Table of Contents

Transmission of Global Financial Shocks to EMU Member States: The Role of Monetary Policy and National Factors

Maria Gelman, University of Kiel
Axel Jochem, Deutsche Bundesbank
Stefan Reitz, University of Kiel

Challenges of Fiscal Policy in Emerging and Developing Economies

Raju Huidrom, World Bank
Ayhan Kose, International Monetary Fund (IMF)
Franziska Ohnsorge, World Bank

Monetary versus Macroprudential Policies: Causal Impacts of Interest Rates and Credit Controls in the Era of the UK Radcliffe Report

David Aikman, Bank of England - Monetary Assessment and Strategy Division
Oliver Bush, London School of Economics & Political Science (LSE), Bank of England
Alan M. Taylor, University of California, Davis - Department of Economics, University of Virginia - Department of Economics, National Bureau of Economic Research (NBER), Centre for Economic Policy Research (CEPR)

Repurchase Agreements as an Instrument of Monetary Policy at the Time of the Accord

Kenneth Garbade, Federal Reserve Bank of New York

Friedman's Lack of Influence on British Economic Policy

James Forder, University of Oxford - Balliol College

Bad Luck, Bad Policy, or Learning? A Markov-Switching Approach to Understanding Postwar U.S. Macroeconomic Dynamics

Gabriela Best, California State University, Fullerton - Mihaylo College of Business & Economics
Joonyoung Hur, The Bank of Korea


MACROECONOMICS: MONETARY & FISCAL POLICIES eJOURNAL

"Transmission of Global Financial Shocks to EMU Member States: The Role of Monetary Policy and National Factors" Free Download
Bundesbank Discussion Paper No. 23/2016

MARIA GELMAN, University of Kiel
AXEL JOCHEM, Deutsche Bundesbank
Email:
STEFAN REITZ, University of Kiel

The paper analyses the transmission of global financial shocks to individual member states of the European Monetary Union (EMU), in which monetary policy is delegated to the ECB and financial markets are fully integrated. Using a panel VAR model, we show that the asymmetric effects of global shocks on member states are partly offset by the uniform access of commercial banks to the Eurosystem's open market operations in conjunction with the redistribution of liquidity via the TARGET mechanism. However, an appropriate policy mix of sound public finances, solid financial regulation and targeted macroprudential measures is necessary in order to safeguard macroeconomic sustainability without needing to manage capital flows.

"Challenges of Fiscal Policy in Emerging and Developing Economies" Fee Download
CEPR Discussion Paper No. DP11347

RAJU HUIDROM, World Bank
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AYHAN KOSE, International Monetary Fund (IMF)
FRANZISKA OHNSORGE, World Bank
Email:

This paper presents a systematic analysis of the availability and use of fiscal space in emerging and developing economies. These economies built fiscal space in the run-up to the Great Recession of 2008.09, which was then used for stimulus. This reflects a more general trend over the past three decades, where availability of fiscal space has been associated with increasingly countercyclical (or less procyclical) fiscal policy. However, fiscal space has shrunk since the Great Recession and has not returned to pre-crisis levels. Emerging and developing economies face downside risks to growth and prospects of rising financing costs. In the event that these cause a sharp cyclical slowdown, policymakers may need to employ fiscal policy as a possible tool for stimulus. An important prerequisite for fiscal policy to be effective is that these economies have the necessary fiscal space to employ countercyclical policies. Over the medium-term, credible and well-designed institutional arrangements, such as fiscal rules, stabilization funds, and medium-term expenditure frameworks, can help build fiscal space and strengthen policy outcomes.

"Monetary versus Macroprudential Policies: Causal Impacts of Interest Rates and Credit Controls in the Era of the UK Radcliffe Report" Fee Download
CEPR Discussion Paper No. DP11353

DAVID AIKMAN, Bank of England - Monetary Assessment and Strategy Division
Email:
OLIVER BUSH, London School of Economics & Political Science (LSE), Bank of England
Email:
ALAN M. TAYLOR, University of California, Davis - Department of Economics, University of Virginia - Department of Economics, National Bureau of Economic Research (NBER), Centre for Economic Policy Research (CEPR)
Email:

We have entered a world of conjoined monetary and macroprudential policies. But can they function smoothly in tandem, and with what effects? Since this policy cocktail has not been seen for decades, the empirical evidence is almost non-existent. We can only fix this shortcoming in a historical laboratory. The Radcliffe Report (1959), notoriously skeptical about the efficacy of monetary policy, embodied views which led the UK to a three-decade experiment of using credit controls alongside conventional changes in the central bank interest rate. These non-price tools are similar to policies now being considered or used by macroprudential policymakers. We describe these tools, document how they were used by the authorities, and craft a new, largely hand-collected dataset to help estimate their effects. We develop a novel identification strategy, which we term Factor-Augmented Local Projection (FALP), to investigate the subtly different impacts of both monetary and macroprudential policies. Monetary policy acted on output and inflation broadly in line with consensus views today, but credit controls had markedly different effects and acted primarily to modulate bank lending.

"Repurchase Agreements as an Instrument of Monetary Policy at the Time of the Accord" Free Download
FRB of NY Staff Report No. 780

KENNETH GARBADE, Federal Reserve Bank of New York
Email:

Following the Treasury–Federal Reserve Accord of March 3, 1951, the Federal Open Market Committee (FOMC) focused on free reserves — the difference between excess reserves (reserve deposits in excess of reserve requirements) and borrowed reserves — as the touchstone of U.S. monetary policy. However, managing free reserves was problematic because highly variable and not readily predictable autonomous factors, including float, Treasury balances at Federal Reserve Banks, and currency in the hands of the public, induced comparable volatility and unpredictability in reserve deposits and hence in free reserves. Managing free reserves effectively required policy instruments that could inject and drain large quantities of reserves quickly at low transaction costs.

This paper surveys the two leading policy instruments for reserves management: 1) open market purchases and sales of Treasury bills, and 2) repurchase agreements. Outright transactions in bills were specifically authorized by statute and used in unexceptional ways for managing reserves over relatively long periods, but they had significant drawbacks for short-term “in and out? operations when additional reserves were needed for only a few days. Repos, however, while not specifically authorized by statute, were ideally suited for in-and-out operations. The acceptance of repurchase agreements as an instrument of monetary policy, even in the face of active resistance by some FOMC members, illustrates how utility can sometimes trump concerns about statutory authority, equity, and need.

"Friedman's Lack of Influence on British Economic Policy" Free Download

JAMES FORDER, University of Oxford - Balliol College
Email:

Using a range of sources, it is argued that, contrary to common belief, Milton Friedman had no special influence on British policy in the 1970s and 1980s. The opposing impression appears to be derived in part from the work of Friedman’s admirers, but principally from the allegations of Margaret Thatcher’s opponents who believed they could taint her with his name.

"Bad Luck, Bad Policy, or Learning? A Markov-Switching Approach to Understanding Postwar U.S. Macroeconomic Dynamics" Free Download

GABRIELA BEST, California State University, Fullerton - Mihaylo College of Business & Economics
Email:
JOONYOUNG HUR, The Bank of Korea
Email:

In this paper we analyze changes in the Federal Reserve behavior and objectives since the 1960s justified by potentially evolving beliefs — through a real-time learning process — about the structure of the economy and/or shifts in policymakers preferences in the late 1970s. In addition, we allow for changes in the volatility of the structural shocks in a medium scale DSGE model. The empirical results show that accounting for changes in the volatility of the shocks in a model that allows for real-time learning by policymakers improves the fit of the model to the U.S. data. In fact, the model captures the non-policy related high volatility periods experienced in the 1970s and early 1980s. To conclude, we observe that a change in monetary policy objectives, assumptions about policymakers’ learning process, and Markov-switching volatility are key to fit the model to the U.S. data, and to understand Federal Reserve behavior during the Great Inflation.

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This eJournal distributes working and accepted paper abstracts of empirical and theoretical papers on different aspects of monetary and fiscal policies. The topics in this eJournal include E1 and E6 from Section E of the classification system of the JEL.

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MACROECONOMICS EJOURNALS

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Social Science Electronic Publishing (SSEP), Inc., Harvard Business School, National Bureau of Economic Research (NBER), European Corporate Governance Institute (ECGI)
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Advisory Board

Macroeconomics: Monetary & Fiscal Policies eJournal

OLIVIER J. BLANCHARD
National Bureau of Economic Research (NBER), Peter G. Peterson Institute for International Economics

JOHN Y. CAMPBELL
Morton L. and Carole S. Olshan Professor of Economics, Harvard University - Department of Economics, National Bureau of Economic Research (NBER)

STEPHEN G. CECCHETTI
Professor of International Economics, Brandeis International Business School, National Bureau of Economic Research (NBER), Centre for Economic Policy Research (CEPR)

BENJAMIN M. FRIEDMAN
William Joseph Maier Professor of Economics, Harvard University - Department of Economics, National Bureau of Economic Research (NBER)

ROBERT E. HALL
Stanford University - The Hoover Institution on War, Revolution and Peace, National Bureau of Economic Research (NBER)

ROBERT E. LUCAS
John Dewey Distinguished Service Professor, University of Chicago - Department of Economics, National Bureau of Economic Research (NBER)

BENNETT T. MCCALLUM
Professor, Carnegie Mellon University - David A. Tepper School of Business, National Bureau of Economic Research (NBER)

ALLAN H. MELTZER
University Professor of Political Economics, Carnegie Mellon University - David A. Tepper School of Business

FREDERIC S. MISHKIN
Alfred Lerner Professor of Banking and Financial Institutions, Columbia Business School - Finance and Economics, National Bureau of Economic Research (NBER)

PAUL M. ROMER
National Bureau of Economic Research (NBER)

JULIO J. ROTEMBERG
Harvard University - Business, Government and the International Economy Unit, National Bureau of Economic Research (NBER)

MATTHEW D. SHAPIRO
Professor, University of Michigan at Ann Arbor - Department of Economics, Professor, National Bureau of Economic Research (NBER)

ROBERT J. SHILLER
Yale University - Cowles Foundation, National Bureau of Economic Research (NBER), Yale University - International Center for Finance

CHRISTOPHER A. SIMS
Princeton University - Department of Economics, National Bureau of Economic Research (NBER)

JOHN B. TAYLOR
Stanford University, National Bureau of Economic Research (NBER)