The effectiveness of quantitative easing: new evidence on private investment

This paper examines the effect of Federal Reserve’s large-scale purchases of securities on private investment. We find tentative evidence that quantitative easing (QE) stimulated the level of aggregate investment through the interest rate channel by narrowing corporate bond spread. In particular, the Fed’s purchases of mortgage-backed securities were found to have a statistically significant effect on aggregate private investment. Moreover, using a GARCH model, we find that QE has led to a reduction in the volatility of private investment. This finding remains robust with a QE dummy variable as an alternative measure of the unconventional monetary policy. The study also indicates how different aspects of QE influence private investment and its volatility.     

Analysis of an unannounced foreign exchange regime change

Starting in 2004 the Guyanese foreign exchange rate has been remarkably stable relative to earlier periods. This paper explores the reasons for the stability of the rate. First, the degree of concentration in the foreign exchange market has increased, thus making the task of moral suasion relatively straightforward once this policy tool comes to bear on the dominant trader(s). Second, long-term or non-volatile capital inflows make the exchange rate less susceptible to sudden reversal. Third, commercial banks, the dominant foreign exchange traders, have large outlays of assets in domestic currency, thus their desire for exchange rate stability. The econometric exercise is consistent with the notion that trader market power has contributed to lower volatility in the G$/US exchange rate. The paper also presents a model that analyzes monetary policy effects in the presence of a mark-up or threshold interest rate.     

The Political Economy of Guyana’s Underdevelopment

Using a history-inspired game theoretic approach, the paper shows how dictatorship and pro-ethnic voting under democracy, in a society characterized by bi-communal polarization, can result in sub-optimal economic performance. The relatively poor economic outcome is facilitated by an adverse institutional construct, the constitution, which inadvertently encourages low intensity but persistent ethnic rivalry. Mutual distrust in how the other side will vote on the day of secret ballot induces the members of each group to vote for their respective elites, hence non-cooperation. The model is extended to include Gintis’ psychic gain parameter that shows cooperation is possible in the prisoners’ dilemma framework. The latter theoretical result implies a policy proposal of constitutional reform that promotes inter-group cooperation of the distribution of economic resources.     

Exchange Rate Targeting and Gold Demand by Central Banks: Modeling International Reserves Composition

This article explores the composition of international reserves under a central bank’s exchange rate policy target. The model allows for numerical estimation of a shadow price of the target exchange rate, interpreted as the central bank’s sacrifice of policy precision for additional unit of portfolio variance or return. The simulations indicate a percentage range gold demand by monetary authority in two regimes under multiple equilibria. Accumulating foreign reserves as precautionary policy suggests increasing shares of gold demand. The central bank would incur greater exchange rate target sacrifice if it wants to achieve higher portfolio returns. The results suggest that ability to target the exchange rate is unaffected by the higher volatility of monthly returns on gold.