FX Intervention in the New Keynesian Model

We develop an open-economy New Keynesian Model with foreign exchange (FX) intervention in the presence of a financial accelerator and shocks to risk appetite in international capital markets. We obtain closed-form solutions for optimal monetary and FX intervention policies assuming the central bank cannot commit to future policies, and we compare the solution to that under policy commitment. We show how FX intervention can help reduce the volatility of the exchange rate, of inflation, and of the output gap, thus mitigating welfare losses associated with shocks in the international capital markets. We also show that, when the financial accelerator is strong, there is a risk of indeterminacy (self-fulfilling currency and inflation movements) although FX intervention can reduce this risk and thus reinforce the credibility of the inflation targeting regime. Model simulations match well the impact of a VIX shock obtained by local projections on a panel of inflation targeting emerging markets.     

The side effects of quantitative easing: Evidence from the UK bond market

We examine the returns to UK government bonds before, during and between the phases of quantitative easing to identify the side effects for the market itself. We show that the onset of QE led to a sustained reduction in the costs of trading and removed some return regularities. However, controlling for a wide range of market activity, including issuance and QE announcements, we find evidence that investors could have earned excess returns after costs by trading in response to the purchase auction calendar. Drawing on economic theory, we explore the implications of these findings for both the efficiency of the market and the costs of government debt management in both the short and long run.     

Basel regulations and banks’ efficiency: The case of the Philippines

Using stochastic frontier analysis, this paper has examined the impact of Basel II on the cost efficiency of Philippine commercial banks from 2001 to 2011. The overall mean cost efficiency estimate is 0.75, indicating substantial inefficiencies in the banks averaging to 25% of total costs. Findings show that higher capital requirement tends to improve the cost efficiency but more powerful supervisors can adversely affect the efficiency of the banks. The other potential correlates that may help explain the efficiency of the banks are risk and asset quality and bank-specific variables. From a policy perspective, this study is informative to policymakers on the general direction in which to proceed with reforms (i.e., maintain higher capital requirements, curtail powerful supervisors, and enhance private monitoring) and in identifying factors that could contribute to banks’ efficiency especially in light of the newly implemented Basel III in the country. In effect, this paper also assesses the readiness of the banks toward the implementation of Basel III.     

The Role of Inflation Target Adjustment in Stabilization Policy

How and under what circumstances can adjusting the inflation target serve as a stabilization-policy tool and contribute to welfare improvement? We answer these questions quantitatively with a standard New Keynesian model that includes cost-push-type shocks. Our proposed inflation target rule calls for the target to be adjusted in a persistent manner and in the opposite direction to the realization of a cost-push shock, which is essentially a makeup strategy. The inflation target rule, combined with a Taylor-type rule, significantly reduces inflation fluctuations originating from cost-push shocks and mitigates the stabilization trade-off, resulting in a similar level of welfare to that associated with the Ramsey optimal policy.     

Pervasive inattentiveness

In this paper we analyze how inattentiveness in capital investment decisions shapes business cycle dynamics in a dynamic stochastic general equilibrium (DSGE) model with inattentiveness. We find that the model with pervasive inattentiveness matches several business cycle moments much better than an otherwise identical model without informational frictions in investment. These findings reinforce the need for pervasive stickiness to mimic the inertia found in macroeconomic data.     

Measuring US sectoral shocks in the world input–output network

I measure the importance of sectoral shocks in US aggregate output by using the World Input–Output Table (WIOT). The WIOT allows me to correct potential sub-graph bias in previous literature, caused by using only the US industrial production input–output table. I report results from three closely related models to show how sensitive the analyses are to different specifications. The estimates vary from 10% to 45%.     

Changing Perceptions of Maturity Mismatch in the U.S. Banking System: Evidence from Equity Markets

We use the sensitivity of bank holding company equity returns to market interest rates as an indicator of perceived maturity mismatch. Based on data from 1990 to 2009, there is only weak evidence that market participants perceived banks to be effectively short‐funded. However, looking at 1990–1996 and 1997–2009 subsamples separately, our results suggest that U.S. commercial banks were perceived as short‐funded during the earlier time period but not the later. During this time of changing perceptions of maturity mismatch, banks were increasing their holdings of real estate loans as a share of total assets. We present evidence that, subsequent to 1996, market participants perceived real estate loans as having become effectively shorter‐term.     

Inclusive wealth with a changing but aging population

We consider the effect of population age distribution in inclusive wealth accounting. Numerical results demonstrate that the wealth of nations with an aging demographic structure, as well as those with a rapidly increasing working-age generation, may have been overestimated.     

Macroeconomic Effects of Asset‐Price Shocks in a Globalized Financial Market

In this paper, I study a model in which shocks to asset prices affect the real sector of the economy through a credit channel. As financial markets become internationally integrated, the economy becomes less vulnerable to domestic asset‐price shocks, but more vulnerable to foreign asset‐price shocks. To the extent that monetary policy stabilization is feasible and desirable, the globalization of financial markets shifts the focus of monetary policy from domestic asset prices to worldwide asset prices.     

On the size of fiscal multipliers: A counterfactual analysis

We point out that fiscal multipliers derived from SVAR-models include the predicted future path of policy instruments. After the initial shock, net taxes and government expenditures react to each other and are autocorrelated. In a counterfactual simulation, we report fiscal multipliers that abstract from these dynamic responses.