Forward exchange,short term capital flows and monetary policy

Summary This paper re-examines the relationships between short term capital flows and monetary policy, in the light of a new theoretical approach of the forward exchange market. They contend that the traditional forward exchange market theory is a misleading one as it fails to give all the importance it deserves to the distinction between covered and uncovered exchange transactions and to the actual role of the arbitrageurs. As a consequence of this analysis, they demonstrate that the problem of monetary management in an open economy must be dealt with in a way different from what has been usual, and they conclude that monetary policy, central banks' intervention on the foreign exchange market and direct controls on capital movements can still have some efficiency in the struggle against inflation, either of the domestic or the imported type.     

Forward exchange,short term capital flows and monetary policy: A comment

Summary In this comment it is argued that the theoretical explanation of Coulbois and Prissert of the functioning of the forward exchange market (the cambist theory) is nothing but a simplified version of the interest parity theory, because in their theory the horizontal arbitrage function implicitly plays a dominant role.Further some critical remarks are made concerning the role of non-bank arbitrages and the influence of interest arbitrage on the spot rate, on the size of the international short-term capital movements and on the domestic money supply.They want to thank Mr. William Schep for his helpful comments with regard to the translation into English of the original text.     

Navigating the trilemma: Capital flows and monetary policy in China

In recent years China has faced an increasing trilemma—how to pursue an independent domestic monetary policy and limit exchange rate flexibility, while at the same time facing large and growing international capital flows. This paper analyzes the impact of the trilemma on China's monetary policy as the country liberalizes its good and financial markets and integrates with the world economy. It shows how China has sought to insulate its reserve money from the effects of balance of payments inflows by sterilizing through the issuance of central bank liabilities. However, we report empirical results indicating that sterilization dropped precipitously in 2006 in the face of the ongoing massive buildup of international reserves, leading to a surge in reserve money growth.We also estimate a vector error correction model linking the surge in China's reserve money to broad money, real GDP, and the price level. We use this model to explore the inflationary implications of different policy scenarios. Under a scenario of continued rapid reserve money growth (consistent with limited sterilization of foreign exchange reserve accumulation) and strong economic growth, the model predicts a rapid increase in inflation. A model simulation using an extension of the framework that incorporates recent increases in bank reserve requirements also implies a rapid rise in inflation. By contrast, model simulations incorporating a sharp slowdown in economic growth such as that seen in late 2008 and 2009 lead to less inflation pressure even with a substantial buildup in international reserves.     

Short-term capital flows under flexible exchange rates

Zusammenfassung Kurzfristige Kapitalbewegungen bei flexiblen Wechselkursen. — In dieser Arbeit werden die kurzfristigen Kapitalzuflüsse in ihrer Eigenschaft als ausl?ndische Nachfrage nach heimischem Geld behandelt. Unter diesem Aspekt hat ein exogener Zufluβ bei flexiblen Wechselkursen eine unmittelbar deflation?re Wirkung. Auβerdem werden die wechselkursinduzierten kurzfristigen Kapital-bewegungen in einem einfachen makro?konomischen Modell analysiert. Selbst wenn man den mehr traditionellen Typ von zinselastischen Kapitalbewegungen in dem Modell berücksichtigt, führt der hier gew?hlte Ansatz zu bedeutsamen Modifikationen der Standardargumentation.

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Résumé Les flux des capitaux à court terme sous les conditions de cours de change flexibles. — Cet article se concentre sur les afflux des capitaux à court terme compris comme démande extérieure en faveur d’argent local. Un afflux exogène sous cet angle a un effet directement déflationniste sous les conditions de cours de change flexibles. De plus, cet article analyse le r?le des afflux des capitaux à court terme induits par le cours de change. Même en considérant le type plus traditionel des flux des capitaux étant élastique envers l’intérêt dans notre modèle cette approche mène aux qualifications signifiantes du modèle de standard.

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Resumen Flujos de capital de corto plazo bajo tasas de cambio flexibles. — Este artículo se concentra sobre los influjos de capital de corto plazo considerados como demanda extranjera por moneda doméstica. Un influjo exógeno tiene, bajo este punto de vista, un efecto deflatorio directo bajo tasas de cambio flexibles. Además, este articulo analiza el rol de los flujos de capital de corto plazo inducidos por variaciones en la tasa de cambio en un modelo macro-económico simple. Incluso considerando en nuestro modelo flujos de capital elásticos con respecto a la tasa de interés del tipo más tradicional, este enfoque nos muestra cualificaciones significativas del modelo standard.

     

我国短期国际资本流入研究

国际短期资本流动对我国经济的影响越来越明显。本文由国内外学者对国际短期资本流动的实证研究综述展开,分析并探讨了国际短期资本流动的动因。本文通过实证检验,试图找出影响我国短期资本流动的关键影响因素。研究表明,短期资本流动与中美利差、房地产指数以及证券市场的收益率呈正相关关系,而汇率的变动对短期资本流动影响不大,汇率的预期变动才是影响短期资本流动的因素之一。     

Impact of monetary policy on exchange market pressure: The case of Nepal

This paper uses a monetary model of exchange market pressure to examine the impact of monetary policy on the Nepalese exchange rate. Using a recently developed estimation technique, impulse indicator saturation, along with general-to-specific modeling, we find that a contractionary monetary policy results in easing of pressure on the exchange rate. The robustness of the results is confirmed using misspecification tests.     

Endogenous monetary policy shifts and the term structure: Evidence from Japanese government bond yields

I construct a no-arbitrage term structure model with endogenous regime shifts and apply it to Japanese government bond (JGB) yields. This model subjects the short-term interest rate to monetary regime shifts, specifically a zero interest rate policy (ZIRP) and normal regimes, which depend on macroeconomic variables. The estimates show that under the ZIRP regime, the effect of deflation (inflation) on lowering (raising) bond yields amplifies on the long end of yield curves, compared with a case with positive interest rates under the normal regime. On the other hand, output gaps’ ability to raise bond yields weakens for all maturities.     

Flexible exchange rates and perfect foresight: The implications of domestic monetary policy for foreign prices and stabilization policy

Zusammenfassung Flexible Wechselkurse und vollkommene Voraussicht: Implikationen der inl?ndischen Geldpolitik für die Preisentwicklung und Stabilisierungspolitik im Ausland. — Vorgestellt wird eine Variante mit zwei L?ndern und vollkommener Voraussicht, die auf dem 1976 von Dornbusch entwickelten Modell flexibler Wechselkurse basiert. Die Güterpreise in beiden L?ndern passen sich danach nur z?gernd der übernachfrage an. Die Isolierung des ausl?ndischen Preisniveaus von einem unerwarteten dauerhaften Anstieg der heimischen Geldmenge erfordert in dem Augenblick eine sprunghafte Erh?hung der ausl?ndischen Geldmenge, in dem es im Inland zum Anstieg kommt, gefolgt von einem Rückgang auf das frühere Niveau. Soll das ausl?ndische Preisniveau bei einer im voraus angekündigten Geldpolitik im Inland stabilisiert werden, dann mu\ die ausl?ndische Geldmenge zu dem Zeitpunkt sprunghaft erh?ht werden, zu dem die Ankündigung im Inland erfolgt. Die weitere zeitliche Entwicklung der Geldversorgung im Ausland h?ngt von bestimmten Parametern des Modells ab, die n?her erl?utert werden.

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Résumé Taux de change flexibles et la prévision parfaite: les implications des politiques monétaires locales pour les prix et la politique de stabilisation à l’étranger. — L’auteur présente une version de prévision parfaite et à deux pays d’un modèle des taux de change flexibles développé par Dornbusch en 1976. Les prix des biens dans les deux pays s’ajustent inertement à l’excès de demande. L’isolation du niveau de prix étranger d’une imprévue augmentation permanente du stock monétaire rend nécessaire un saut en stock monétaire étranger au moment où l’augmentation locale se passe, suivie par une réduction jusqu’au niveau initial. La stabilisation des prix à l’étranger au cas d’une politique locale monétaire préannoncée implique un saut en masse monétaire étrangère si l’annonce est faite. Le développement subséquent de la masse monétaire dépend des certains paramètres dans le modèle.

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Resumen Tasas de cambio flexibles y predicción perfecta: las implicaciones de la política monetaria doméstica sobre los precios externos y la política de estabilización. — Se présenta una versión de predicción perfecta de dos países de un modelo de tasas de cambio flexibles de Dornbusch de 1976. Los precios de los bienes se ajustan en ambos países lentamente al exceso de demanda. La aislación del nivel de precios extranjero de un aumento permanente no anticipado del stock monetario del pais natal requière de un salto en el stock de monedas extranjeras cuando se produce el aumento doméstico, seguido de una disminución a su nivel original. Estabilización de precios extranjeros con una pol⩼ica monetaria doméstica preanunciada envuelve un salto en la oferta monetaria extranjera cuando se hace el anuncio. La trayectoria en el tiempo de la oferta monetaria depende de ciertos parámetros en el modelo.

     

Devaluation,capital flows and the balance of payments: A respecification

Zusammenfassung Abwertung, Kapitalverkehr und die Zahlungsbilanz: Eine Respezifizierung. — Dieser Aufsatz stellt ein Zahlungsbilanzmodell der Abwertung für einen Zwei-L?nder-Fall vor, in dem beide L?nder gro\ genug sind, um die Zinss?tze sowohl im Inland als auch im Ausland beeinflussen zu k?nnen. Das Modell legt besonderes Gewicht auf abwertungsinduzierte ?nderungen der Kapitalstr?me, die entstehen, wenn das Portefeuille-Gleichgewicht nach der Abwertung wiederhergestellt wird. Zus?tzlich werden langfristige abwertungsinduzierte Ver?nderungen des ?steady-state? Kapitalverkehrs bei Aufrechterhaltung des Portefeuille-Gleichgewichts untersucht. Der Aufsatz gibt eine Synthese der Handelsbilanzwirkungen in den herk?mmlichen Abwertungsmodellen und der Kapitalverkehrswirkungen im Zahlungsbilanzmodell. Abschlie\end werden die Implikationen für die Geldpolitik aufgezeigt.

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Résumé Dévaluation, mouvements de capitaux et balances des paiements: une ré-spécification. — Cet article présente un modèle de balance des paiements pour le cas d’une dévaluation oè les deux pays sont assez grands pour influencer les taux d’intérêt à l’intérieur et à l’extérieur. Le modèle met l’accent sur les ajustements des mouvements de capitaux associés avec les tendances de regagner l’équilibre du portefeuille après la dévaluation. En outre, l’auteur étudie les changements à long terme des mouvements de capitaux induits par la dévaluation pour le cas où l’équilibre du portefeuille est maintenu pendant toute la période. L’article intègre les effets sur la balance commerciale élaborés par des modèles synthétiques de la dévaluation avec les effects sur les mouvements de capitaux élaborés par le modèle de balance des paiements: A la fin de l’étude, l’auteur donne des implications pour la politique monétaire.

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Resumen Devaluación cambiaria, flujos de capital y la balanza de pagos: una re-especificación. — Este artículo presenta un modelo de balanza de pagos para analizar la devaluación en el supuesto de existir solamente dos países lo suficientemente grandes como para influenciar las tasas de interés tanto internas como externas. El modelo se centra en los ajustes de los flujos de capital inducidos por una devaluación cambiaria y ocurridos en el momento de reestablecerse el equilibrio portfolio. Además, se estudian los cambios en los movimientos capital inducidos a largo plazo por una devaluación, manteniéndose el equilibrio portfolio durante todo el período. El articulo intégra los efectos de balanza de marcancías en los modelos de devaluación estándar con los efectos de balanza de pagos de los flujos de capital. Al final se se?alan las implicaciones del anàlisis para la política monetaria.

     

Uncertainty and monetary policy

The experience of monetary policy making in an uncertain environmenthas encouraged increased attention to the concept of model uncertainty,that is, uncertainty as to which is the best model. A particulardifficulty has been the need to operationalise the concept inorder to yield definitive policy recommendations. If this typeof uncertainty is unquantifiable, then a policy rule determinedby a single model may not in fact be the best approach; pluralismof method and the exercise of judgement offer a potential solution.A rigorous foundation for such an approach is available in Keynes'sphilosophical analysis of decision making under uncertainty.It is concluded that more analytical attention needs to be devotedto agents’ own model uncertainty, and to judgement. Butultimately the scope for synthesis between the model uncertaintyand Keynes uncertainty approaches rests on whether or not thesubject matter is such that knowledge of it is best representedby one formal model.     

Making monetary policy: objectives and rules

What is it that monetary policy-makers do and how do they doit? The simple answer is that a central banker moves interestrates in order to maintain steady real growth and stable prices.In this essay, I examine the issues that arise in framing theproblem faced by monetary policy-makers. I begin with a discussionof how, over the past decade or so, central banks have beenmade more independent and more accountable. The result has beenthe virtual elimination of the inflation bias problem that iscaused by political interference in the monetary policy process,and better overall macroeconomic performance. The essay proceedswith an example of a formal version of the policy-makers' problem,describing their objectives and the information they need toformulate a policy rule. I conclude with a discussion of a simpleversus complex policy rules, the impact of uncertainty on policy-making,and how central bankers use formal modelling in making theirday-to-day decisions.     

Factor shares,inequality, and capital flows

I present an endogenous growth model where innovations are factor saving and model the choice of technologies in an Overlapping Generations framework. Markets are competitive and factor prices are determined by marginal productivity of factors; therefore, the income share of reproducible factors increases with the stage of development. Beyond the standard results of this type of model I find that (i) without bequests long‐run growth is not possible, (ii) if the economy presents long‐run growth then intrageneration inequality may last forever but if the economy does not present long‐run growth then in steady state, there is no intrageneration inequality, (iii) when the economy is open, the pattern of capital flows depends not only on the relative abundance of factors but also on the technologies and, for this reason, capital may not flow from rich to poor economies, and (iv) consistently, capital flows may not help to break poverty traps.     

China's trilemma: monetary policy autonomy in an economy with a managed floating exchange rate

Mundell's trilemma theory says that capital flow, exchange rate stability, and monetary policy autonomy cannot be achieved simultaneously. Using monthly data from the People's Bank of China from 1999 to 2019, we find that the trilemma theory is not nearly as tight in China's practice as in theory, and the central bank can internally offset the effect of exchange rate volatility by ways other than the monetary base (such as central bank securities). Our results also indicate that, before 2012, monetary policy autonomy in China was weak due to the problem of ‘funds outstanding for foreign exchange’. With the reform of the Renminbi (RMB) exchange rate system in 2005, the effectiveness of central bank securities in compensating for the flow of foreign exchange reserves has gradually been strengthened in China.