- Foreign exchange intervention: strategies and effectiveness – “Foreign exchange intervention has been actively used as a policy tool in many economies in Asia and elsewhere. In this paper, we examine two intervention rules (leaning against exchange rate misalignment and leaning against the wind), utilised with varying degrees of transparency, based on a simple model with three kinds of agents: fundamentalists, speculators and the central bank. We assess the effectiveness of these rules against five criteria: stabilising the exchange rate, reducing current account imbalances, discouraging speculation, minimising reserves volatility and limiting intervention costs. Overall we find no dominant intervention strategy. Intervention that reduces exchange rate volatility, for example, also reduces the risks of speculation, creating a feedback loop and potentially leading to high levels of speculation, reserves volatility and intervention costs. These intervention costs will be especially large when exchange rate movements are driven by interest rate shocks, although some degree of opaqueness can help to reduce them. Survey evidence from BIS (2005, 2013) indicates that central banks follow a range of different strategies when intervening in foreign exchange rates. Given the trade-offs that different strategies entail in our model, this is not surprising.”
- Liquidity Squeeze, Abundant Funding and Macroeconomic Volatility – This paper studies the choice between building liquidity buffers and raising funding ex post, to deal with liquidity shocks. We uncover the possibility of an inefficient liquidity squeeze equilibrium. Agents typically choose to build smaller liquidity buffers when they expect cheap funding. However, when agents hold smaller liquidity buffers, they can raise less funding because of limited pledgeability, which in the aggregate depresses the funding cost. This incentive structure yields multiple equilibria, one being an inefficient liquidity squeeze equilibrium where agents do not build any liquidity buffer. Comparative statics show that this inefficient equilibrium is more likely when the supply of funding is large, and/or when aggregate shocks display low volatility. Last, the effectiveness of policy options to restore efficiency is limited because the net gain to intervention decreases with the availability of funding. In other words, policy becomes ineffective when the equilibrium becomes inefficient.”
- Global Asset Allocation Shifts – “We show that global asset reallocations of U.S. fund investors obey a strong factor structure, with two factors accounting for more than 90% of the overall variation. The first factor captures switches between U.S. bonds and equities. The second reflects reallocations from U.S. to international assets. Portfolio allocations respond to U.S. monetary policy, most prominently around FOMC events when institutional investors reallocate from basically all other asset classes to U.S. equities. Reallocations of both retail and institutional investors show return-chasing behavior. Institutional investors tend to reallocate toward riskier, high-yield fixed income segments, consistent with a search for yield.”
- When is macroprudential policy effective? – “Previous studies have shown that limits on loan-to-value (LTV) and debt-to-income (DTI) ratios can stabilise the housing market, and that tightening these limits tends to be more effective than loosening them. This paper examines whether the relative effectiveness of tightening vs. loosening macroprudential measures depends on where in the housing cycle they are implemented. I find that tightening measures have greater effects when credit is expanding quickly and when house prices are high relative to income. Loosening measures seem to have smaller effects than tightening, but the difference is negligible in downturns. Loosening being found to have small effects is consistent with where it occurs in the cycle.”
- The transmission of monetary policy in EMEs in a changing financial environment: a longitudinal analysis – “The departure from the Modigliani-Miller conditions, due for instance to market incompleteness, asymmetric information or taxation, tends to increase the importance of indirect channels by which monetary policy affects the level of economic activity in emerging market economies (EMEs). The bank lending channel highlighted by Bernanke and Blinder (1988) is a prominent example of such indirect effect of monetary policy. In this study we investigate how the bank lending channel acts above and beyond the traditional money channel that most macroeconomic models emphasize. We find that, particularly in EMEs with high bank reliance, changes in the volume of bank credit are important drivers of fixed capital formation. Using micro-level bank balance sheet data, we then show how monetary policy and sovereign risk premia affected bank credit growth in EMEs between 2001 and 2013. We find that both, changes in the monetary policy stance and changes in risk premia have had significant effects on credit volumes. Furthermore, we show that these effects tend to affect smaller banks more strongly. Our results suggest that the accommodative monetary policies that have been seen recently were contributing factors to the rapid expansion of credit in many EMEs.”
Accurate, Focused Research on Law, Technology and Knowledge Discovery Since 2002
Sorry, comments are closed for this post.