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on Monetary Economics |
| By: | Tamim Bayoumi; Giovanni Dell'Ariccia; Karl Friedrich Habermeier; Tommaso Mancini Griffoli; Fabian Valencia |
| Abstract: | The proposed SDN would take stock of the current debate on the shape that monetary policy should take after the crisis. It revisits the pros and cons of expanding the objectives of monetary policy, the merits of turning unconventional policies into conventional ones, how to make monetary policy frameworks more resilient to the risk of being constrained by the zero-lower bound going forward, and the institutional challenges to preserve central bank independence with regards to monetary policy, while allowing adequate government oversight over central banks’ new responsibilities. It will draw policy conclusions where consensus has been reached, and highlight the areas where more work is needed to get more granular policy advice. |
| Keywords: | Monetary policy;Central banks;Central bank autonomy;Macroprudential Policy;Financial stability;Cross country analysis;Monetary Policy, Financial Stability, Central Bank Independence |
| Date: | 2014–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfsdn:14/3&r=mon |
| By: | Clemens J. M. Kool Author-Name-First Clemens J. M. (Utrecht University); Daniel L. Thornton Author-Name-First Daniel L. (Federal Reserve Bank of St. Louis) |
| Abstract: | This paper investigates the effectiveness of forward guidance for the central banks of four countries: New Zealand, Norway, Sweden, and the United States. We test whether forward guidance improved market participantsÕ ability to forecast future short-term and long-term rates. We find some evidence that forward guidance improved market participantsÕ ability to forecast short-term rates over relatively short forecast horizons in New Zealand, Norway and Sweden, but not so for the United States. Most effects are small, often insignificant, and vary across benchmarks. In addition, forward guidance induces convergence of survey forecasts for New Zealand, but less so for the other countries, in particular the United States. |
| Keywords: | monetary policy, central bank transparency, interest rates, term structure, forecasting. |
| JEL: | E52 E43 E47 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:lui:casmef:1405&r=mon |
| By: | Issing, Otmar |
| Abstract: | In a contribution prepared for the Athens Symposium on 'Banking Union, Monetary Policy and Economic Growth', Otmar Issing describes forward guidance by central banks as the culmination of the idea of guiding expectations by pure communication. In practice, he argues, forward guidance has proved a misguided idea. What is presented as state of the art monetary policy is an example of pretence of knowledge. Forward guidance tries to give the impression of a kind of rule-based monetary policy. De facto, however, it is an overambitious discretionary approach which, to be successful, would need much more (or rather better) information than is currently available. In Issing's view, communication must be clear and honest about the limits of monetary policy in a world of uncertainty. -- |
| Keywords: | central bank communication,monetary policy,forward guidance |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewh:16&r=mon |
| By: | Michael D. Bordo |
| Abstract: | An analogy has been made between the collapse of the Bretton Woods system in 1971 and the recent Eurozone crisis. The build up of TARGET balances in the Eurosystem of Central Banks after 2007 with the GIPS (deficit countries having large liabilities) and Germany (a surplus country) with large claims is seen as similar to the rising and persistent balance of payments deficits and declining gold reserves by the United States as center country of the BWS gold dollar standard in the 1960s. This paper argues that a better Bretton Woods analogy is between the UK which ran persistent balance of payments deficits reflecting low productivity growth and overly expansionary financial policies (an analogy to the GIPS) countries with West Germany which ran persistent balance of payments surpluses reflecting high productivity and conservative financial policies (analogous to Germany today). However Bretton Woods is very different from the Eurozone in many dimensions. An even better analogy than BWS is a comparison of the clearing mechanism in the U.S.—The Gold Settlement account— with the Target payments mechanism for the Eurozone. In the early 1930s massive gold flows from the interior, hard hit by banking panics, to New York City were similar to the payments imbalances within the Eurozone in the recent crisis. The Federal Reserve did little to accommodate the demands for liquidity leading to a collapse of the payments system in March 1933. By contrast the build up of TARGET reflected full accommodation of the liquidity demands of the member states. TARGET represented an institutional innovation that prevented a repeat of the 1930s payments crisis. |
| JEL: | N1 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20270&r=mon |
| By: | Laurence M. Ball |
| Abstract: | Many central banks target an inflation rate near two percent. This essay argues that policymakers would do better to target four percent inflation. A four percent target would ease the constraints on monetary policy arising from the zero bound on interest rates, with the result that economic downturns would be less severe. This benefit would come at minimal cost, because four percent inflation does not harm an economy significantly. |
| Keywords: | Inflation targeting;Inflation rates;Monetary policy;Central banks;Inflation, Monetary Policy, Inflation Target |
| Date: | 2014–06–09 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:14/92&r=mon |
| By: | Manmohan Singh |
| Abstract: | This paper focuses on how changes in financial plumbing of the markets may impact the monetary policy options as central banks contemplate lift off from zero lower bound (ZLB). Under the proposed regulations, banks will face leverage ratio constraints. As a result of quantitative easing (QE), banks want balance sheet “space†for financial intermediation/ non-depository activities. At the same time, regulatory changes are boosting demand for high quality liquid assets. The paper also discusses the role of repo markets and the importance of collateral velocity and the need to avoid wedges between repo and monetary policy rates when leaving ZLB. |
| Keywords: | Central banks;Repurchase agreements;Securities markets;Balance sheets;Reserves;Financial intermediation;United States;Monetary policy;Financial stability;quantitative easing; collateral velocity; Federal Reserve; monetary policy; repo rate |
| Date: | 2014–06–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:14/111&r=mon |
| By: | Natan P. Epstein; Rafael Portillo |
| Abstract: | This paper analyzes the monetary policy framework in Kazakhstan. The authorities have been successful in containing inflation in the context of a managed exchange rate regime. Over the past two years, the central bank has taken steps to enhance its ability to regulate liquidity in the financial system. However, the current policy interest rate does not properly signal the stance of policy, reflected in a weak transmission from the policy rate to money market interest rates. With the use of a stylized model, the paper studies the macro determinants of money market interest rates under the current framework, and illustrates both the benefits and challenges of active interest rate policy. The model shows that limited use of instruments to steer short-term interest rates weakens the framework’s ability to counteract shocks. Finally, the paper explores the implications of varying degrees of exchange rate flexibility for interest rate policy and open market operations. |
| Keywords: | Monetary policy;Kazakhstan;Exchange rate regimes;Interest rates;Money markets;External shocks;Devaluation;Econometric models;Monetary Policy, Interest Rate, Money Market, Exchange Rate. |
| Date: | 2014–06–13 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:14/108&r=mon |
| By: | Andrew Berg; Rafael A Portillo; Luis-Felipe Zanna |
| Abstract: | We study the role of the exchange rate regime, reserve accumulation, and sterilization policies in the macroeconomics of aid surges. Absent sterilization, a peg allows for almost full aid absorption — an increase in the current account deficit net of aid—delivering the same effects as those of a flexible regime but with a necessary increase in inflation. Regardless of the regime, policies that limit absorption—and result in large accumulation of reserves—are welfare reducing: they help reduce the real appreciation (and inflation under the peg), but at the expense of reducing private consumption and investment, and therefore medium-term growth. |
| Keywords: | Exchange rate regimes;Aid flows;Africa;Foreign exchange;Reserves accumulation;Central banks;Monetary policy;Fiscal policy;Economic models;Reserve Accumulation Policies, Sterilization Policies, Transfer Problem., fixed exchange rate, fixed exchange rate regime, flexible exchange rate, flexible exchange rate regime, real exchange rate, exchange rate appreciation, exchange rates, real exchange rate appreciation, fixed exchange rate regimes, nominal exchange rate, flexible exchange rates, flexible exchange rate regimes, exchange sales, exchange rate commitment, foreign exchange sales, exchange rate policies, currency substitution, exchange rate peg, exchange reserves, fixed exchange rates, foreign exchange reserves, exchange rate policy, exchange rate target |
| Date: | 2014–01–30 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:14/18&r=mon |
| By: | Carlo Altavilla (European Central Bank); Domenico Giannone (LUISS University of Rome, EIEF, ECARES and CEPR) |
| Abstract: | We assess the perception of professional forecasters regarding the effectiveness of unconventional monetary policy measures undertaken by the U.S. Federal Reserve after the collapse of Lehman Brothers. Using individual survey data, we analyse the changes in forecasting of bond yields around the announcement and implementation dates of non-standard monetary policies. The results indicate that bond yields are expected to drop significantly for at least one year after the announcement and the implementation of accommodative policies. |
| Keywords: | Survey of Professional Forecasters, Large Scale Asset Purchases, Quantitative Easing, Operation Twist, Forward Guidance, Tapering. |
| JEL: | E58 E65 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:lui:casmef:1406&r=mon |
| By: | Juan Pablo Medina Guzman; Jorge Roldos |
| Abstract: | We study interactions between monetary and macroprudential policies in a model with nominal and financial frictions. The latter derive from a financial sector that provides credit and liquidity services that lead to a financial accelerator-cum-fire-sales amplification mechanism. In response to fluctuations in world interest rates, inflation targeting dominates standard Taylor rules, but leads to increased volatility in credit and asset prices. The use of a countercyclical macroprudential instrument in addition to the policy rate improves welfare and has important implications for the conduct of monetary policy. “Leaning against the wind†or augmenting a standard Taylor rule with an argument on credit growth may not be an effective policy response. |
| Keywords: | Monetary policy;Macroprudential Policy;Capital flows;Business cycles;Financial sector;Economic models;Capital Inflows, Monetary Policy, Macroprudential Policy, Welfare Analysis. |
| Date: | 2014–02–12 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:14/30&r=mon |
| By: | Jean-Bernard Chatelain (Centre d'Economie de la Sorbonne - Paris School of Economics); Kirsten Ralf (ESCE - International Business School) |
| Abstract: | This paper investigates the identification, the determinacy and the stability of ad hoc, "quasi-optimal" and optimal policy rules augmented with financial stability indicators (such as asset prices deviations from their fundamental values) and minimizing the volatility of the policy interest rates, when the central bank precommits to financial stability. Firstly, ad hoc and quasi-optimal rules parameters of financial stability indicators cannot be identified. For those rules, non zero policy rule parameters of financial stability indicators are observationally equivalent to rule parameters set to zero in another rule, so that they are unable to inform monetary policy. Secondly, under controllability conditions, optimal policy rules parameters of financial stability indicators can all be identified, along with a bounded solution stabilizing an unstable economy as in Woodford (2003), with determinacy of the initial conditions of non-predetermined variables. |
| Keywords: | Identification, financial stability, monetary policy, optimal policy under commitment, augmented Taylor rule. |
| JEL: | C61 C62 E43 E44 E47 E52 E58 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:14034&r=mon |
| By: | F. Gulcin Ozkan; D. Filiz Unsal |
| Abstract: | We explore optimal monetary and macroprudential policy rules for a small open economy. Delegating 'lean against the wind' squarely to macroprudential policy provides a more robust policy mix to shock uncertainty—(i) if macroprudential measures exist, there are no significant welfare gains from monetary policy reacting to credit growth under a financial shock; and (ii) monetary responses to financial markets could generate bigger welfare losses than macroprudential responses under different shocks. The source of outstanding liabilities also plays a role in the choice of policy instrument— macroprudential policies are particularly effective for emerging markets where foreign borrowing is sizeable. |
| Keywords: | Macroprudential Policy;Monetary policy;Small open economies;Emerging markets;Entrepreneurship;External borrowing;Financial stability;Econometric models;Financial instability; monetary policy; macroprudential measures; emerging |
| Date: | 2014–06–24 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:14/112&r=mon |
| By: | Bennani, Hamza |
| Abstract: | This paper provides an extension of Morris and Shin's (2002) model (Morris, S., Shin, H. S. (2002). Social value of public information. The American Economic Review, 92(5), 1521-1534.). It considers an "interpretation bias" of the public signal sent by central banks such as the ECB or the FED. It is shown that such a bias is detrimental and should be considered when central banks implement their communication policy. |
| Keywords: | central bank communication, monetary policy, public information. |
| JEL: | C71 C78 E52 E58 |
| Date: | 2014–07–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:57150&r=mon |
| By: | Ewa Stanisławska (Narodowy Bank Polski) |
| Abstract: | The paper employs on individual bank data with aim to analyse interest rate pass-through from money market rates to banks’ deposits and lending rates. In the first step, the speed and completeness of interest rate adjustment is assessed. As the sample covers period prior to and after the outburst of the financial crisis, some comparisons of interest rate transmission process in these periods are made. In the second step, the influence of individual banks characteristics, like size, strength of deposit base, quality of credit portfolio, etc., on the features of interest rate transmission is examined. It seems that t heir impact i s not strong, as they affect rather the speed of adjustment than its scale in the long term. |
| Keywords: | interest rates pass-through, monetary policy transmission mechanism, interest rate channel |
| JEL: | E52 E43 G21 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:179&r=mon |
| By: | Geert Mesters (VU University Amsterdam, the Netherlands); Bernd Schwaab (European Central Bank); Siem Jan Koopman (VU University Amsterdam, the Netherlands) |
| Abstract: | We develop an econometric methodology for the study of the yield curve and its interactions with measures of non-standard monetary policy during possibly turbulent times. The yield curve is modeled by the dynamic Nelson-Siegel model while the monetary policy measurements are modeled as non-Gaussian variables that interact with latent dynamic factors, including the yield factors of level and slope. Yield developments during the financial and sovereign debt crises require the yield curve model to be extended with stochastic volatility and heavy tailed disturbances. We develop a flexible estimation method for the model parameters with a novel implementation of the importance sampling technique. We empirically investigate how the yields in Germany, France, Italy and Spain have been affected by monetary policy measures of the European Central Bank. We model the euro area interbank lending rate EONIA by a log-normal distribution and the bond market purchases within the ECB's Securities Markets Programme by a Poisson distribution. We find evidence that the bond market interventions had a direct and temporary effect on the yield curve lasting up to ten weeks, and find limited evidence that purchases changed the relationship between the EONIA rate and the term structure factors. |
| Keywords: | dynamic Nelson-Siegel models, Central bank asset purchases, non-Gaussian, state space methods, importance sampling, European Central Bank |
| JEL: | C32 C33 E52 E58 |
| Date: | 2014–06–17 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20140071&r=mon |
| By: | Ales Bulir; JaromÃr HurnÃk; 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 Keynesian 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: | Central banks;Inflation targeting;Monetary policy;Transparency;Keynesian economics;Economic models;Inflation targeting, Kalman filter, monetary policy communication. |
| Date: | 2014–05–29 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:14/91&r=mon |
| By: | Rakesh Mohan; Muneesh Kapur |
| Abstract: | The unconventional monetary policies (UMPs) pursued by the advanced economies (AEs) have posed macroeconomic challenges for the emerging market economies (EMEs) through volatile capital flows and exchange rates. AE central banks need to acknowledge and appreciate the spillovers resulting from such UMPs. Central banks of the AEs, who have set up standing mutual swap facilities, should explore similar arrangements with other significant EMEs with appropriate risk mitigation measures. These initiatives could do much to actually curb volatility in global financial markets and hence in capital flows to EMEs, thus obviating the need for defensive policy actions on the part of EMEs. |
| Keywords: | Monetary policy;Spillovers;Developed countries;Emerging markets;Capital flows;Central banks;Central bank role;Capital flows, central banks, coordination, emerging markets, unconventional monetary policy, spillovers |
| Date: | 2014–04–29 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:14/70&r=mon |
| By: | Mariano Kulish (School of Economics, Australian School of Business, the University of New South Wales); James Morley (School of Economics, Australian School of Business, the University of New South Wales); Tim Robinson (School of Economics, Australian School of Business, the University of New South Wales) |
| Abstract: | Motivated by the increasing use of forward guidance, we consider DSGE models in which the central bank holds the policy rate fixed for an extended period of time. Private agents' beliefs about how long the fixed-rate regime will last in uences current output and in ation. We estimate the structural parameters for US data and infer the expected duration of the zero lower bound regime. Our results suggest that the average expected duration is around 3 quarters and has varied significantly since the onset of the zero lower bound regime, with changes that can be related to the Federal Reserve's forward guidance. |
| Keywords: | forward guidance, dsge estimation, zero lower bound, unconventional monetary policy, shadow rate |
| JEL: | C32 E52 E58 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:swe:wpaper:2014-32&r=mon |
| By: | Dániel Felcser (Magyar Nemzeti Bank (the central bank of Hungary)); Balázs Vonnák (Magyar Nemzeti Bank (the central bank of Hungary)) |
| Abstract: | It is well documented in the literature that identified vector autoregression (VAR) models often produce puzzling results when the effect of unexpected monetary policy movements is estimated. Many authors find that raising interest rate generates protracted appreciation of the exchange rate (the so-called delayed overshooting puzzle) which is in contradiction with traditional theory of exchange rate dynamics based on uncovered interest parity. Since the dynamics of exchange rate is determined to a substantial extent by carry traders, we investigate the behaviour of the exchange rate and carry trade activity within the same VAR for a panel of small open economies. We identify structural shocks by allowing the interest rate and exchange rate to react simultaneously to monetary policy and changes in expected risk premium. Our results show that the delayed overshooting is not a robust finding. Exchange rate appreciation and carry trade movements take place almost on impact after an unexpected interest rate hike. Roughly half of the variation in carry trade positions can be explained by domestic interest rate changes and risk premium shocks. |
| Keywords: | delayed overshooting, vector autoregressions, carry trade, monetary policy |
| JEL: | E52 F31 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:wpaper:2014/3&r=mon |
| By: | Roberto Perrelli; Shaun K. Roache |
| Abstract: | Emerging markets have experienced a sizeable decline in their neutral real interest rates until recently. In this paper we try to identify the main factors that contributed to it, with a focus on Brazil. We estimate an interval for Brazil’s time-varying neutral rate based on a range of structural and econometric models. We assess the implications of incorrectly estimating a time-varying neutral rate using a small structural model with a simple monetary policy instrument rule. We find that policy prescriptions are very different when facing uncertainty of neutral rate and of output gap. Our result contrasts sharply with Orphanides (2002), suggesting that the best response to neutral rate uncertainty is to ensure policy remains highly sensitive to inflation and output variations. |
| Keywords: | Interest rates;Brazil;Inflation targeting;Monetary policy;Economic models;Natural rate of interest; small monetary model; inflation targeting regime. |
| Date: | 2014–05–12 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:14/84&r=mon |
| By: | Andrew Swiston; Florencia Frantischek; Przemek Gajdeczka; Alexander Herman |
| Abstract: | This paper examines the financial strength of central banks in Central America and the Dominican Republic (CADR). Some central banks are working off the effects of intervention in distressed financial institutions during the 1990’s and early 2000’s. Their net income has improved since then owing to lower interest rates, a reduction in interest bearing debt, and recapitalization transfers. Claims on the government have fallen, but remain high and are typically reimbursed at below-market rates, and capital is negative when adjusting for this. Capital is sufficient to back a low inflation target given that the income position is supported by unremunerated reserve requirements. Capital is likely to increase over time, but only gradually, leaving countries vulnerable to macroeconomic risks. The capacity of CADR central banks to engage in macroeconomic stabilization would benefit from increased emphasis on low inflation as the primary objective of monetary policy and a stronger commitment by governments to recapitalization. |
| Keywords: | Central banks;Dominican Republic;Central America;Capital;Demand for money;Accounting;Asset management;central bank, central bank financial strength, money demand, recapitalization, Central America, Costa Rica, Dominican Republic, Guatemala, Honduras, Nicaragua |
| Date: | 2014–05–13 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:14/87&r=mon |
| By: | Shaun K. Roache |
| Abstract: | Inflation persistence is sometimes defined as the tendency for price shocks to push the inflation rate away from its steady state—including an inflation target—for a prolonged period. Persistence is important because it affects the output costs of lowering inflation back to the target, often described as the “sacrifice ratioâ€. In this paper I use inflation expectations to provide a comparison of inflation persistence in Brazil with a sample of inflation targeting (IT) countries. This approach suggests that inflation persistence increased in Brazil through early 2013, in contrast to many of its IT peers, mainly due to “upward†persistence. The 2013 rate hiking cycle may have contributed to some recent decline in persistence. |
| Keywords: | Inflation;Brazil;Inflation targeting;Monetary policy;Cross country analysis;Economic models; |
| Date: | 2014–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:14/55&r=mon |
| By: | Olmos, Lorena; Sanso Frago, Marcos |
| Abstract: | Given the unobservable quality of the natural rate of interest, the consequences of central banks using an incorrect value in the monetary policy rule are analyzed in a New Keynesian DSGE model with endogenous growth, financial frictions and trend inflation. Our results confirm the financial structure plays a key role in the determination of the natural rate of interest and show that the mismeasurements affect the long-run growth rate by modifying the actual inflation rate trend, which is different from the target. Finally, we develop a mechanism to monitor the accuracy of the natural rate estimate. |
| Keywords: | natural rate of interest, New Keynesian DSGE models, endogenous growth, �financial frictions, trend inflation |
| JEL: | E43 E44 E58 O40 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:57212&r=mon |
| By: | Wong, Arlene |
| Abstract: | This paper studies the effects of monetary policy on the expenditure of households of different ages using micro data from the U.S. Consumer Expenditure Survey. I find that contractionary monetary policy shocks reduce the expenditure of young households by significantly more than older households. Households react asymmetrically in part because young households tend to have lower savings and higher labor market risk. This implies that the age composition of the population affects the setting of optimal monetary policy in response to aggregate shocks. Counter-factual analysis suggests that the projected population aging in the U.S. will dampen the pass-through of monetary policy to the economy. |
| Keywords: | Monetary policy; expenditure; age structure |
| JEL: | E24 E52 J11 |
| Date: | 2014–07–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:57096&r=mon |
| By: | Atish R. Ghosh; Jonathan David Ostry; Mahvash Saeed Qureshi |
| Abstract: | This paper revisits the bipolar prescription for exchange rate regime choice and asks two questions: are the poles of hard pegs and pure floats still safer than the middle? And where to draw the line between safe floats and risky intermediate regimes? Our findings, based on a sample of 50 EMEs over 1980-2011, show that macroeconomic and financial vulnerabilities are significantly greater under less flexible intermediate regimes—including hard pegs—as compared to floats. While not especially susceptible to banking or currency crises, hard pegs are significantly more prone to growth collapses, suggesting that the security of the hard end of the prescription is largely illusory. Intermediate regimes as a class are the most susceptible to crises, but “managed floatsâ€â€”a subclass within such regimes—behave much more like pure floats, with significantly lower risks and fewer crises. “Managed floating,†however, is a nebulous concept; a characterization of more crisis prone regimes suggests no simple dividing line between safe floats and risky intermediate regimes. |
| Keywords: | Exchange rate regimes;Emerging markets;Currency pegs;Floating exchange rates;Economic models;Time series;crisis, vulnerabilities, real exchange rate, flexible exchange rate, intermediate exchange rate, exchange rate flexibility, intermediate exchange rate regimes, flexible exchange rate regimes, nominal exchange rate, exchange rate overvaluation, real exchange rate overvaluation, flexible exchange rates, exchange rate arrangements, current account balance, overvalued exchange rates, effective exchange rate, exchange rate regime classification, exchange rate guarantee, exchange rate volatility, fixed exchange rates, currency basket, nominal effective exchange rate, real effective exchange rate, history of exchange rate, exchange rate management, alternative exchange rate regimes, currency boards, currency appreciation, exchange rate movements, exchange rate regime classifications, real exchange rate misalignment, real exchange rates, de facto exchange rate regime, exchange reserves, foreign exchange, exchange rate parity, foreign exchange reserves, exchange rate systems |
| Date: | 2014–01–24 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:14/11&r=mon |
| By: | Bahar Öztürk; Mico Mrkaic |
| Abstract: | The monetary transmission mechanism in the euro area has been adversely affected by the recent crises. Using survey data on thousands of euro area firms, we study factors that affect the access to finance of SMEs. We find that changes in bank funding costs and borrower leverage matter for firms’ access to finance. Increases in bank funding costs and borrowers’ debt-to-asset ratios are significantly and negatively associated with firms’ access to finance. The use of subsidies significantly improve access to finance of SMEs. Finally, access to finance is found to be positively related to firm size and firm age. |
| Keywords: | Access to capital markets;Euro Area;Monetary transmission mechanism;Private sector;Credit;Borrowing;Banking sector;Monetary policy;access to finance; micro, small and medium sized enterprises; monetary policy |
| Date: | 2014–05–09 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:14/78&r=mon |
| By: | Philipp Wegmueller |
| Abstract: | I contribute to the resurging debate on the reform of the international monetary system by asking: How does the size of the public sector under different exchange rate regimes affect macroeconomic stability and welfare? In response to a meeting of the Bretton Woods Commission in 1993, renowned economist Anna Schwartz (2000) claimed providently that the increasing size of the public sector impedes the viability of an exchange rate regime with a fixed rule for convertibility. I study her line of reasoning using a new Keynesian small open economy framework. One important feature of the paper is to bridge the literature on the choice of the exchange rate regime with the literature on the effects of government size for macroeconomic stability. The main findings are threefold: First, output is stabilized by the share of the public sector and destabilized by the tax rate, irrespective of the exchange rate regime in place. Second, inflation is destabilized by the level of income taxes under flexible prices but stabilized under sticky prices. Finally, irrespective of the model specification, an exchange rate peg exhibits the largest macroeconomic volatility and highest welfare losses. |
| Keywords: | Exchange Rate Regimes; Government Size; Welfare; Macroeconomic stability |
| JEL: | E32 E52 E63 F33 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:ube:dpvwib:dp1404&r=mon |
| By: | Villarreal, Francisco G. |
| Abstract: | Despite growing interest regarding the distributive impact of macroeconomic policies, the relationship between monetary policy and inequality has received relatively little attention in the literature. This is partly explained by the fact that the workhorse model used for monetary policy analysis summarises the demand-side of the economy by means of a representative agent, whose welfare is the normative criterion of optimal policy. However, alternative formulations using incomplete market models which feature heterogeneous agents, indicate that monetary policy does have an effect on the distribution of income, consumption and wealth, which potentially has implications for the design and conduct of optimal policy. The document empirically investigates the nature of the relationship between monetary policy and household income inequality in Mexico. The ultimate purpose is to uncover certain regularities which characterise the relationship, which can eventually serve as stylised facts for the design of theoretical models. The response of household's income inequality, and its components, to monetary policy shocks indicate that unanticipated increases in the nominal interest rate are correlated with a reduction of household income inequality in the short run, and that the effect dissipates over a two-year horizon. The results are robust to the particular measure of inequality used, as well as the procedure used to identify the policy shocks. |
| Keywords: | Monetary Policy, Income Distribution, Small Open Economy |
| JEL: | C1 D3 E5 |
| Date: | 2014–06–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:57074&r=mon |
| By: | Kyuil Chung; Jong-Eun Lee; Elena Loukoianova; Hail Park; Hyun Song Shin |
| Abstract: | This paper examines how the financial activities of non-financial corporates (NFCs) in international markets potentially affects domestic monetary aggregates and financial conditions. Monetary aggregates reflect, in part, the activities of NFCs, who channel capital market financing into the domestic banking system, thereby influencing funding conditions and credit availability. Periods of capital inflows are also those when the domestic currency is appreciating, and such periods of rapid exchange rate appreciation coincide with increases in the central bank’s foreign exchange reserves, increasing the stock of narrow money. The paper examines economic significance of cross-country panel data on monetary aggregates and other measures of non-core bank liabilities. Non-core liabilities that reflect the activities of NFCs reflect broad credit conditions and predict global trade and growth. |
| Keywords: | Monetary aggregates;Corporate sector;International capital markets;Capital inflows;Liquidity;Exchange rate appreciation;Banking sector;capital flows, debt securities, global capital markets, open capital markets, index options, hedging, securities markets, international capital flows, corporate bonds, capital market financing, corporate bond market, hoarding, subsidiaries, border capital flows, net capital, real effective exchange rate |
| Date: | 2014–01–24 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:14/9&r=mon |
| By: | Tomasz Lyziak (Narodowy Bank Polski) |
| Abstract: | This paper presents survey-based direct measures of inflation expectations of consumers, enterprises and financial sector analysts in Poland. It then goes on to provide the results of testing those features of inflation expectations that seem the most important from the point of view of monetary policy and its transmission mechanism. The study is the revised version of the NBP Working Paper no. 115 [ Lyziak (2012)]. It uses new measures of consumer inflation expectations and covers the updated sample (2001- 2013). Characteristics of inflation expectations in Poland are diversified across the analysed groups of economic agents. Inflation expectations of financial sector analysts and enterprises outperform those of consumers in terms of their accuracy and information content, although consumer inflation expectations are also to some extent forward-looking. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:178&r=mon |
| By: | Prachi Mishra; Kenji Moriyama; Papa M'B. P. N'Diaye; Lam Nguyen |
| Abstract: | This paper analyzes market reactions to the 2013–14 Fed announcements relating to tapering of asset purchases and their relationship to macroeconomic fundamentals and country economic and financial structures. The study uses daily data on exchange rates, government bond yields, and stock prices for 21 emerging markets. It finds evidence of markets differentiating across countries around volatile episodes. Countries with stronger macroeconomic fundamentals, deeper financial markets, and a tighter macroprudential policy stance in the run-up to the tapering announcements experienced smaller currency depreciations and smaller increases in government bond yields. At the same time, there was less differentiation in the behavior of stock prices based on fundamentals. |
| Keywords: | Monetary policy;United States;Unconventional monetary policy instruments;Announcements;Emerging markets;Financial markets;Bond yields;Stock prices;Emerging markets, tapering, Fed policy announcements, vulnerability. |
| Date: | 2014–06–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:14/109&r=mon |
| By: | Wei Liao; Sampawende J.-A. Tapsoba |
| Abstract: | China has been moving to a more market oriented financial system, which has implications for the monetary policy environment. The paper investigates the stability of the money demand function (MDF) in light of progress in financial sector reforms that, for example, have resulted in significant financial innovation (so-called shadow banking) and more liberalized interest rates. The analysis of international experience suggests that rapid development of the financial system often leads to structural shifts in the MDF. For example, financial innovation and liberalization alter the sensitivity of money balances to income and the interest rate. For China, we find that the stable long-run relationship between money demand, output, and interest rates that existed between 2002 and 2008 disappears after 2008. This coincides with the period of rapid financial innovation, especially the growth in off-balance sheet and nonbank financial intermediation. The results suggest that usefulness of M2 as an intermediate monetary target has declined with financial innovation and reform. A result that underscores the importance of moving toward increased reliance on more price-based targets such as interest rates. |
| Keywords: | Monetary policy;China;Interest rates;Demand for money;Financial sector;Banks;Cross country analysis;Financial Liberalization, Financial Innovation, and Money Demand Function |
| Date: | 2014–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:14/75&r=mon |
| By: | Jack Ree; Seoeun Choi |
| Abstract: | We examine how Korea’s capital flows and trade have been affected by the quantitative easing (QE) of the United States and the quantitative and qualitative easing (QQME) of Japan. Korea is an intriguing case due to its borderline position between advanced and emerging market country groups, and the common perception that Korea competes fiercely with Japan in the world market for trade. We find that QE had little direct impact on capital flows to Korea, and tapering is unlikely to cause capital outflows from it owing to partial safe-haven behavior of capital flows to Korea. We also find that the exchange rate spillover from QQME to Korea has been limited both on trade and capital flow fronts. |
| Keywords: | Spillovers;Korea, Republic of;Capital flows;Monetary policy;Japan;United States;Trade integration;Exports;Exchange rates;Economic integration;Unconventional monetary policy, spillover, capital flow, trade |
| Date: | 2014–04–03 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:14/53&r=mon |
| By: | Heise, Arne |
| Abstract: | It will be argued that it is not of fundamental importance for growth and employment whether the EU clings to the Euro or allows for a dissolution of the Eurozone and a reemergence of national currencies but how multi-level macroeconomic coordination of different policy areas and nation-states will be achieved. Given that this insight is based on an alternative economic reasoning which is (still) not the common view of most political and economic actors relevant in the EU, it will be analysed under which conditions it would be recommendable to maintain the Euro or to reestablish national currencies. -- |
| Keywords: | european integration,neo-functionalism,neo-realism |
| JEL: | F15 P16 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cessdp:43&r=mon |
| By: | Hasan, Zubair Hasan |
| Abstract: | The financial turmoil that the 2007 subprime debacle of the US set into motion has raised a welter of puzzling questions for the policy makers across the world. The position seems all the more confusing in the Muslim world where the fast expanding Islamic finance operates in competition with the conventional in a dual setting. The turmoil has led many to blaming the private lure for the colossal failure of financial institutions. In contrast, others counter argue to put public policy in the dock under the exalted banner of ‘regime uncertainty’. They blames the aggravation of the trouble on the uncalled for government intervention in financial markets. Interestingly, few draw attention to moral crimes committed on either side of the fence among the causative factors. This paper seeks to investigate if the monetary policies the Central Banks follow - now including the Basel capital adequacy norms as well - would suit or suffice Islamic banking institutions competing with the conventional in a dual financial framework? In this context, it questions the claim that risk-sharing is or can alone be the basis for Islamic finance. |
| Keywords: | Keywords: Monetary policy, Dual financial system, Profit sharing ratio, Regime uncertainty |
| JEL: | E3 E5 E51 E58 |
| Date: | 2014–07–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:57133&r=mon |
| By: | Issing, Otmar |
| Abstract: | In the wake of the Global Financial Crisis that started in 2007, policymakers were forced to respond quickly and forcefully to a recession caused not by short-term factors, but rather by an over-accumulation of debt by sovereigns, banks, and households: a so-called balance sheet recession. Though the nature of the crisis was understood relatively early on, policy prescriptions for how to deal with its consequences have continued to diverge. This paper gives a short overview of the prescriptions, the remaining challenges and key lessons for monetary policy. -- |
| Keywords: | recession,monetary policy,balance sheet adjustment |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewh:15&r=mon |
| By: | Jean-Louis Combes; Xavier Debrun; Alexandru Minea; Rene Tapsoba |
| Abstract: | The paper examines the joint impact of inflation targeting (IT) and fiscal rules (FR) on fiscal behavior and inflation in a broad panel of advanced and developing economies over the period 1990-2009. The main contribution of the paper is to show that, as suggested by the theoretical literature, interactions between FR and IT matter a great deal for policy outcomes. Specifically, the combination of FR and IT appears to deliver more disciplined macroeconomic policies than each of these institutions in isolation. In addition, the sequencing of the monetary and fiscal reforms plays a role: adopting FR before IT delivers stronger results than the reverse sequence. |
| Keywords: | Inflation targeting;Fiscal rules;Fiscal policy;Macroprudential Policy;Monetary policy;Economic models;Inflation targeting, fiscal rules, institutional reform sequencing. |
| Date: | 2014–05–28 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:14/89&r=mon |
| By: | Nicolas E. Magud; Esteban Vesperoni |
| Abstract: | We document the behavior of macro and credit variables during episodes of capital inflows reversals in economies with different degrees of exchange rate flexibility. We find that exchange rate flexibility is associated with milder credit growth during the boom but, even though smaller than in more rigid regimes, it cannot shield the economy from a credit reversal. Furthermore, we observe what we dub as a recovery puzzle: credit growth in economies with more flexible exchange rate regimes remains tepid well after the capital flow reversal takes place. This results stress the complementarity of macro-prudential policies with the exchange rate regime. More flexible regimes could help smoothing the credit cycle through capital surchages and dynamic provisioning that build buffers to counteract the credit recovery puzzle. In contrast, more rigid exchange rate regimes would benefit the most from measures to contain excessive credit growth during booms, such as reserve requirements, loan-to-income ratios, and debt-to-income and debt-service-to-income limits. |
| Keywords: | Flexible exchange rates;Bank credit;Capital inflows;Capital flows;Economic models;capital inflows, reversals, credit, macro-prudential |
| Date: | 2014–04–16 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:14/61&r=mon |
| By: | Soldatos, Gerasimos T. |
| Abstract: | Troika economics has brought Greece to a serious depression at a zero lower bound, with near unlimited supply of labor and near unlimited demand for money. In this paper, it is argued that these circumstances dictate to Greece the implementation individually of a long-term self-financing deficit-spending plan as a means of putting money into circulation in the country. Such a seigniorage-based self-financing deficit-spending, will boost demand and in response, output, tax base and tax revenue given the tax rate, with the increase in revenue being more than enough to be covering the deficit, and the excess revenue being channeled to paying out the accumulated debt. A k-percent monetary growth rule and constant inflation rate should be put forward, domestic credit expansion should be kept below OECD average, and potential output and tax Laffer curve assessments should be keeping track of the changing hysteresis effect. In view of the political instability plaguing modern Greece, the k-percent, balanced-budget, and no-open-market operations (unless under acts of God) rules should be constitutionalised (along with the tax system). |
| Keywords: | Quantity theory of money, Self-financing fiscal policy, Greek austerity |
| JEL: | E6 H1 I3 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:57080&r=mon |
| By: | Andrea Terzi |
| Abstract: | With the creation of the Economic and Monetary Union and the euro, the national government debt of eurozone member-states became credit sensitive. While the potentially destabilizing impact of adverse cyclical conditions on credit-sensitive debt was seriously underestimated, the design was intentional, framed within a Friedman-Fischer-Buchanan view that "no monetization" rules provide a powerful means to discipline government behavior. While most countries follow some kind of "no monetization" rule, the one embraced by the eurozone was special, as it also prevented monetization on the secondary market for debt. This made all eurozone public debt defaultable--at least until the European Central Bank (ECB) announced the Outright Monetary Transactions program, which can be seen as an enhanced rule-based approach that makes governments solvent on the condition that they balance their budgets. This has further narrowed Europe's options for policy solutions that are conducive to job creation. An approach that would require no immediate changes in the European Union's (EU) political structure would be for the EU to fund "net government spending in the interest of Europe" through the issue of a eurobond backed by the ECB. |
| Keywords: | Euro; Eurozone; Debt Monetization; Sovereign Debt Crisis; Government Budget Constraint |
| JEL: | E63 H63 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_810&r=mon |
| By: | Longmei Zhang; Edda Zoli |
| Abstract: | In recent years, macroprudential policy has become an increasingly active policy area. Many countries have adopted it as a tool to safeguard financial stability, in particular to deal with the credit and asset price cycles driven by global capital flows. This paper reviews the use of key macroprudential instruments and capital flow measures in 13 Asian economies and 33 economies in other regions since 2000, and constructs various macroprudential policy indices, aggregating sub-indices on key instruments. Asian economies appear to have made greater use of macroprudential tools, especially housing-related measures, than their counterparts in other regions. The effects of macroprudential policy are then assessed through an event study, cross-country macro panel regressions and bank-level micro panel regressions. The analysis suggests that macroprudential policy and capital flow measures have helped curb housing price growth, equity flows, credit growth, and bank leverage. The instruments that have been particularly effective in this regard include loan-to-value ratio caps, housing tax measures, and foreign currency-related measures. |
| Keywords: | Macroprudential Policy;Asia;Capital flows;Credit expansion;Asset prices;Inflation;Business cycles;Monetary policy;macroprudential policy; capital flow measures; credit growth; housing price |
| Date: | 2014–02–06 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:14/22&r=mon |
| By: | Marco Airaudo (School of Economics, LeBow College of Business, Drexel University); Salvatore Nisticò (Dipartimento di Scienze Sociali ed Economiche, Sapienza University of Rome); Luis-Felipe Zanna (Research Department, International Monetary Fund, Washington (DC)) |
| Abstract: | We explore the stability properties of interest rate rules granting an explicit response to stock prices in a New-Keynesian DSGE model populated by Blanchard-Yaari non-Ricardian households. The constant turnover between long-time stock holders and asset-poor newcomers generates a financial wealth channel where the wedge between current and expected future aggregate consumption is affected by the market value of financial wealth, making stock prices non-redundant for the business cycle. We find that if the financial wealth channel is sufficiently strong responding to stock prices enlarges the policy space for which the rational expectations equilibrium is both determinate and learnable (in the E-stability sense of Evans and Honkapohja, 2001). In particular, the Taylor principle ceases to be necessary, and also mildly passive policy responses to in ation lead to determinacy and E-stability. Our results appear to be more prominent in economies characterized by a lower elasticity of substitution across differentiated products and/or more rigid labor markets. |
| Keywords: | Learning; Expectational Stability; Interest Rate Rules; Multiple Equilibria; Determinacy, Stock Prices |
| JEL: | E4 E5 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:saq:wpaper:4/14&r=mon |
| By: | Jaromir Benes; Michael Kumhof; Douglas Laxton |
| Abstract: | This paper presents the theoretical structure of MAPMOD, a new IMF model designed to study vulnerabilities associated with excessive credit expansions, and to support macroprudential policy analysis. In MAPMOD, bank loans create purchasing power that facilitates adjustments in the real economy. But excessively large and risky loans can impair balance sheets and sow the seeds of a financial crisis. Banks respond to losses through higher spreads and rapid credit cutbacks, with adverse effects for the real economy. These features allow the model to capture the basic facts of financial cycles. A companion paper studies the simulation properties of MAPMOD. |
| Keywords: | Financial crisis;Credit expansion;Bank credit;Credit risk;Banks;Loans;Macroprudential Policy;Monetary policy;Economic models;lending boom, credit crunch, financial crisis, financialy cycle, asset price bubble, macroprudential policy |
| Date: | 2014–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:14/57&r=mon |