Two targets,two instruments: Monetary and exchange rate policies in emerging market economies

This paper examines the case for using two instruments—the policy interest rate and sterilized foreign exchange market intervention—in emerging market countries seeking to stabilize inflation and output while attenuating disequilibrium currency movements. We estimate policy reaction functions for central banks, documenting that indeed both instruments tend to be deployed. We show that whether discretionary monetary policy or inflation targeting is preferable depends on the volatility of shocks relative to the central bank's time inconsistency problem. The use of FX intervention as a second instrument improves welfare under both regimes, but more so under inflation targeting. Overall, a regime of (two-way) sterilized intervention-cum-inflation targeting can result in better outcomes in the presence of imperfect capital mobility/asset substitutability—yielding similar gains to a discretionary policy while still delivering the inflation target.     

Self-oriented monetary policy,global financial markets and excess volatility of international capital flows

This paper explores the nature of macroeconomic spillovers from advanced economies to emerging market economies (EMEs) and the consequences for independent use of monetary policy in EMEs. We first empirically document that a US contractionary monetary policy shock leads a retrenchment in EME capital flows, a fall in EME GDP, and an exchange rate depreciation. We construct a theoretical model that can help to account for these findings. In the model, macroeconomic spillovers may be exacerbated by financial frictions. Absent financial frictions, international spillovers are minor, and an inflation targeting rule represents an effective policy for the EME. With frictions in financial intermediation, however, spillovers are substantially magnified, and an inflation targeting rule has little advantage over an exchange rate peg. However, an optimal monetary policy markedly improves on the performance of naive inflation targeting or an exchange rate peg. Furthermore, optimal policies don't need to be coordinated across countries. A non-cooperative, self-oriented optimal policy gives results very similar to those of a global cooperative optimal policy.     

Multinational banking and the international transmission of financial shocks: Evidence from foreign bank subsidiaries

Using bank-level data on 368 foreign subsidiaries of 68 multinational banks in 47 emerging economies during 1994–2008, we present consistent evidence that internal capital markets in multinational banking contribute to the transmission of financial shocks from parent banks to foreign subsidiaries. We find that internal capital markets transmit favorable and adverse shocks by affecting subsidiaries’ reliance on their own internal funds for lending. We also find that the transmission of financial shocks varies across types of shocks; is strongest among subsidiaries in Central and Eastern Europe, followed by Asia and Latin America; is global rather than regional; and becomes more conspicuous in recent years. We also explore various conditions under which the international transmission of financial shocks via internal capital markets in multinational banking is stronger, including the subsidiaries’ reliance on funds from their parent bank, the subsidiaries’ entry mode, and the capital account openness and banking market structure in host countries.     

Bubbles and capital flow volatility: Causes and risk management

Emerging market economies are fertile ground for the development of real estate and other financial bubbles. Despite these economies’ significant growth potential, their corporate and government sectors do not generate the financial instruments to provide residents with adequate stores of value. Capital often flows out of these economies seeking these stores of value in the developed world. Bubbles are beneficial because they provide domestic stores of value and thereby reduce capital outflows while increasing investment. But they come at a cost, as they expose the country to bubble-crashes and capital flow reversals. We show that domestic financial underdevelopment not only facilitates the emergence of bubbles, but also leads agents to undervalue the aggregate risk embodied in financial bubbles. In this context, even rational bubbles can be welfare reducing. We study a set of aggregate risk management policies to alleviate the bubble-risk. We show that liquidity requirements, sterilization of capital inflows and structural policies aimed at developing public debt markets ‘collateralized’ by future revenues, all have a high payoff in this environment.     

Granular institutional investors and global market interdependence

We study the propagation of global investment risk across markets through the granular view of institutional investors. Applying the conditional value-at-risk estimation to micro-level weekly observations of international mutual funds between 2003 and 2011, we find that idiosyncratic shocks to large institutional investors explain both aggregate market risk and cross-market risk interdependence. Conditional on the US capital markets being in financial distress, idiosyncratic shocks to the top 10% largest funds investing in the US explain about 40% of the risk fluctuations in other non-US markets. The findings are also economically and statistically significant for the top largest funds investing in non-US markets, with the effects becoming especially large during the global financial crisis of 2007–09. These results are robust after controlling for common risk factors and applying alternative measures of idiosyncratic shocks.     

Equilibrium Indeterminacy and Asset Price Fluctuation in Japan: A Bayesian Investigation

This paper investigates sources of asset price fluctuation in Japan using an estimated financial accelerator model. For explicit treatment of expectational beliefs characterized by sunspots, the model is analyzed over the parameter space where the equilibrium can be indeterminate. We show that indeterminacy arises if the financial accelerator effect is sufficiently large. According to our Bayesian estimation results, Japan's economy was affected by sunspot shocks; however, the contribution of the sunspots to asset price volatility was low. Rather, net worth and cost shocks drove the asset price fluctuation. We find, however, that the sunspots substantially affected capital investment.     

美联储政策变化、国际资本流动与宏观经济波动

本文构建包含国际投资者、外资企业和银行流动性冲击的DSGE模型来探究美联储货币政策变动和政策不确定性对我国宏观经济的影响和作用机制。研究发现:(1) 美联储加息会导致我国产出、投资和通货膨胀的下降、汇率贬值、国际资本外流和银行系统流动性紧张。随着金融摩擦程度的增加和银行杠杆率的上升,美联储加息对我国产出、投资和资产价格的负面影响会进一步增强。(2) 美联储货币政策不确定性的增加会直接导致外资企业的投资、劳动需求和产出的下降,并对我国总产出、总投资和资产价格产生明显的负向外溢效应,进一步加剧我国宏观经济的波动。(3)为应对美联储的利率变动,适当限制国际资本流动能有效稳定我国经济波动和改善社会福利,而实施固定汇率和央行盯住美国利率的政策会加大宏观经济的波动,并导致社会福利下降。     

Financial friction in an emerging economy

The objective of this study is to evaluate the role of the frictional domestic credit market in an emerging country by using a small-open-economy DSGE model with a banking sector. The calibration results show that the financial friction does not significantly influence the macroeconomic effects of the shocks to the domestic productivity, foreign interest rate and export demand. We also evaluate whether and how the trade and financial openness can influence the effects of the domestic financial shocks that in turn affect the supply of loans in the credit market. We show that greater trade and financial openness can reduce the macroeconomic impacts of the domestic financial distress. Under a more open international capital market, the capital outflow caused by the domestic financial shock does not lead to drastic exchange rate variation. This helps dampen the adverse effects of the financial distress on the economy.     

Restructuring economic and financial power : The potential role of a foreign exchange-transaction levy

National fiscal and monetary policies are dominated by financial markets, and the obsession of these markets with inflation is forcing governments to neglect other crucial economic and social goals such as growth of employment and reduction of poverty. Exchange rate volatility also adds to business costs and risk. Introduction of a small international levy on foreign exchange transactions would reduce short-term speculation and so the power of the markets to influence interest rates and to destabilize exchange rates. Revenue from the levy would be of benefit to both national governments and the UN for disaster relief, development and strengthened security programmes. Support for the levy is growing.     

经常账户冲击、资本账户管理与中央银行货币政策操作

经常账户负向冲击及引发的宏观变量联动性通常对各经济体央行货币政策操作构成挑战。本文构建了融入经常账户冲击的小型开放经济DSGE模型,比较了采取不同资本账户管理工具(数量型和价格型)情景下,央行执行数量型货币政策规则、盯住CPI通胀泰勒规则、盯住PPI通胀泰勒规则下,经常账户负向冲击对货币政策操作的异质性影响及传导机制,并进行了福利分析。主要结论如下:第一,经常账户负向冲击将对本国央行货币政策操作构成一定影响;第二,资本账户管理可以成为缓冲经常账户负向冲击的防火墙,价格型资本账户管理工具与盯住PPI通胀泰勒规则相结合造成的福利损失较小;第三,经常账户贸易端与收益端双重负向冲击对一国货币政策操作的影响更大,但公众预期到的经常账户恶化对货币政策操作的影响将有所减弱。本文认为,转型经济体央行应倾向于执行价格型货币政策规则,最优货币政策应在稳定价格水平与缓释风险方面进行权衡,适度降低对名义汇率的关注度,稳慎推进资本账户开放进程,并可优先选择价格型资本账户管理工具。     

The effects of asymmetric information between borrowers and lenders in an open economy

This paper assesses the effects of asymmetric information between borrowers and lenders in an open economy with access to international capital markets. Information asymmetry and agency costs arise because only borrowers can costlessly observe actual returns from production. Agency costs increase the cost of external finance and lower steady state investment, capital and output. They also affect the business cycle and the central bank’s response to shocks. The long-run effects of agency costs are exacerbated in an open economy and their impact is influenced by the degree of access to international capital markets. The results thus highlight the importance of incorporating credit market interactions into open economy macroeconomic models.     

Overaccumulation,Interest, and Prices

I use a financial accelerator model to study interest and prices under boom–busts driven by changes in expectations about total factor productivity (TFP) and credit. I show that inflation falls in the boom phase of the TFP episode and then recovers during the bust, yet rises in the boom phase of the credit episode and then falls during the bust. Furthermore, for both episodes, the overaccumulation of debt relative to capital during the boom is critical for the busts since it implies a fall in credit worthiness. Finally, I show that stricter inflation targeting reduces inefficiencies in all instances but the boom phase of the TFP episode.     

The case for inflation stability

We evaluate the case for inflation stabilization in a New Keynesian (NNS) model that includes various frictions, capital accumulation and a variety of shocks. In such a model, price rigidity may provide the monetary authorities with an opportunity to improve upon the inefficient flexible price equilibrium via the suitable cyclical manipulation of real marginal costs. We find that such an opportunity is of limited value and that a strong case for perfect inflation stabilization remains. Policies that tolerate a small amount of inflation variability may outperform perfect inflation targeting when capital adjustment costs are low and the monetary distortion is substantial but only if prices are very flexible.     

央行汇市干预的效果与经验

外汇市场干预是大多数国家央行管理汇率的主要手段。2008年全球金融危机以及其后的欧美债务危机,使得金融市场动荡加剧,外汇市场因避险资金的流动也日益不平静,央行的汇市干预在目标、方式、效果、影响等方面部呈现出一些新的特点,文章对此进行回顾和总结,并从将外汇干预作为宏观调控的组成部分、变被动干预为主动干预以及扩展干预模式等方面,就进一步完善央行汇市干预方式提出政策建议。     

Macroeconomic policies and performance in Latin America

This paper provides new evidence on macroeconomic policies and results in Latin America and the Caribbean. Results are: (i) credibility allows adoption of counter-cyclical macroeconomic policies; (ii) accuracy in meeting inflation targets depends on central bank independence and country risk; (iii) intermediate exchange rate (ER) regimes have become less persistent; (iv) ER regimes matter for inflation and growth; (v) real ER trends are not explained by productivity growth and supply reforms do not resolve real ER misalignments; (vi) financial integration has increased significantly; (vii) foreign shocks are a major growth determinant; and (viii) composition of foreign capital inflows matters for growth.     

Exchange market pressure and absorption by international reserves: Emerging markets and fear of reserve loss during the 2008–2009 crisis

This paper evaluates how the global financial crisis emanating from the U.S. was transmitted to emerging markets. Our focus is on the extent that the crisis caused external market pressures (EMP), and whether the absorption of the shock was mainly through exchange rate depreciation or the loss of international reserves. Controlling for variety of factors associated with EMP, we find clear evidence that emerging markets with higher total foreign liabilities, including short- and long-term debt, equities, FDI and derivative products—had greater exposure and were much more vulnerable to the financial crisis. Countries with large balance sheet exposure – high external portfolio liabilities exceeding international reserves—absorbed the global shock by allowing greater exchange rate depreciation and comparatively less reserve loss. Despite the remarkable buildup of international reserves by emerging markets during the period prior to the financial crisis, countries relied primarily on exchange rate deprecation rather than reserve loss to absorb most of the exchange market pressure shock. This could reflect a deliberate choice (“fear of reserve loss”) or market actions that caused very rapid exchange rate adjustment, especially in emerging markets with open capital markets, overwhelming policy actions.     

Capital and resolution policies: The US interbank market

We develop an empirically based simulation study to test two types of policies designed to control systemic risk: preventive policies targeting capital requirements and mitigation policies targeting default resolution. We find that capital buffers reduce both the number of defaults and the resulting losses. The loss reduction benefit increases as the magnitude of adverse shocks becomes higher. We find that a simple branch-breakup resolution strategy reduces the loss borne by the Federal Deposit Insurance Corporation (FDIC). The mitigation effect becomes higher as the fraction of assets resolved through auctions and auction competitiveness increase.     

货币政策、消费品和投资品通货膨胀——基于金融加速器视角

本文建立一个包含消费品和投资品生产的两部门新凯恩斯DSGE模型,并且引入金融加速器以分析货币政策对消费品和投资品通货膨胀的影响机制,同时使用1999Q1至2015Q4的中国宏观经济数据对模型进行贝叶斯估计。估计结果表明,两个部门的菲利普斯曲线都具有较高的价格粘性。外部融资溢价对两个部门企业投资的影响存在异质性,投资品部门的金融加速器效应更加明显。脉冲响应分析表明货币政策扩张时,投资品部门的产出和通胀膨胀上升幅度比消费品部门更大。理论模型的脉冲响应与VAR实证分析得到的经验事实相一致。金融摩擦导致的消费品和投资品部门需求结构的异质性是解释货币政策对两个部门影响差异的关键。数值模拟分析发现金融加速器机制主要改变货币政策对投资品产出和通货膨胀的影响,对消费品部门影响改变较小。方差分解结果表明加总技术冲击、投资边际效率冲击和货币政策冲击是经济波动的主要来源。     

内外部金融周期差异如何影响中国跨境资本流动?

本文揭示了内外部金融周期差异影响跨境资本流动的机制,并以美国为外部经济代表,基于1998年第一季度至2018年第一季度数据进行了实证检验。研究发现:(1)中国跨境资本流动波动主要来自短期资本流动波动;分类看,其他投资波动较大;方向上看,流入波动要大于流出波动。(2)利差、汇差、资产价差(股指变动差异和房价变动差异)是影响跨境资本流动的重要因素,汇差和资产价差对短期资本流动影响尤甚。(3)内外部金融周期差异变动对资本流入的影响比对资本流出的影响更明显。(4)近年来,利差对跨境资本流动影响减弱,汇差和资产价差对跨境资本流动影响增强。结果说明,防范跨境资本流动风险要关注其他投资资本流动大幅波动风险,同时注意防范汇率和资产价格波动共振对跨境资本流动的冲击。     

Inflation targeting and nominal-income-growth targeting: When and why are they suboptimal?

We compare optimal and simple interest-rate rules. Our model features optimizing agents, monopolistic competition in both product and labor markets, and one-period nominal contracts (for wages alone or for both wages and prices) signed before shocks are known. Exact solutions ensure that we obtain correct welfare rankings. Optimal rules maximize the unconditional expected utility of the representative agent with commitment subject to the information set of the policymaker. Even with monopolistic distortions, the optimal full-information rule makes the economy mimic the hypothetical full-flexibility equilibrium. Strict versions of inflation targeting, nominal-income-growth targeting, and other such simple rules are suboptimal under both full and partial information but flexible versions are optimal under certain partial-information assumptions. Nominal-income-growth targeting dominates inflation targeting for plausible parameter values.