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on International Finance |
| By: | Anusha Chari; Karlye Dilts Stedman; Kristin J. Forbes |
| Abstract: | Evidence suggests that macroprudential policy has small and insignificant effects on the volume of portfolio flows. We show, however, that these minor effects mask very different relationships across the global financial cycle. A tighter ex-ante macroprudential stance amplifies the impact of global risk shocks on bond and equity flows—increasing outflows by significantly more during risk-off episodes and increasing inflows significantly more during risk on episodes. These amplification effects are more prominent at the “extremes,” especially for extreme risk-off periods, and are larger for regulations that target specific risks (such as currency or housing exposures) than those which strengthen generalized cyclical buffers (such as the CCyB). This paper estimates these relationships using a policy-shocks approach that corrects for reverse causality by combining high-frequency risk measures with weekly data on portfolio investment and a new measure of macroprudential regulations that captures the intensity of policy stances. Overall, the results support a growing body of evidence that macroprudential regulation can reduce the volume and volatility of bank flows but shift risks in ways that aggravate vulnerabilities in other parts of the financial system. |
| Keywords: | Macroprudential regulation |
| JEL: | F32 F34 F38 G15 G23 G28 |
| Date: | 2021–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:93599&r= |
| By: | Ariel Dvoskin Author-Email: ariel.dvoskin@bcra.gov.ar Author-Workplace-Name: Central Bank of Argentina; Sebastián Katz (Central Bank of Argentina) |
| Abstract: | What are the most appropriate policy regimes and mix of instruments in small open economies to deal with capital flows volatility and the influence of the global financial cycle? In this article, we review the recent experience of various emerging economies and the arguments in favor of the use of various conventional and unconventional policy tools and approaches. In particular, we analyze the different reasons that prevent full exchange rate flexibility as a shock absorber, which demands, in many circumstances, the use of alternative tools, sometimes as substitutes but in many other cases as complements of FX flexibility: FX markets interventions, macroprudential regulations and capital flow management measures. Our main contribution is to present the FX transmission channels to the macro/financial performance and the tools currently used by many Central Banks to deal with FX shocks identified by an extensive literature in a systematic and orderly manner. We conclude that the most appropriate policy responses critically depend, not only on the nature and intensity of the shock, but also on the structural conditions and particular circumstances that each economy exhibits at the "starting point". |
| Keywords: | capital flows, capital flow management measures, exchange rate policy, FX markets interventions, macroprudential regulations, small open economies. |
| JEL: | E58 F31 F38 G28 |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:bcr:wpaper:202197&r= |
| By: | Javier Bianchi; Saki Bigio; Charles Engel |
| Abstract: | We develop a theory of exchange rate fluctuations arising from financial institutions’ demand for dollar liquid assets. Financial flows are unpredictable and may leave banks “scrambling for dollars.” Because of settlement frictions in interbank markets, a precautionary demand for dollar reserves emerges and gives rise to an endogenous convenience yield on the dollar. We show that an increase in the dollar funding risk leads to a rise in the convenience yield and an appreciation of the dollar, as banks scramble for dollars. We present empirical evidence on the relationship between exchange rate fluctuations for the G10 currencies and the quantity of dollar liquidity, which is consistent with the theory. |
| Keywords: | Exchange rates; Liquidity premia; Monetary policy |
| JEL: | E44 F31 F41 G20 |
| Date: | 2021–11–05 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:93468&r= |