Monetary policy spillovers and the trilemma in the new normal: Periphery country sensitivity to core country conditions

We investigate why and how the financial conditions of developing and emerging market countries (peripheral countries) can be affected by the movements in the center economies – the U.S., Japan, the Eurozone, and China. We apply a two-step approach. First, we estimate the sensitivity of countries' financial variables to the center economies [policy interest rate, stock market prices, and the real effective exchange rates (REER)] while controlling for global and domestic factors. Next, we examine the association of the estimated sensitivity coefficients with the macroeconomic conditions, policies, real and financial linkages with the center economies, and the level of institutional development. In the last two decades, for most financial variables, the strength of the links with the center economies have been the dominant factor while the movements of policy interest rate also appear sensitive to global financial shocks around the emerging market crises of the late 1990s and since the global financial crisis of 2008. While certain macroeconomic and institutional variables are important, the arrangement of open macropolicies such as the exchange rate regime and financial openness are also found to have direct influence on the sensitivity to the center economies. An economy that pursues greater exchange rate stability and financial openness faces a stronger link with the center economies through policy interest rates and real effective exchange rate (REER) movements. We also find that exchange market pressure (EMP) in peripheral economies is sensitive to the movements of the center economies' REER and EMP during and after the global financial crisis. Open macro policy arrangements, especially exchange rate regimes, also have indirect effects on the strength of financial linkages, interacting with other macroeconomic conditions. Thus, trilemma policy arrangements, including exchange rate flexibility, continue to affect the sensitivity of developing countries to policy changes and shocks in the center economies.     

Adjustment patterns to commodity terms of trade shocks: The role of exchange rate and international reserves policies

We analyze the way in which Latin American countries have adjusted to commodity terms of trade (CTOT) shocks in the 1970–2007 period. Specifically, we investigate the degree to which the active management of international reserves and exchange rates impacted the transmission of international price shocks to real exchange rates. We find that active reserve management not only lowers the short run impact of CTOT shocks significantly, but also affects the long run adjustment of REER, effectively lowering its volatility. We also show that relatively small increases in the average holdings of reserves by Latin American economies (to levels still well below other emerging regions current averages) would provide a policy tool as effective as a fixed exchange rate regime in insulating the economy from CTOT shocks. Reserve management could be an effective alternative to fiscal or currency policies for relatively trade closed countries and economies with relatively poor institutions or high government debt. Finally, we analyze the effects of active use of reserve accumulation aimed at smoothing REERs. The result support the view that “leaning against the wind” is potent, but more effective when intervening to support weak currencies rather than intervening to slow down the pace of real appreciation. The active reserve management reduces substantially REER volatility.     

开放经济下的“双支柱”调控稳定效应研究

本文研究了管理浮动汇率制下我国货币政策和宏观审慎政策双支柱的调控稳定效应。首先,本文从实证层面考察了人民币汇率升贬值对央行货币政策的非对称影响。接着,本文构建了包含银行部门与货币错配的开放宏观经济模型,重点分析了在面对美联储加息、人民币贬值压力的情况下,货币政策(包括对汇率的反应)和宏观审慎政策(对外债的逆周期调节)的配合如何影响宏观经济和金融的稳定。结论表明,如果缺少宏观审慎政策的配合,货币政策对汇率的反应将导致产出、通货膨胀和资产价格等经济金融变量的波动增大。在存在宏观审慎政策的前提下,相对于完全浮动汇率制,管理浮动汇率制从中长期看能进一步促进产出和外债等核心变量的稳定。     

Assessing exchange rate dynamics of East Africa: fragmented or integrated?

This article investigates the dynamics of the currency markets of the East African Community, using forecast error variance decompositions from vector autoregressions. It shows that the exchange rates of Kenya, Tanzania and Uganda have been mainly driven by shocks to their own economies, while those of Burundi and Rwanda have been increasingly dictated by spillovers from the dollar and euro since the global financial crisis. Interactions within the region are limited, although there is some sign of elevation. This makes a clear contrast with European currency markets prior to the euro, where spillovers from the German mark dominated the markets.     

From Financial Repression to External Distress: The Case of Venezuela

Recent work suggests a connection between domestic debt and external default. We examine potential linkages for Venezuela, where the evidence reveals a nexus among domestic debt, financial repression, and external vulnerability. The financial repression tax (as a share of GDP) is similar to OECD economies, in spite of higher debt ratios in the latter. The financial repression “tax rate” is higher in years of exchange controls and legislated interest rate ceilings. We document a link between domestic disequilibrium and a weakening of the net foreign asset position via private capital flight. We suggest these findings are not unique to Venezuela.     

Saving the Euro: Mitigating Financial or Trade Spillovers?

This paper analyzes through what channels the euro crisis affected firms and the efficacy of policies to mitigate the crisis. It analyzes stock price responses for 3,045 nonfinancial firms in 16 countries to four key policy events during 2010–11. Using precrisis benchmarks, it separates financial effects from trade effects and examines how bank and trade linkages propagated shocks. It finds that policy measures affected financially dependent firms more, particularly in creditor countries with greater bank exposure to peripheral euro countries, in statistically and economically significant ways. Trade linkages with peripheral countries played little role, although euro movements meant some differential effects.     

提升债务本币化程度 完善我国外债管理

外债作为对境外资金利用的一种形式,一定程度上是国家综合实力和经济承受力的体现。从别国本币外债的发展趋势看,发达经济体本币外债占比一直较高,新兴经济体近年来普遍呈上升态势。发展本币外债的主要动因,在于其能消除货币错配风险、规避汇率风险以及便利本币跨境使用等。随着人民币跨境使用需求的增长,人民币外债类型和规模将逐渐增多,建议按照国际标准建立统一的全口径外债统计体系等方式,完善我国本外币外债管理。     

Measuring International Economic Linkages with Stock Market Data

This article develops a new framework for measuring financial and real economic linkages between countries. Using United States and United Kingdom data from 1957 to 1989, we find closer financial linkages after the Bretton Woods currency arrangement was abandoned and Britain suspended exchange controls. In a pairwise application to fifteen countries over a shorter period, we also find that news about future dividend growth is more highly correlated between countries than contemporaneous output measures. This suggests that there are lags in the international transmission of economic shocks and that contemporaneous output correlation may understate the magnitude of integration.     

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。     

Monetary policy in emerging markets: Can liability dollarization explain contractionary devaluations?

In emerging markets, external debt is denominated almost entirely in large, developed country currencies such as the U.S. dollar. This liability dollarization offers a channel through which exchange rate variation can lead to business cycle instability. When firms' assets are denominated in domestic currency and liabilities are denominated in foreign currency, an exchange rate depreciation worsens firms' balance sheets, which leads to higher capital costs and contractions in capital spending. To illustrate this, I construct a quantitative, sticky price, small open economy model in which a monetary policy induced devaluation leads to a persistent contraction in output. In this model, fixed exchange rates offer greater stability than an interest rule that targets inflation.     

欧元区主权债务危机与欧元的前景

欧元区并不是一个真正意义上的最优货币区,各国之间差异较大,财政政策与货币政策难以协调,欧元的福利外溢和隐形担保作用激励逆向选择和道德风险,这是促成欧元区债务危机的重要推手。欧元区主权债务危机短期内将削弱欧元的稳定和国际地位,但欧元和欧元区的"系统重要性"可以保证欧元不会崩溃。欧元区如能借机务实推动改革,中长期欧元仍将在国际货币体系中发挥重要作用。     

International spillovers from Euro area and US credit and demand shocks: A focus on emerging Europe

In this paper, we examine the international effects of contractions in loan supply, loan demand and aggregate demand in the euro area and the USA. All three shocks have been at the forefront in spreading stress during the period of the global financial crisis and in particular so to countries that are strongly integrated with the euro area. We find that these shocks decrease international output and total credit to a varying degree. Loan demand and aggregate demand shocks in the euro area trigger significant negative spillovers on output in most other regions. Evidence for global negative output effects of euro area loan supply shocks is fraught with considerable estimation uncertainty. When these three types of shocks emanate from the USA, we find significant negative spillovers on output also for loan supply shocks. In general, international effects on total credit are an order of magnitude larger than those on output, with again more evidence that is significant for US than euro area shocks. Last, and taking a regional stance, our results indicate that economies from emerging Europe are most vulnerable to all shocks considered. Through their strong economic integration with the euro area, these economies are likewise exposed to euro area and US shocks, and spillover effects are often larger than the domestic response in the country of shock-origin.     

美国货币政策推升了新兴市场国家非金融企业杠杆率吗？

全球金融危机后,美国量化宽松货币政策的实施导致全球流动性异常充裕,对新兴市场国家非金融企业外部融资环境造成显著影响。本文运用28个新兴市场国家2003-2015年非金融类上市企业财务数据和美国影子利率数据对美国货币政策调整与新兴市场国家非金融企业杠杆率变动之间的关系进行了实证分析。结果显示,美国影子利率与新兴市场国家非金融企业杠杆率变动之间存在显著负相关关系,即美国影子利率的降低会促使新兴市场国家非金融企业杠杆率出现更大幅度的上涨。进一步地,这一影响在融资约束程度较高的企业、外部融资依赖度较高的行业以及资本账户开放程度较高但汇率弹性僵化的国家表现得更为显著。上述发现意味着新兴市场国家在调控企业部门杠杆率的过程中,除要考虑国内因素外,也应高度重视美国货币政策的变化。     

Portfolio capital flows and the US dollar exchange rate: Viewed from the lens of time and frequency dynamics of connectedness

This study uses proprietary data on daily net non-resident portfolio flows to emerging markets to analyse the interconnectedness of non-resident debt and equity portfolio flows under different market conditions. We find that there is less interconnectedness during normal times but increased interconnectedness during periods of uncertainty and stress, suggesting an asymmetry in the spillovers of these portfolio flows. Importantly, we find that shocks in the broad EM US dollar exchange rate are a net transmitter of shocks to debt and equity portfolio flows of EM economies. Our analysis, based on the net directional spillover index, shows that this effect is most pronounced during the COVID-19 pandemic. Furthermore, using a frequency domain approach to connectedness, we find that the broad EM US dollar exchange rate is a net transmitter of shocks to the EM economies’ debt and equity flows, with the impact hitting portfolio capital flows within at least a week to 100 days. Our results suggest that pre-emptive macroprudential policy measures and better risk monitoring can improve the resilience of borrowers and investors in EM economies during times of global shocks, particularly during US dollar appreciations when portfolio flows tend to reverse.     

External shocks, U.S. monetary policy and macroeconomic fluctuations in emerging markets

Estimated structural VARs show that external shocks are an important source of macroeconomic fluctuations in emerging markets. Furthermore, U.S. monetary policy shocks affect interest rates and the exchange rate in a typical emerging market quickly and strongly. The price level and real output in a typical emerging market respond to U.S. monetary policy shocks by more than the price level and real output in the U.S. itself. These findings are consistent with the idea that “when the U.S. sneezes, emerging markets catch a cold.” At the same time, U.S. monetary policy shocks are not important for emerging markets relative to other kinds of external shocks.     

Macro-Networks: An application to euro area financial accounts

This paper develops a financial network, designated the “Macro-Network”, that depicts the connections between the main financial and non-financial sectors of the economy in the various financial instruments of the euro area. The Macro-Network comprises of linkages across financial and non-financial sectors in each country. These country-level sector networks are then connected by the cross-border links between the individual banking sectors. Using the Macro-Network to simulate financial shocks, we find that the propagation effects depend on the underlying network structure, which evolves over time. After the financial crisis, bilateral linkages contracted sharply, reflecting the surge in counterparty risk and the de-leveraging processes. Nonetheless, our analysis suggests that even after this process, vulnerabilities remained in the euro area financial system, while a more diversified portfolio of cross-border exposures might mitigate the shock effects. We identify sectors which are most relevant for the propagation of financial shocks in the Macro-Network.     

Are global shocks leading indicators of currency crisis in Viet Nam?

This paper aims to identify leading indicators of a currency crisis in Viet Nam based on an early warning system for the period 1996–February 2016. This paper found that global financial shocks (e.g., regional and global financial crisis, unexpected changes in monetary policy of largest economies such as the United States and the People’s Republic of China), and domestic credit growth rate are leading indicators of a currency crisis in Viet Nam in all three models. Deficits in trade balance, international reserves, and overvaluation of the dong are also good indicators. In addition, a model in which a currency crisis or turbulence in the foreign exchange market is defined based on the exchange market pressure and parallel market premium, with window length of 2 months, outperformed for predicting a currency crisis in Viet Nam. Empirical results suggested that probability of predicting a true currency crisis was 77.5%.     

Financial sector development and dollarization in emerging economies

This paper discusses important features of financial dollarization and its implications for the macro economy and financial sector deepening. Despite the need to slow down the rate of inflation and keep exchange rates under control, to achieve growth and economic development, monetary policies may permit increases in the base money to keep pace with real GDP growth. In heavily dollarized economies, during periods of sharp devaluations of the domestic currency, financial assets and liabilities shift toward foreign currency, exacerbating downward pressure on the exchange rate. When central banks face pressures to keep the exchange rate steady in nominal terms, interest rates in the domestic currency are set at levels substantially higher than those on dollar assets. In such states of the world, banks prefer to lend to the government sector at these higher rates than to the private sector. Although private firms may benefit from lower rates on dollar loans, they also face significant exchange rate or currency risk due to the currency mismatch emerging from their dollar debt while their receivables may tilt toward domestic currency denominated instruments. This weakens their balance sheet, which in turn increases the exposure of the banking sector to a variety of risks.     

International spillovers of monetary policy: Lessons from Chile,Korea, and Poland

In this paper, we assess evidence on international monetary policy spillovers to domestic bank lending in Chile, Korea, and Poland, using confidential bank-level data and different measures of monetary policy shocks in relevant currency areas. These three emerging market economies are small and open, their banking systems do not have significant presence overseas, and they can be considered as price takers in the world economy. Such features allow for better identification of binding financial constraints and foreign monetary policy shocks. We find that the monetary policy shocks spill over into domestic bank lending, modifying the degree to which financial frictions tighten or relax, and this evidence is consistent with international bank lending and portfolio channels.     

Forward premium anomaly of the British pound and the euro

Using pooled data, we study the forward discount bias (FDB) of 24 British pound and 24 euro exchange rates. The results show a FDB during “non-crisis” periods, which is more pronounced for advanced than emerging economies. This finding is especially striking during the period of the European sovereign debt crisis (2010 to 2013), for which we find a FDB for the currencies of advanced economies versus the pound, but not versus the euro. The differences between the results for advanced and emerging country currencies are mainly related to whether the period under investigation is classified as a crisis period or not. Our findings support the literature that relates carry trade activities to the FDB; as such activities are assumed to decrease during times of uncertainty. Further, our study shows evidence for asymmetric behavior with respect to the forward premium, as well as, to the overvaluation and undervaluation of the currency. We find negative slope coefficients for advanced country currencies during crisis periods when the pound and the euro are overvalued and sell at a premium. This suggests that even during crisis periods carry trade activities are present, which may be related to investors' assumptions of higher returns when an overvalued pound or euro is expected to move back to equilibrium.