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Record ID
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26
[ Page 68 of 68, No. 1 ]
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Date
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2010 |
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Author
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Gulcin Ozkan, F.; Unsal, D. Filiz
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Title
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External Finance, Sudden Stops, and Financial Crisis: What is Different This Time? |
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Summary /
Abstract
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This paper develops a two-country DSGE model to investigate the transmission of a global financial crisis to a small open economy. We find that economies hit by a sudden stop arising from financial distress in the global economy are likely to face a more prolonged crisis than sudden stop episodes of domestic origin. Moreover, in contrast to the existing literature, our results suggest that the greater a country's trade integration with the rest of the world, the greater the response of its macroeconomic aggregates to a sudden stop of capital flows.
Source: IMF Working Paper No. 10/158: |
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URL
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http://www.imf.org/external/pubs/cat/longres.cfm?sk=24034.0
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Record ID
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28
[ Page 68 of 68, No. 2 ]
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Date
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2010 |
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Author
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Benjamin Friedman and Kenneth Kuttner
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Affiliation
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Harvard University and Williams College |
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Title
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Implementation of Monetary Policy: How Do Central Banks Set Interest Rates? |
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Summary /
Abstract
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Central banks no longer set the short-term interest rates that they use for monetary policy purposes by manipulating the supply of banking system reserves, as in conventional economics textbooks; today this process involves little or no variation in the supply of central bank liabilities. In effect, the announcement effect has displaced the liquidity effect as the fulcrum of monetary policy implementation. The chapter begins with an exposition of the traditional view of the implementation of monetary policy, and an assessment of the relationship between the quantity of reserves, appropriately defined, and the level of short-term interest rates. Event studies show no relationship between the two for the United States, the Euro-system, or Japan. Structural estimates of banks’ reserve demand, at a frequency corresponding to the required reserve maintenance period, show no interest elasticity for the U.S. or the Euro-system (but some elasticity for Japan). The chapter next develops a model of the overnight interest rate setting process incorporating several key features of current monetary policy practice, including in particular reserve averaging procedures and a commitment, either explicit or implicit, by the central bank to lend or absorb reserves in response to differences between the policy interest rate and the corresponding target. A key implication is that if reserve demand depends on the difference between current and expected future interest rates, but not on the current level per se, then the central bank can alter the market-clearing interest rate with no change in reserve supply. This implication is borne out in structural estimates of daily reserve demand and supply in the U.S.: expected future interest rates shift banks’ reserve demand, while changes in the interest rate target are associated with no discernable change in reserve supply. The chapter concludes with a discussion of the implementation of monetary policy during the recent financial crisis, and the conditions under which the interest rate and the size of the central bank’s balance sheet could function as two independent policy instruments. |
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Keywords
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Reserve supply, reserve demand, liquidity effect, announcement effect |
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URL
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http://d.repec.org/n?u=RePEc:wil:wileco:2010-03&r=mac
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Record ID
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48
[ Page 68 of 68, No. 4 ]
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Date
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2009-12 |
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Author
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Morten L. Bech and Elizabeth Klee
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Affiliation
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Federal Reserve Bank of New York |
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Title
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The Mechanics of a Graceful Exit: Interest on Reserves and Segmentation in the Federal Funds Market |
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Summary /
Abstract
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To combat the financial crisis that intensified in the fall of 2008, the Federal Reserve injected a substantial amount of liquidity into the banking system. The resulting increase in reserve balances exerted downward price pressure in the federal funds market, and the effective federal funds rate began to deviate from the target rate set by the Federal Open Market Committee. In response, the Federal Reserve revised its operational framework for implementing monetary policy and began to pay interest on reserve balances in an attempt to provide a floor for the federal funds rate. Nevertheless, following the policy change, the effective federal funds rate remained below not only the target but also the rate paid on reserve balances. We develop a model to explain this phenomenon and use data from the federal funds market to evaluate it empirically. In turn, we show how successful the Federal Reserve may be in raising the federal funds rate even in an environment with substantial reserve balances.
Source: NY Fed Staff Report no. 416 December 2009 |
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Keywords
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federal funds, segmentation, interest on reserves, corridor system, exit strategy |
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Record ID
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40
[ Page 68 of 68, No. 5 ]
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Date
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2009 |
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Author
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David Parsley and Helen Popper
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Affiliation
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Vanderbilt University and Santa Clara University |
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Title
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Evaluating Exchange Rate Management An Application to Korea |
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Summary /
Abstract
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This paper uses data-rich estimation techniques to study monetary policy in an open economy. We apply the techniques to a small, forward-looking model and explore the importance of the exchange rate in the monetary policy rule. This approach allows us to discern whether a monetary authority targets the exchange rate per se, or instead simply responds to the exchange rate in order to achieve its other objectives. The approach also removes a downward bias on the estimate of the extent of inflation targeting. We find that this bias is important in the case of Korea, a de jure inflation targeter. In contrast to previous studies, our findings suggest that the Bank of Korea actively targets inflation, not the exchange rate. Apparently, the exchange rate has been only indirectly important in Korea's monetary policy.
Source: HKIMR Working Paper No.28/2009 |
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URL
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http://www.hkimr.org/view_attachment.asp?type=23&id=223
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Remarks
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This is a useful empirical study on the role of the exchange rate in the monetary policy rule of an IT country. I venture to guess that the authors' conclusion that BoK targets inflation and not the exchange rate is equally applicable to the BSP; of course, this can be tested with Philippine data using the same forward-looking model and estimation techniques of this paper. |
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Record ID
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34
[ Page 68 of 68, No. 6 ]
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Date
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2006-08 |
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Author
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V. V. Chari and Patrick J. Kehoe
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Affiliation
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University of Minnesota and Federal Reserve Bank of Minneapolis |
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Title
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Modern Macroeconomics in Practice: How Theory Is Shaping Policy |
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Summary /
Abstract
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Theoretical advances in macroeconomics made in the last three decades have had a major influence on macroeconomic policy analysis. Moreover, over the last several decades, the United States and other countries have undertaken a variety of policy changes that are precisely what macroeconomic theory of the last 30 years suggests. The three key developments that have shaped macroeconomic policy analysis are the Lucas critique of policy evaluation due to Robert Lucas, the time inconsistency critique of discretionary policy due to Finn Kydland and Edward Prescott, and the development of quantitative dynamic stochastic general equilibrium models following Finn Kydland and Edward Prescott.
Source: Federal Reserve Bank of Minneapolis, Research Department Staff Report 376 |
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URL
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http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=1093
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Remarks
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This is another useful survey of theoretical developments in the last 30 years that have shaped macroeconomic and central banking policies, written by Chari and Kehoe of the University of Minnesota and the Fed Res Bank of Minneapolis. |
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