Table of Contents

Foreign Central Bank Activities in U.S. Futures Markets

Raymond P.H. Fishe, University of Richmond - E. Claiborne Robins School of Business
Michel A. Robe, American University - Kogod School of Business
Aaron Smith, University of California, Davis - Department of Agricultural and Resource Economics

The International Monetary and Financial System: Its Achilles Heel and What to Do About it

Claudio E. V. Borio, Bank for International Settlements (BIS) - Research and Policy Analysis

Spillovers, Capital Flows and Prudential Regulation in Small Open Economies

Paul Castillo, Central Reserve Bank of Peru
Cesar Carrera, Central Reserve Bank of Peru
Marco Ortiz, Central Reserve Bank of Peru
Hugo Vega Hobaica, Central Reserve Bank of Peru

Traditional and Matter-of-Fact Financial Frictions in a DSGE Model for Brazil: The Role of Macroprudential Instruments and Monetary Policy

Fabia Aparecida Carvalho, Brazilian Central Bank
Marcos R Castro, Independent
Silvio M A Costa, Brazilian Central Bank

A Policy Model to Analyze Macroprudential Regulations and Monetary Policy

Sami Alpanda, Bank of Canada - Canadian Economic Analysis Department
Gino Cateau, Independent
Césaire Meh, Government of Canada - Bank of Canada

The Effects of Intraday Foreign Exchange Market Operations in Latin America: Results for Chile, Colombia, Mexico and Peru

Miguel Fuentes, Pontifical Catholic University of Chile - Institute of Economics
Pablo M. Pincheira, Central Bank of Chile - Research Department
Juan Manuel Julio, Bank of the Republic, Universidad Nacional de Colombia
Hernan Rincon , Banco de la República
Santiago García-Verdú, Banco de México
Miguel Zerecero, Bank of Mexico
Marco Vega, Central Reserve Bank of Peru
Erick Lahura, Central Bank of Peru
Ramon Moreno, Bank for International Settlements (BIS)


MACROECONOMICS: MONETARY & FISCAL POLICIES eJOURNAL

"Foreign Central Bank Activities in U.S. Futures Markets" Free Download

RAYMOND P.H. FISHE, University of Richmond - E. Claiborne Robins School of Business
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MICHEL A. ROBE, American University - Kogod School of Business
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AARON SMITH, University of California, Davis - Department of Agricultural and Resource Economics
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We analyze the daily positions of 31 foreign Central Banks in U.S. interest rate futures markets between 2003 and 2011 to investigate whether such positions reveal targeted hedging or informed profit-making decisions. Central Bank positions before the financial crisis of 2007-2009 are consistent with hedging some underlying balance sheet exposure. During and after the crisis, the pattern suggests an attempt to enhance returns on foreign reserve assets. In particular, Central Banks held and profited from directional positions in 5- and 10-year T-Note futures in a manner indicative of a non-hedging strategy. We also examine whether Central Bank position changes show synchronization as if they are affected by common shocks or reflect coordinated policy actions. We identify differences before and after the onset of the financial crisis: Euro-linked Central Banks become more synchronized while non-European Central Banks show no significant change in synchronization during the crisis. We also document that Central Bank positions generally account for a small fraction of the overall size of these markets, so it is unlikely that these institutions’ goal is to influence U.S. interest rates.

"The International Monetary and Financial System: Its Achilles Heel and What to Do About it" Free Download
BIS Working Paper No. 456

CLAUDIO E. V. BORIO, Bank for International Settlements (BIS) - Research and Policy Analysis
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This essay argues that the Achilles heel of the international monetary and financial system is that it amplifies the "excess financial elasticity" of domestic policy regimes, ie it exacerbates their inability to prevent the build-up of financial imbalances, or outsize financial cycles, that lead to serious financial crises and macroeconomic dislocations. This excess financial elasticity view contrasts sharply with two more popular ones, which stress the failure of the system to prevent disruptive current account imbalances and its tendency to generate a structural shortage of safe assets - the "excess saving" and "excess demand for safe assets" views, respectively. In particular, the excess financial elasticity view highlights financial rather than current account imbalances and a persistent expansionary rather than contractionary bias in the system. The failure to adjust domestic policy regimes and their international interaction raises a number of risks: entrenching instability in the global system; returning to the modern-day equivalent of the divisive competitive devaluations of the interwar years; and, ultimately, triggering an epoch-defining seismic rupture in policy regimes, back to an era of trade and financial protectionism and, possibly, stagnation combined with inflation.

"Spillovers, Capital Flows and Prudential Regulation in Small Open Economies" Free Download
BIS Working Paper No. 459

PAUL CASTILLO, Central Reserve Bank of Peru
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CESAR CARRERA, Central Reserve Bank of Peru
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MARCO ORTIZ, Central Reserve Bank of Peru
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HUGO VEGA HOBAICA, Central Reserve Bank of Peru
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This paper extends the model of Aoki et al. (2009) considering a two sector small open economy. We study the interaction of borrowing, asset prices, and spillovers between tradable and non-tradable sectors. Our results suggest that when it is difficult to enforce debtors to repay their debt unless it is secured by collateral, a productivity shock in the tradable sector generates an increase in asset prices and leverage that spills over to the non-tradable sector, generating an appreciation of the real exchange and an increase in domestic lending. Macro-prudential instruments are introduced under the form of cyclical loan-to-value ratios that limit the amount of capital that entrepreneurs can pledge as collateral. Cyclical taxes that respond to the movements in the price of non-tradable goods are analysed. Simulation results show that this type of instruments significantly lessen the amplifying effects of borrowing constraints on small open economies and consequently reduce output and asset price volatility.

"Traditional and Matter-of-Fact Financial Frictions in a DSGE Model for Brazil: The Role of Macroprudential Instruments and Monetary Policy" Free Download
BIS Working Paper No. 460

FABIA APARECIDA CARVALHO, Brazilian Central Bank
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MARCOS R CASTRO, Independent
SILVIO M A COSTA, Brazilian Central Bank
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This paper investigates the transmission channel of macroprudential instruments in a closed economy DSGE model with a rich set of financial frictions. Banks' decisions on risky retail loan concessions are based on borrowers' capacity to settle their debt with labor income. We also introduce frictions in banks' optimal choices of balance sheet composition to better reproduce banks' strategic reactions to changes in funding costs, in risk perception and in the regulatory environment. The model is able to reproduce not only price effects from macroprudential policies, but also quantity effects. The model is estimated with Brazilian data using Bayesian techniques. Unanticipated changes in reserve requirements have important quantitative effects, especially on banks' optimal asset allocation and on the choice of funding. This result holds true even for required reserves deposited at the central bank that are remunerated at the base rate. Changes in required core capital substantially impact the real economy and banks' balance sheet. When there is a lag between announcements and actual implementation of increased capital requirement ratios, agents immediately engage in anticipatory behavior. Banks immediately start to retain dividends so as to smooth the impact of higher required capital on their assets, more particularly on loans. The impact on the real economy also shifts to nearer horizons. Announcements that allow the new regulation on required capital to be anticipated also improve banks' risk positions, since banks achieve higher capital adequacy ratios right after the announcement and throughout the impact period. The effects of regulatory changes to risk weights on bank assets are not constrained to impact the segment whose risk was reassessed. We compare the model responses with those generated by models with collateral constraints traditionally used in the literature. The choice of collateral constraint is found to have important implications for the transmission mechanisms.

"A Policy Model to Analyze Macroprudential Regulations and Monetary Policy" Free Download
BIS Working Paper No. 461

SAMI ALPANDA, Bank of Canada - Canadian Economic Analysis Department
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GINO CATEAU, Independent
CÉSAIRE MEH, Government of Canada - Bank of Canada
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We construct a small-open-economy, New Keynesian dynamic stochastic general-equilibrium model with real-financial linkages to analyze the effects of financial shocks and macroprudential policies on the Canadian economy. Our model has four key features. First, it allows for non-trivial interactions between the balance sheets of households, firms and banks within a unified framework. Second, it incorporates a risk-taking channel by allowing the risk appetite of investors to depend on aggregate economic activity and funding conditions. Third, it incorporates long-term debt by allowing households and businesses to pay back their stock of debt over multiple periods. Fourth, it incorporates targeted and broader macroprudential instruments to analyze the interaction between macroprudential and monetary policy. The model also features nominal and real rigidities, and is calibrated to match dynamics in Canadian macroeconomic and financial data. We study the transmission of monetary policy and financial shocks in the model economy, and analyze the effectiveness of various policies in simultaneously achieving macroeconomic and financial stability. We find that, in terms of reducing household debt, more targeted tools such as loan-to-value regulations are the most effective and least costly, followed by bank capital regulations and monetary policy, respectively.

"The Effects of Intraday Foreign Exchange Market Operations in Latin America: Results for Chile, Colombia, Mexico and Peru" Free Download
BIS Working Paper No. 462

MIGUEL FUENTES, Pontifical Catholic University of Chile - Institute of Economics
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PABLO M. PINCHEIRA, Central Bank of Chile - Research Department
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JUAN MANUEL JULIO, Bank of the Republic, Universidad Nacional de Colombia
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HERNAN RINCON , Banco de la República
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SANTIAGO GARC?A-VERDÚ, Banco de México
MIGUEL ZERECERO, Bank of Mexico
MARCO VEGA, Central Reserve Bank of Peru
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ERICK LAHURA, Central Bank of Peru
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RAMON MORENO, Bank for International Settlements (BIS)
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This paper analyses the effects of sterilised, intraday foreign exchange market operations (non-discretionary and discretionary) on foreign exchange returns and volatility in four inflation targeting economies in Latin America. The distribution of exchange rates during intervention and non-intervention days are first compared, and then event study regressions are used to estimate the impact of intervention (and macro surprises) on exchange rate returns and exchange rate volatility as well as on foreign exchange market turnover (in Colombia). In general, the results suggest that the impact of both non-discretionary and discretionary operations is at times significant but transitory. However, an analysis of Chile's experience suggests that the announcement effects of even non-discretionary programmes may be significant and persistent.

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Macroeconomics: Monetary & Fiscal Policies eJournal

OLIVIER J. BLANCHARD
International Monetary Fund (IMF), National Bureau of Economic Research (NBER)

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