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Cost-Benefit Analysis of Leaning Against the Wind by Mr.Lars E. O. Svensson Pdf
“Leaning against the wind” (LAW) with a higher monetary policy interest rate may have benefits in terms of lower real debt growth and associated lower probability of a financial crisis but has costs in terms of higher unemployment and lower inflation, importantly including a higher cost of a crisis when the economy is weaker. For existing empirical estimates, costs exceed benefits by a substantial margin, even if monetary policy is nonneutral and permanently affects real debt. Somewhat surprisingly, less effective macroprudential policy and generally a credit boom, with resulting higher probability, severity, or duration of a crisis, increases costs of LAW more than benefits, thus further strengthening the strong case against LAW.
Leaning Against the Wind: A Cost-Benefit Analysis for an Integrated Policy Framework by Mr.Luis Brandao-Marques,Mr.R. G Gelos,Mr.Machiko Narita,Erlend Nier Pdf
This paper takes a new approach to assess the costs and benefits of using different policy tools—macroprudential, monetary, foreign exchange interventions, and capital flow management—in response to changes in financial conditions. The approach evaluates net benefits of policies using quadratic loss functions, estimating policy effects on the full distribution of future output growth and inflation with quantile regressions. Tightening macroprudential policy dampens downside risks to growth stemming from loose financial conditions, and is beneficial in net terms. By contrast, tightening monetary policy entails net losses, calling for caution in the use of monetary policy to “lean against the wind.” These findings hold when policies are used in response to easing global financial conditions. Buying foreign-exchange or tightening capital controls has small net benefits.
Cost-Benefit Analysis of Leaning Against the Wind by Lars Svensson Pdf
'Leaning against the wind' (LAW) with a higher monetary policy interest rate may have benefits in terms of lower real debt growth and associated lower probability of a financial crisis but has costs in terms of higher unemployment and lower inflation, importantly including a higher cost of a crisis when the economy is weaker. For existing empirical estimates, costs exceed benefits by a substantial margin, even if monetary policy is nonneutral and permanently affects real debt. Somewhat surprisingly, less effective macroprudential policy and generally a credit boom, with resulting higher probability, severity, or duration of a crisis, increases costs of LAW more than benefits, thus further strengthening the strong case against LAW.
Leaning Against the Wind and the Timing of Monetary Policy by Mr.Itai Agur,Ms.Maria Demertzis Pdf
If monetary policy is to aim also at financial stability, how would it change? To analyze this question, this paper develops a general-form framework. Financial stability objectives are shown to make monetary policy more aggressive: in reaction to negative shocks, cuts are deeper but shorter-lived than otherwise. By keeping cuts brief, monetary policy tightens as soon as bank risk appetite heats up. Within this shorter time span, cuts must then be deeper than otherwise to also achieve standard objectives. Finally, we analyze how robust this result is to the presence of a bank regulatory tool, and provide a parameterized example.
IMF Research Bulletin, June 2016 by International Monetary Fund. Research Dept. Pdf
In the June 2016 issue of IMF Research Bulletin, Eugenio Cerutti interviews Lars E.O. Svensson. Lars, a professor at the Stockholm School of Economics, was a Visiting Scholar at the IMF. In the interview, he discusses monetary policy, financial stability, and life at the IMF. The Bulletin also features a listing of recent Working Papers, Staff Discussion Notes, and key IMF publications. The table of contents from the latest issue of IMF Economic Review is also included.
Progress and Confusion by Olivier Blanchard,Raghuram Rajan,Kenneth Rogoff,Lawrence H. Summers Pdf
Leading economists consider the shape of future economic policy: will it resume the pre-crisis consensus, or contend with the post-crisis “new normal”? What will economic policy look like once the global financial crisis is finally over? Will it resume the pre-crisis consensus, or will it be forced to contend with a post-crisis “new normal”? Have we made progress in addressing these issues, or does confusion remain? In April of 2015, the International Monetary Fund gathered leading economists, both academics and policymakers, to address the shape of future macroeconomic policy. This book is the result, with prominent figures—including Ben Bernanke, John Taylor, and Paul Volcker—offering essays that address topics that range from the measurement of systemic risk to foreign exchange intervention. The chapters address whether we have entered a “new normal” of low growth, negative real rates, and deflationary pressures, with contributors taking opposing views; whether new financial regulation has stemmed systemic risk; the effectiveness of macro prudential tools; monetary policy, the choice of inflation targets, and the responsibilities of central banks; fiscal policy, stimulus, and debt stabilization; the volatility of capital flows; and the international monetary and financial system, including the role of international policy coordination. In light of these discussions, is there progress or confusion regarding the future of macroeconomic policy? In the final chapter, volume editor Olivier Blanchard answers: both. Many lessons have been learned; but, as the chapters of the book reveal, there is no clear agreement on several key issues. Contributors Viral V. Acharya, Anat R. Admati, Zeti Akhtar Aziz, Ben Bernanke, Olivier Blanchard, Marco Buti, Ricardo J. Caballero, Agustín Carstens, Jaime Caruana, J. Bradford DeLong, Martin Feldstein, Vitor Gaspar, John Geanakoplos, Philipp Hildebrand, Gill Marcus, Maurice Obstfeld, Luiz Awazu Pereira da Silva, Rafael Portillo, Raghuram Rajan, Kenneth Rogoff, Robert E. Rubin, Lawrence H. Summers, Hyun Song Shin, Lars E. O. Svensson, John B. Taylor, Paul Tucker, José Viñals, Paul A. Volcker
Monetary Policy and Financial Stability by Janet Louise Yellen,International Monetary Fund Pdf
The issue of using monetary policy for financial stability purposes is hotly contested. The crisis was a reminder that price stability is not sufficient for financial stability, financial crises are costly, and policy should aim to decrease the likelihood of crises, not only rely on dealing with their repercussions once they occur. It is clear that well-targeted prudential policies (including micro and macroprudential regulation and supervision) should be pursued actively to attenuate the buildup of financial risks. The question is whether monetary policy should be altered to contain financial stability risks. Should it lend a hand by temporarily raising interest rates more than warranted by price and output stability objectives? Keeping rates persistently higher is also possible, but more costly.
Systemic Risk in the Financial Sector by Douglas W. Arner,Emilios Avgouleas,Danny Busch,Steven L. Schwarcz Pdf
In late 2008, the world's financial system was teetering on the brink of systemic collapse. While the impacts of the global financial crisis would be felt immediately, at every level of the economy, it would also send years-long aftershocks through investment, banking and regulatory circles worldwide. More than a decade after the worst year of the global financial crisis, what has been learned from its harsh lessons? Are governments and regulators more prepared for another financial system failure that would significantly affect the real economy? What may be the potential triggers for such a collapse to occur in the future? Systemic Risk in the Financial Sector: Ten Years after the Great Crash draws on some of the world's leading experts on financial stability and regulation to examine and critique the progress made since 2008 in addressing systemic risk. The book covers topics such as central banks and macroprudential policies; fintech; regulators' perspectives from the United States and the European Union; the logistical and incentive challenges that impede standardization and collection; clearing houses and systemic risk; optimal resolution and bail-in tools; and bank leverage, welfare and regulation. Drawing on experts across disciplines — including Howell Jackson, John Geanakoplos, Charles Goodhart, Anat Admati, Roberta Romano and Martin Hellwig — Systemic Risk in the Financial Sector is the definitive guide to understanding the global financial crisis, the safeguards being put into place to try to avoid similar crises in the future, and the limitations of those safeguards.
Author : Eric Monnet,Miklos Vari Publisher : International Monetary Fund Page : 48 pages File Size : 47,8 Mb Release : 2019-08-16 Category : Business & Economics ISBN : 9781498320474
Liquidity Ratios as Monetary Policy Tools: Some Historical Lessons for Macroprudential Policy by Eric Monnet,Miklos Vari Pdf
This paper explores what history can tell us about the interactions between macroprudential and monetary policy. Based on numerous historical documents, we show that liquidity ratios similar to the Liquidity Coverage Ratio (LCR) were commonly used as monetary policy tools by central banks between the 1930s and 1980s. We build a model that rationalizes the mechanisms described by contemporary central bankers, in which an increase in the liquidity ratio has contractionary effects, because it reduces the quantity of assets banks can pledge as collateral. This effect, akin to quantity rationing, is more pronounced when excess reserves are scarce.
The ASEAN Way by Ms.Ana Corbacho,Mr.Shanaka J Peiris Pdf
The first part of the book examines the evolution of monetary policy and prudential frameworks of the ASEAN5, with particular focus on changes since the Asian financial crisis and the more recent period of unconventional monetary policy in advanced economies. The second part of the book looks at policy responses to global financial spillovers. The third and last part of the book elaborates on the challenges ahead for monetary policy, financial stability frameworks, and the deepening of financial markets.
Author : John B. Taylor Publisher : University of Chicago Press Page : 460 pages File Size : 54,6 Mb Release : 2007-12-01 Category : Business & Economics ISBN : 9780226791265
This timely volume presents the latest thinking on the monetary policy rules and seeks to determine just what types of rules and policy guidelines function best. A unique cooperative research effort that allowed contributors to evaluate different policy rules using their own specific approaches, this collection presents their striking findings on the potential response of interest rates to an array of variables, including alterations in the rates of inflation, unemployment, and exchange. Monetary Policy Rules illustrates that simple policy rules are more robust and more efficient than complex rules with multiple variables. A state-of-the-art appraisal of the fundamental issues facing the Federal Reserve Board and other central banks, Monetary Policy Rules is essential reading for economic analysts and policymakers alike.
Monetary and Macroprudential Policy Coordination Among Multiple Equilibria by Mr.Itai Agur Pdf
The notion of a tradeoff between output and financial stabilization is based on monetary-macroprudential models with unique equilibria. Using a game theory setup, this paper shows that multiple equilibria lead to qualitatively different results. Monetary and macroprudential authorities have tools that impose externalities on each other's objectives. One of the tools (macroprudential) is coarse, while the other (monetary policy) is unconstrained. We find that this asymmetry always leads to multiple equilibria, and show that under economically relevant conditions the authorities prefer different equilibria. Giving the unconstrained authority a weight on "helping" the constrained authority ("leaning against the wind") now has unexpected effects. The relation between this weight and the difficulty of coordinating is hump-shaped, and therefore a small degree of leaning worsens outcomes on both authorities' objectives.
