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on Central Banking |
| By: | Manmohan Singh; Haobin Wang |
| Abstract: | We develop a theoretical model that shows that in the near future, the monetary policies of some key central banks in advanced economies (AEs) will have two dimensions—changes in short-term policy rates and balance sheet adjustments. This will affect emerging market economies (EMs), especially those with a pegged exchange rate, as these EMs primarily use a single monetary policy tool, i.e., the short-term policy rate. We show that changes in policy rates and balance sheet adjustments in AEs may differ in their respective financial spillovers to pegged EMs. Thus, it will be difficult for EMs to mitigate different types of spillovers with a single monetary policy tool. In that context, we use the model to show how EMs might use additional tools—capital controls and/or macro-prudential policy—to complement their monetary policy and financial stability toolkit. We also discuss how balance sheet adjustments that affect long-term interest rates may percolate to influence short-term interest rates via financial plumbing. |
| Date: | 2017–07–25 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:17/172&r=cba |
| By: | Willem THORBECKE |
| Abstract: | In 2008, U.S. demand collapsed and triggered deflation. The U.S. Federal Reserve (Fed) employed large-scale asset purchases (LSAP) to fight deflation. How did news of LSAP affect inflationary expectations? If investors believed that LSAP would raise inflation, they would sell assets exposed to inflation and purchase inflation hedges. This would lower the prices of assets that are exposed to inflation and raise the prices of assets that benefit from inflation. Examining the relationship between asset price changes and inflation sensitivities can thus shed light on how financial markets process LSAP news. The results indicate that initially LSAP announcements lowered expected inflation. Only as inflation approached its target did news of LSAP raise expected inflation. |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:17097&r=cba |
| By: | Davide Debortoli; Jinill Kim; Jesper Lindé; Ricardo C Nunes |
| Abstract: | Yes, it makes a lot of sense. This paper studies how to design simple loss functions for central banks, as parsimonious approximations to social welfare. We show, both analytically and quantitatively, that simple loss functions should feature a high weight on measures of economic activity, sometimes even larger than the weight on inflation. Two main factors drive our result. First, stabilizing economic activity also stabilizes other welfare relevant variables. Second, the estimated model features mitigated inflation distortions due to a low elasticity of substitution between monopolistic goods and a low interest rate sensitivity of demand. The result holds up in the presence of measurement errors, with large shocks that generate a trade-off between stabilizing inflation and resource utilization, and also when ensuring a low probability of hitting the zero lower bound on interest rates. |
| Keywords: | Central banks and their policies;Central banks' objectives, simple loss function, monetary policy design, sticky prices and sticky wages, DSGE models, Central banks’ objectives, Time-Series Models |
| Date: | 2017–07–19 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:17/164&r=cba |
| By: | Elena Gerko; Hélène Rey |
| Abstract: | The importance of financial markets and international capital flows have increased greatly since the 1990s. How does this affect the effectiveness of monetary policy? We analyse the transmission of monetary policy in two important financial centres, the United States and the United Kingdom. Studying the responses of mortgage and corporate spreads we find evidence in favour of an important financial channel in both countries. Our identification strategy allows us to study movements in the policy rates and the effect of forward guidance, broadly defined. We also analyse international financial spillovers, which we find to be asymmetric. |
| JEL: | E4 E52 E58 F41 G15 |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23651&r=cba |
| By: | Heedon Kang; Francis Vitek; Rina Bhattacharya; Phakawa Jeasakul; Sònia Muñoz; Naixi Wang; Rasool Zandvakil |
| Abstract: | This paper analyzes cross-border macrofinancial spillovers from a variety of macroprudential policy measures, using a range of quantitative methods. Event study and panel regression analyses find that liquidity and sectoral macroprudential policy measures often affect cross-border bank credit, whereas capital measures do not. This empirical evidence is stronger for tightening than for loosening measures, is distributed across credit leakage and reallocation effects, and is generally regionally concentrated. Consistently, structural model based simulation analysis indicates that output and bank credit spillovers from sectoral macroprudential policy shocks are generally small worldwide, but are regionally concentrated and economically significant for countries connected by strong trade or financial linkages. This simulation analysis also indicates that countercyclical capital buffer adjustments have the potential to generate sizeable regional spillovers. |
| Date: | 2017–07–24 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:17/170&r=cba |
| By: | Giovanni Melina; Stefania Villa |
| Abstract: | Using an estimated dynamic stochastic general equilibrium model with banking, this paper first provides evidence that monetary policy reacted to bank loan growth in the US during the Great Moderation. It then shows that the optimized simple interest-rate rule features no response to the growth of bank credit. However, the welfare loss associated to the empirical responsiveness is small. The sources of business cycle fluctuations are crucial in determining whether a “leaning-against-the-wind” policy is optimal or not. In fact, the predominant role of supply shocks in the model gives rise to a trade-off between inflation and financial stabilization. |
| Date: | 2017–07–31 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:17/179&r=cba |
| By: | François Gourio; Anil K Kashyap; Jae Sim |
| Abstract: | Credit booms sometimes lead to financial crises which are accompanied with severe and persistent economic slumps. Does this imply that monetary policy should “lean against the wind” and counteract excess credit growth, even at the cost of higher output and inflation volatility? We study this issue quantitatively in a standard small New Keynesian dynamic stochastic general equilibrium model which includes a risk of financial crisis that depends on “excess credit”. We compare monetary policy rules that respond to the output gap with rules that respond to excess credit. We find that leaning against the wind may be attractive, depending on several factors, including (1) the severity of financial crises; (2) the sensitivity of crisis probability to excess credit; (3) the volatility of excess credit; (4) the level of risk aversion. |
| JEL: | E52 E58 G28 |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23658&r=cba |
| By: | Andrey G. Shulgin (National Research University Higher School of Economics) |
| Abstract: | This paper constructs a theoretical general equilibrium model for exchange rate determination in a small open commodity exporting economy based on an imperfect capital market a la Gabaix-Maggiori and appropriate for estimation on high frequency data and could be used for the evaluation of sterilized intervention effectiveness. To find empirical confirmation of the theoretical setup validity I use Russian daily statistics to estimate the model and investigate the reaction of the Russian ruble-US dollar exchange rate to sterilized interventions in the form of foreign currency repo auctions conducted by the Bank of Russia in the period of 2014-2017. I also estimate a vector error correction model on the same dataset and use it as important empirical benchmark for the theoretical model. The empirical analysis revealed a temporary statistically significant effect of sterilized intervention on exchange rate level, which peaked eight working days after the auction day. The combination of theoretical and empirical approaches demonstrates the effectiveness of the portfolio and the ineffectiveness of signalling channels in the transmission mechanism of the sterilized intervention instrument in Russian case |
| Keywords: | sterilized interventions; intervention effectiveness; repo auctions; commodity export; imperfect capital market; Russia. |
| JEL: | E58 F32 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:hig:wpaper:170/ec/2017&r=cba |
| By: | Emilio Ocampo |
| Abstract: | This paper seeks to identify what worked and what didn’t work to stop inflation in Argentina in the last seventy years. The approach is descriptive rather than theoretical and examines the relative performance of the only ten stabilization plans that, during the period 1952-2015, lasted at least 24 months. The paper also compares the performance of these plans along other dimensions, such as economic growth, unemployment and income distribution and evaluates the impact of international economic conditions. The analysis sheds light on the debates shock vs. gradualism and orthodox vs. heterodox and puts the current stabilization plan in a historical context. |
| Keywords: | Argentina, economic policy, inflation, stabilization plans, shock, gradualism, orthodoxy, heterodoxy. |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:cem:doctra:613&r=cba |
| By: | Darryl King; Luis Brandao-Marques; Kelly Eckhold; Peter Lindner; Diarmuid Murphy |
| Abstract: | This paper considers the central bank mandate with respect to financial stability and identifies the links to the functioning of securities markets. It argues that while emergency support to securities markets is an important part of the crisis management response, a high bar should be set for its use. Importantly, it should be used only as part of a comprehensive policy package. The paper considers what types of securities markets may be important for financial stability, what market conditions could trigger emergency support measures, and how programs can be designed to restore market functioning while minimizing moral hazard. |
| Keywords: | Liquidity;Central banks and their policies;Lender-of-last resort, market maker of last resort, fire sales, and financial stability, financial stability, Government Policy and Regulation |
| Date: | 2017–07–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:17/152&r=cba |
| By: | Mohammad Bitar; Sami Ben Naceur; Rym Ayadi; Thomas Walker |
| Abstract: | The paper provides robust evidence that compliance with Basel Core Principles (BCPs) has a strong positive effect on the Z-score of conventional banks, albeit less pronounced on the Zscore of Islamic banks. Using a sample of banks operating in 19 developing countries, the results appear to be driven by capital ratios, a component of Z-score for the two types of banks. Even though smaller on Islamic banks, individual chapters of BCPs also suggest a positive effect on the stability of conventional banks. The findings support the effective role of BCP standards in improving bank stability, whose important implications led to the Islamic Financial Services Board (IFSB) publication of new recommendations in 2015 to bring BCP standards in line with the Core Principles for Islamic Finance Regulation (CPIFRs) standards. Our findings suggest that because Islamic banks are benchmarked closely to BCPs, the implementation of CPFIRs should also positively affect their stability. |
| Date: | 2017–07–18 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:17/161&r=cba |