nep-cba New Economics Papers
on Central Banking
Issue of 2016‒03‒17
25 papers chosen by
Maria Semenova
Higher School of Economics

  1. Economic fundamentals and monetary policy autonomy By Davis, Scott
  2. On the Mechanics of New Keynesian Models By Peter Rupert; Roman Sustek
  3. Identification of Monetary Policy Shocks within a Svar Using Restrictions Consistent with a DSGE Model By Nikolay Arefiev
  4. Global Constraints on Central Banking:The case of Turkey By Ahmet Benlialper; Hasan Comert
  5. Robust monetary policy in a linear model of the polish economy: is the uncertainty in the model responsible for the interest rate smoothing effect? By Mariusz Gorajski
  6. Bringing the Central Bank into the Study of Currency Internationalization: Monetary Policy, Independence, and Internationalization By Hyoung-kyu Chey; Yu Wai Vic Li
  7. Inflation Expectations and a Model-Based Core Inflation Measure in Colombia By Hernando Vargas-Herrera
  8. More on the Changing Imperatives for U.S. Monetary Policy Normalization By Bullard, James B.
  9. Uncertainty-Induced Dynamic Inefficiency and the Optimal Inflation Rate By Jung, Kuk Mo
  10. Monetary Policy, Residential Investment, and Search Frictions: An Empirical and Theoretical Synthesis By Lunsford, Kurt Graden
  11. A monetary policy rule for Russia, or is it rules? By Korhonen, Iikka; Nuutilainen, Riikka
  12. Floating with a Load of FX Debt? By Tatsiana Kliatskova; Uffe Mikkelsen
  13. Monetary Transmission; Are Emerging Market and Low Income Countries Different? By Ales Bulir; Jan Vlcek
  14. The Game of Anchors; Studying the Causes of Currency Crises in Belarus By Alex Miksjuk; Sam Ouliaris; Mikhail Pranovich
  15. Taylor Visits Africa By Carlos Goncalves
  16. Monetary Commitment and the Level of Public Debt By Stefano Gnocchi; Luisa Lambertini
  17. What’s In a Name? That Which We Call Capital Controls By Atish R. Ghosh; Mahvash Qureshi
  18. Monetary Policy in a Developing Country; Loan Applications and Real Effects By Charles Abuka; Ronnie K Alinda; Camelia Minoiu; José-Luis Peydró; Andrea Presbitero
  19. Insider-outsider labor markets, hysteresis and monetary policy By Jordi Galí
  20. Local Versus International Crises, Foreign Subsidiaries and Bank Stability: Evidence from the MENA Region By Tammuz Alraheb; Amine Tarazi
  21. How Was the Quantitative Easing Program of the 1930s Unwound? By Gabriel P. Mathy; Matthew Jaremski
  22. Inflation Dynamics and Monetary Policy in Bolivia By Alejandro D. Guerson
  23. Stitching together the global financial safety net By Denbee, Edd; Jung, Carsten; Paternò, Francesco
  24. Institutional Quality, Cyclicality of Macroeconomic Policies and the Effects of Macroeconomic Shocks: Evidence from Transition Economies By Shaig Adigozalov; Vugar Rahimov
  25. Currency Premia and Global Imbalances By Della Corte, Pasquale; Riddiough, Steven; Sarno, Lucio

  1. By: Davis, Scott (Federal Reserve Bank of Dallas)
    Abstract: During a time of rising world interest rates, the central bank of a small open economy may be motivated to increase its own interest rate to keep from suffering a destabilizing outflow of capital and depreciation in the exchange rate. This is especially true for a small open economy with a current account deficit, which relies on foreign capital inflows to finance this deficit. This paper will investigate the underlying structural characteristics that would lead an economy with a floating exchange rate to adjust their interest rate in line with the foreign interest rate, and thus adopt a de facto exchange rate ”peg”. Using a panel data regression similar to that in Shambaugh (QJE 2004) and most recently in Klein and Shambaugh (AEJ Macro 2015), this paper shows that the method of current account financing has a large effect on whether or not the central bank will opt for exchange rate and capital flow stabilization during a time of rising world interest rates. A current account deficit financed mainly through reserve depletion or the accumulation of private sector debt will cause the central bank to pursue de facto exchange rate stabilization, whereas a current account deficit financed through equity or FDI will not. Quantitatively, reserve depletion of about 7% of GDP will motivate the central bank with a floating currency to adjust its interest rate in line with the foreign interest rate to where it appears that the central bank has an exchange rate peg.
    JEL: E30 E50 F30 F40
    Date: 2016–02–24
  2. By: Peter Rupert (Department of Economics University of California-Santa Barbara (UCSB)); Roman Sustek (School of Economics and Finance Queen Mary; Centre for Macroeconomics (CFM))
    Abstract: We scrutinize the monetary transmission mechanism in New-Keynesian models, focusing on the role of capital, the key ingredient in the transition from the basic framework to DSGE models. The widely held view that monetary policy affects output and inflation in these models through a real interest rate channel is shown to be misguided. A decline in output and inflation is consistent with a decline, increase, or no change in the real interest rate. The expected path of Taylor rule shocks and the New-Keynesian Phillips Curve are key for inflation and output; the real rate largely reflects consumption smoothing.
    Keywords: New-Keynesian models, monetary transmission mechanism, real interest rate channel, capital
    JEL: E30 E40 E50
    Date: 2016–02
  3. By: Nikolay Arefiev (National Research University Higher School of Economics)
    Abstract: I identify and estimate the monetary policy rule and the monetary policy shocks within a structural vector autoregression model for the US economy. I make two contributions to the literature. First, for identi cation I propose to use restrictions consistent with the literature on dynamic stochastic general equilibrium (DSGE) models. Typical DSGE model produces more restrictions than is required for the identi cation, so overidentifying restrictions can be tested against the data. The second contribution is a new method of testing the overidentifying restrictions. This method divides the set of identifying restrictions into subsets, and tests each subset independently of the others. This method does not reject most restrictions produced by the DSGE model. The only rejections provide evidence that the Federal Reserve uses delayed information about the in ation in policy making. The proposed approach to identi cation helps explain and solve the price puzzle problem reported in the previous literature.
    Keywords: graphical identi cation; sparse SVAR; price puzzle.
    JEL: C30 E52
    Date: 2016
  4. By: Ahmet Benlialper (Ipek University); Hasan Comert (Middle East Technical University)
    Abstract: This study aims to evaluate the developments in Turkish monetary policy after 2002 and understand constraints on the effectiveness of The Turkish Central Bank (CBRT). The CBRT has significantly altered its monetary policy in response to the crisis. It became much more experimental and aware of challenges it faced. However, the Bank’s ability to exert influence on key variables seems to have been restrained by factors outside of its control. Financial flows exert great influence on key macroeconomic variables the Bank monitors closely. Furthermore, energy prices are among the key determinants of inflation in Turkey. As a result, the Bank’s influence on growth and inflation through intermediate variables became a daunting task. The magnitude and direction of flows seem to be mainly related to global risk perception determining the worldwide liquidity conditions rather than domestic factors. Under these conditions central banks may not set their official interest rates independent of interest rates in advanced countries. Indeed, our VAR analysis exercise supports this argument for the Turkish case. Existing policy framework would not produce desired outcomes unless the sources of the problems such as financial flows as the main global constraints on monetary policy are addressed in a much more serious manner
    Keywords: central banking, economic and financial crisis, capital inflows, the Turkish economy
    JEL: E52 E52 G01 F31 F32 O53
    Date: 2015–07–01
  5. By: Mariusz Gorajski (Department of Econometrics, Faculty of Economics and Sociology, University of Lodz, Poland)
    Abstract: Estimates of the generalised Taylor rule suggest that monetary policy in Poland can be characterized as having reacted in a moderate fashion to output and inflation gaps and are strongly dependent on the lagged interest rate. Moreover, as for the majority of central banks the short-term rate paths are smooth and only gradual changes can be observed. Optimal monetary policy models in the linear-quadratic framework produce high variability of interest rates, and are hence inconsistent with the data. One can obtain gradual behaviour of optimal monetary policy by adding an interest rate smoothing term to the central bank objective. This heuristic procedure has not much substantiation in the central bank's targets and raises the question: What are the rational reasons for the gradual movements in the monetary policy instrument? In this paper we determine optimal monetary polices in a VAR model of the Polish economy with parameter uncertainty. By incorporating a proper structure of multiplicative uncertainty in the linear-quadratic model of the Polish economy we find a data consistent robust monetary policy rule. Thus proving that parameter uncertainty can be the rationale for "timid" movements in the short-interest rate dynamics. Finally, we show that there is trade-off between parameter uncertainty and the interest rate smoothing incentive.
    Keywords: Optimal Monetary Policy, Parameter Uncertainty, the Brainard conservatism principle, Interest rate smoothing, SVAR model
    JEL: E47 E52
    Date: 2016–01
  6. By: Hyoung-kyu Chey (National Graduate Institute for Policy Studies); Yu Wai Vic Li (Hong Kong Institute of Education)
    Abstract: Despite the central bank's crucial position in the economy, as the issuer of the currency and the body responsible for monetary policy, its preferences regarding currency internationalization and its roles in that process have rarely been analyzed in the literature. This study attempts to fill this critical gap by bringing the central bank into the study of currency internationalization. A conventional understanding of currency internationalization is that it tends to reduce monetary policy autonomy, which implies a natural tendency of the central bank to oppose it. This study shows, however, that currency internationalization does not necessarily reduce the central bank's monetary policy autonomy, and may in fact even strengthen it. It shows that currency internationalization is likely to strengthen the central bank's independence as well. Based on these findings, this study argues that a central bank with weak monetary policy autonomy and low independence is more likely to support the internationalization of its country's currency. These arguments are empirically verified, mainly by in-depth analysis of the case of the People's Bank of China and the renminbi.
    Date: 2016–02
  7. By: Hernando Vargas-Herrera
    Abstract: Inflation expectations in Colombia are characterized. Empirical evidence following conventional tests suggests that they might not be rational, although the period of disinflation included in the sample makes it difficult to ascertain this conclusion. Inflation expectations display close ties with observed past and present headline inflation and are affected by exogenous shocks in a possibly non-linear way. A model-based core inflation measure is computed that addresses the shortcomings of traditional exclusion measures when temporary supply shocks have widespread effects and are persistent.
    Keywords: Inflation expectations, core inflation, supply shocks, monetary policy
    JEL: E31 E37 E52
    Date: 2016–02–26
  8. By: Bullard, James B. (Federal Reserve Bank of St. Louis)
    Abstract: St. Louis Fed President James Bullard spoke about how further declines in inflation expectations and a reduced risk of asset price bubbles likely give the FOMC more leeway in its normalization program.
    Date: 2016–02–24
  9. By: Jung, Kuk Mo
    Abstract: I construct an overlapping-generations model of money with Epstein and Zin (1989) preferences and study how aggregate output uncertainty affects the optimal rate of inflation. When money only serves as savings instruments, I find that the optimality of Friedman Rule breaks up only if agents prefer late resolution of uncertainty. However, if an additional role of money as a medium of exchange is introduced, then the Friedman Rule becomes generally suboptimal regardless of agents' preferences for the timing of uncertainty resolution. The aggregate output uncertainty, nevertheless, crucially determines the level of optimal inflation rate in this case.
    Keywords: money; overlapping generations; recursive preferences; optimal inflation
    JEL: E31 E52 E58
    Date: 2016–02
  10. By: Lunsford, Kurt Graden (Federal Reserve Bank of Cleveland)
    Abstract: Using a factor-augmented vector autoregression (FAVAR), this paper shows that residential investment contributes substantially to GDP following monetary policy shocks. Further, it shows that the number of new housing units built, not changes in the sizes of existing or new housing units, drives residential investment fluctuations. Motivated by these results, this paper develops a dynamic stochastic general equilibrium (DSGE) model where houses are built in discrete units and traded through searching and matching. The search frictions transmit shocks to housing construction, making them central to producing fluctuations in residential investment. The interest rate spread between mortgages and risk-free bonds also transmits monetary policy to the housing market. Following monetary shocks, the DSGE model matches the FAVAR’s positive co-movement between nondurable consumption and residential construction spending. In addition, the FAVAR shows that the mortgage spread falls following an expansionary monetary shock, providing empirical support for the DSGE model’s monetary transmission mechanism.
    Keywords: Factor-augmented vector autoregression; interest rate spread; monetary policy; residential investment; search theory;
    JEL: C32 E30 E40 E50 R31
    Date: 2016–02–12
  11. By: Korhonen, Iikka (BOFIT); Nuutilainen, Riikka (BOFIT)
    Abstract: We estimate several monetary policy rules for Russia for the period 2003–2015. We find that the traditional Taylor rule describes the conduct of monetary policy in Russia reasonably well, whether coefficients are restricted to being the same or allowed to change over the sample period. We find that the Bank of Russia often overshot its inflation target and that extensive overshooting is associated with large depreciations of the ruble, testifying to the importance of the exchange rate in the conduct of monetary policy in Russia.
    Keywords: monetary policy rule; Taylor rule; McCallum rule; Russia; inflation
    JEL: E31 E43 E52 P33
    Date: 2016–02–25
  12. By: Tatsiana Kliatskova; Uffe Mikkelsen
    Abstract: Countries with de jure floating exchange rate regimes are often reluctant to allow their currencies to float freely in practice. One reason why countries may wish to limit exchange rate volatility is potential negative balance sheet effects due to currency mismatches on the balance sheets of firms and households. In this paper, we show in a sample of 15 emerging market economies that countries with large foreign exchange (FX) debt in the non-financial private sector tend to react more strongly to exchange rate changes using both FX interventions and monetary policy. Thus, our results support the idea that an important source of “fear of floating†is balance sheet currency mismatches. This effect is asymmetric; that is, countries stem depreciation but not appreciation pressure. Moreover, FX debt financed through the domestic banking system is more important for fear of floating than FX debt obtained directly from external sources.
    Keywords: Central banks and their policies;Exchange rates;Emerging markets;Monetary policy;Foreign exchange;FX interventions, Balance sheet effects, exchange, exchange rate, currency, debt, International Lending and Debt Problems, All Countries,
    Date: 2015–12–30
  13. By: Ales Bulir; Jan Vlcek
    Abstract: We use two alternative representations of the yield curve to test the functioning of the interest rate transmission mechanism along the yield curve based on government paper in a sample of emerging market and low-income countries. We find a robust link from shortterm policy and interbank rates to longer-term bond yields. Two policy implications emerge. First, the presence of well-developed secondary financial markets does not seem to affect transmission of short term rates along the yield curve. Second, the strength of the transmission mechanism seems to be affected by the choice of the monetary regime: countries with a credible inflation targeting regime seem to have “better behaved†yield curves than those with other monetary regimes.
    Date: 2015–11–20
  14. By: Alex Miksjuk; Sam Ouliaris; Mikhail Pranovich
    Abstract: Belarus experienced a sequence of currency crises during 2009-2014. Our empirical results, based on a structural econometric model, suggest that the activist wage policy and extensive state program lending (SPL) conflicted with the tightly managed exchange rate regime and suppressed monetary policy transmission. This created conditions for the unusually frequent crises. At the current juncture, refocusing monetary policy from exchange rate to inflation would help to avoid disorderly external adjustments. The government should abandon wage targets and phase out SPL to remove the underlying source of the imbalances and ensure lasting stabilization.
    Keywords: Europe;Belarus;Foreign exchange;Fiscal policy;currency crisis, exchange rate policies, currency, exchange rate, monetary policy, currency crises, economy, Time-Series Models, Monetary Policy (Targets, Instruments, and Effects), Open Economy Macroeconomics,
    Date: 2015–12–29
  15. By: Carlos Goncalves
    Abstract: Many low-income countries do not use interest rates as their main monetary policy instrument. In East Africa, for instance, targeting money aggregates has been pretty much the rule rather than the exception. Nevertheless, these targets are seldom met and often readjusted according to the economic environment. This opens up the possibility that central banks are de facto pursuing a strategy more akin to a Taylor Rule. Estimations of small-scale models for Kenya, Uganda and Tanzania suggest that these self-styled "monetary targeters" are respecting the Taylor Principle, that is are on average increasing nominal interest rates more than proportionally to inflation. Nevertheless, steep deviations from the Taylor Rule have taken place in Kenya and Tanzania. In Uganda, these errors are much smaller, in fact similar in size to Taylor Rule deviations found for Brazil. More surprisingly, they are smaller than South Africa’s, the continent’s sole long-term inflation targeter.
    Keywords: Tanzania;Uganda;South Africa;Sub-Saharan Africa;Kenya;Neutral interest rates, central bank, inflation target, monetary policy, interest rates, interest, inflation, central banks, General,
    Date: 2015–12–09
  16. By: Stefano Gnocchi; Luisa Lambertini
    Abstract: We analyze the interaction between committed monetary policy and discretionary fiscal policy in a model with public debt, endogenous government expenditures, distortive taxation and nominal rigidities. Fiscal decisions lack commitment but are Markov-perfect. Monetary commitment to an interest rate path leads to a unique level of debt. This level of debt is positive if the central bank adopts closed-loop strategies that raise the real interest rate when inflation is above target owing to fiscal deviations. More aggressive defence of the inflation target implies lower debt and higher welfare. Simple Taylor-type interest rate rules achieve welfare levels similar to those generated by sophisticated closed-loop strategies.
    Keywords: Credibility; Fiscal policy; Inflation targets; Monetary policy framework
    JEL: E24 E32 E52
    Date: 2016
  17. By: Atish R. Ghosh; Mahvash Qureshi
    Abstract: This paper investigates why controls on capital inflows have a bad name, and evoke such visceral opposition, by tracing how capital controls have been used and perceived, since the late nineteenth century. While advanced countries often employed capital controls to tame speculative inflows during the last century, we conjecture that several factors undermined their subsequent use as prudential tools. First, it appears that inflow controls became inextricably linked with outflow controls. The latter have typically been more pervasive, more stringent, and more linked to autocratic regimes, failed macroeconomic policies, and financial crisis—inflow controls are thus damned by this “guilt by association.†Second, capital account restrictions often tend to be associated with current account restrictions. As countries aspired to achieve greater trade integration, capital controls came to be viewed as incompatible with free trade. Third, as policy activism of the 1970s gave way to the free market ideology of the 1980s and 1990s, the use of capital controls, even on inflows and for prudential purposes, fell into disrepute.
    Keywords: Capital controls;Capital inflows;International financial system;Globalization;Financial crises;Capital flows;capital controls, capital flows, gold standard, interwar period, Bretton Woods
    Date: 2016–02–12
  18. By: Charles Abuka; Ronnie K Alinda; Camelia Minoiu; José-Luis Peydró; Andrea Presbitero
    Abstract: The transmission of monetary policy to credit aggregates and the real economy can be impaired by weaknesses in the contracting environment, shallow financial markets, and a concentrated banking system. We empirically assess the bank lending channel in Uganda during 2010–2014 using a supervisory dataset of loan applications and granted loans. Our analysis focuses on a short period during which the policy rate rose by 1,000 basis points and then came down by 1,200 basis points. We find that an increase in interest rates reduces the supply of bank credit both on the extensive and intensive margins, and there is significant pass-through to retail lending rates. We document a strong bank balance sheet channel, as the lending behavior of banks with high capital and liquidity is different from that of banks with low capital and liquidity. Finally, we show the impact of monetary policy on real activity across districts depends on banking sector conditions. Overall, our results indicate significant real effects of the bank lending channel in developing countries.
    Keywords: Demand for money;Central banks and their policies;Monetary policy transmission, Bank lending channel, Bank balance sheet channel, Developing countries, bank, banks, credit, lending, interest, Financial Markets and the Macroeconomy, Monetary Policy (Targets, Instruments, and Effects), All Countries,
    Date: 2015–12–23
  19. By: Jordi Galí
    Abstract: I develop a version of the New Keynesian model with insider- outsider labor markets and hysteresis that can account for the high persistence of European unemployment. I study the implications of that environment for the design of monetary policy. The optimal policy calls for strong emphasis on unemployment stabilization which a standard interest rate rule fails to deliver, with the gap between the two increasing in the degree of hysteresis. A simple interest rule that includes the unemployment rate is shown to approximate well the optimal policy.
    Keywords: wage stickiness, New Keynesian model, unemployment fluctuations, Phillips curve, monetary policy tradeoffs.
    JEL: E24 E31 E32
    Date: 2016–01
  20. By: Tammuz Alraheb (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société)
    Abstract: We investigate the impact of global and local crises on bank stability and examine the effect of owning bank subsidiaries in other countries. We consider banks from MENA countries which experienced both types of crises during our sample period. Our findings highlight a negative impact of the global financial crisis of 2007-2008 on bank stability but, on the whole, no negative impact of the 'Arab Spring'. A deeper investigation shows that owning subsidiaries outside the home country is a source of increased fragility during normal times, yet a source of higher stability during the 'Arab Spring' but not during the global financial crisis. Moreover, owning foreign subsidiaries in one or two world regions is insufficient to neutralize the 'Arab Spring' crisis, while being present in three or more regions is more stabilizing during the 'Arab Spring' but also more destabilizing during the global financial crisis. Our findings contribute to the literature examining bank stability and have several policy implications. (T. Al Raheb). c Email: (A. Tarazi) 2 Local Versus International Crises, Foreign Subsidiaries and Bank Stability: Evidence from the MENA Region. Abstract We investigate the impact of global and local crises on bank stability and examine the effect of owning bank subsidiaries in other countries. We consider banks from MENA countries which experienced both types of crises during our sample period. Our findings highlight a negative impact of the global financial crisis of 2007-2008 on bank stability but, on the whole, no negative impact of the 'Arab Spring'. A deeper investigation shows that owning subsidiaries outside the home country is a source of increased fragility during normal times, yet a source of higher stability during the 'Arab Spring' but not during the global financial crisis. Moreover, owning foreign subsidiaries in one or two world regions is insufficient to neutralize the 'Arab Spring' crisis, while being present in three or more regions is more stabilizing during the 'Arab Spring' but also more destabilizing during the global financial crisis. Our findings contribute to the literature examining bank stability and have several policy implications.
    Keywords: MENA region,Bank stability,Subsidiaries,Financial crises
    Date: 2016–02–24
  21. By: Gabriel P. Mathy; Matthew Jaremski
    Abstract: Outside of the recent past, excess reserves have only concerned policymakers in one other period: the Great Depression of the 1930s. This historical episode thus provides the only guidance about the Fed's current predicament of how to unwind from the extensive Quantitative Easing program. Excess reserves in the 1930s were never actually unwound through a reduction in the monetary base. Nominal economic growth swelled required reserves while an exogenous reduction in monetary gold inflows due to war embargoes in Europe allowed banks to naturally reduce their excess reserves. Excess reserves fell rapidly in 1941 and would have unwound fully even without the entry of the United States into World War II. As such, policy tightening was at no point necessary and likely was even responsible for the 1937-1938 recession.
    Date: 2016
  22. By: Alejandro D. Guerson
    Abstract: This paper explores inflation dynamics and monetary policy in Bolivia. Bolivia’s monetary policy framework has been effective in stabilizing inflation in recent times. This has been a challenging task given high price volatility of key consumer goods subject to recurrent supply shocks, especially food items. Empirical testing indicates that the monetary policy framework has contributed to the stabilization of inflation, with effective transmission through the bank lending channel, while the defacto dollar peg has also played a role. Looking ahead, the current framework will be tested by the new commodity price normal and a potentially permanent adjustment in relative prices. Against this background, consideration could be given to a more flexible exchange rate policy arrangement, with short term interest rates as the main policy instrument.
    Keywords: Western Hemisphere;Exchange rate flexibility;Bolivia;Inflation;Monetary policy;Exchange rate peg, central bank, exchange rate, interest rates, foreign exchange, General, Bolivia.,
    Date: 2015–12–18
  23. By: Denbee, Edd (Bank of England); Jung, Carsten (Bank of England); Paternò, Francesco (Banca d’Italia)
    Abstract: Financial globalisation and the expansion in global capital flows bring a number of benefits — more efficient allocation of resources, improved risk sharing and more rapid technology transfer. But they can also increase the risk of financial crisis. In recent years, to reduce these risks to stability, countries have reformed financial regulation, enhanced frameworks for central bank liquidity provision and developed new elements, and increased the resources, of the global financial safety net (GFSN). A comprehensive and effective GFSN can help prevent liquidity crises from escalating into solvency crises and local balance of payments crises from turning into systemic sudden stop crises. The traditional GFSN consisted of countries’ own foreign exchange reserves with the IMF acting as a backstop. But since the global financial crisis there have been a number of new arrangements added to the GFSN, in particular the expansion of swap lines between central banks and regional financing arrangements. The new look GFSN is more fragmented than in the past, with multiple types of liquidity insurance and individual countries and regions having access to different size and types of financial safety nets. These new facilities provide many benefits, such as increasing the resources available to some countries and providing additional sources of economic surveillance. However, many facilities have yet to be drawn upon and variable coverage risks leaving some countries with inadequate access. This paper consider the features, costs and benefits of each of the components of the GFSN and whether the overall size and distribution across countries and regions is likely to be sufficient for a plausible set of shocks. We find that the components of the GFSN are not fully substitutable: different elements exhibit different levels of versatility, have been shown to be more or less effective depending upon the circumstances, have different cost profiles and have different implications for the functioning of the international monetary and financial system as a whole. We argue that while swap lines and RFAs can play an important role in the global financial safety net they are not a substitute for having a strong, well resourced, IMF at the centre of it. By running a series of stress scenarios we find that for all but the most severe crisis scenarios, the current resources of the GFSN are likely to be sufficient. However, this finding relies upon the IMF’s overall level of resources (including both permanent and temporary) being maintained at their current level. Our analysis also highlights that the aggregation of global resources can mask vulnerabilities at the country, and even regional, level. In other words, while the current safety net might be big enough in aggregate, there is a risk that, for large enough shocks, gaps in coverage could be revealed. Steps should be taken to ensure the different components of the safety net function effectively together to reduce the risk of gaps appearing. Policymakers should consider measures which (i) reduce vulnerabilities in external balance sheets which leave countries exposed to volatility in cross-border capital flows and increase potential demands on the safety net; (ii) secure the availability of appropriate GFSN resources, including the IMF’s resource base; and (iii) make more efficient use of the current GFSN resources by ensuring the elements of the GFSN more effectively complement one another.
    Keywords: Capital flows; GFSN; cross-border; Financial globalisation
    Date: 2016–02–12
  24. By: Shaig Adigozalov (Central Bank of the Republic of Azerbaijan); Vugar Rahimov (Central Bank of the Republic of Azerbaijan)
    Abstract: In this paper, we study the role of institutional quality in the cyclicality of macroeconomic policies of transition economies. Using annual data over 1996-2013, we find that the quality of institutions play a significant role in their ability to carry out counter-cyclical macroeconomic policy. This paper also analyzes the effects of monetary and fiscal shocks on output. Dividing the countries into two groups, namely CIS and non-CIS, we find that median impulse response of CIS countries’ GDP to monetary shock is negative, while in non-CIS countries this effect is close to zero. However, we find negative effect of fiscal shock on CIS countries’ GDP while the median effect of fiscal shock on GDP is very close to zero in non-CIS countries.
    Keywords: Institutional quality, transition economies, macroeconomic policies, monetary shocks, fiscal shocks.
    Date: 2015–10–01
  25. By: Della Corte, Pasquale; Riddiough, Steven; Sarno, Lucio
    Abstract: We show that a global imbalance risk factor that captures the spread in countries' external imbalances and their propensity to issue external liabilities in foreign currency explains the cross-sectional variation in currency excess returns. The economic intuition is simple: net debtor countries offer a currency risk premium to compensate investors willing to finance negative external imbalances because their currencies depreciate in bad times. This mechanism is consistent with exchange rate theory based on capital flows in imperfect financial markets. We also find that the global imbalance factor is priced in cross sections of other major asset markets.
    Keywords: carry trade; currency risk premium; foreign exchange excess returns; global imbalances
    JEL: F31 F37 G12 G15
    Date: 2016–02

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