidence on the monetary policy transmission channels. It extends the existing literature along three lines: i) it takes a global perspective with aggregate series based on a broader set of countries (ca 70% per cent of the global economy) and a longer time (1960-2010) than previous studies. It, thereby, internalises potential international transmission channels (i.e. via global commodity prices); ii) it examines the interaction between monetary variables, asset prices (notably residential property) and inflation; and iii) it looks at the role of public debt for consumer price developments. On the basis of a VAR analysis, the study finds that i) global money demand shocks affect global inflation and also global commodity prices, which in turn impact on inflation; ii) global asset/property price dynamics appear to respond to financing cost shocks, but not to shocks to global money demand. Moreover, positive house price shocks exert a significant influence on inflation. From a global perspective, the study suggests recognition of global externalities of commodities and asset values as well as the close monitoring of real estate price developments.

Keywords

VAR, global inflation, global house prices, global money

URL

http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121462&r=cba

Record ID

250     [ Page 43 of 68, No. 7 ]

Date

2012-08

Author

Tanya Molodtsova and David Papell

Affiliation

National Bureau of Economic Research

Title

Taylor Rule Exchange Rate Forecasting During the Financial Crisis

Summary /
Abstract

This paper evaluates out-of-sample exchange rate predictability of Taylor rule models, where the central bank sets the interest rate in response to inflation and either the output or the unemployment gap, for the euro/dollar exchange rate with real-time data before, during, and after the financial crisis of 2008-2009. While all Taylor rule specifications outperform the random walk with forecasts ending between 2007:Q1 and 2008:Q2, only the specification with both estimated coefficients and the unemployment gap consistently outperforms the random walk from 2007:Q1 through 2012:Q1. Several Taylor rule models that are augmented with credit spreads or financial condition indexes outperform the original Taylor rule models. The performance of the Taylor rule models is superior to the interest rate differentials, monetary, and purchasing power parity models.

Keywords

Taylor Rule, Financial Crisis

URL

http://d.repec.org/n?u=RePEc:nbr:nberwo:18330&r=cba

Record ID

249     [ Page 43 of 68, No. 8 ]

Date

2012-08

Author

Paolo Gelain, Kevin J. Lansing, and Caterina Mendicino

Affiliation

Norges Bank, FRB San Francisco, and Bank of Portugal

Title

House prices, credit growth, and excess volatility: implications for monetary and macroprudential policy

Summary /
Abstract

Progress on the question of whether policymakers should respond directly to financial variables requires a realistic economic model that captures the links between asset prices, credit expansion, and real economic activity. Standard DSGE models with fully-rational expectations have difficulty producing large swings in house prices and household debt that resemble the patterns observed in many developed countries over the past decade. We introduce excess volatility into an otherwise standard DSGE model by allowing a fraction of households to depart from fully-rational expectations. Specifically, we show that the introduction of simple moving-average forecast rules for a subset of households can significantly magnify the volatility and persistence of house prices and household debt relative to otherwise similar model with fully-rational expectations. We evaluate various policy actions that might be used to dampen the resulting excess volatility, including a direct response to house price growth or credit growth in the central bank’s interest rate rule, the imposition of more restrictive loan-to-value ratios, and the use of a modified collateral constraint that takes into account the borrower’s loan-to-income ratio. Of these, we find that a loan-to-income constraint is the most effective tool for dampening overall excess volatility in the model economy. We find that while an interest-rate response to house price growth or credit growth can stabilize some economic variables, it can significantly magnify the volatility of others, particularly inflation.

Keywords

Housing - Prices ; Housing - Econometric models

URL

http://d.repec.org/n?u=RePEc:fip:fedfwp:2012-11&r=mon

Record ID

248     [ Page 43 of 68, No. 9 ]

Date

2012-08

Author

Tanya Molodtsova and David Papell

Affiliation

National Bureau of Economic Research

Title

Taylor Rule Exchange Rate Forecasting During the Financial Crisis

Summary /
Abstract

This paper evaluates out-of-sample exchange rate predictability of Taylor rule models, where the central bank sets the interest rate in response to inflation and either the output or the unemployment gap, for the euro/dollar exchange rate with real-time data before, during, and after the financial crisis of 2008-2009. While all Taylor rule specifications outperform the random walk with forecasts ending between 2007:Q1 and 2008:Q2, only the specification with both estimated coefficients and the unemployment gap consistently outperforms the random walk from 2007:Q1 through 2012:Q1. Several Taylor rule models that are augmented with credit spreads or financial condition indexes outperform the original Taylor rule models. The performance of the Taylor rule models is superior to the interest rate differentials, monetary, and purchasing power parity models.

Keywords

Taylor rule, Exchange rates

URL

http://d.repec.org/n?u=RePEc:nbr:nberwo:18330&r=mon

Record ID

247     [ Page 43 of 68, No. 10 ]

Date

2012-08

Author

Sami Ben Mim and Mohamed Sami Ben Ali

Affiliation

University of Sousse

Title

Through Which Channels Can Remittances Spur Economic Growth in MENA Countries?

Summary /
Abstract

This paper studies the remittances’ effect on economic growth. Using panel data techniques, the authors estimate several specifications to provide support of such relationship for MENA countries over the period 1980–2009. The findings provide new robust evidence on how remittances are used in MENA countries and detect the main channels which may interfere in this process. Estimation outcomes show that the most important part of remittances is consumed and that remittances stimulate growth only when they are invested. Moreover, empirical results suggest that remittances can enhance growth by encouraging human capital accumulation. Human capital is therefore an effective channel through which remittances stimulate growth in MENA countries.

Keywords

Workers’ remittances; economic growth; panel data; MENA zone

URL

http://www.economics-ejournal.org/economics/journalarticles/2012-33/version_1/count