nep-mon New Economics Papers
on Monetary Economics
Issue of 2013‒09‒24
28 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. How Monetary Policy is Made: Two Canadian Tales By Matthias Neuenkirch; Pierre Siklos
  2. Collateral and Monetary Policy By Manmohan Singh
  3. Capital Account Policies in Chile Macro-financial considerations along the path to liberalization By Yan Carriere-Swallow; Pablo Garcia-Silva
  4. A Tale of Two Deficits: Public Budget Balance of Reserve Currency Countries By Andreas Steiner
  5. Is Inflation Targeting Operative in an Open Economy Setting? By Esteban Pérez Caldentey; Matías Vernengo
  6. Price Indexation, Habit Formation, and the Generalized Taylor Principle By Saroj Bhattarai; Jae Won Lee; Woong Yong Park
  7. How the Euro Crisis Evolved and How to Avoid Another: EMU, Fiscal Policy and Credit Ratings By Polito, Vito; Wickens, Michael R.
  8. International monetary transmission to the Euro area: Evidence from the U.S., Japan and China By Vespignani, Joaquin L.; Ratti, Ronald A.
  9. The Global Financial Crisis and the Language of Central Banking: Central Bank Guidance in Good Times and in Bad By Pierre L. Siklos
  10. Empirical Evidence on the Long-Run Neutrality Hypothesis Using Divisia Money By Tang, Maggie May-Jean; Puah, Chin-Hong; Awang Marikan, Dayang-Affizzah
  11. The Macroprudential Framework: Policy Responsiveness and Institutional Arrangements By Cheng Hoon Lim; Ivo Krznar; Fabian Lipinsky; Akira Otani; Xiaoyong Wu
  12. Monetary Policy and Hysteresis in Potential Output By Daniel Kienzler; Kai Daniel Schmid
  13. Euro Area Policies: Selected Issues Paper By International Monetary Fund. European Dept.
  14. Monetary Shocks with Observation and Menu Costs By Alvarez, Fernando E; Lippi, Francesco; Paciello, Luigi
  15. Banking and the Macroeconomy in China: A Banking Crisis Deferred? By Le, Vo Phuong Mai; Matthews, Kent; Meenagh, David; Minford, Patrick; Xiao, Zhiguo
  16. Liquidity and Welfare By Yi Wen
  17. Semiparametric Estimates of Monetary Policy Effects: String Theory Revisited By Joshua D. Angrist; Òscar Jordà; Guido Kuersteiner
  18. Unconventional Monetary Policy and Asset Price Risk By Shaun K. Roache; Marina V Rousset
  19. Optimal versus realized bank credit risk and monetary policy By Delis, Manthos; Karavias, Yiannis
  20. Factors Influencing Emerging Market Central Banks’ Decision to Intervene in Foreign Exchange Markets By Matthew S Malloy
  21. Capital Flows in the Euro Area By Lane, Philip R.
  22. Remapping EMU. On the future Construction of Economic and Monetary Union By Stefan Ederer; Stefan Weingärtner
  23. Which Fundamentals Drive Exchange Rates? A Cross-Sectional Perspective By Sarno, Lucio; Schmeling, Maik
  24. Institutional Arrangements for Macroprudential Policy in Asia By Cheng Hoon Lim; Rishi S Ramchand; Hong Wang; Xiaoyong Wu
  25. Towards deeper financial integration in Europe: What the Banking Union can contribute By Buch, Claudia M.; Körner, Tobias; Weigert, Benjamin
  26. Central Bank Screening, Moral Hazard, and the Lender of Last Resort Policy By Mei Li; Frank Milne; Junfen Qiu
  27. Identifying Taylor Rules in Macro-Finance Models By David Backus; Mikhail Chernov; Stanley E. Zin
  28. Getting to Know GIMF: The Simulation Properties of the Global Integrated Monetary and Fiscal Model By Derek Anderson; Ben Hunt; Mika Kortelainen; Michael Kumhof; Douglas Laxton; Dirk Muir; Susanna Mursula; Stephen Snudden

  1. By: Matthias Neuenkirch (University of Aachen); Pierre Siklos (Wilfrid Laurier University)
    Abstract: This paper examines the policy rate recommendations of the Bank of Canada's Governing Council (GC) and the C.D. Howe Institute's Monetary Policy Council (MPC)since 2003. We find, first, that differences in the median recommendations between the MPC and the GC are persistent but small (i.e., 25 bps). The median MPC recommendation is based on a higher steady state real interest rate. However, the response of the MPC and the GC to output and inflation shocks are, for the most part, comparable. Second, we are also able to examine the individual recommendations for the MPC. Estimates of the determinants of consensus inside the MPC or disagreement with the GC yield some useful insights. For example, disagreements are more likely when rates are proposed to rise than at other times. Equally interesting is the finding that the Bank of Canada conditional commitment on the overnightrate in 2009-10 has a relatively larger restricting impact on the MPC's median recommendation than the GC'starget rate.
    Keywords: Bank of Canada, central bank communication, committee behaviour, monetary policy committees,shadow councils, Taylorrules.
    JEL: E43 E52 E58 E61 E69
    Date: 2013
  2. By: Manmohan Singh
    Abstract: Financial lubrication in markets is indifferent to margin posting via money or collateral; the relative price(s) of money and collateral matter. Some central banks are now a major player in the collateral markets. Analogous to a coiled spring, the larger the quantitative easing (QE) efforts, the longer the central banks will impact the collateral market and associated repo rate. This may have monetary policy and financial stability implications since the repo rates map the financial landscape that straddles the bank/nonbank nexus.
    Keywords: Monetary policy;Money markets;Central banks;velocity of collateral; IS/LM; quantitative easing; central banks; repo rate
    Date: 2013–08–28
  3. By: Yan Carriere-Swallow; Pablo Garcia-Silva
    Abstract: This paper recounts Chile’s experience with capital account policies since the 1990s. We present how two external shocks were confronted under very different macroeconomic and capital account frameworks. We show that during the 1997-98 Asian-LTCM-Russia crisis, a closed capital account and relatively rigid exchange rate severely constrained the monetary policy response to the shock, aggravating the fall in domestic demand. During the 2008-09 crisis, a full-fledged inflation targeting framework allowed the authorities to implement a significant countercyclical response. We argue that domestic stability considerations lay behind the policy regime switch toward capital account liberalization from 1999 onwards.
    Keywords: Capital account;Chile;Capital account liberalization;Capital controls;Financial crisis;Monetary policy;Inflation targeting;Global Financial Crisis 2008-2009;capital controls, monetary policy, exchange rate policy, small-open economy, inflation targeting
    Date: 2013–05–14
  4. By: Andreas Steiner (Universitaet Osnabrueck)
    Abstract: Central banks invest their foreign exchange reserves predominantly in government bonds. The global accumulation of reserves therefore affects the equilibrium in the market for government bonds of reserve currency countries. By means of a panel data analysis we examine the relationship between reserve currency status and public budget balance during different constellations of the international monetary system: the sterling period (1890-1935) and the dollar dominance (since World War II). We show for both periods that reserve currency status significantly lowers the fiscal balance. Any additional dollar of reserves lowers the center's balance by 0.7-1.4 dollars. These novel findings show that reserve currency status increases sovereign debt of the center country.
    Keywords: Reserve Currency, Public Balance, International Monetary System
    JEL: F31 F33 F41 H62 E62 C23
    Date: 2013–09–13
  5. By: Esteban Pérez Caldentey; Matías Vernengo
    Abstract: The justification for inflation targeting rests on three core propositions. The first is called ‘lean against the wind’, which refers to fact that the monetary authority contracts (expands) aggregate demand below capacity when the actual rate of inflation is above (below) target. The second is ‘the divine coincidence’, which means that stabilizing the rate of inflation around its target is tantamount to stabilizing output around its full employment level. The third proposition is that of stability. This means that the inflation target is part of an equilibrium configuration which generates convergence following any small disturbance to its initial conditions. These propositions are derived from a closed economy setting which is not representative of the countries that actually have adopted inflation targeting frameworks. Currently there are 27 countries, 9 of which are classified as industrialized and 18 as developing countries that have explicitly implemented a fully fledged inflation targeting regime (FFIT). These countries are open economies and are concerned by the evolution of the external sector and the exchange rate as proven by their interventions in the foreign exchange markets. We show that these three core propositions and the practice of inflation targeting are inoperative in an open economy context.
    Keywords: Inflation Targeting, Open Economies, Exchange Rate
    JEL: E42 E58 F41
    Date: 2013
  6. By: Saroj Bhattarai; Jae Won Lee; Woong Yong Park
    Abstract: We prove that the Generalized Taylor Principle, under which the nominal interest rate reacts more than one-for-one to inflation in the long run, is a necessary and (under some extra mild restrictions on parameters) sufficient condition for determinacy in a sticky price model with positive steady-state inflation, interest rate smoothing in monetary policy, partial dynamic price indexation, and habit formation in consumption.
    Keywords: Determinacy; Generalized Taylor Principle; Sticky prices; Price indexation; Habit formation; Steady-state inflation
    JEL: E31 E52 E58
    Date: 2013–09
  7. By: Polito, Vito; Wickens, Michael R.
    Abstract: This paper argues that the crisis was an outcome of EMU: setting a common monetary policy for countries with different initial inflation rates. The crisis countries were those with high inflation rates which then had negative real interest rates and consequently over-borrowed. Current policy discussions focus on crisis measures: fiscal, banking and political union, not avoiding another crisis. This paper suggests two ways to avoid a future crisis: offset an inappropriate monetary policy using fiscal policy; markets could better price loan rates by taking into account default risk. The paper shows that neither was done prior to the crisis.
    Keywords: credit ratings; EMU; euro crisis; fiscal policy
    JEL: E52 E62 H63 H68
    Date: 2013–06
  8. By: Vespignani, Joaquin L.; Ratti, Ronald A.
    Abstract: There are marked differences in the effect of increases in monetary aggregates ‎in China, Japan ‎and the U.S. on Euro area economic and financial variables over 1999-2012. Increases in ‎monetary aggregates ‎in China are associated with significant increases in the world price of ‎commodities and with increases in Euro area inflation, industrial production and exports. ‎Results are consistent with shocks to China’s M2 facilitating domestic growth with ‎expansionary consequences for the Euro area economy. In contrast, increases in monetary ‎aggregates in Japan are associated with significant appreciation of the Euro and decreases in ‎Euro area industrial production and exports. Production of goods highly competitive with ‎European goods in Japan and expenditure switching in Japan are consistent with the results. ‎U.S. monetary expansion has relatively small effects on the Euro area over this period ‎compared to results reported in the literature for earlier sample periods.‎
    Keywords: International monetary transmission, China’s monetary aggregates, Euro area Commodity prices
    JEL: E52 E58 F31 F42
    Date: 2013–09–10
  9. By: Pierre L. Siklos
    Abstract: Words are critical in how the public perceives the work of central banks and the quality of monetary policy. Press releases that accompany policy rate decisions and, where available, the minutes of central bank committee meetings, are focal points for the media in public discussions about the conduct of monetary policy. Using data from five countries, I examine whether the language used by central banks has changed since the global financial crisis (GFC) began. Briefly, I find that concerns about financial stability peaked just as the global financial crisis reached its zenith. However, concerns over uncertainty about the current and anticipated state of the economy have also risen over time. More generally, central bank speak became more aggressive throughout the crisis years. More conventional expressions about the current stance of monetary policy took a back seat to other concerns in central bank policy statements and minutes.
    Keywords: central bank communication, financial stability, language analysis
    JEL: E52 E58 E61 E69
    Date: 2013–09
  10. By: Tang, Maggie May-Jean; Puah, Chin-Hong; Awang Marikan, Dayang-Affizzah
    Abstract: By employing Fisher and Seater’s (1993) long-run neutrality test, the researchers tested the monetary neutrality proposition in Singapore for the period of 1980-2009. Empirical findings show that monetary neutrality does not hold in Singapore when both the simple-sum money and Divisia money are employed. As both the simple-sum and Divisia monetary aggregates are non-neutral, monetary authorities may consider their use as a monetary policy tool affecting real economic activity.
    Keywords: Monetary Neutrality, Divisia Money, ARIMA Model
    JEL: C12 C43 E50
    Date: 2013
  11. By: Cheng Hoon Lim; Ivo Krznar; Fabian Lipinsky; Akira Otani; Xiaoyong Wu
    Abstract: This paper gauges if, and how, institutional arrangements are correlated with the use of macroprudential policy instruments. Using data from 39 countries, the paper evaluates policy response time in various types of institutional arrangements for macroprudential policy and finds that the macroprudential framework that gives the central bank an important role is associated with more timely use of macroprudential policy instruments. Policymakers may also tend to use macroprudential instruments more quickly if the ability to conduct monetary policy is somehow constrained. This finding points to the importance of coordination between macroprudential and monetary policy.
    Keywords: Macroprudential Policy;Financial stability;Central banks;Monetary policy;Central bank role;macroprudential, institutions, instruments, systemic risk, credit, interest rate.
    Date: 2013–07–17
  12. By: Daniel Kienzler; Kai Daniel Schmid
    Abstract: We show that actively stabilizing economic activity plays a more prominent role in the conduct of monetary policy when potential output is subject to hysteresis. We augment a basic NewKeynesian model by hysteresis in potential output and contrast simulation outcomes of this extended model to the standard model. We find that considering hysteresis allows for a more realistic propagation of macroeconomic shocks and persistent movements in output after monetary shocks. Our central policy implication of active output gap stabilization arises from stability analyses and welfare considerations.
    Keywords: Monetary Policy, Hysteresis, Potential Output, Output Gap Mismeasurement
    JEL: E32 E50 E52
    Date: 2013
  13. By: International Monetary Fund. European Dept.
    Keywords: Monetary policy;Monetary transmission mechanism;Current account;Export performance;Debt reduction;Private sector;Public sector;Economic models;Selected issues;Euro Area;
    Date: 2013–07–25
  14. By: Alvarez, Fernando E; Lippi, Francesco; Paciello, Luigi
    Abstract: We compute the impulse response of output to an aggregate monetary shock in a general equilibrium when firms set prices subject to a costly observation of the state and a menu cost. We study how the aggregate effects of a monetary shock depend on the relative size of these costs. We find that empirically reasonable observations costs increase the impact and the persistence of the output response to monetary shocks compared to models with menu cost only, flattening the shape of the impulse response function. Moreover we show that if the shocks are not large the results are independent of the assumption of whether firms know the realization of the monetary shock on impact.
    Keywords: impulse responses; inattentiveness; monetary shocks; sticky prices
    JEL: E5
    Date: 2013–05
  15. By: Le, Vo Phuong Mai; Matthews, Kent; Meenagh, David; Minford, Patrick; Xiao, Zhiguo
    Abstract: The downturn in the world economy following the global banking crisis has left the Chinese economy relatively unscathed. This paper develops a model of the Chinese economy using a DSGE framework with a banking sector to shed light on this episode. It differs from other applications in the use of indirect inference procedure to test the fitted model. The model finds that the main shocks hitting China in the crisis were international and that domestic banking shocks were unimportant. However, directed bank lending and direct government spending was used to supplement monetary policy to aggressively offset shocks to demand. The model finds that government expenditure feedback reduces the frequency of a business cycle crisis but that any feedback effect on investment creates excess capacity and instability in output.
    Keywords: China; Crises; DSGE model; Financial Frictions; Indirect Inference
    JEL: C1 E3 E44 E52
    Date: 2013–04
  16. By: Yi Wen (Federal Reserve Bank of St. Louis)
    Abstract: This paper develops an analytically tractable Bewley model of money featuring capital and financial intermediation. It is shown that when money is a vital form of liquidity to meet uncertain consumption needs, the welfare costs of inflation can be extremely large. With log utility and parameter values that best match both the aggregate money demand curve suggested by Lucas (2000) and the variance of household consumption, agents in our model are willing to reduce consumption by 7%-10% (or more) to avoid 10% annual inflation. In other words, raising the U.S. inflation target from 2% to 3% amounts to roughly a 0.5 percentage reduction in aggregate consumption. The astonishingly large welfare costs of inflation arise because inflation tightens liquidity constraints by destroying the buffer-stock value of money, thus raising the volatility of consumption at the household level. Such an inflation-induced increase in the idiosyncratic consumption-volatility at the micro level cannot be captured by representative-agent models or the Bailey triangle. Although the development of a credit and banking system can reduce the welfare costs of inflation by alleviating liquidity constraints, with realistic credit limits the cost of moderate inflation still remains several times larger than estimations based on the Bailey triangle. Our finding not only provides a justification for adopting a low inflation target by central banks, but also offers a plausible explanation for the robust positive relationship between inflation and social unrest in developing countries where money is the major form of household financial wealth.
    Date: 2013
  17. By: Joshua D. Angrist; Òscar Jordà; Guido Kuersteiner
    Abstract: We develop a flexible semiparametric time series estimator that is then used to assess the causal effect of monetary policy interventions on macroeconomic aggregates. Our estimator captures the average causal response to discrete policy interventions in a macro-dynamic setting, without the need for assumptions about the process generating macroeconomic outcomes. The proposed procedure, based on propensity score weighting, easily accommodates asymmetric and nonlinear responses. Application of this estimator to the effects of monetary restraint suggest contractionary policy slows real economic activity. By contrast, the Federal Reserve's ability to stimulate real economic activity through monetary expansion appears to be much more limited. Estimates for recent financial crisis years are similar to those for the earlier, pre-crisis period.
    JEL: C32 C54 E52 E58 E65
    Date: 2013–08
  18. By: Shaun K. Roache; Marina V Rousset
    Abstract: We examine the effects of unconventional monetary policy (UMP) events in the United States on asset price risk using risk-neutral density functions estimated from options prices. Based on an event study including a key exchange rate, an equity index, and five commodities, we find that “tail risk†diminishes in the immediate aftermath of UMP events, particularly downside left tail risk. We also find that QE1 and QE3 had stronger effects than QE2. We conclude that UMP events that serve to ease policies can help to bolster market confidence in times of high uncertainty.
    Keywords: Monetary policy;United States;Asset prices;Commodity prices;Central Banks and their Policies; Futures Pricing; Option Pricing; Event Studies
    Date: 2013–08–30
  19. By: Delis, Manthos; Karavias, Yiannis
    Abstract: Standard banking theory suggests that there exists an optimal level of credit risk that yields maximum bank profit. We identify the optimal level of risk-weighted assets that maximizes banks’ returns in the full sample of US banks over the period 1996–2011. We find that this optimal level is cyclical, being higher than the realized credit risk in relatively stable periods with high profit opportunities for banks but quickly decreasing below the realized in periods of turmoil. We place this cyclicality into the nexus between bank risk and monetary policy. We show that a contractionary monetary policy in stable periods, where the optimal credit risk is higher than the realized credit risk, increases the gap between them. An increase in this gap also comes as a result of an expansionary monetary policy in bad economic periods, where the realized risk is higher than the optimal risk.
    Keywords: Banks; Optimal credit risk; Profit maximization; Monetary policy
    JEL: C13 E5 G21
    Date: 2013–09–13
  20. By: Matthew S Malloy
    Abstract: Using panel data for 15 economies from 2001-12, I identify determinants of central bank foreign exchange intervention in emerging markets (“EMsâ€) with flexible to moderately managed exchange rates. Similar to other studies, I find that central banks tend to “lean against the wind,†buying/selling more foreign exchange in response to greater short-run and medium-run appreciation/depreciation pressures. The panel structure provides a framework to test whether other macroeconomic variables influence the different rates of reserve accumulation between economies. In testing other variables, I find evidence of both precautionary and external competitiveness motives for reserve accumulation.
    Keywords: Central banks;Emerging markets;Exchange markets;Intervention;Reserves accumulation;Cross country analysis;Economic models;foreign exchange intervention, international reserves
    Date: 2013–03–15
  21. By: Lane, Philip R.
    Abstract: We investigate the behaviour of gross capital flows and net capital flows for euro area member countries. We highlight the extraordinary boom-bust cycles in both gross flows and net flows since 2003. We also show that the reversal in net capital flows during the crisis has been very costly in terms of macroeconomic and financial outcomes for the high-deficit countries. Finally, we describe the reforms that can improve macro-financial stability across the euro area.
    Keywords: capital flows; euro; imbalances
    JEL: E42 F32 F41
    Date: 2013–05
  22. By: Stefan Ederer; Stefan Weingärtner
    Abstract: The economic crisis has laid open deficiencies in the construction of the European Economic and Monetary Union. At its foundation, it was assumed that monetary integration would reduce the likelihood of asymmetric shocks. The crisis shows, however, that endogenous mechanisms may even amplify existing asymmetries. Without a lender of last resort, a common regulation and supervision of banks, a common fiscal policy and a co-ordinated economic policy the European Monetary Union is incomplete. The European Council and the Commission have proposed reforms for the completion of Economic and Monetary Union. Among these proposals are the implementation of a Banking Union and an integrated economic and fiscal policy. In the long run, national government debt is to be mutualised at the European level. A European fiscal capacity shall be combined with an automatic transfer mechanism between member countries, in order to smooth business cycle differentials. Further proposals are intended to accelerate in future structural reforms by the member countries along the lines of the country-specific recommendations issued by the Commission and the Council. A first step towards creating an integrated Banking Union has been taken by the introduction, albeit in an attenuated version, of a common bank supervision. However, key elements to secure the stability of the euro area are still missing. Measures recently decided under the acute pressure of the crisis ("Six-pack", "Twopack", "Fiscal compact", "Euro-plus Pact") are confined to structural reform and have de-facto suspended the operation of automatic stabilisers in the crisis countries. This severely undermines popular support in debtor and creditor countries alike for Economic and Monetary Union, to the point of jeopardising its existence.
    Date: 2013–09
  23. By: Sarno, Lucio; Schmeling, Maik
    Abstract: Standard present-value models suggest that exchange rates are driven by expected future fundamentals, implying that exchange rates contain information about future fundamentals. We test this key empirical prediction of present-value models in a sample of 35 currency pairs ranging from 1900 to 2009. Employing a variety of tests, we find that exchange rates have strong and significant predictive power for nominal fundamentals (inflation, money balances, nominal GDP), whereas predictability of real fundamentals and risk premia is much weaker and largely confined to the post-Bretton Woods era. Overall, we uncover ample evidence that future macro fundamentals drive current exchange rates.
    Keywords: economic fundamentals; Exchange rates; forecasting; present value model
    JEL: F31 G10
    Date: 2013–05
  24. By: Cheng Hoon Lim; Rishi S Ramchand; Hong Wang; Xiaoyong Wu
    Abstract: This paper surveys institutional arrangements for macroprudential policy in Asia. Central banks in Asia typically have a financial stability mandate, and play a key role in the macroprudential framework. Smaller and more open economies with prudential regulation inside the central bank tend to have institutional arrangements that give the central bank a leading role. In larger and more complex economies where prudential regulation is outside the central bank, the financial stability mandate is usually shared with other agencies and the government tends to play a leading role. Domestic policy coordination is typically performed by a financial stability committee/other coordination body while cross-border cooperation is largely governed by Memoranda of Understanding.
    Keywords: Macroprudential Policy;Asia;Central banks;Financial stability;Central bank role;banking, financial stability, institutional arrangements, macroprudential, regulation
    Date: 2013–07–17
  25. By: Buch, Claudia M.; Körner, Tobias; Weigert, Benjamin
    Abstract: The agreement to establish a Single Supervisory Mechanism in Europe is a major step towards a Banking Union, consisting of centralized powers for the supervision of banks, the restructuring and resolution of distressed banks, and a common deposit insurance system. In this paper, we argue that the Banking Union is a necessary complement to the common currency and the Internal Market for capital. However, due care needs to be taken that steps towards a Banking Union are taken in the right sequence and that liability and control remain at the same level throughout. The following elements are important. First, establishing a Single Supervisory Mechanism under the roof of the ECB and within the framework of the current EU treaties does not ensure a sufficient degree of independence of supervision and monetary policy. Second, a European institution for the restructuring and resolution of banks should be established and equipped with sufficient powers. Third, a fiscal backstop for bank restructuring is needed. The ESM can play a role but additional fiscal burden sharing agreements are needed. Direct recapitalization of banks through the ESM should not be possible until legacy assets on banks' balance sheets have been cleaned up. Fourth, introducing European-wide deposit insurance in the current situation would entail the mutualisation of legacy assets, thus contributing to moral hazard. --
    Keywords: Banking Union,Europe,Single Supervisory Mechanism,Risk Sharing
    JEL: E02 E42 G18
    Date: 2013
  26. By: Mei Li (University of Guelph); Frank Milne (Queen's University); Junfen Qiu (Central University of Finance and Economics)
    Abstract: This paper establishes a theoretical model to examine the LOLR policy when a central bank cannot distinguish between solvent and insolvent banks. We study two cases: a case where the central bank cannot screen insolvent banks and a case where the central bank can only imperfectly screen insolvent banks. The major results that our model produces are as follows: (1) It is impossible for any separating equilibrium to exist because insolvent banks always have an incentive to mimic solvent banks to gamble for resurrection. (2) The pooling equilibria in which, on one hand, all the banks borrow from the central bank and, on the other hand, all the banks do not borrow from the central bank, could exist given certain market beliefs off the equilibrium path. However, neither of the equilibria is socially efficient because insolvent banks will continue to hold their unproductive assets, rather than efficiently liquidating them. (3) When the central bank can screen banks imperfectly, the pooling equilibrium where all the banks borrow from the central bank becomes more likely, and the pooling equilibrium where all the banks do not borrow from the central bank becomes less likely. (4) Higher precision in central bank screening will improve social welfare not only by identifying insolvent banks and forcing them to efficiently liquidate their assets, but also by reducing moral hazard and deterring banks from choosing risky assets in the first place. (5) If a central bank can commit to a specific precision level before the banks choose their assets, rather than conducting a discretionary LOLR policy, it will choose a higher precision level to reduce moral hazard and will attain higher social welfare.
    Keywords: Central Bank Screening, Moral Hazard, Lender of Last Resort
    JEL: D82 G2
    Date: 2013–09
  27. By: David Backus; Mikhail Chernov; Stanley E. Zin
    Abstract: Identification problems arise naturally in forward-looking models when agents observe more than economists. We illustrate the problem in several macro-finance models with Taylor rules. When the shock to the rule is observed by agents but not economists, identification of the rule's parameters requires restrictions on the form of the shock. We show how such restrictions work when we observe the state directly, indirectly, or infer it from observables.
    JEL: E43 E52 G12
    Date: 2013–08
  28. By: Derek Anderson; Ben Hunt; Mika Kortelainen; Michael Kumhof; Douglas Laxton; Dirk Muir; Susanna Mursula; Stephen Snudden
    Abstract: The Global Integrated Monetary and Fiscal model (GIMF) is a multi-region, forward-looking, DSGE model developed by the Economic Modeling Division of the IMF for policy analysis and international economic research. Using a 5-region version of the GIMF, this paper illustrates the model’s macroeconomic properties by presenting its responses under a wide range of experiments, including fiscal, monetary, financial, demand, supply, and international shocks.
    Keywords: Economic models;Monetary policy;Financial sector;External shocks;Fiscal policy;Fiscal consolidation;Government expenditures;Demand;business cycle, fiscal multipliers; fiscal consolidation; fiscal policy; general equilibrium models, interest rates, macroeconomic interdependence, monetary policy, policy effects, simulation.
    Date: 2013–02–27

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