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on Central Banking |
| By: | John Keating (Department of Economics, The University of Kansas); Lee Smith (Department of Economics, The University of Kansas) |
| Abstract: | This paper analyzes optimal monetary policy in a standard New-Keynesian model augmented with a financial sector. The banks in the model are subject to shocks which impede their ability and willingness to produce financial assets. We show these financial market supply shocks decrease both the natural rates of output and interest. The implication is that an optimizing central bank with real time data on only inflation, output, interest rate spreads and monetary aggregates will respond positively to the growth rate of monetary aggregates which signal movement in the natural rate from these financial shocks. This simple rule is implementable by central banks as it makes the policy instrument a function of only observables and does not require precise knowledge of the model or the parameters. The key is the use of the Divisia monetary aggregate which provides a parameter- and estimation- free approximation to the the true monetary aggregate. We show policy rules reacting to the Divisia monetary aggregate have well-behaved determinacy properties - satisfying a novel Taylor principle for monetary aggregates. Finally, we conclude with a minimax robust policy prescription given the uncertainty surrounding parameters driving the financial and other structural shocks. |
| Keywords: | Monetary Aggregates, Optimal Monetary Policy, Taylor Rules, Financial Sector |
| JEL: | C43 E32 E41 E44 E51 E52 E58 E60 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:kan:wpaper:201307&r=cba |
| By: | Wataru Tamura (The University of Tokyo) |
| Abstract: | This paper examines optimal monetary policy and central bank transparency in an economy where firms set prices under informational frictions. The economy modeled in this paper is subject to two types of shocks that determine the efficient level of output and firms’ desired mark-ups. To minimize the welfare-reducing output gap and price dispersion among firms, the central bank controls firms’ incentives and expectations by using a monetary instrument and by disclosing information on the fundamentals. This paper shows that the optimal policy comprises the partial disclosure of information and the adjustment of the monetary instrument contingent on the disclosed information. Under this optimal policy, public information is formed by the weighted difference of the two shocks in order to induce a negative correlation between their conditional expectations, while monetary policy should offset the detrimental effect of such a disclosure policy on price stabilization. |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:cfi:fseres:cf329&r=cba |
| By: | Linda S. Goldberg |
| Abstract: | International financial linkages, particularly through global bank flows, generate important questions about the consequences for economic and financial stability, including the ability of countries to conduct autonomous monetary policy. I address the monetary autonomy issue in the context of the international policy trilemma: Countries seek three typically desirable but jointly unattainable objectives—stable exchange rates, free international capital mobility, and monetary policy autonomy oriented toward, and effective at, achieving domestic goals. I argue that global banking entails some features that are distinct from the broad issues of capital market openness captured in existing studies. In principle, if global banks with affiliates in foreign markets can reduce frictions in international capital flows, then the macroeconomic policy trilemma could bind tighter and interest rates will exhibit more co-movement across countries. However, if the information content and stickiness of the claims and services provided are enhanced relative to a benchmark alternative, then global banks can weaken the trilemma rather than enhance it. The result is a prediction of heterogeneous effects on monetary autonomy, tied to the business models of the global banks and whether countries are investment or funding locations for those banks. Empirical tests of the trilemma support this view that global bank effects are heterogeneous and that the primary drivers of monetary autonomy are exchange rate regimes. |
| Keywords: | Monetary policy ; International economic integration ; Foreign exchange rates ; Capital movements ; Banks and banking, International ; Flow of funds |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:640&r=cba |
| By: | Richard Dennis |
| Abstract: | This paper studies the behavior of a central bank that seeks to conduct policy optimally while having imperfect credibility and harboring doubts about its model. Taking the Smets-Wouters model as the central bank’s approximating model, the paper’s main findings are as follows. First, a central bank’s credibility can have large consequences for how policy responds to shocks. Second, central banks that have low credibility can benefit from a desire for robustness because this desire motivates the central bank to follow through on policy announcements that would otherwise not be time-consistent. Third, even relatively small departures from perfect credibility can produce important declines in policy performance. Finally, as a technical contribution, the paper develops a numerical procedure to solve the decision-problem facing an imperfectly credible policymaker that seeks robustness. |
| Keywords: | Imperfect Credibility, Robust Policymaking, Time-consistency |
| JEL: | E58 E61 C63 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2013-68&r=cba |
| By: | Ragna Alstadheim (Norges Bank (Central Bank of Norway)); Hilde C. Bjørnland (BI Norwegian Business School and Norges Bank (Central Bank of Norway)); Junior Maih (Norges Bank (Central Bank of Norway)) |
| Abstract: | Do central banks respond to exchange rate movements? According to Lubik and Schorfheide (2007) who estimate structural general equilibrium models with monetary policy rules, the answer is "Yes, some do". However, their analysis is based on a sample with multiple regime changes, which may bias the results. We revisit their original question using a Markov switching set up which explicitly allows for parameter changes. Fitting the data from four small open economies to the model, we find that the size of policy responses, and the volatility of structural shocks, have not stayed constant during the sample period (1982-2011). In particular, central banks in Sweden and the UK switched from a high response to the exchange rate in the 1980s and early 1990s, to a low response some time after inflation targeting was implemented. Canada also observed a regime change, but the decline in the exchange rate response was small relative to the increase in the response to inflation and output. Norway, on the other hand, did not observe a shift in the policy response over time, as the central bank has stayed in a regime of high exchange rate response prior and post implementing inflation targeting. |
| Keywords: | Monetary policy, Exchange rates, Inflation targeting, Markov switching, Small open economy |
| JEL: | C68 E52 F41 |
| Date: | 2013–10–10 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2013_24&r=cba |
| By: | Judit Krekó (Magyar Nemzeti Bank (central bank of Hungary)); Csaba Balogh (Magyar Nemzeti Bank (central bank of Hungary)); Kristóf Lehmann (Magyar Nemzeti Bank (central bank of Hungary)); Róbert Mátrai (Magyar Nemzeti Bank (central bank of Hungary)); György Pulai (Magyar Nemzeti Bank (central bank of Hungary)); Balázs Vonnák (Magyar Nemzeti Bank (central bank of Hungary)) |
| Abstract: | This paper provides an overview of the impact of unconventional central bank instruments, the relevant international experiences and the room for application in Hungary. The use of unconventional instruments may be justified by the existence of financial market friction, turmoil, failure or constraint, when instruments that change the size and/or composition of central bank balance sheets may be more efficient in achieving monetary policy objectives than traditional interest rate policy. Empirical analyses found the unconventional instruments applied in developed countries successful in easing market tensions, increasing market liquidity and reducing yields. Although they proved to be unsuccessful in providing a boost to economic growth, they were able to mitigate the fall in lending and output. Vulnerable emerging countries with a lower credit rating and high external debt have much less room for manoeuvre to apply non-conventional instruments. Even liquidity providing instruments, which are otherwise considered the least risky, may result in exchange rate depreciation and flight of capital during a crisis. The interventions that involve risk taking by the government may add to market concerns about fiscal sustainability. Due to Hungary’s vulnerability, high country risk premium and large foreign exchange exposure, most of the instruments applied in other countries would entail financial stability risks at home. In theory, the sharp reduction in the supply of bank credit could provide sound justification for the use of unconventional central bank instruments in Hungary. It should be noted, however, that insufficient credit supply is mainly attributable to a lack of willingness by banks to lend, which can be less influenced by the Bank, rather than to any lack of capacity to lend. In addition to banks’ high risk aversion, uncertain macroeconomic environment and economic policy measures affecting the banking sector also decreased willingness to lend, which is beyond the authority of the central bank. Therefore, these instruments at most may have a role in preventing a possible future deterioration in banks’ lending capacity from becoming an obstacle to lending in a turbulent period. |
| Keywords: | monetary policy, unconventional tools, financial intermediation |
| JEL: | E44 E52 E58 E61 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:opaper:2013/100&r=cba |
| By: | Bacchetta, P.; Benhima, K.; Kalantzis, Y. |
| Abstract: | In this paper, we consider an alternative perspective to China's exchange rate policy. We study a semi-open economy where the private sector has no access to international capital markets but the central bank has full access. Moreover, we assume limited financial development generating a large demand for saving instruments by the private sector. We analyze the optimal exchange rate policy by modeling the central bank as a Ramsey planner. Our main result is that in a growth acceleration episode it is optimal to have an initial real depreciation of the currency combined with an accumulation of reserves, which is consistent with the Chinese experience. This depreciation is followed by an appreciation in the long run. We also show that the optimal exchange rate path is close to the one that would result in an economy with full capital mobility and no central bank intervention. |
| Keywords: | China, exchange rate policy and international reserves. |
| JEL: | E58 F31 F41 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:452&r=cba |
| By: | Lucia Esposito (Bank of Italy); Andrea Nobili (Bank of Italy); Tiziano Ropele (Bank of Italy) |
| Abstract: | Changes in interest rates constitute a major source of risk for banks’ business activity and can diversely affect their financial conditions and performance. We use a unique dataset to analyse Italian banks’ exposure to interest rate risk during the crisis, relying on the standardized duration gap approach proposed by the Basel Committee. We provide evidence that banks managed their overall interest rate risk exposure by means of on-balance-sheet restructuring complemented by hedging with financial derivatives. But the complementary relationship between risk-management decisions differs significantly across banks. The different impact of a future increase in interest rates on banks’ economic value will be a matter of concern for policymakers when they return to a less accommodative monetary policy stance. |
| Keywords: | interest rate risk, derivatives, hedging, financial crisis |
| JEL: | E43 G21 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_933_13&r=cba |
| By: | Antoine Martin; James McAndrews; Ali Palida; David Skeie |
| Abstract: | Monetary policy measures taken by the Federal Reserve as a response to the 2007-09 financial crisis and subsequent economic conditions led to a large increase in the level of outstanding reserves. The Federal Open Market Committee (FOMC) has a range of tools to control short-term market rates in this situation. We study several of these tools, namely, interest on excess reserves (IOER), reverse repurchase agreements (RRPs), and the term deposit facility (TDF). We find that overnight RRPs (ON RRPs) may provide a better floor on rates than term RRPs because they are available to absorb daily liquidity shocks. Whether the TDF or RRPs best support equilibrium rates depends on the intensity of interbank monitoring costs versus balance sheet costs, respectively, that banks face. In our model, using the RRP and TDF concurrently may most effectively stabilize short-term rates close to the IOER rate when such costs are rapidly increasing. |
| Keywords: | Federal Open Market Committee ; Monetary policy ; Bank reserves ; Bank liquidity ; Interest rates ; Repurchase agreements |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:642&r=cba |
| By: | Marcello Pericoli (Bank of Italy) |
| Abstract: | The no-arbitrage affine Gaussian term structure model is used to analyse the impact of macroeconomic surprises on the nominal and the real term structure in the euro area and in the United States. We find that nominal rates are affected by surprises in economic growth, the labour market and the economic outlook in the United States, and above all by surprises in inflation in the euro area. As far as real rates are concerned, we find that they are not affected by macroeconomic surprises in the United States, but they are by surprises in inflation and monetary policy in the euro area. Inflation expectations in both areas are not systematically influenced by monetary policy surprises. In the United States forward inflation risk premia became sizeable around the start of the financial crisis at the end of the last decade and increased considerably just before the adoption of the first unconventional monetary policy measures in March 2009. By contrast, in the euro area forward inflation risk premia remained unchanged even after the adoption of the unconventional monetary policy measures in October 2008 and May 2010. In both areas long-term inflation expectations have been well anchored over the past years. |
| Keywords: | inflation risk premium, affine term structure, Kalman filter, macroeconomic and monetary surprises |
| JEL: | C02 G10 G12 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_927_13&r=cba |
| By: | Giuseppe Cappelletti (Bank of Italy); Lucia Esposito (Bank of Italy) |
| Abstract: | This paper studies the interaction between monetary and fiscal authorities while investors are coordinating on a speculative attack. The authorities want to achieve specific targets for output and inflation but also to avoid a regime change (i.e. sovereign default). They use the traditional policy instruments. The model examines the informational role of simultaneous implementation of monetary and fiscal policies in coordination environments. While endogenous information generated by the intervention of one policy maker has been shown to lead to multiple equilibria, we show that if the actions chosen by the central bank and the government not only deliver information to the markets but also influence the fundamentals of the economy, when the authorities have a strong incentive to preserve the status quo over other objectives, then there is no equilibrium in which investors' strategies depend monotonically on their private information on fundamentals. |
| Keywords: | global games, complementarities, signaling, self-fulfilling expectations, multiple equilibria, crises, regime change, policy interactions |
| JEL: | C7 D8 E5 E6 F3 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_934_13&r=cba |
| By: | Isabelle SALLE; Marc-Alexandre SENEGAS; Murat YILDIZOGLU |
| Abstract: | This paper revisits the benefits of explicitly announcing an inflation target for the con- duct of monetary policy in the framework of an agent-based model (ABM). This framework offers a flexible tool for modeling heterogeneity among individual agents and their bounded rationality, and to emphasize, on this basis, the role of learning in macroeconomic dynamics. We consider that those three features (heterogeneity, bounded rationality, and learning) are particularly relevant if one desires to question the rationale for the monetary authorities to be transparent about the inflation target, and to achieve credibility. Indeed, the inflation targeting’s potential role in anchoring inflation expectations and stabilizing the inflation and the economy can be analyzed more realistically if we do not assume a representative agent framework based on substantial rationality in behaviors and expectations. Our results show that a dynamic loop between credibility and success can arise, and stabilize inflation, but only in the case of a learning environment that corresponds to a moderate degree in heterogeneity regarding the behavior and decisions of individual agents. In a more general way, we analyze, using this ABM, different assumptions about the nature of the economic volatility, and the degree of disclosure of the target. |
| Keywords: | Monetary Policy, Inflation Targeting, Credibility, Expectations, Agent-Based Model. |
| JEL: | C61 C63 E52 E58 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:grt:wpegrt:2013-24&r=cba |
| By: | Ales Bulir; Jaromir Hurnik; Katerina Smidkova |
| Abstract: | We offer a novel methodology for assessing the quality of inflation reports. In contrast to the existing literature, which mostly evaluates the formal quality of these reports, we evaluate their economic content by comparing inflation factors reported by the central banks with ex-post model-identified factors. Regarding the former, we use verbal analysis and coding of inflation reports to describe inflation factors communicated by central banks in real time. Regarding the latter, we use reduced-form, new ÂKeynesian models and revised data to approximate the true inflation factors. Positive correlations indicate that the reported inflation factors were similar to the true, model-identified ones and hence mark high-quality inflation reports. Although central bank reports on average identify inflation factors correctly, the degree of forward-looking reporting varies across factors, time, and countries. |
| Keywords: | Inflation targeting, Kalman filter, modeling, monetary policy communication. |
| JEL: | E17 E31 E32 E37 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2013/03&r=cba |
| By: | Gilberto Tadeu Lima; Mark Setterfield, Jaylson Jair da Silveira |
| Abstract: | Drawing on an extensive empirical literature that suggests persistent and time-varying heterogeneity in inflation expectations, this paper embeds two inflation forecasting heuristics – one based on the current rate of inflation, the second anchored to the official inflation target – in a simple macrodynamic model. Decision makers switch between these forecasting heuristics based on satisficing evolutionary dynamics. We show that convergence towards an equilibrium consistent with the level of output and rate of inflation targeted by policy makers is achieved regardless of whether or not the satisficing evolutionary dynamics that guide the choices agents make between inflation forecasting strategies are subject to noise. We also show that full credulity – a situation where all agents eventually use the forecasting heuristic based on the target rate of inflation – is neither a necessary condition for realization of the inflation target, nor an inevitable consequence of the economy’s achievement of this target. These results demonstrate that uncertainty in decision making resulting in norm-based inflation expectations that are both heterogeneous and time-varying need not thwart the successful conduct of macroeconomic policy. |
| Keywords: | Inflation targeting; macroeconomic stability; heterogeneous expected inflation; satisficing evolutionary dynamics |
| JEL: | C73 E12 E52 |
| Date: | 2013–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:spa:wpaper:2013wpecon11&r=cba |
| By: | Eric Dor (IESEG School of Management (LEM-CNRS)) |
| Abstract: | This paper computes the total recapitalization needs of the banking sector of each European country in case of a new systemic financial crisis. These estimations are based on the estimated capital shortages of big individual banks published by the Volatility Laboratory of New York University Stern Business School and the Center for Risk Management of Lausanne. |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:ies:wpaper:e201319&r=cba |
| By: | Jordi Galí; Luca Gambetti |
| Abstract: | We estimate the response of stock prices to exogenous monetary policy shocks using vector-autoregressive models with time-varying parameters. Under our baseline identification scheme, the evidence cannot be easily reconciled with conventional views on the effects of interest rate changes on asset price bubbles. |
| Keywords: | leaning against the wind policies, .nancial stability, in.ation targeting, asset price booms. |
| JEL: | E52 G12 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1392&r=cba |
| By: | Massimiliano Affinito (Bank of Italy) |
| Abstract: | This paper tests the hypothesis of liquidity hoarding in the Italian banking system during the 2007-2011 global financial crisis. According to this hypothesis, in periods of crisis, interbank markets stop working and central banks’ interventions are ineffective because banks hoard the liquidity injected rather than channelling it on to other banks and the real economy. The test uses monthly data at banking-group level for all intermediaries operating in Italy between January 1999 and August 2011. This is the first paper to use micro data to analyse the relationship between single banks’ positions vis-à -vis the central bank and the interbank market. The results show that the Italian interbank market functioned well even during the crisis, and, contrary to widespread conjecture, the liquidity injected by the Eurosystem was intermediated among banks and towards the real economy. This finding is robust to the use of several estimation methods and data on the different segments of the money market. |
| Keywords: | liquidity, financial crisis, central bank refinancing, interbank market |
| JEL: | G21 E52 C30 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_928_13&r=cba |
| By: | Kiema, Ilkka (University of Helsinki); Jokivuolle, Esa (Bank of Finland Research) |
| Abstract: | The aim of the Internal Ratings Based Approach (IRBA) of Basel II was that capital suffices for unexpected losses with at least a 99.9% probability. However, because only a fraction of the required regulatory capital (a quarter to a half) had to be loss absorbing capital, the actual solvency probabilities may have been much lower, as the global financial crisis illustrates. Our estimates suggest that under Basel II IRBA the loss-absorbing capital of an average-quality portfolio bank suffices for unexpected losses with a 95%-99% probability. This translates into an expected bank failure rate as high as once in twenty years. Even if the bank's interest income is incorporated into our model, the expected failure rate is still substantial. We show that the expected failure rate increases with loan portfolio riskiness. Our calculations may be viewed as a measure of regulatory "self-delusion" included in Basel II capital requirements. |
| Keywords: | capital requirements; IRBA; Basel II; financial crisis |
| JEL: | G21 G28 |
| Date: | 2013–10–09 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2013_025&r=cba |
| By: | Bulow, Jeremy (Stanford University); Klemperer, Paul (University of Oxford) |
| Abstract: | Today's regulatory rules, especially the easily-manipulated measures of regulatory capital, have led to costly bank failures. We design a robust regulatory system such that (i) bank losses are credibly borne by the private sector (ii) systemically important institutions cannot collapse suddenly; (iii) bank investment is counter-cyclical; and (iv) regulatory actions depend upon market signals (because the simplicity and clarity of such rules prevents gaming by firms, and forbearance by regulators, as well as because of the efficiency role of prices). One key innovation is "ERNs" (equity recourse notes--superficially similar to, but importantly distinct from, "cocos") which gradually "bail in" equity when needed. Importantly, although our system uses market information, it does not rely on markets being "right". |
| JEL: | G10 G21 G28 G32 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:2132&r=cba |
| By: | Olivier Armantier; John Sporn |
| Abstract: | During the Great Recession, the Federal Reserve implemented several novel programs to address adverse conditions in financial markets. Three of these temporary programs relied on an auction mechanism: the Term Auction Facility, the Term Securities Lending Facility, and the disposition of the Maiden Lane II portfolio. These auctions differed from one another in several dimensions: their objectives, rules, and the financial asset being traded. The object of this paper is to document, compare, and provide a rationale for the mechanics of the different auctions implemented by the Federal Reserve during the Great Recession. |
| Keywords: | Financial crises ; Auctions ; Recessions ; Federal Reserve System |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:635&r=cba |
| By: | Otaviano Canuto; Matheus Cavallari |
| Keywords: | Finance and Financial Sector Development - Debt Markets Banks and Banking Reform Private Sector Development - Emerging Markets Finance and Financial Sector Development - Currencies and Exchange Rates Economic Theory and Research Macroeconomics and Economic Growth |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wboper:16116&r=cba |
| By: | Mark Aguiar; Manuel Amador; Emmanuel Farhi; Gita Gopinath |
| Abstract: | We propose a continuous time model of nominal debt and investigate the role of inflation credibility in the potential for self-fulfilling debt crises. Inflation is costly, but reduces the real value of outstanding debt without the full punishment of default. With high inflation credibility, which can be interpreted as joining a monetary union or issuing foreign currency debt, debt is effectively real. By contrast, with low inflation credibility, sovereign debt is nominal and in a debt crisis a government may opt to inflate away a fraction of the debt burden rather than explicitly default. This flexibility potentially reduces the country's exposure to self-fulfilling crises. On the other hand, the government lacks credibility not to inflate in the absence of crisis. This latter channel raises the cost of debt in tranquil periods and makes default more attractive in the event of a crisis, increasing the country's vulnerability. We characterize the interaction of these two forces. We show that there is an intermediate inflation credibility that minimizes the country's exposure to rollover risk. Low inflation credibility brings the worst of both worlds—high inflation in tranquil periods and increased vulnerability to a crisis. |
| JEL: | E31 E4 E62 F34 G15 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19516&r=cba |
| By: | Maria Th. Kasselaki (Bank of Greece); Athanasios O. Tagkalakis (Bank of Greece) |
| Abstract: | This paper studies the links between of financial soundness indicators and financial crisis episodes controlling for several macroeconomic and fiscal variables in 20 OECD. We focus our attention on aggregate capital adequacy, asset quality and bank profitability indicators compiled by the IMF. Our key findings suggest that in times of severe financial crisis regulatory capital to risk weighted assets is increased (by about 0.5-0.6 percentage points –p.p.) to abide by regulatory and supervisory demands, non performing loans (NPL) to total loans increase dramatically (by about 0.5-0.6 p.p.), but loan loss provisions lag behind NPLs (they fall by about 12.3-18.8 p.p.) and profitability deteriorates dramatically (returns on assets (equity) fall by about 0.3-0.4 (5.0-7.0) p.p.). |
| Keywords: | Bank profitability; capital adequacy; asset quality; financial crisis. |
| JEL: | E44 E58 G21 G28 E61 E62 H61 H62 E32 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:158&r=cba |
| By: | Blaise Gnimasoun; Valérie Mignon |
| Abstract: | This paper aims at studying current-account imbalances by paying a particular attention to exchange-rate misalignments. We rely on a nonlinear model linking the persistence of current-account imbalances to the deviation of the exchange rate to its equilibrium value. Estimating a panel smooth transition regression model on a sample of 22 industrialized countries, we show that persistence of current-account imbalances strongly depends on currency misalignments. More specifically, while there is no persistence in cases of currency undervaluation or weak overvaluation, persistence tends to augment for overvaluations higher than 11%. In addition, whereas disequilibria are persistent even for very low overvaluations in the euro area, persistence is observed only for overvaluations higher than 14% for non-eurozone members. |
| Keywords: | current-account imbalances, current-account persistence, exchange-rate misalignments, panel smooth transition regression models |
| JEL: | F32 F31 C33 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2013-31&r=cba |