Download or read book Macro prudential Policy in a Fisherian Model of Financial Innovation written by Javier Bianchi and published by International Monetary Fund. This book was released on 2012-07-01 with total page 54 pages. Available in PDF, EPUB and Kindle. Book excerpt: The interaction between credit frictions, financial innovation, and a switch from optimistic to pessimistic beliefs played a central role in the 2008 financial crisis. This paper develops a quantitative general equilibrium framework in which this interaction drives the financial amplification mechanism to study the effects of macro-prudential policy. Financial innovation enhances the ability of agents to collateralize assets into debt, but the riskiness of this new regime can only be learned over time. Beliefs about transition probabilities across states with high and low ability to borrow change as agents learn from observed realizations of financial conditions. At the same time, the collateral constraint introduces a pecuniary externality, because agents fail to internalize the effect of their borrowing decisions on asset prices. Quantitative analysis shows that the effectiveness of macro-prudential policy in this environment depends on the government's information set, the tightness of credit constraints and the pace at which optimism surges in the early stages of financial innovation. The policy is least effective when the government is as uninformed as private agents, credit constraints are tight, and optimism builds quickly.
Download or read book Macro Prudential Policies to Mitigate Financial System Vulnerabilities written by Mr.Stijn Claessens and published by International Monetary Fund. This book was released on 2014-08-19 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt: Macro-prudential policies aimed at mitigating systemic financial risks have become part of the policy toolkit in many emerging markets and some advanced countries. Their effectiveness and efficacy are not well-known, however. Using panel data regressions, we analyze how changes in balance sheets of some 2,800 banks in 48 countries over 2000–2010 respond to specific macro-prudential policies. Controlling for endogeneity, we find that measures aimed at borrowers––caps on debt-to-income and loan-to-value ratios––and at financial institutions––limits on credit growth and foreign currency lending––are effective in reducing asset growth. Countercyclical buffers are little effective through the cycle, and some measures are even counterproductive during downswings, serving to aggravate declines, consistent with the ex-ante nature of macro-prudential tools.
Download or read book Financial Crises Explanations Types and Implications written by Mr.Stijn Claessens and published by International Monetary Fund. This book was released on 2013-01-30 with total page 66 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper reviews the literature on financial crises focusing on three specific aspects. First, what are the main factors explaining financial crises? Since many theories on the sources of financial crises highlight the importance of sharp fluctuations in asset and credit markets, the paper briefly reviews theoretical and empirical studies on developments in these markets around financial crises. Second, what are the major types of financial crises? The paper focuses on the main theoretical and empirical explanations of four types of financial crises—currency crises, sudden stops, debt crises, and banking crises—and presents a survey of the literature that attempts to identify these episodes. Third, what are the real and financial sector implications of crises? The paper briefly reviews the short- and medium-run implications of crises for the real economy and financial sector. It concludes with a summary of the main lessons from the literature and future research directions.
Download or read book Bank Bailouts written by Mr.Tito Cordella and published by International Monetary Fund. This book was released on 1999-08-01 with total page 31 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper shows that a central bank, by announcing and committing ex-ante to a bailout policy that is contingent on the realization of certain states of nature (for example on the occurrence of an adverse macroeconomic shock), creates a risk-reducing “value effect” that more than outweighs the moral hazard component of such a policy.
Download or read book Current Account Reversals and Currency Crises written by Mr.Gian Milesi-Ferretti and published by International Monetary Fund. This book was released on 1998-06-01 with total page 45 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper studies large reductions in current account deficits and exchange rate depreciations in low- and middle-income countries. It examines which factors help predict the occurrence of a reversal or a currency crisis, and how these events affect macroeconomic performance. Both domestic factors, such as the low reserves, and external factors, such as unfavorable terms of trade, are found to trigger reversals and currency crises. The two types of events are, however, distinct; an exchange rate crash is associated with a fall in output growth and a recovery thereafter, while for reversals there is no systematic evidence of a growth slowdown.
Download or read book Optimal Macroprudential Policy and Asset Price Bubbles written by Nina Biljanovska and published by International Monetary Fund. This book was released on 2019-08-30 with total page 51 pages. Available in PDF, EPUB and Kindle. Book excerpt: An asset bubble relaxes collateral constraints and increases borrowing by credit-constrained agents. At the same time, as the bubble deflates when constraints start binding, it amplifies downturns. We show analytically and quantitatively that the macroprudential policy should optimally respond to building asset price bubbles non-monotonically depending on the underlying level of indebtedness. If the level of debt is moderate, policy should accommodate the bubble to reduce the incidence of a binding collateral constraint. If debt is elevated, policy should lean against the bubble more aggressively to mitigate the pecuniary externalities from a deflating bubble when constraints bind.
Download or read book Monetary and Macroprudential Policies to Manage Capital Flows written by Juan Pablo Medina Guzman and published by International Monetary Fund. This book was released on 2014-02-12 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study interactions between monetary and macroprudential policies in a model with nominal and financial frictions. The latter derive from a financial sector that provides credit and liquidity services that lead to a financial accelerator-cum-fire-sales amplification mechanism. In response to fluctuations in world interest rates, inflation targeting dominates standard Taylor rules, but leads to increased volatility in credit and asset prices. The use of a countercyclical macroprudential instrument in addition to the policy rate improves welfare and has important implications for the conduct of monetary policy. “Leaning against the wind” or augmenting a standard Taylor rule with an argument on credit growth may not be an effective policy response.
Download or read book Macroprudential Policy and Labor Market Dynamics in Emerging Economies written by Alan Finkelstein Shapiro and published by International Monetary Fund. This book was released on 2015-04-03 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: Emerging economies have high shares of self-employed individuals running owner-only firms who, in contrast to many salaried firms, have little access to formal financing and therefore rely on informal financing (input credit) from other firms. We build a small open economy real business cycle model with labor and financial market frictions where formal credit markets, informal credit, and the structure of the labor market interact. The model successfully replicates the cyclical behavior of sectoral employment, formal credit, and the main macroeconomic aggregates in emerging economies. We show that a countercyclical macroprudential policy that reduces formal credit fluctuations has positive though quantitatively limited effects on consumption and output volatility, but generates larger unemployment fluctuations in response to productivity shocks; the same policy increases labor market and aggregate volatility in response to net worth shocks. The link between input credit and the labor market structure---key for capturing the cyclical dynamics of labor and credit markets in the data---plays a crucial role for these results.
Download or read book Capital Regulation Liquidity Requirements and Taxation in a Dynamic Model of Banking written by Gianni De Nicolo and published by . This book was released on 2019 with total page 51 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper studies the impact of bank regulation and taxation in a dynamic model where banks are exposed to credit and liquidity risk and can resolve financial distress in three costly forms: bond issuance, equity issuance or fire sales. We find an inverted U-shaped relationship between capital requirements and bank lending, efficiency, and welfare, with their benefits turning into costs beyond a certain threshold. By contrast, liquidity requirements reduce lending, efficiency and welfare significantly. On taxation, corporate income taxes generate higher government revenues and entail lower efficiency and welfare costs than taxes on non-deposit liabilities.
Download or read book Preemptive Policies and Risk Off Shocks in Emerging Markets written by Ms. Mitali Das and published by International Monetary Fund. This book was released on 2022-01-07 with total page 54 pages. Available in PDF, EPUB and Kindle. Book excerpt: We show that “preemptive” capital flow management measures (CFM) can reduce emerging markets and developing countries’ (EMDE) external finance premia during risk-off shocks, especially for vulnerable countries. Using a panel dataset of 56 EMDEs during 1996–2020 at monthly frequency, we document that countries with preemptive policies in place during the five year window before risk-off shocks experienced relatively lower external finance premia and exchange rate volatility during the shock compared to countries which did not have such preemptive policies in place. We use the episodes of Taper Tantrum and COVID-19 as risk-off shocks. Our identification relies on a difference-in-differences methodology with country fixed effects where preemptive policies are ex-ante by construction and cannot be put in place as a response to the shock ex-post. We control the effects of other policies, such as monetary policy, foreign exchange interventions (FXI), easing of inflow CFMs and tightening of outflow CFMs that are used in response to the risk-off shocks. By reducing the impact of risk-off shocks on countries’ funding costs and exchange rate volatility, preemptive policies enable countries’ continued access to international capital markets during troubled times.
Download or read book Handbook of International Economics written by and published by Elsevier. This book was released on 2022-04-07 with total page 370 pages. Available in PDF, EPUB and Kindle. Book excerpt: Handbook of International Economics, Sixth Edition provides a definitive reference for researchers and advanced graduate students. The book includes self-contained surveys of the current state of a branch of economics in the form of chapters prepared by leading specialists. These surveys summarize not only received results but also newer developments from journal articles and discussion papers. Chapters cover The Global Financial Cycle, Dominant Currency Paradigm: a review, Rethinking exchange rate regimes, CIP deviations, the dollar, and frictions in international capital markets, International macroeconomics with imperfect financial markets, The prudential use of capital controls and foreign currency reserves, and Financial crises: a survey. - Provides the authority and expertise of leading contributors from an international board of authors - Presents the latest release in the Handbook of International Economics series - Includes self-contained surveys of the current state of a branch of economics in the form of chapters prepared by leading specialists
Download or read book Macroeconomic Policy after the Crash written by Richard Barwell and published by Springer. This book was released on 2017-02-27 with total page 432 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book reviews the key policy debates during the post-crash era, describing the issues that policymakers grappled with, the decisions that they took and the details of the policy instruments that were created. It focuses specifically on the policy regimes at the epicentre of the crisis: micro- and macro-prudential policy with chapters exploring the revolution in the conduct of macroeconomic policy in the period since the financial crisis. The author shows that throughout this period policymakers have had to balance two conflicting objectives – to repair balance sheets in the banking and public sectors whilst simultaneously trying to catalyse an economic recovery – and that has required them to innovate new tools and even new policy regimes in response. This book goes behind the jargon and explains what exactly policymakers at the Bank of England, the Treasury and beyond did and why, from QE to austerity to Basel III.
Download or read book Macroprudential Policy written by R. Barwell and published by Springer. This book was released on 2013-05-07 with total page 544 pages. Available in PDF, EPUB and Kindle. Book excerpt: The financial crisis of 2008 is probably the single most important economic event in post-war history. Macroprudential policy is the response to that crisis – a determined attempt to stabilize the financial system. This book explains why it is necessary, who will be responsible for executing this responsibility and how they will go about doing it.
Download or read book Financial Crises written by Mr.Stijn Claessens and published by International Monetary Fund. This book was released on 2014-02-19 with total page 754 pages. Available in PDF, EPUB and Kindle. Book excerpt: The lingering effects of the economic crisis are still visible—this shows a clear need to improve our understanding of financial crises. This book surveys a wide range of crises, including banking, balance of payments, and sovereign debt crises. It begins with an overview of the various types of crises and introduces a comprehensive database of crises. Broad lessons on crisis prevention and management, as well as the short-term economic effects of crises, recessions, and recoveries, are discussed.
Download or read book International Reserves and Rollover Risk written by Mr.Javier Bianchi and published by International Monetary Fund. This book was released on 2013-01-31 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt: Two striking facts about international capital flows in emerging economies motivate this paper: (1) Governments hold large amounts of international reserves, for which they obtain a return lower than their borrowing cost. (2) Purchases of domestic assets by nonresidents and purchases of foreign assets by residents are both procyclical and collapse during crises. We propose a dynamic model of endogenous default that can account for these facts. The government faces a trade-off between the benefits of keeping reserves as a buffer against rollover risk and the cost of having larger gross debt positions. Long-duration bonds, the countercyclical default premium, and sudden stops are important for the quantitative success of the model.
Download or read book Liquidity Trap and Excessive Leverage written by Mr.Anton Korinek and published by International Monetary Fund. This book was released on 2014-07-21 with total page 49 pages. Available in PDF, EPUB and Kindle. Book excerpt: We investigate the role of macroprudential policies in mitigating liquidity traps driven by deleveraging, using a simple Keynesian model. When constrained agents engage in deleveraging, the interest rate needs to fall to induce unconstrained agents to pick up the decline in aggregate demand. However, if the fall in the interest rate is limited by the zero lower bound, aggregate demand is insufficient and the economy enters a liquidity trap. In such an environment, agents' exante leverage and insurance decisions are associated with aggregate demand externalities. The competitive equilibrium allocation is constrained inefficient. Welfare can be improved by ex-ante macroprudential policies such as debt limits and mandatory insurance requirements. The size of the required intervention depends on the differences in marginal propensity to consume between borrowers and lenders during the deleveraging episode. In our model, contractionary monetary policy is inferior to macroprudential policy in addressing excessive leverage, and it can even have the unintended consequence of increasing leverage.
Download or read book Does Financial Tranquility Call for Stringent Regulation written by Deepal Basak and published by International Monetary Fund. This book was released on 2018-05-31 with total page 41 pages. Available in PDF, EPUB and Kindle. Book excerpt: Consistent with the Minsky hypothesis and the “volatility paradox” (Brunnermeier and Sannikov, 2014), recent empirical evidence suggests that financial crises tend to follow prolonged periods of financial stability and investor optimism. But does financial tranquility always call for more stringent regulation over time? We examine this question using a simple portfolio choice model that features the interaction between learning and externality. We evaluate the potential of a macroprudential policy to restore efficiency, and characterize the necessary and sufficient condition for the countercyclicality of the optimal regulation/macroprudential policy. Our paper implies that policymakers should not only consider the cyclical indicators “on the surface” (for example, credit growth), but also closely examine the deep structural change of the resilience of the system. The paper also highlights the importance of assigning the macroprudential policy function to independent agencies with technical expertise.
