Record ID

590     [ Page 6 of 34, No. 1 ]

Date

2015-01

Author

Mauricio Villamizar-Villegas and David Perez-Reyna

Affiliation

Banco de la Republica Colombia

Title

A Survey on the Effects of Sterilized Foreign Exchange Intervention

Summary /
Abstract

In this paper we survey prominent theories that have shaped the literature on sterilized foreign exchange interventions. We identify three main strands of literature: 1) that which advocates the use of sterilized interventions; 2) that which deems sterilized interventions futile; and 3) that which requires some market friction in order for sterilized interventions to be effective. We contribute to the literature in three important ways. First, by reviewing new theoretical models that have surfaced within the last decade. Second, by further penetrating into the theory of interventions in order to analyze the key features that make each model distinct. And third, by only focusing on sterilized operations, which allows us to sidestep the effects induced by changes in the stock of money supply. Additionally, the models that we present comprise both a macro and micro-structure approach so as to provide a comprehensive view of the theory behind exchange rate intervention.

Keywords

Sterilized foreign exchange intervention, impossible trinity, portfolio balance channel, signaling channel, uncovered interest rate parity.

URL

http://www.banrep.gov.co/sites/default/files/publicaciones/archivos/be_862.pdf

Record ID

589     [ Page 6 of 34, No. 2 ]

Date

2014-12

Author

Mariano Kulish, James Morley, and Tim Robinson

Affiliation

School of Economics, Australian School of Business, the University of New South Wales); School of Economics, Australian School of Business, the University of New South Wales; and Melbourne Institute of Applied Economics and Social Research, University of Melbourne

Title

Estimating DSGE models with forward guidance

Summary /
Abstract

Motivated by the use of forward guidance, we propose a method to estimate DSGE models in which the central bank holds the policy rate fixed for an extended period. Private agents’ beliefs about how long the fixed-rate regime will last influences, among other observable variables, current output, inflation and interest rates of longer maturities. We estimate the shadow policy rate and construct counterfactual scenarios to quantify the severity of the zero lower bound constraint. Using the Smets and Wouters (2007) model, we find that the expected duration of the zero interest rate policy has been around 2 years, that the shadow rate has been around -3 per cent and that the zero lower bound has imposed a significant output loss.

Keywords

Zero lower bound, forward guidance

URL

http://research.economics.unsw.edu.au/RePEc/papers/2014-32.pdf

Record ID

588     [ Page 6 of 34, No. 3 ]

Date

2015-01

Author

Sebastian Edwards

Affiliation

National Bureau of Economic Research

Title

Monetary Policy Independence under Flexible Exchange Rates: An Illusion?

Summary /
Abstract

I analyze whether countries with flexible exchange rates are able to pursue an independent monetary policy, as suggested by traditional theory. I use data for three Latin American countries with flexible exchange rates, inflation targeting, and capital mobility – Chile, Colombia and Mexico – to investigate the extent to which Federal Reserve actions are translated into local central banks’ policy rates. The results indicate that there is significant “policy contagion,” and that these countries tend to “import” Fed policies. The degree of monetary policy independence is lower than what traditional models suggest.

Keywords

Monetary policy independence, flexible exchange rates

URL

http://www.nber.org/papers/w20893.pdf

Remarks

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Record ID

587     [ Page 6 of 34, No. 4 ]

Date

2015-01

Author

Pranjul Bhandari and Jeffrey A. Frankel

Affiliation

National Bureau of Economic Research

Title

Nominal GDP Targeting for Developing Countries

Summary /
Abstract

The revival of interest in nominal GDP (NGDP) targeting has come in the context of large advanced economies. We consider the case for NGDP targeting for mid-sized developing countries, in light of their susceptibility to supply shocks and terms of trade shocks. For India, in particular, one major exogenous supply shock is the monsoon rains. NGDP targeting splits the impact of supply shocks automatically between inflation and real GDP growth. In the case of annual inflation targeting (IT), by contrast, the full impact of an adverse supply shock or terms of trade shock is felt as a loss in real GDP alone. NGDP targeting automatically accommodates supply shocks as most central banks with discretion would do anyway, while retaining the advantage of anchoring expectations as rules are designed to do. We outline a simple theoretical model and derive the condition under which an NGDP targeting regime would dominate other regimes such as annual IT for achieving objectives of output and price stability. We go on to estimate for the case of India the parameters needed to ascertain whether the condition holds, particularly the slope of the aggregate supply curve. Estimates suggest that the condition may indeed hold.

Keywords

Nominal GDP Targeting, developing countries

URL

http://www.nber.org/papers/w20898.pdf

Remarks

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Record ID

586     [ Page 6 of 34, No. 5 ]

Date

2015-01

Author

Francesco Grigoli, Alexander Herman, Andrew Swiston, and Gabriel Di Bella

Affiliation

Western Hemisphere Department, IMF

Title

Output Gap Uncertainty and Real-Time Monetary Policy

Summary /
Abstract

Output gap estimates are subject to a wide range of uncertainty owing to data revisions and the difficulty in distinguishing between cycle and trend in real time. This is important given the central role in monetary policy of assessments of economic activity relative to capacity. We show that country desks tend to overestimate economic slack, especially during recessions, and that uncertainty in initial output gap estimates persists several years. Only a small share of output gap revisions is predictable ex ante based on characteristics like output dynamics, data quality, and policy frameworks. We also show that for a group of Latin American inflation targeters the prescriptions from typical monetary policy rules are subject to large changes due to output gap revisions. These revisions explain a sizable proportion of the deviation of inflation from target, suggesting this information is not accounted for in real-time policy decisions.

Keywords

Output gap; monetary policy; policy rule; data revisions; real-time; uncertainty; Brazil; Chile; Colombia; Mexico; Peru; inflation target; business cycle.

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp1514.pdf

Record ID

585     [ Page 6 of 34, No. 6 ]

Date

2013-12

Author

Carlos Garriga, Finn E. Kydland, and Roman Šustek

Affiliation

Federal Reserve Bank of St. Louis, University of California–Santa Barbara and NBER, and Queen Mary, University of London and Centre for Macroeconomics, London School of Economics sustek19@gmail.com.

Title

Mortgages and monetary policy

Summary /
Abstract

Mortgage loans are a striking example of a persistent nominal rigidity. As a result, under incomplete markets, monetary policy affects decisions through the cost of new mortgage borrowing and the value of payments on outstanding debt. Observed debt levels and payment to income ratios suggest the role of such loans in monetary transmission may be important. A general equilibrium model is developed to address this question. The transmission is found to be stronger under adjustable- than fixed-rate contracts. The source of impulse also matters: persistent inflation shocks have larger effects than cyclical fluctuations in inflation and nominal interest rates.

Keywords

Mortgages; debt servicing costs; monetary policy; transmission mechanism; housing investment

URL

http://eprints.lse.ac.uk/58248/1/__lse.ac.uk_storage_LIBRARY_Secondary_libfile_shared_repository_Content_Centre%20For%20Macroeconomics%20discussion%20papers_Mortgages%20monetary%20policy_Garriga_Mortgages%20monetary%20policy_2014.pdf

Record ID

584     [ Page 6 of 34, No. 7 ]

Date

2015-02

Author

Till Cordes, Tidiane Kinda, Priscilla S. Muthoora, and Anke Weber

Affiliation

Fiscal Affairs Department, IMF

Title

Expenditure Rules: Effective Tools for Sound Fiscal Policy?

Summary /
Abstract

This paper provides new evidence on the effectiveness of expenditure rules. The analysis is based on a unique dataset covering all countries with national and supranational fiscal rules, including 33 expenditure rules, between 1985 and 2013. It contributes to the existing literature on fiscal rules in two main ways. First, it is the most comprehensive assessment of compliance with rules and of the potential role of expenditure rules, in particular regarding long-term sustainability. Second, it analyzes whether expenditure rules are associated with changes in public investment and its efficiency.

Keywords

Expenditure rules, Fiscal governance, Fiscal policy, Rules versus discretion, Stabilization

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp1529.pdf

Record ID

583     [ Page 6 of 34, No. 8 ]

Date

2014-12

Author

Eidenberger, Judith, Neudorfer, Benjamin, Sigmund, Michael, and Stein, Ingrid

Affiliation

Deutsche Bundesbank, EuroSystem

Title

What predicts financial (in)stability? A Bayesian approach

Summary /
Abstract

This paper contributes to the literature on early warning indicators by applying a Bayesian model averaging approach. Our analysis, based on Austrian data, is carried out in two steps: First, we construct a quarterly financial stress index (AFSI) quantifying the level of stress in the Austrian financial system. Second, we examine the predictive power of various indicators, as measured by their ability to forecast the AFSI. Our approach allows us to investigate a large number of indicators. The results show that excessive credit growth and high returns of banks' stocks are the best early warning indicators. Unstable funding (as measured by the loan to deposit ratio) also has a high predictive power.

Keywords

Financial crisis, early warning indicators, government policy and regulation, financial stress index

URL

http://econstor.eu/bitstream/10419/106175/1/813252709.pdf

Record ID

582     [ Page 6 of 34, No. 9 ]

Date

2015-01

Author

Gurnain Pasricha, Matteo Falagiarda, Martin Bijsterbosch, and Joshua Aizenman

Affiliation

National Bureau of Economic Research

Title

Domestic and Multilateral Effects of Capital Controls in Emerging Markets

Summary /
Abstract

This paper assesses the effects of capital controls in emerging market economies (EMEs) during 2001-2011, focusing on cross-country spillovers of changes in these controls. We use a novel dataset on weighted changes in capital controls (and currency-based measures) in 18 major EMEs. We first use panel VARs to test for effectiveness of own capital controls which take into account the endogeneity of such controls. Next, using near-VARs, we provide new evidence of multilateral effects of capital controls of the BRICS. Our results suggest a limited domestic impact of capital controls. Outflow easing measures do not have a significant impact on any of the variables in the model. Inflow tightening measures increase monetary policy autonomy (measured by the covered interest differential), but at the cost of a more appreciated exchange rate. These measures are therefore not effective in allowing EMEs to choose a trilemma configuration with a de-facto closed capital account, larger monetary policy autonomy and a weaker exchange rate. We do not find a clear difference between countries with extensive and long-standing capital controls (India and China) and other countries. Capital control actions in BRICS (Brazil, Russia, India, China and South Africa) had significant spillovers to other EMEs during the 2000s in particular via exchange rates. Multilateral effects were more important among the BRICS than between the BRICS and other, smaller EMEs, particularly in the pre-global financial crisis period. They were more significant in the aftermath of the global financial crisis than before the crisis. This change stems in particular from the fact that spillovers from capital flow policies in BRICS countries to non-BRICS became more significant in the post-global financial crisis period. These results are robust to various specifications of our models.

Keywords

Capital controls, emerging markets

URL

http://www.nber.org/papers/w20822.pdf

Remarks

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Record ID

581     [ Page 6 of 34, No. 10 ]

Date

2015-01

Author

Alvaro Ortiz Vidal-Abarca and Alfonso Ugarte Ruiz

Affiliation

BBVA

Title

Introducing a New Early Warning System Indicator (EWSI) of banking crises

Summary /
Abstract

We introduce a new Early Warning System Indicator (EWSI) of banking crises based on a non-linear (Gomperzt curve) panel data model of credit deepening. The capability of our estimated credit-gap measure relative to alternative credit gaps computed through ad hoc procedures (linear or Hodrick Prescott trends) is tested in the context of alternative univariate and multivariate Early Warning Systems (EWS). Our new EWSI proves to be an outperforming and reliable leading indicator of banking crises while overcoming most of the problems of linear and stochastic procedures. The estimated credit gap outperforms the rest of indicators in both in-sample and out–of-sample forecasting accuracy (e.g. AUROC statistics) in a univariate comparison. Furthermore, we also test the importance of our EWSI in a multivariate framework through a Bayesian Model Average (BMA) technique, confirming our initial positive results. Finally, we estimate an Early Warning System for 68 developed and emerging countries based on our credit gap which can be used to compute Banking Crises Probabilities and to estimate dynamic thresholds for the EWSI indicators.

Keywords

Credit gap, Early warning indicators, Bayesian model averaging, macro-prudential policies

URL

https://www.bbvaresearch.com/wp-content/uploads/2015/01/WP_EWS-SystemVersion-Sep2014_i.pdf

Record ID

580     [ Page 6 of 34, No. 11 ]

Date

2014-02

Author

Tim Hursey, Alexander Wolman, and Andreas Hornstein

Affiliation

University of Pennsylvania, Federal Reserve Bank of Richmond, and Federal Reserve Bank of Richmond

Title

Monetary Policy and Global Equilibria in an Economy with Capital

Summary /
Abstract

Short-term interest rates in the United States have been near their lower bound since late 2008. Treasury rates out to a two-year maturity have been close to zero since mid-2011, and over this same period, inflation has been declining. This combination of low interest rates and declining inflation has lead some observers to point to the "perils of Taylor rules," for example, Bullard (2010), when a monetary policy that actively targets a positive inflation rate leads to an outcome with much lower inflation, and possibly even deflation. The possibility of equilibria with persistent deviations of inflation from the target set by the policy maker has been investigated for model economies without state variables. Quantitative representations of the U.S. economy as embodied by DSGE models include as an essential element capital accumulation. In this paper we study the possibility for persistent low inflation outcomes for a monetary model with capital.

Keywords

Monetary policy, inflation targeting, Taylor rule

URL

https://www.economicdynamics.org/meetpapers/2014/paper_733.pdf

Record ID

579     [ Page 6 of 34, No. 12 ]

Date

2015-01

Author

Maurice Obstfeld

Affiliation

University of California, Berkely and BIS

Title

Trilemmas and trade-offs: living with financial globalisation

Summary /
Abstract

This paper evaluates the capacity of emerging market economies (EMEs) to moderate the domestic impact of global financial and monetary forces through their own monetary policies. Those EMEs that are able to exploit a flexible exchange rate are far better positioned than those that devote monetary policy to fixing the rate - a reflection of the classical monetary policy trilemma. However, exchange rate changes alone do not insulate economies from foreign financial and monetary shocks. While potentially a potent source of economic benefits, financial globalisation does have a downside for economic management. It worsens the trade-offs monetary policy faces in navigating among multiple domestic objectives. This drawback of globalisation raises the marginal value of additional tools of macroeconomic and financial policy. Unfortunately, the availability of such tools is constrained by a financial policy trilemma that is distinct from the monetary trilemma. This second trilemma posits the incompatibility of national responsibility for financial policy, international financial integration and financial stability.

Keywords

Policy trilemma, financial stability, financial globalisation, international policy transmission

URL

http://www.bis.org/publ/work480.pdf

Record ID

578     [ Page 6 of 34, No. 13 ]

Date

2015-01

Author

Karim Barhoumi and Laurent Ferrara

Affiliation

IMF and Banque de France

Title

A World Trade Leading Index (WTLI)

Summary /
Abstract

This paper develops a new monthly World Trade Leading Indicator (WTLI) that relies on nonparametric and parametric approaches. Compared to the CPB World Trade Monitor’s benchmark indicator for global trade the WTLI captures turning points in global trade with an average lead between 2 and 3 months. We also show that this cyclical indicator is able to track the annual growth rate in global trade, suggesting that the recent slowdown is due in part to certain cyclical factors. This new tool can provide policy makers with valuable foresight into the future direction of economic activity by tracking world trade more efficiently.

Keywords

World trade, leading indicators, factor models

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp1520.pdf

Record ID

577     [ Page 6 of 34, No. 14 ]

Date

2014-12

Author

Luis Eduardo Arango, Ximena Chavarro and Eliana González

Affiliation

Banco de la Republica Colombia

Title

Commodity price shocks and inflation within an optimal monetary policy framework: the case of Colombia

Summary /
Abstract

A small open macroeconomic model, in which an optimal interest rate rule emerges to drive the inflation behavior, is used to model inflation within an inflation targeting framework. This set up is used to estimate the relationship between commodity prices shocks and the inflation process in a country that both export and import commodities. We found evidence of a positive, yet small, impact from food international price shocks to inflation. However, these effects are no longer observable once the sample is split in the periods before and after the boom. The lack of effect from oil and energy price shocks we obtain supports the recent findings in the literature of a substantial decrease in the pass-through from oil prices to headline inflation. Thus, our interpretation is that monetary authority has faced rightly the shocks to commodity prices. Inflation expectations are the main determinant of inflation during the inflation targeting regime. Commodity prices movements are to a great extent included in the information set to form expectations.

Keywords

commodity prices, inflation targeting

URL

http://www.banrep.gov.co/sites/default/files/publicaciones/archivos/be_858.pdf

Record ID

576     [ Page 6 of 34, No. 15 ]

Date

2014-12

Author

Tobias Adrian and Nellie Liang

Affiliation

Federal Reserve Bank of New York and Board of Governors of the Federal Reserve System

Title

Monetary Policy, Financial Conditions, and Financial Stability

Summary /
Abstract

In the conduct of monetary policy, there exists a risk-return tradeoff between financial conditions and financial stability, which complements the traditional inflation-real activity tradeoff of monetary policy. The tradeoff exists even if monetary policy does not target financial stability considerations independently of its inflation and real activity goals, as the buildup of financial vulnerabilities from persistent accommodative monetary policy when the economy is close to potential increases risks to future financial stability. We review monetary policy transmission channels and financial frictions that give rise to this tradeoff between financial conditions and financial stability, within a monitoring program across asset markets, banking firms, shadow banking, and the nonfinancial sector. We focus on vulnerabilities that affect monetary policies' risk- return tradeoff including (i) pricing of risk, (ii) leverage, (iii) maturity and liquidity mismatch, and (iv) interconnectedness and complexity. We also discuss the extent to which structural and time-varying macroprudential policies can counteract the buildup of vulnerabilities, thus mitigating monetary policy's risk-return tradeoff.

Keywords

Risk taking channel of monetary policy, monetary policy transmission, monetary policy rules, financial stability, financial conditions, macroprudential policy

URL

http://www.imes.boj.or.jp/research/papers/english/14-E-13.pdf

Record ID

575     [ Page 6 of 34, No. 16 ]

Date

2014-12

Author

Lars E.O. Svensson

Affiliation

Riksbank

Title

Forward Guidance

Summary /
Abstract

Forward guidance about future policy settings, in the form of a published policy-rate path, has for many years been a natural part of normal monetary policy for several central banks, including the Reserve Bank of New Zealand and the Swedish Riksbank. The Swedish and New Zealand experience of a published policy-rate path is examined, especially to what extent the market has anticipated the path (the predictability of the path) and to what extent market expectations line up with the path after publication (the credibility of the path). The recent Swedish experience is very dramatic. In particular, it shows a case with a large discrepancy between a high and rising Riksbank path and a low and falling market path, with the market path providing a good forecast of the future policy rate. The discrepancy is explained by the Riksbank’s leaning against the wind in recent years and related circumstances. The New Zealand experience is less dramatic, but shows cases where the market implements either a substantially tighter or easier policy than intended by the RBNZ. There are also cases of the market being ahead of the RBNZ and the RBNZ later following the market.

Keywords

Forward guidance, monetary policy

URL

http://www.nber.org/papers/w20796.pdf

Remarks

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Record ID

574     [ Page 6 of 34, No. 17 ]

Date

2014-10

Author

John B. Taylor

Affiliation

Stanford University

Title

Inflation Targeting In Emerging Markets: The Global Experience

Summary /
Abstract

This paper assesses the emerging market experience with inflation targeting in recent years. It places this experience in the broader context of global monetary policy. It shows that a shift away from rules based policy by many developed country central banks has adversely affected the inflation targeting performance of the emerging market countries. First, it has created direct economic spillovers, which have blurred the good effects of inflation targeting. Second, it has led to policy spillovers in which emerging market central banks have been driven to deviate from their inflation targeting rules. The implication of this research is that emerging market countries should stick to the type of inflation targeting they adopted a decade or more ago with macroprudential policy simply focused on getting the overall risk environment right.

Keywords

Inflation targeting, global experience, emerging markets, monetary policy

URL

http://www.hoover.org/sites/default/files/14112_-_taylor_-_inflation_targeting_in_emerging_markets_-_the_global_experience.pdf

Record ID

573     [ Page 6 of 34, No. 18 ]

Date

2014-11

Author

Elisabetta Gualandri and Mario Noera

Affiliation

Center for Research in Banking and Finance and Bocconi University, Milan

Title

MONITORING SYSTEMIC RISK: A SURVEY OF THE AVAILABLE MACROPRUDENTIAL TOOLKIT

Summary /
Abstract

Understanding the nature of systemic risk and identifying the channels of diffusion of the shocks are the necessary prerequisite to anticipate and manage successfully the insurgence of financial crises. In order to prevent financial distress and manage instability, the macroprudential regulator needs to track and measure systemic risks ex-ante. The aim of the paper is twofold: on one side, it reviews the theoretical frameworks which allow to assess the different dimensions of systemic risk and, on the other, it classifies accordingly and analyzes the methodologies available to assess in advance the occurrence of systemic distress. The paper classifies the different definitions of systemic risk and discusses their significance during the 2007-08 crisis. It presents the tools available to extract real time information on market perception of risk from market prices of securities and derivatives (i.e. CDS and equity options). The analysis is extended to the methods focused on the measurement of the financial fragility due to the networks linkages within the financial system. On the basis of the available empirical research, the paper also reviews the capacity of the different methods to spot in advance the insurgence of the crisis prior to 2007-08 and draws some preliminary conclusions on the completeness and consistency of the toolkit available to policy makers.

Keywords

Systemic risk, financial crisis, prudential regulation, financial institutions.

URL

http://www.cefin.unimore.it/new/wp-content/uploads/2014/11/Cefin_WP_50.pdf

Record ID

572     [ Page 6 of 34, No. 19 ]

Date

2014-12

Author

Frederic S. Mishkin and Eugene N. White

Affiliation

NBER

Title

Unprecedented Actions: The Federal Reserve’s Response to the Global Financial Crisis in Historical Perspective

Summary /
Abstract

Interventions by the Federal Reserve during the financial crisis of 2007-2009 were generally viewed as unprecedented and in violation of the rules—notably Bagehot’s rule—that a central bank should follow to avoid the time-inconsistency problem and moral hazard. Reviewing the evidence for central banks’ crisis management in the U.S., the U.K. and France from the late nineteenth century to the end of the twentieth century, we find that there were precedents for all of the unusual actions taken by the Fed. When these were successful interventions, they followed contingent and target rules that permitted pre-emptive actions to forestall worse crises but were combined with measures to mitigate moral hazard.

Keywords

Federal Reserve, Global Financial Crisis

URL

http://www.nber.org/papers/w20737.pdf

Remarks

You may purchase this paper on-line in .pdf format from SSRN.com ($5) for electronic delivery.

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Record ID

571     [ Page 6 of 34, No. 20 ]

Date

2014-11

Author

Luis F. Melo Velandia, Rubén A. Loaiza Maya and Mauricio Villamizar-Villegas

Affiliation

Banco de la Republica Colombia

Title

Bayesian Combination for Inflation Forecasts: The Effects of a Prior Based on Central Banks’ Estimates

Summary /
Abstract

Typically, central banks use a variety of individual models (or a combination of models) when forecasting inflation rates. Most of these require excessive amounts of data, time, and computational power; all of which are scarce when monetary authorities meet to decide over policy interventions. In this paper we use a rolling Bayesian combination technique that considers inflation estimates by the staff of the Central Bank of Colombia during 2002-2011 as prior information. Our results show that: 1) the accuracy of individual models is improved by using a Bayesian shrinkage methodology, and 2) priors consisting of staff's estimates outperform all other priors that comprise equal or zero-vector weights. Consequently, our model provides readily available forecasts that exceed all individual models in terms of forecasting accuracy at every evaluated horizon.

Keywords

Bayesian shrinkage, inflation forecast combination, internal forecasts, rolling window estimation

URL

http://www.banrep.gov.co/sites/default/files/publicaciones/archivos/be_853.pdf